Lines in the Sand: Border Effects, Economic Integration and Disintegration of Post-War Iraq

Abstract

Recent reports from Iraq paint a mixed picture of a country taking steps toward selfgovernance and economic recovery as well as one experiencing waves of violent internecine conflict. In this paper, we analyze weekly price data for 255 goods from the eighteen Iraqi governorates over the years 2005-2008 to assess the extent that markets are developing. The law of price one suggests that, after controlling for distance between major cities, prices should converge in the presence of relatively free trade among the governorates. Our model explores whether prices have converged across regions, over time and what might explain those dynamics. Our paper suggests four empirical regularities associated with market development in Post-War Iraq. First, the degree of price distortion (i.e. price dispersion) has been approximately two times higher than those reported using similar techniques and data in the United States and Japan. Second, the degree of price distortion drops significantly during the period commonly referred to as "the surge" and rises afterward, though at a more modest pace. Third, the degree of price distortion is significantly smaller in areas in which the United States military presence was greatest, i.e. Sunni and Kurdish regions as opposed to Shia regions. Finally, there is limited evidence to suggest that the sub-national economies (Kurdish, Shia, and Sunni) and not completely economically integrated, though the "border effects" are smaller than those reported across countries in the trade literature. Hence, we conclude there are "lines in the sand" rather than significant border impediments to trade. Taken together, these results suggest a significant role for violence and security in explaining market distortions and market integration and disintegration.

Keywords: Trade, Conflict, War

JEL Classification: E6, H1, H5, D74, O11