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Predation, taxation, investment and conflict:
International evidence
Eli Berman (UCSD, NBER)Joseph Felter (Stanford)Ethan Kapstein (Arizona State University, NBER)Erin Troland (UCSD)
Prepared for International Agricultural Trade Research ConsortiumSan DiegoDecember 6 2014
Motivation: Development Spending In
Fragile States
2
.1.2
.3.4
.5.6
Pro
port
ion
1976 1986 1996 2006
Total Aid
1976 1986 1996 2006
Year
US Aid
1976 1986 1996 2006
EC Aid
1976 1986 1996 2006
UK Aid
Three Year Moving Average
Yearly Proportion of Foreign Aid Flowing to Conflict Countries, 1976-2010
Two reasons: 1. Traditional development – severely dysfunctional governments2. Development as a tool of counterterrorism and counterinsurgency
Motivation:
Economic Development in Fragile EnvironmentsHow should economic development be managed when people and property are insecure?
Activist view:
Development can’t hurt, so try e.g., Marshall Plan
Cross-country correlation of Income and civil war is negative
- Problem: evidence of predation (Collier, Nunn & Quian,
Crost et al., Fearon ) or something (Berman et al) ?
Conservative view:
Welfare theorems assume secure property rights.
Besides, these places suffer serious political dysfunction
at the macro level.
So.. wait til people and property are secured before
attempting projects.
.. and when it is, FDI will flow in, and local investment will stay home
- Problem #1: would you allow 1.5B people to wait?
These same places are at heightened risk due to drought, natural disasters & climate change,
epidemics, civil wars , crime, human trafficking, because of poor governance.
- Problem #2: what about their neighbors, who suffer externalities from un(der)governed
spaces, that are hard to prevent/deter without direct intervention?
Lack of evidence until recently on these questions.
3
Motivation:
Economic Development in Fragile EnvironmentsHow could development even occur in places where people and property are too insecure for
investment?
This indeed looks like the complement of the
map of trade / capita.
BUT.. Property rights could be endogenous,
and subject to a cost / benefit calculation by
governments
Lack of evidence on this, until now.
4
Our maps have internal boundarieswhich indicate where people and property are safe
Investment and violence in the Philippines
6
• From left: population, industrial building permits/capita, casualties from government-
initiated violence and casualties from rebel-initiated violence.
• Looks like the cross-country negative correlation of income and violence,
.. but incl. govt. – initiated violence.
Preview: ‘Predation’ and ‘Tax capture’Both rebels and govt. appear to respond to changes in investment
with changes in violence
Left hand side variableAll
Fatalities
FatalitiesGovt
Initiated (GI)incidents
FatalitiesRebel
Initiated (RI) Incidents
All Incidents
GI incidents RI incidents
Value of building permits
Constant
Observations
0.141*** 0.0942** 0.0439 0.108* 0.0432 0.0514
(0.0436) (0.0421) (0.0341) (0.0579) (0.0533) (0.0444)
0.0413*** 0.0105 0.0308** 0.0409 0.0153 0.0256*
(0.0144) (0.00678) (0.0125) (0.0253) (0.0150) (0.0140)
480 480 480 480 480 480
R-squared 0.044 0.034 0.040 0.023 0.017 0.036
Mean LHS variable 0.279 -0.00197 -0.00560 0.0118 0.0119 -0.000113
Note: Estimated in first-differences of seven years, across 80 provinces
Overview
Motivation
ModelAsymmetric vs. symmetric conflict
Four sided game
Data
Estimates
Anecdotal evidence on FDI
Discussion
Conclusions
8
• Research from last decade on subnational conflict: policies designed for symmetric conflicts typically fail in irregular conflicts
• .. both kinetic and nonkinetic policies. Why?
Choosing the right Model Symmetric vs. Asymmetric substate conflicts
Development
programs
Improved
quality of life
Reduced
violent
conflict and
insurgency
A BDevelopment
programs
Development
programs
Improved
quality of life
Improved
quality of life
Reduced
violent
conflict and
insurgency
Reduced
violent
conflict and
insurgency
A B
TGD Research Agenda:
Civilians
Provide
Balance of forces
Asymmetric (rebel < govt.) Symmetric (rebel govt.)
