Fiscal decentralization, intergovernmental transfer reform and conflict in Colombian municipalities

In this paper, we examine how conflict in Colombia responded differentially to a fiscal decentralization reform in 2001 for the regions with different presence of armed militia groups, namely the Revolutionary Armed Force of Colombia (FARC), the National Liberation Army (ELN), and the United Self-Defense Group of Colombia (AUC). We also examine the differential impact on municipalities with and without oil reserves. We are using municipal-level data on general characteristics of municipalities, fiscal variables, and variables related to conflict. While there is a rich literature on the economic drivers and impacts of conflicts, the literature that examines the relationship between fiscal decentralization and conflicts is relatively small. We are contributing to the literature by examining this relationship at the local (municipal) level, which has not been explored widely or conclusively in other studies. We are also addressing spatial dependence among municipalities. This is important because it is likely that conflict and other economic variables lead to spillovers that impact municipalities in close proximity. We employ spatial econometric techniques, particularly Spatial Durbin Model (SDM), to account for spatial dependence in the data. Our results show a decrease in conflict in response to the intergovernmental transfer reform, but the exact response vary by conflict region. Oil reserves in some municipalities seem to have played a role in the conflict outcomes as well.