Measuring the Economic Impact of Civil War

Civil wars impose substantial costs on the domestic economy. We empirically measure the economic impact of such internal wars. The paper contributes to the existing literature both theoretically and methodologically. First, it explores the economic channels through which civil war affects growth. Previous studies have shown the negative growth effects of civil wars. We go a step further by identifying the channels through which war strips a country of its growth potential. Our argument is that civil war negatively impacts private investment through the process of portfolio substitution. Methodologically, the paper improves on both the data and statistical models used in the existing literature. Our data set includes better measurements of the intensity and scope of civil war as well as new economic and political data for the 1990s. Moreover, using a multiple imputation technique, we minimize the estimation bias due to missing data. Finally, to improve the model, we apply fixed and random effects models to the panel data. The evidence gives strong support to our argument indicating that the driving force behind the negative effects of civil war on economic growth is a decrease in private investment.