Poverty, Armed Conflict and Financial Instability
Civil conflict has far-reaching effects on underdeveloped economies. Whilst military expenditure may be diverted into projects that encourage human capital accumulation and the construction of essential infrastructure, conflict destroys institutions and infrastructure generating financial instability and exacerbating stagnation and underdevelopment. Vicious circles emerge as socioeconomic instability contributes to ongoing civil unrest and financial instability, in turn increasing the risk of future conflicts. In this paper, the relationships between conflict, finance and poverty are analysed by exploring the hypothesis that poverty and conflict are magnified by financial factors. Interactions between conflict, absolute poverty and finance are estimated using least squares and binary dependent variable techniques adapted to capture simultaneity, with heterogeneity captured using fixed effects techniques. The results suggest a strongly significant positive relationship between poverty and conflict; the risk of war is positively associated with financial factors suggesting that financial resources will influence poverty indirectly by increasing risks of conflict.
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