Abstract
Abstract Despite informality being the norm in conflict-affected countries, most estimates of the impact of conflict on economic activity rely on formal sector data. Using high-frequency data from Afghanistan, this paper assesses how surges in conflict intensity affect not only the formal sector, but also informal and illicit activities. Nighttime light provides a proxy for aggregate economic activity, mobile phone traffic by registered firms captures fluctuations in formal sector output, and the land surface devoted to poppy cultivation gives a measure of illicit production. The unit of observation is the district and the period of reference is 2012–2016. The results show that an increase in conflict-related casualties has a strong negative impact on formal economic activity in the following quarter and a positive effect on illicit activity after two quarters. The impact on aggregate economic activity is negative, but more muted.
Highlights
Conflict can affect a country’s development through various channels, including the loss of physical and human capital, the disruption of production processes, and the undermining of markets (Blattman and Miguel, 2010)
Conflict has a negative effect on overall economic activity up to two quarters after a surge in the number of casualties
Given that the elasticity of aggregate economic activity to nighttime light is estimated at 0.25, the relative change of the former when conflict increases by one standard deviation is approximately 0.4% (= 0.25 × 1.7)
Summary
Conflict can affect a country’s development through various channels, including the loss of physical and human capital, the disruption of production processes, and the undermining of markets (Blattman and Miguel, 2010). The empirical evidence available shows a negative correlation between economic activity and conflict intensity. Estimates of the impact of conflict on aggregate economic activity differ in their magnitude, but they are all negative and sizeable. According to Collier (1999), civil wars result in a 2.2% decline in GDP per capita annually, primarily because of slow production and due to the loss of capital. Acemoglu et al (2011) find that cities that suffered the Holocaust most intensely have grown less since and that administrative districts where the Holocaust had the largest impact have lower GDP per capita and lower average wages today. Singh (2013) reports that Punjab districts experiencing a major terrorist incident saw their long-term fixed investment decline by around 17%
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