Too Much of a Good Thing: How High Investment Causes Low Growth after Civil War

• In Event: Peace, Conflict, Business, and the Economy

Abstract

How do recovering post-conflict states finance reconstruction? Following development economics, the nascent literature on post-conflict reconstruction stresses the importance of attracting FDI, and attempts to identify the factors that lead to greater investment in post-conflict settings. That the link between FDI and growth in developing countries extends to post-conflict states has frequently been assumed, but not empirically demonstrated. Contrary to this frequent assumption, the data reveal that post-civil war states do not show a significant relationship between FDI inflows and recovery. We argue that this puzzle can be explained by large and sudden post-conflict spikes in FDI into resource-rich states. While it is possible that a gradual increase in FDI may be beneficial, resource-poor states see little investment in the aftermath of civil wars. The magnitude and pace of FDI inflows into many resource-rich states, on the other hand, causes large spikes in exchange rates, resulting in episodes of Dutch disease that significantly slow post-conflict recovery. Our paper tests this proposed explanation and finds empirical support for each link in the causal chain.

Authors

• Joshua Kaasik, University of Pittsburgh

• Jude C. Hays, University of Pittsburgh

• Burcu Savun, University of Pittsburgh