Information, anonymous Afghanistan, Iraq, and Philippines (Berman
et al 2011), Algeria (Galula 1964), China
(Mao 1937), Guatemala (Stoll 1993), Malaya
(Clutterbuck 1966, Thompson 1966),
Vietnam (Popkin 1979, Kalyvas & Kocher
2009, West 2013)
Information, attributable Greek civil war
(Kalyvas 2006)
Recruits or other support Colombia
(Dube & Vargas 2013)
Syria (rural) [current],
Azerbaijan (Kalyvas &Balcells 2010), Bosnia
(Kalyvas &Balcells 2010), Congo (Kalyvas
&Balcells 2010), Georgia (Kalyvas &Balcells
2010), Liberia (Ellis 1999, Lidow 2012),
Rwanda [1994] (Kalyvas &Balcells 2010),
Somalia [1991] (Kalyvas & Balcells 2010)
10
Empirical Studies of Conflict (ESOC)
We’ve actually studied a lot of the asymmetric conflict population
Countries: Iraq, Afghanistan, Vietnam, the Philippines, Colombia, Northern Ireland, Northern Caucasus, Palestinian Territories, Pakistan.(for details: esoc.princeton.edu)
TRACK 1
IRAQ AFGHANISTAN
VIETNAMPHILIPPINES
COLOMBIA
A t l a n t i c
I n d i a n
O c e a n O c e a n
TRACK 3
YEMEN
AFGHANISTAN
PAKISTAN
COLOMBIA
A t l a n t i c
I n d i a n
O c e a n O c e a n
TRACK 2
N. IRELAND
OCCUPIED�TERRITORIES
PHILIPPINES
N.CAUCASUS
COLOMBIA
A t l a n t i c
I n d i a n
O c e a n O c e a n
N. IRELAND
OCCUPIED�TERRITORIES
N.CAUCASUS
Theories of Development in Fragile
Environments
Four major theories link economic development to violence:
1.Information-centric counterinsurgency (Mao, US Army)
2.Predation (Collier, Fearon)
3.Opportunity costs (Becker)
4.Grievance
And.. Gratitude (Kilcullen)
11
Theory for asymmetric conflict:
Insurgency as a Three-sided Contest
12
REBELSGOVERNMENTSuppression/COIN (m)
Attacks (v)
CIVILIANPOPULATION
SERVICESPersonal Security
Dispute Adjudication
& Justice
Education
Health
Infrastructure
Representation
e.g., Berman – Shapiro
Felter, J. Pol. Econ 2011;
Kress, Science 2012
Predation and taxation in asymmetric conflict
13
REBELSGOVERNMENT Enforcement
Rebel Violence
COMMUNITY
FIRMS
Stages of play
1. Nature draws norms, n
2. F, G and R choose I, m and v
3. C chooses i
4. Control of territory resolved by P(a =1) = h(m)i , payoffs occur
Solve by backwards induction
14
Utility of Noncombatant Community from
Information-sharing (stage #3)
15
EUC
Information (i)
n > v
n < v
max0≤𝑖≤1
EUC(c, i, n, v, m )│n = u[ c – n ] h(m ) i + u[ c – v ](1-h(m ) i ) ..
Government, Rebels, Firms (Stage #2)
G minimizes costs:
𝒎𝒊𝒏𝒎≥𝟎
ECG( v , m , p*, I ) = A(v )[1-p*] + D(m ) – θG I p* ,
where p* = (v - nL) f h(m )
R maximizes damage + extortion – costs
max𝑣≥0
EUR(v , m, p*,I ) = [A(v )+ θR(v )I ](1-p*) – B(v , I )
F maximizes profit net of expected tax/extortion
max𝐼≥0
, E (v, m, p*,I ) = x(I) – I – {θG p* + θR(v) [1-p*]} I
We assume θG < θR(v) , so govt control will encourage I.
First order conditions (stage #2)
Three equations in three unknowns determine best response functions
m*(v, I) for G, v*(m, I ) for R in and I*(m, v ) for F, in stage #2:
0 = 𝜕𝐸𝐶𝐺
𝜕𝑚= -[A(v )+ θGI ] ( v - nL ) f h'(m*) + D'(m*),
0 = 𝜕𝐸𝑈𝑅
𝜕𝑣= [A'(v*)+ θR'(v*)I ](1-p*) – [A(v*) + θR(v*)I ] f h(m) ) –
𝜕𝐵(𝑣,𝐼)
𝜕𝑣,
0 = 𝜕
𝜕𝐼EΠ(v,m,a,I ) = x'(I*) – 1 – [θG p* + θR (v ) (1-p*)] .
