By How Much Does Conflict Reduce Financial Development?

UNU-WIDER Discussion Paper, 2002/48

Posted: 20 Nov 2014

See all articles by Tony Addison

Tony Addison

United Nations University

Syed Mansoob Murshed

Institute of Social Studies (ISS)

Abdur Chowdhury

Marquette University - Department of Economics; United Nations - Economic Commission for Europe

Date Written: 2002

Abstract

Financial development is vulnerable to social conflict. Conflict reduces the demand for domestic currency as a medium of exchange and a store of value. Conflict also leads to poor quality governance, including weak regulation of the financial system, thereby undermining the sustainability of financial institutions. Conflict therefore reduces the social return to financial liberalization and other financial-sector reforms. This paper presents a theoretical model integrating the effects of conflict and financial liberalization, and then tests the model on data for 79 countries. Using an explanatory variable that measures the intensity of conflict (from low to high) the results show that conflict significantly reduces financial development, and that this negative effect increases as conflict intensifies. The paper concludes that conflict reduction is essential if financial reform is to have its full benefit for development.

Keywords: Financial development, conflict, financial regulation

JEL Classification: O16, O23

Suggested Citation

Addison, Tony and Murshed, Syed Mansoob and Chowdhury, Abdur, By How Much Does Conflict Reduce Financial Development? (2002). UNU-WIDER Discussion Paper, 2002/48. Available at SSRN: https://ssrn.com/abstract=2528091

Tony Addison (Contact Author)

United Nations University ( email )

Katajanokanlaituri 6B
Helsinki, FIN-00160
Finland

Syed Mansoob Murshed

Institute of Social Studies (ISS) ( email )

PO Box 29776
2502 LT The Hague, 2518 AX
Netherlands
+31 70 426 0591 (Phone)
+31 70 426 0799 (Fax)

Abdur Chowdhury

Marquette University - Department of Economics ( email )

P.O. Box 1881
Milwaukee, WI 53201-1881
United States

United Nations - Economic Commission for Europe ( email )

Palais des Nations
Geneva
Switzerland

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