"Resource curse" and civil wars

I had blogged previously on the striking correlation between civil strife and under-development and the presence of valuable commercial resources. In an interesting study, economists Oeindrila Dube and Juan Vargas, using data from the impact of Colombia's decades-old civil war on oil and coffee, shows that commodity price movements can have widely varying impacts on the local political situation.

They claim that the "labor intensity" of the natural resource determines the local political dynamics. Thus, areas with labour intensive agriculture become less civil strife prone as the prices of agriculture products rise. When farm prices or those of other labor-intensive resources go up, the benefits are spread out more widely, and many laborers see their incomes increase accordingly. Alternatively, when farm prices fall, local incomes decline, and the warlords find more willing recruits.

In contrast, in case of natural resources like minerals, metal and oil, their extraction is capital intensive, and benefits are confined to a limited few and not evenly spread over the general population. Therefore when prices rise, it is natural that the fight for control over these resources intensifies, and conversely when prices fall, the scramble for control is lesser.

The authors conclude, "In a framework where labor is used to violently appropriate capital income, a rise in the price of labor intensive goods is predicted to lower conflict by raising wages. In contrast, a rise in the price of the capital intensive good is predicted to increase conflict by raising the return to predation."

Raymond Fisman and Edward Miguel, suggest shifting some amount of international development assistance away from long-term investment and toward short-term emergency aid for countries hard-hit by a collapse in prices of labor-intensive commodities. This aid would be scaled back when the prices stabilized. They argue for strong political institutions to manage sharing of incomes arising from price rises in capital intensive commodities.

The co-relation between declining farm prices and civil wars, also highlights the importance of insulating the producers from the vagaries of the global market in agriculture commodities. This is all the more important in many African economies, where the overwhelming share of the population and the economy as a whole is dependent on farming. As Robert Shiller has shown, there is a strong case to be made in favor of newer financial instruments like GDP derivative contracts that trade in the so-called macro-markets. Such instruments can hedge these economies against steep declines in prices of agriculture commodities.

Update 1
Paul Collier outlines three explanations for resource curse
1. First, the discovery and extraction of natural resources can lead to the crowding out of other sectors, otherwise known as "Dutch Disease". The booming natural resource sector draws labor and capital away from other areas, and the natural-resource revenues result in a stronger exchange rate, reducing the competitiveness of non-resource exports.

2. Commodity price volatility enables boom and bust spending cycles characterized by poor investments and irresponsible spending.

3. Resource revenues can cause deterioration in governance and public institutions through a variety of channels. Bribery becomes a more efficient means of obtaining votes than the delivery of public services. Citizens paying low taxes thanks to resource revenues are less likely to scrutinize their leaders.