17
Best response functions: m* and v*
18
Enforce
ment
(m)
m*(v,I')
v*(m,I)
m*(v,I)
A
B
Violence (v)
m*(v,I')
v*(m,I)
v*(m,I')
AD
B
Violence (v)
C
v*'(mg,I')m
DataObs Weight Mean Std. Dev. Min Max
LEVELS
Incidents / 10K 560 579984131 0.2920597 0.4027358 0 4.444788
Govt Init Incidents (GI) 560 579984131 0.1885914 0.2638765 0 3.232574
Total GI Fatalities 560 579984131 0.0437253 0.094605 0 1.346906
Govt Fatalities 560 579984131 0.0076726 0.0276077 0 0.4872676
Rebel Fatalities 560 579984131 0.0343113 0.0740779 0 1.212215
Civilian Fatalities 560 579984131 0.0017414 0.0086107 0 0.1195494
Rebel Init Incidents (RI) 560 579984131 0.1018476 0.1734013 0 1.610619
Total RI Fatalities 560 579984131 0.0543291 0.0969217 0 0.9267434
Govt Fatalities 560 579984131 0.0267594 0.0539714 0 0.6771753
Rebel Fatalities 560 579984131 0.0063105 0.0282851 0 0.7116066
Civilian Fatalities 560 579984131 0.0212592 0.0424385 0 0.3781036
Value of Industrial Building
Permits per Capita (PHP) 560 579984131 0.0654696 0.1018505 0 1.295499
Lagged Value of Industrial
Building Permits per Capita 480 502363824 0.0696258 0.1073403 0 1.295499
Population 560 579984131 2604672 2986180 15974 1.15E+07
Note: Each observation is a province–year, over the seven years 2002 through 2008, for 80 provinces, NT= 560 for levels and
480 for first differences less 80 for lagged variables. All population figures are extrapolated based on the censuses of 2000 and
2007. Means and standard deviations are weighted by estimated population. The variable "weight" reports the sum of weights
over all NT province-years.
21
Results: estimating equations
We seek to estimate partial derivatives 𝛽1 and 𝛾1in equations
(6) 𝑚𝑖𝑡 = 𝛼(𝑛𝑖) + 𝛽1𝐼𝑖𝑡 + 𝛽2𝑣𝑖𝑡 + 𝑑𝑡 + 휀𝑖𝑡 , and (7) 𝑣𝑖𝑡 = 𝛿(𝑛𝑖) + 𝛾1𝐼𝑖𝑡 + 𝛾2𝑔𝑖𝑡 + 𝑙𝑡 + 𝜂𝑖𝑡 .
But we lack an instrument for 𝐼𝑖𝑡 So we estimate partial correlations, and rely on the
model for interpretation.
22
Building Permits and Violence
Long Differences: 2002 - 2008
23
Results: Enforcement and Investment
24
LEVELS FIRST DIFFERENCES
(1) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
All GI
Incidents
All GI
Incidents
All GI
Incidents
All GI
Fatalities
All GI
Fatalities
GI Govt
Fatalities
GI Govt
Fatalities
GI Rebel
Fatalities
GI Rebel
Fatalities
GI Civilian
Fatalities
GI
Civilian
Fatalities
Value of
industrial
building permits -0.659*** 0.0432 0.0202 0.0942** 0.0851* 0.0281* 0.0267 0.0696*** 0.0622** -0.00349 -0.00385
(0.193) (0.0533) (0.0566) (0.0421) (0.0455) (0.0156) (0.0163) (0.0264) (0.0288) (0.00339) (0.00359)
All RI Fatalities 0.524*** 0.208* 0.0310 0.168** 0.00836
(0.195) (0.111) (0.0379) (0.0803) (0.00871)
Constant 0.183*** 0.0153 -0.000810 0.0105 0.00408 0.00122 0.000264 0.00841 0.00323 0.000843 0.000586
(0.0307) (0.0150) (0.0142) (0.00678) (0.00694) (0.00159) (0.00223) (0.00630) (0.00607) (0.000981) (0.00101)
Observations 560 480 480 480 480 480 480 480 480 480 480
R-squared 0.075 0.017 0.077 0.034 0.075 0.015 0.023 0.035 0.080 0.010 0.014
Mean DV 0.266 0.0119 0.0119 -0.00197 -0.00197 0.000965 0.000965 -0.00279 -0.00279 -0.000142 -0.000142
All specifications include a complete set of year indicators. Regressions are weighted by estimated population. Robust standard errors in parentheses,
clustered by province. First differenced specifications are chosen over fixed effects because of suspected nonstationarity of incidents per capita in
levels (Breitung panel unit root test has p=0.925 for rejecting a null hypothesis of a unit root in levels of per capita incidents, allowing for demeaning
and trends. For changes in per capita incidents that statistic is p=0.000, lambda=-4.85.) *** p<0.01, ** p<0.05, * p<0.1
Results: Enforcement and InvestmentRobustness check
25
Left panel – results from last table Right panel – result with largest
outlier (Zambales province) removed
remain positive but smaller and
less significant.
