Economic Consequences of Conflict

Abstract

This research addresses a relatively unexplored but vitally important issue: How and why do nations recover after wars? Our goal is to identify the elements that systematically accelerate postwar recovery. We want to formally assess the impact of foreign aid and investment, human capital, demographic changes, and most importantly the political capacity of governments on post war recovery rates. This inquiry is motivated by inconsistencies emerging from past empirical and theoretical works. Previous empirical work identified the existence of a Phoenix Factor among the most developed nations traumatized by major war (Germany, Japan, Italy, or France). Despite massive economic and demographic losses, these societies recovered their previous economic standing and productivity within one generation after both World War I and II. Yet, these uniform patterns of recovery seemingly do not apply to developing nations. Recent empirical assessments of postwar recovery that combine civil and international wars suggest that the Phoenix Factor pattern applies to developed societies and some developing societies, but does not hold in most developing societies. The open question is why?Consistent with the Phoenix Factor, the Neoclassical Growth model anticipates fast recovery following wars but does not account for the possibility of protracted losses. Given the mixed empirical record we seek a possible explanation by modifying the Overlapping Generation (OLG) Model that allows multiple steady states during recovery. At one extreme OLG anticipate rapid recovery, and at the other extreme permit postwar collapse leading to a poverty trap. The intellectual objective is to identify and explain why some developing societies encounter great difficulties in their postwar recovery efforts, while others recover within a generation their previous productivity.