Carrot or stick? Redistributive transfers versus policing in contexts of civil unrest* Patricia Justino** Institute of Development Studies, UK WCFIA, Harvard University, USA This draft: 02 November 2007. Comments are most welcome Abstract Recurrent episodes of civil unrest significantly reduce the potential for economic growth and poverty reduction. Yet the economics literature offers little understanding of what triggers civil unrest in society and how to prevent it. This paper provides a theoretical analysis in a dynamic setting of the merits of redistributive transfers in preventing the onset of (and reducing) civil unrest and compare it with policies of more direct intervention such as the use of police. We present empirical evidence for a panel of Indian states, where conflict, transfers and policing are treated as endogenous variables. Our empirical results show, in the medium-term, redistributive transfers are both a more successful and cost-effective means to reduce civil unrest. Policing is at best a short-term strategy. In the longer term, it may trigger further social discontent. JEL codes: C23, C33, D74, I38, O53. Keywords: Transfers, policing, conflict, unrest, India, panel data. * I would like to thank M. D. Asthana, Chris Cramer, Barbara Harriss-White, Ron Herring, Julie Litchfield, Barry Reilly, Rathin Roy, Subir Sinha, Bogdan Stefański, Manny Teitelbaum, Philip Verwimp, Alan Winters and participants at the 2005 AEA annual meeting, the 2004 RES annual conference, the WIDER conference on Making Peace Work (June 2004) and seminars at SOAS, Oxford, Sussex, IDS, ISS and Sheffield for useful comments and discussions. All remaining errors are mine. I have benefited from financial support from the Bristish Academy (PDF/2002/288). I am very grateful to the Weatherhead Center for International Affairs at Harvard University, and Bob Bates in particular, for providing the facilities to finish this paper. Previous drafts of this paper were circulated previously under the title ‘Redistribution, Inequality and Political Conflict’. ** Email.: [email protected], [email protected]. Introduction The magnitude of private and social costs of social and political instability across many developing countries has brought the analysis of civil conflict into the forefront of modern development economics. Conflicts across the world, ranging from civil wars to riots and civil protests, have affected millions of people and have resulted in lost opportunities in terms of economic growth and human development (Collier, 1999; Stewart et. al., 2001; Fearon and Laitin, 2003). Existing literature offers, however, remarkable little understanding of what determines this significant constraint to development and what can be done to prevent it. The literature has mostly concentrated on two explanations for the origin of civil conflicts. They are, respectively, greed and grievance (see Collier and Hoeffler, 1998, 2004). Although in practice both motivations may co-exist simultaneously (Murshed, 2005), the greed explanation emphasizes the role of lootable rents in producing inter-group rivalry for their control, while the grievance concept refers to historical injustices and inter-group inequalities. Cross-country analyses have highlighted the importance of greed-related factors in determining the onset of civil wars (see Collier and Hoeffler, 2004; Fearon and Laitin, 2003). The relationship between forms of income inequality (grievance) and the onset of violent mass conflicts has been tested with mixed results (see Cramer, 2002 for a discussion). Analyses of between-group, rather than within-group, inequalities have been more successful. This body of research has emphasized the importance of horizontal inequalities between groups, classified by ethnicity, religion and other cultural characteristics, as sources of conflict (e.g. Stewart, 2002; Langer, 2004; Stewart, Brown and Mancini, 2005; Mancini, 2005; Østby, 2006), as well as of societal levels of polarization (e.g. Esteban and Ray, 1991, 1994; Foster and Wolfson, 1992; Wolfson, 1994; Reynal-Querol, 2001; Montalvo and Reynal-Querol, 2003; Caselli and Coleman, 2006), categorical inequalities3(Tilly, 1998) and ethnic fragmentation (e.g. Easterly and Levine, 1997; Elbadawi, 1992). Rises in economic and social disparities between different population groups, systematic social exclusion and other forms of perceived unfairness in social relations often result in the accumulation of discontent to a sufficiently high level to break social cohesion (Sigelman and Simpson, 1977; Bates, 1983; Horowitz, 1985; Muller, 1985; Muller and Seligson, 1987; Midlarsky, 1988; Schock, 1996), and increase the probability of some population groups engaging in rent-seeking or predatory activities (Benhabib and Rustichini, 1991; Fay; 1993; Sala-i-Martin, 1996; Fajnzylber, Lederman and Loayza, 1998; Grossman, 1991; 1999). While this literature provides a good entry point into the analysis of the causes of civil conflicts, it offers little policy application in terms of what can effectively be done to reduce (or even prevent) the onset of conflict episodes. It also focuses mostly on the analysis of large-scale civil wars. Although civil wars have represented a serious constraint to development in recent decades, many developing countries have been badly affected by local conflicts and social upheavals (Barron, Kaiser and Pradhan, 2004; Boix, 2004). These forms of internal civil unrest may not necessarily result in large-scale wars. Nevertheless, they have been responsible for the destruction of livelihoods and markets, increases in the risk of investment, loss of trust between economic agents and the waste of significant human and economic resources, often more so than larger-scale armed conflicts (Barron, Kaiser and Pradhan, 2004). Persistent forms of civil unrest have also often constituted the preliminary stages of more violent conflicts, including civil wars.1 Despite the accumulation of evidence that economic and social factors contribute largely to the onset of civil conflicts, the general tendency of governments in economies prone to civil unrest4is to resort to the use of police and military forces to offset civil and political upheavals.2 This can be a counterproductive measure since it may not necessarily address causes of unrest, when this is rooted in forms of social injustice. Much has been written on the wasteful role of