The Impact of Ethnic Conflict on Economic Complexity: a synthetic difference-in-differences study

Sammanfattning

This study examines how ethnic conflict affects economic complexity, the latter a measure which captures an economy's capacity to produce and export sophisticated goods. While prior research has focused on macroeconomic indicators like GDP, little attention has been paid to how conflict shapes the underlying industrial structure of economies. Using the synthetic difference-in-differences (SDiD) method on panel data from 85 countries (1995-2021), we analyse episodes of conflicts with more than 100 annual fatalities. The results show that ethnic conflict reduces economic complexity by 0.206 standard deviations, with effects persisting beyond the actual conflict period. Further analysis reveals that exports of the most complex products are disproportionately affected, indicating that conflict undermines the diversification and sophistication of export structures. Hypothesized mechanisms linking ethnic conflict to economic complexity include the destruction of productive capital, fragmentation of inter-ethnic business networks, and declining quality of foreign investment.