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Inequality, Redistribution and Conflict

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Opening Lecture 24 November 2017 for the University of Florence School of Economics and Management Development Economics Course.

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Inequality, Redistribution and Conflict

  1. 1. Jose Cuesta UNICEF Office of Research
  2. 2. Objectives • Present an economic perspective to conflict, focusing on: – How do economists think about the role of inequality in conflict? – How do economists think redistribution can solve conflicts? • Critical thinking – Concepts, empirics, perceptions and facts around conflict not always match – Economics cannot explain everything
  3. 3. 1. INEQUALITY 2. INEQUALITY AND ECONOMICS OF CIVIL WAR 3. REDISTRIBUTION AND COUP D’ETAT IN HONDURAS
  4. 4. Did you know that, in the past 25 years, the world’s inequality of incomes across individuals has decreased? A. True B. False
  5. 5. THREE TYPES OF INEQUALITY Between individuals (Global) Between Countries Within Countries
  6. 6. GLOBAL INEQUALITY DECLINING SINCE 1990’S
  7. 7. GLOBAL DECLINES DUE TO BETWEEN COUNTRY INEQUALITY
  8. 8. WHAT ABOUT THE RICH? “THE RICH GETTING RICHER”
  9. 9. BUT REDUCING WITHIN COUNTRY INEQUALITY IS POSSIBLE EVEN IN MIDDLE OF GLOBAL CRISIS
  10. 10. The bottom 40 in 60 of the 83 countries monitored had positive income growth In 49 of these countries, the bottom 40 grew faster than the top 60 EAP and LAC countries tended to perform better, but there is large heterogeneity. South Asia is doing well (for the countries included in the spell) Shared prosperity, 2008-13 10 Source: World Bank, Poverty and Shared Prosperity Flagship 2016 (upcoming). -10% -8% -6% -4% -2% 0% 2% 4% 6% 8% 10% SenegalRwandaMauritiusCameroonTogoCongo, Rep.TanzaniafUgandaCongo, Dem. Rep. Sub-Saharan Africa Sri LankaPakistanIndiaBhutanSouth Asia IraqIran, Islamic Rep. Middle East & North Africa HondurasMexicoCosta RicaDominican RepublicArgentinaeEl SalvadorPanamaNicaraguaUruguayChilePeruColombiaBrazilBoliviaEcuadorParaguay Latin America & Caribbean GreeceIrelandIsraelItalyCyprusLuxembourgPortugalUnited KingdomSpainDenmarkUnited StatesNetherlandsFranceAustriaBelgiumGermanyFinlandSwedenSwitzerlandNorway Industrialized Countries CroatiaLatviaMontenegroEstoniaHungaryLithuaniaSerbiaAlbaniaSloveniaCzech RepublicKyrgyz RepublicArmeniaBulgariaPolandRomaniaTurkeyUkraineGeorgiaMoldovaMacedonia, FYRSlovak RepublicRussian FederationKazakhstanBelarus Eastern Europe & Central Asia Lao PDRPhilippinesIndonesiaVietnamThailandCambodiaMongoliaChina East Asia & Pacific Total population Bottom 40% PROGRESS IN INEQUALITY REDUCTION IS UNEVEN
  11. 11. QN: HAVE CONFLICT-AFFECTED AND FRAGILE COUNTRIES SEEN INCOME INEQUALITY INCREASED? Shared prosperity, 2008-13 11 -10% -8% -6% -4% -2% 0% 2% 4% 6% 8% 10% SenegalRwandaMauritiusCameroonTogoCongo, Rep.TanzaniafUgandaCongo, Dem. Rep. Sub-Saharan Africa Sri LankaPakistanIndiaBhutanSouth Asia IraqIran, Islamic Rep. Middle East & North Africa HondurasMexicoCosta RicaDominican RepublicArgentinaeEl SalvadorPanamaNicaraguaUruguayChilePeruColombiaBrazilBoliviaEcuadorParaguay Latin America & Caribbean GreeceIrelandIsraelItalyCyprusLuxembourgPortugalUnited KingdomSpainDenmarkUnited StatesNetherlandsFranceAustriaBelgiumGermanyFinlandSwedenSwitzerlandNorway Industrialized Countries CroatiaLatviaMontenegroEstoniaHungaryLithuaniaSerbiaAlbaniaSloveniaCzech RepublicKyrgyz RepublicArmeniaBulgariaPolandRomaniaTurkeyUkraineGeorgiaMoldovaMacedonia, FYRSlovak RepublicRussian FederationKazakhstanBelarus Eastern Europe & Central Asia Lao PDRPhilippinesIndonesiaVietnamThailandCambodiaMongoliaChina East Asia & Pacific Total population Bottom 40%
  12. 12. 1. INEQUALITY 2. INEQUALITY AND ECONOMICS OF CIVIL WAR 3. REDISTRIBUTION AND COUP D’ETAT IN HONDURAS
  13. 13. 13 The standard economic model (representative rebel) • Conflict ensues mostly as a result of sufficient pay-offs to the representative rebel (Collier’s greed): war is fundamentally an economic phenomenon • Grievances (historical, regional, ethnic disputes, inequality, poverty) provide a motivation for war (although not part of the initial economic thinking) • Fighting technology (Grossman, Hirschleifer) matters too becuase affect cost of conflict (opportunity)
  14. 14. 14 ECONOMIC MODELS OF CIVIL WAR Collier and Hoeffler (1998) model of rebellion for greed – War occurs if the incentive for rebellion is sufficiently large relative to its costs – Representative rebel but subject to costs of coordination – War will ensue if and last to the extent of the utility of war exceeds the utility of peace for the rebels – Long wars only if high pay-offs – The onset and duration of war governed by the same underlying process
