Domestic Conflict and Globalisation

What role do domestic conflicts play in international trade? Can countries affected by political turmoil –coupled with fuzzy property rights– profit from international trade?

These are the questions that Michelle R. Garfinkel, Stergios Skaperdas and Constantinos Syropoulos seek to clarify in their most recent CESifo Working Paper. To do this, they examined the case of a small country that possesses a potentially tradable natural resource–oil, in the example–that is not indisputably owned by any one population group: i.e. it has all the potential for conflict. The opening up of this country to international trade influences both the resource price and the conflict costs.

The crucial factor here is how the conflict parties react to the market opening, that is, how globalisation affects them. Because, as it turns out, globalisation is not the undiluted good it is purported to be when internal conflict is present and it depends on whether you are an importer or exporter of the highly coveted good in question.

If the small conflict-riven country is an importer, the opening up to global trade will benefit it in two ways: better prices for the good and a reduction in conflict. If, however, the country is an exporter of the resource, the picture changes dramatically. Opening the economy to trade can well induce a large diversion in productive resources to conflict, more than offsetting the well-known gains from trade. Among other things, more effort–and consequently a larger investment– will be made in order to secure access to the resource, and to expand production to the detriment of other goods. This can bring about a decrease in welfare even as the price of the exported resource increases, as the proceeds are diverted to financing the internal war effort. Sudan springs to mind.

Domestic conflict can even reverse the natural flow of trade: countries affected by it might end up exporting a good they need for their own consumption and development solely because the international price is good; they would likely even be importing it in the absence of conflict.

This all points to the importance of considering trade patterns not in isolation from the presence of domestic conflict when formulating policy recommendations for the affected countries. It might turn out that, in the presence of such conflicts, they would be better off striving for autarky instead of opening up to global trade.

Michelle R. Garfinkel, Stergios Skaperdas and Constantinos Syropoulos: Globalization and Domestic Conflict, CESifo Working Paper No.1510

• Other CESifo Working Papers dealing with globalisation
• Other CESifo Working Papers by Stergios Skaperdas
• CESifo Working Papers published in the past three months