The Economic Legacy of Civil War

Abstract

This article positions itself among the very rare microeconomic analyses on the consequences of civil war. Up to now, most analyses on this topic are based on household surveys. The originality of the present study is that it investigates for the first time the likely predominant route by which civil conflict affects the economy, specifically through firms. The context of the study is Sierra Leone, a country that was ravaged by violent conflict from 1991 to 2002. The approach is to use geographical variations in the intensity of conflict to estimate the impact of violence on firms, on which we have data from the World Bank 2007 Employers’ Survey. The proposed theory is that during conflict, violence affects production through a form of technical regress and demand through a reduction in income. The persistent post-conflict effects are less obvious. We assume that war forces a prolonged contraction in output skills, which slows the pace of recovery. We termed this phenomenon “forgetting by not doing”. The results confirm our theory: the size of firms in 2006 is negatively affected by the intensity of the war in the area it operates. The analysis of training needs clearly corroborates the long-lasting lack of skills experienced as a result of the war in areas where the conflict was more intense. Yet, the analysis cannot identify robust recovery patterns.