Results: Violence and Investment
26
LEVELS FIRST DIFFERENCES
(1) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
All RI
Incidents
All RI
Incidents
All RI
Incidents
All RI
Fatalities
All RI
Fatalities
RI Govt
Fatalities
RI Govt
Fatalities
RI Rebel
Fatalities
RI Rebel
Fatalities
RI Civilian
Fatalities
RI
Civilian
Fatalities
Value of
indust blding
permits -0.363*** 0.0514 0.0233 0.0439 0.0247 0.0183 0.000458 0.0126* 0.0110 0.0130 0.0133
(0.113) (0.0444) (0.0506) (0.0341) (0.0374) (0.0142) (0.0165) (0.00733) (0.00757) (0.0210) (0.0204)
GI Fatalities 0.299*** 0.204** 0.190** 0.0173 -0.00290
(0.0962) (0.0810) (0.0821) (0.0144) (0.0409)
Constant 0.134*** 0.0256* 0.0224* 0.0308** 0.0286** 0.00991* 0.00792 0.00925 0.00907 0.0116* 0.0116*
(0.0270) (0.0140) (0.0131) (0.0125) (0.0125) (0.00548) (0.00549) (0.00581) (0.00583) (0.00671) (0.00677)
Observations 560 480 480 480 480 480 480 480 480 480 480
R-squared 0.055 0.036 0.087 0.040 0.081 0.029 0.130 0.020 0.022 0.028 0.028
Mean DV 0.141 -0.000113 -0.000113 -0.00560 -0.00560 -0.00306 -0.00306 -0.000181 -0.000181 -0.00236 -0.00236
All specifications include a complete set of year indicators. Regressions are weighted by estimated population. Robust standard errors in parentheses,
clustered by province. First differenced specifications are chosen over fixed effects because of suspected nonstationarity of incidents per capita in
levels (Breitung panel unit root test has p=0.925 for rejecting a null hypothesis of a unit root in levels of per capita incidents, allowing for demeaning
and trends. For changes in per capita incidents that statistic is p=0.000, lambda=-4.85.) *** p<0.01, ** p<0.05, * p<0.1
Results: Violence and InvestmentRobustness check
27
Left panel – results from last table Right panel – result with largest
outlier (one province) removed
are larger and more significant.
What happened in Zambales?
28
Casualties from
government-
initiated violence
2000: Japanese investment bank loans $215m to modernize Subic Bay.
Zambales until then had a small but persistent Maoist rebel presence.
Rebel initiated incidents rise slowly, peaking in 2003.
In 2004 Japanese firm gets the contract and breaks ground. President Arroyo attends.
In that same year govt. initiated incidents spike, including SOT, combat, intel, police. Altogether 21 fatalities.
From them on incidents fall to a relatively low level, with govt still initiating more than rebels.
By 2007, Korean firm Hanjin is building ships and operating a cargo port, which they claim will be 4th largest dry dock in world.
Discussion
29
Rebel initiated
violence (v*)
Government
initiated
violence (m*)
Firms’
Investment (I*)
Rebel initiated
violence
(v)
+ ? #
Government initiated
violence
(m)
- +
Investment (I) ? # +
Derivatives dy*/dx of
the column variables y
with respect to the row
variables x, when all
other row variables are
held constant.
Testable implication:
Corr(m,I)|v >0
# If 𝜕𝑣
𝜕𝐼
∗│𝑚 > 0 then
𝜕𝐼
𝜕𝑣
∗│𝑚 < 0 ,
by Proposition #11.
Conclusion:
Economic Development in Fragile Environments
Partial correlations, in first-differences:
a. Investment and rebel-initiated violence positively correlated
b. Investment and govt-initiated violence positively correlated
c. Lagged investment and govt–initiated violence negatively correlated
In the context of a model of asymmetric rebellion, with predation and
taxation, those patterns invite us to infer predatory violence and tax
capture, with the latter the stronger effect.
Which is to say, endogenous property rights (the formally provided kind).
Tax capture violence reverses after a year
The evidence weighs against the conventional wisdom:
opportunity cost, grievance, or gratitude mechanisms, at the local level.
Caveats:
a. Symmetric conflicts
b. Macro political considerations in medium and long term 33
Conclusion:
Economic Development in Fragile Environments
Should economic investments, such as FDI be encouraged in places where people and
property are insecure?
Activist view haunted by evidence of predation
But predation in asymmetric conflicts may be dominated by tax capture
- We’ve never had systematic access to data on who initiated the violence before.
How should we feel about tax capture?
Con: It’s violent. Civilians, troops and rebels are at risk. Certainly rebels.
Pro: It may be temporary
Pro: Motivating states to govern their territory is a first order foreign policy concern
(terrorism, epidemic control, human trafficking, drug trafficking).
- and once they do, the restoration of property rights could relax tension with welfare
theorem results
Stay tuned for research results on welfare effects of expanding state capacity.34
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