Conflicts and Growth: The R&D Channel

Abstract Violent conflicts are typically associated with a long-lasting drag on economic output, yet establishing causality based on macro data remains a challenge. This study attempts to establish causality in the conflict-growth nexus by exploiting within-country variation across the technological intensity of various industries. It identifies a channel through which conflicts can impact growth, that is, by hindering R&D activities. The analysis is based on data from two-digit manufacturing industries in a large sample of countries over the last four decades. The results show that conflicts lead to a decline in labor-productivity growth, particularly in industries with higher technological intensity. The differential effect of conflicts on labor-productivity growth in high-tech industries is estimated to be large, and not off set in the post-conflict period. Similar patterns are reflected at the aggregate level: Per capita GDP growth declines in the years of conflicts, driven by lower growth in broader sectors that typically require more R&D (e.g., industrial production and services) rather than traditional activities (e.g., agriculture). The findings offer insight into the observed patterns of durable declines in income in the aftermath of conflicts, considering the role of technological progress and innovation in long-term economic growth.