Peace Dividends: The Economic Effects of Colombia's Peace Agreement

The last decades have seen a resurgence of armed conflict around the world, renewing the need for durable peace agreements. In this paper, I evaluate the economic effects of the peace agreement between the Colombian government and the largest guerrilla group in the country, the FARC, putting an end to one of the longest and most violent armed conflicts in recent history. Using a difference-in-difference strategy comparing municipalities that historically had FARC presence and those with presence of a similar, smaller guerrilla group, the ELN, before and after the start of a unilateral ceasefire by the FARC, I establish three sets of results. First, violence indicators significantly and sizably decreased in historically FARC municipalities. Second, despite this large reduction in violence, I find precisely-estimated null effects across a variety of economic indicators, suggesting no effect of the peace agreement on economic activity. Furthermore, I use a sharp discontinuity in eligibility to the government's flagship business and job creation program for conflict-affected areas to evaluate the policy's impact, also finding precisely-estimated null effects on the same economic indicators. Third, I present evidence that suggests the reason why historically FARC municipalities could not reap the economic benefits from the reduction in violence is a lack of state capacity, caused both by their low initial levels of state capacity and the lack of state entry post-ceasefire. These results indicate that peace agreements require complementary investments in state capacity to yield an economic dividend.