Macroeconomic Shocks and Conflict

IMF Working Papers, March 17, 2023

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Objective: Analyze to what extent changes in a country’s commodity terms-of-trade (ToT) can explain an increase in the incidence and intensity of conflicts through their effect on aggregate income.
Scope: Sample of 133 low- and middle-income countries over a 30-year period.
Paper type: IMF Working Paper No. 2023/068.

Sample size: 133 low- and middle-income countries.
Time span: 30-year period.
Main explanatory variable: commodity terms-of-trade (ToT) shocks.
Main outcomes: number of conflict events and fatalities.
Model: baseline empirical model examining the effect of negative commodity ToT shocks on conflict indicators.

A negative commodity ToT shock leads to an increase in the number of conflict events and fatalities.
Temporal pattern: the effect plays out over several years, with decreasing strength after the second year.
Heterogeneity:
- The magnitude of the effect is twice as large for Low-Income Countries and Fragile and Conflict-affected States when compared with the sample average.
- Macroeconomic shocks create more violence in countries with higher inequality.
- Greater violence is observed where fiscal policy faces relatively stronger constraints on financing a response to the initial shock to incomes.
Robustness: Results are robust to a number of plausible variations in model specification.
Interpretation: Findings, together with prior studies on the economic cost of conflicts, suggest the presence of a fragility trap—a vicious cycle of worsening economic conditions and deteriorating conflicts.

Effective policies and well-tailored external financial support could be expected to help countries address the fragility trap arising from macroeconomic shocks and increased conflict.
Fiscal space and capacity to finance responses to income shocks are important moderators of the conflict response to ToT shocks.

commodity prices, Conflict, fragile and conflict-affected states, low-income countries, spillover, terms-of-trade shock