SMERU Publication

Working Paper
Topic: Economic Policy, Governance, Social Protection

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Beyond the Overall Economic Downturn: Evidence on Sector-specific Effects of Violent Conflict from Indonesia

Marc Vothknecht
DIW Berlin - German Institute for Economic Research

Sudarno Sumarto
The SMERU Research Institute

EDITOR:
Stephen Girschik

ABSTRACT

This paper analyzes the impact of violent conflict on economic activity using micro level data sources from Indonesia. The study compiled a panel dataset at the kabupaten level for the period 2002-2008, and attempted to disentangle the overall negative effect of violent conflict on economic growth into its sectoral components. We find substantial differences across sectors, with the most detrimental impact evident in manufacturing industries and the service sector. Furthermore, the short-run impacts on growth appear to be only temporal and some evidence of the "phoenix effect" in the ready post-conflict period is found. The construction sector, in particular, recovers quickly once the conflict ends, while manufacturing industries and the finance sector appear especially reliant on a lasting peace. The results therefore reveal the substantial effects of violent conflict on the structure of the economy and hence its longer-term growth trajectory. A series of alternative specifications confirm the main findings of the analysis.

Keywords: violent conflict, economic growth, Indonesia
JEL Codes: 011, F51

TABLE OF CONTENTS

ABSTRACT
TABLE OF CONTENTS
LIST OF TABLES
I. INTRODUCTION
II. EXISTING EVIDENCE ON SECTOR-SPECIFIC CONFLICT IMPACTS
III. CONFLICT AND DATA DESCRIPTION

3.1 Background to the Violence
3.2 Growth Data
3.3 Podes Data

IV. ECONOMETRIC APPROACH

4.1 Regression Setup
4.2 Endogeneity of Conflict Variables

V. EMPIRICAL RESULTS

5.1 Descriptive Statistics
5.2 Regression Results

VI. CONCLUSION
LIST OF REFERENCES
APPENDIX