  15. 15. 15 ECONOMIC MODELS OF CIVIL WAR Collier and Hoeffler (1998) model of rebellion for greed – War occurs if the incentive for rebellion is sufficiently large relative to its costs – Representative rebel but subject to costs of coordination – War will ensue if and last to the extent of the utility of war exceeds the utility of peace for the rebels – Long wars only if high pay-offs – The onset and duration of war governed by the same underlying process – QN: IS THIS REASONABLE?
  16. 16. 16 CH1998 MODEL ● T affects – p because implies more state capacity to fight and, hence, more military spending ● Higher T, however, increases G (conditional on victory) ● Higher Y increases the opportunity cost of war ● As C increases, fighting is more costly ● As discount rate increases, utility of a long war decreases (ie, more impatient rebels value less those gains that accrue in the distant future)
  17. 17. 17 CH1998 ESTIMATES
  18. 18. 18 • The model rightly predicts 79 out of 98 cases; the average country has 39% of civil war: – “ideal” country 0, “worst”country, 99%. – Country with 2-time average incomes, 15% – Country with half average incomes, 63% • Max pob civil war at ELF = 38 (out of 100) as predicted, but not statistically significant: – Highly fractionalized societies (i.e., high n of ethnics and languages) and very homogenous societies less likely to engage in civil war; very polarised societies (2 large groups) the real problem… • But nothing on inequality INTERPRETING RESULTS
  19. 19. 19 • Collier & Hoeffler (2004) Opportunity model on outbreak of civil conflict – Realization that war onset and duration may be governed by different processes and what happens during the conflict matters – Now, it is not really greed itself but rather a broader “opportunity” vs. motivation contention – The improvement of this model is the inclusion of grievance – In practice, opportunity includes greed while motivation includes grievance (inequality, weak political rights) ECONOMIC MODELS OF CIVIL WAR
  20. 20. 20 CH (2004) MODEL • Now, extended proxies for opportunity: – Financing of Conflicts: • Exports of natural resources (spx) • Donations from diasporas (share of emigrants living in the US, from US Census) • Subsidies from hostile governments (Cold War period dummy) – Costs: • Per capita incomes (opportunity costs) • Male secondary schooling (relative abundance of recruitments) • Economy’s growth rates (also an opportunity cost) – Country Specific Conflict or Geographics: • Availability of cheap conflict equipment proxied by years since last conflict (arms availability) • Geographical opportunities: mountanious territory index; population density (Gini concentration index for population) – Social Cohesion: (is this really opportunity or grievance?) • Ethno-Linguistic Fractionalization, Religious Fractionalization • Social Fractionalization = (ELF*RF)+max(ELF, RF)
  21. 21. 21 • Variables for Motivation – Ethnic or religious hatred • Political repression (also an opportunity variable)!! • Polity index of political regime (0-autocracy; 1-democracy) – Political exclusion • Proxied by Ethnic dominance, that is, 1 if largest ethnic group constitutes 45-90% of total population (opportunity???) – Economic inequality • Gini coefficient and V-I quintiles ratio – Scale effects: • Population size … but this can also scale opportunities! CH (2004) MODEL
  22. 22. 22 RESULTS CH(2004) MODEL • Opportunistic model performs “well”, but objective grievance variables add little explanatory power including inequality • Diasporas also increase risk of conflict … or conflicto makes diásporas bigger? • Previous peace duration does not affect conflict…hard to believe • All cost variables significantly reduce risk of conflict • Dispersed population increases risk of conflict and so mountanious terrain • Only ethnic dominance significant across grievance variables • Risk of conflict increases with population • At the mean of all variables, probability of civil conflict is 11.5%
  23. 23. 23 CONCLUSION ECONOMIC MODELS OF CIVIL WAR • From “greed model explains all” (CH 1998) to opportunistic factors (greed and viability) dominate grievances (CH 2004) • However: – (a) how to really decide which dominant explanation when a variable has multiple effects (eg. Income, ethnicity)? – (b) endogeneity is almost overlooked: no IVs, simply “previous episode” strategy. • Only OK if individuals do not anticipate the future (i.e. Investment today does not change even if people anticipate a war tomorrow) • The problem is that the underlying theory of CH models is based on individuals acting today based on future C&Bs! – (c) what explains the ¾ of civil war risk unexplained by all the models?
