Culture, Economic Shocks and Conflict: Does Trust Moderate the Effect of Price Shocks on Conflict?*

Abstract

Internal conflict has affected most developing countries over the past several decades. Economic shocks are among the primary drivers of civil conflict. However, the empirical evidence on the impact of price shocks on the risk of conflict is mixed. This paper documents an important channel through which culture may affect conflict in the wake of economic shocks: trust. We use price shocks to extractive commodities as an exogenous variation in the country's economic outlook. We examine a panel of developing countries over 67 years to study whether trust moderates the effect of economic shocks on conflict and use a Difference-in-Differences strategy with country and year fixed effects to estimate the moderating impact of generalised trust. We find that these price shocks are less likely to result in the onset of civil war and conflict in countries with higher trust levels. A one standard deviation increase in the extractive commodity price shock leads to a 30 per cent difference in the probability of the onset of civil conflict between two countries with generalised trust levels one standard deviation apart. We also find that trust does not moderate the effect of price shocks on the cessation of conflict. Our study provides new empirical evidence on the interdependence of economic shocks and culture on conflict.