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Faculty of Economics

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Baddeley, M.

Civil War and Human Development: Impacts of Finance and Financial Infrastructure

CWPE1127

Abstract: In this paper interactions between finance, development and armed conflict are explored to demonstrate that financial factors are crucial in sustaining conflict-underdevelopment feedback loops. Military expenditure drains resources, financial instability leads to conflict (and vice versa), war retards the development of financial institutions/infrastructure, and interactions between finance and conflict are exacerbated by distributional struggles. Some of these feedback effects are captured within a two-stage model of war, finance and development and this is used as the basis for an empirical analysis. Econometrically, the model is estimated using panel estimation and two stage Probit least squares (2SPLS) binary dependent variable estimation techniques to control for simultaneity and heterogeneity. The results suggest that financial constraints and financial instability increase the chances of civil war directly and, via negative impacts on development, indirectly too.

Keywords: Human development, civil conflict, military spending, financial instability, financial infrastructure

JEL Codes: O15 O16 O43 H56

PDF: http://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe1127.pdf

Open Access Link: https://doi.org/10.17863/CAM.976