  24. 24. EVIDENCE FROM OTHER MODELS • Regan & Norton (2005)… international – Discrimination and ELF increases probability of rebellion and civil war but not violent protest – Inequality variable not included • Murshed & Gates (2007) … Nepal – Horizontal inequities (province gaps in life expectancy, schooling, road density) matter but not clear sign – “Grievance dominates”… but R 2 ≈.5 • Sorli et al (2005) … international – CH 2004 model – Oil, Islam, Middle East dummies not significant (no “Middle East exceptionalism” in terms of conflict) 24
  25. 25. 25 QN: How much the Economic model of conflict could explain the Arab Spring?
  26. 26. 1. INEQUALITY 2. INEQUALITY AND ECONOMICS OF CIVIL WAR 3. REDISTRIBUTION AND COUP D’ETAT IN HONDURAS
  27. 27. CHRONOLOGY – Before the crisis, Honduran Constitution did not allow President’s re-election, which ensured a predictable transfer of power among elites – March 2009: President Zelaya announces plans of Constitutional Assembly referendum to allow re- election (for same day as November elections) – June 2009: Supreme Electoral Tribunal, Supreme Court, Congress all declare referendum unconstitutional and illegal – June 2009: Zelaya announces a popular consultation to decide if referendum goes (by June 28th) 27
  28. 28. CHRONOLOGY – June 2009: Military cupola warns Zelaya of consequences if keeps pressing ahead with consultation – June 2009: Zelaya dismisses Armed Forces General in Chief, Gen. Vasquez – June 27th, 2009: Electoral material for consultation arrives to Tegucigalpa from Caracas. Zelaya and followers enter the air force base where material was in custody and took it out. – June 28th, 2009: Military grabbed Zelaya in PJs and took him to Costa Rica – July-October 2009: Several failed attempts by Zelaya to step back to Honduras – October 2009: Zelaya appears by surprise in Brazilian Embassy in Tegucigalpa • After weeks of blockage, intermittent negotiations, Oct. 30th, both delegations sign up an agreement • Unity Government; no immunity granted; no direct reposition of Zelaya; 28
  29. 29. MODELING THE HONDURAN “CONSTITUTIONAL” COUP D’ETAT (Cuesta 2017) – Conflict theory is the foundation for the model – Max U, C/B, Motivation and Opportunity, Greed – Although Honduras lacks natural resources and ethnic conflict, grievances—poverty, inequality, and “continuous crisis”—; greed—re-election—; and opportunity—a willing military—all present 29
  30. 30. MODELING THE CRISIS • The Set Up – Two groups: Government and Opposition – Govt. taxes; spends on public services (social and security/defense); gets aid and foreign investments – Opposition engages in economic activity, receives also foreign investment (but neither aid nor incurs in defense spending) – Two nature states: peace and violence – Each player will decide between each scenario independently, that is, without knowing a prior the other’s decision – The model determines which are the conditions for peace being the optimal response by government and coup for the opposition 30
  31. 31. 31 Peace Violence Peace Social Contract Repression Violence Coup Civil Conflict GOVERNMENT OPPOSITION MODELING THE CRISIS
  32. 32. • The Assumptions – Optimizing utility = optimizing expected incomes from each outcome – Independence of actions – Cost of the coup is not a problem (always a technology available if go-ahead) – cheap coup possible in Honduras if done by the military – Short-sighted agents: – Opposition does not explicitly account for efforts to regain power by government or international community sanctions if coup wins – Neither punishment if coup fails – Model focuses on gross benefits from the coup in the form of resources redistributed under a new social contract 32 MODELING THE CRISIS
  33. 33. 33 MODELING THE CRISIS .0 )1(      GGC R GGP FYG TnFYG MSYR TnYR RC R RP   The Government:      peaceifpR coupifCR R      peaceifpG coupifCG G CP GGG )1(   . GG FFM  )1(  GG FFM  )1( 
  34. 34. SOLVING THE MODEL 34 The government will therefore seek a peaceful state if Gp   Gc , which holds if: GG R GG FpYTnpFY )(  (5) The opposition will instead stage a coup if Rc > Rp , which holds if: Y R  S  Y R  nRT (6) Rearranging both conditions, the following is obtained: G R FTn  (7) TnS R (8) G FM )1(  (9)
  35. 35. • Solving the Model – Govt. will opt for peace if the proportion of public transfers to the opposition (to ‘buy peace’) does not exceed the required incremental cost of a military intervention to repress the opposition… Peace is cheaper than conflict (opportunity) – Opposition will stage a coup if expected welfare losses from avoiding the social contract breach exceed public transfers during peace … Current transfers are lower than feared loses and buying the military (fear as grievance) 35 SOLVING THE MODEL
  36. 36. DATA 36
  37. 37. RESULTS The model predicts a coup from opposition if: • 6.7 ≤  (very expensive for the government to control the military) • S> 11.1 percent of GDP (a huge expected benefit from the coup) • M 10.8 percent of GDP (the opposition willing to “redistribute” to the military) Otherwise, the military will defend the status quo
  38. 38. CONCLUSIONS COUP D’ETAT MODEL • Opposition must have feared substantial losses from a new social contract to support a coup … 11% GDP • In practice: – 11% GDP is between 10% GDP of the annual Poverty Reduction Strategy and Collier’s 15% average civil conflict GDP loss – fear explains why taking action even before the social contract breach actually takes place (future rather than historical grievance) – Huge expected loses explain why then and not before (for instance, back in mid-90s higher poverty and inequality) • Ironically, now there is a political agreement to allow President’s reelection 38
  39. 39. QN: How well does this model of feared loses—or gains—of breaking the status quo help explain Mugabe’s resignation? 39
  40. 40. KEY TAKE AWAY MESSAGES • Inequality is a complex phenomenon, with unequal progress, and hard to measure • Greed-based theories of conflict do not see inequality as a key determinant • Inequality is a motivation, grievance factor • Determinants can be objective or subjective (fear), past, present or future • Redistribution typically thought as a solution, but depends how’s done it can be a problem too • The historical, sociological, political, cultural dimensions very poorly included in these models
  41. 41. THANK YOU! • Follow us on Twitter @UNICEFInnocenti • Like us on Facebook @UNICEFInnocenti • And visit our website for more research: www.unicef-irc.org
  42. 42. References • Collier, P. & A. Hoeffler (1998) “On the Economic Causes of Civil War” Oxford Economic Papers, Vol 50, 563-73 • Collier, P. & A. Hoeffler (2004) ‘Greed and Grievance in Civil War’ Oxford Economic Papers, Vol. 56, No. 4, pp. 563-595 • Cuesta, J. (2017) Redistribution and Military Coups, International Journal of Development and Conflict, 2017, 7(1):12—31. • Grossman, H. I. (1991) ‘A General Equilibrium Model of Insurrections’ American Economic Review Vol. 81, No. 4, pp. 912-21. • Hirshleifer, J. (1995) ‘Anarchy and its Breakdown’ Journal of Political Economy, Vol. 103, No. 1, pp. 26-52. • Murshed, M. & S. Gates (2005) ‘Spatial-Horizontal Inequality and the Maoist Insurgency in Nepal’Review of Development Economics Vol 9, No. 1, pp. 121-34 • Regan, P. & D. Norton (2005) ‘Greed, Grievance and Mobilization in Civil War’ Journal of Conflict Resolution Vol. 49, No. 3, pp. 319-36 • Sorli, M., N. P. Gleditsch & H. Strand (2005) ‘Why Is There So Much Conflict in the Middle East?’ Journal of Conflict Resolution Vol. 49, No. 1, pp. 141-65 • World Bank (2016) Poverty and Shared Prosperity 2016

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