Internal Conflicts and Shadow Economies


Existing scholarship on the political economy of political violence, to date, has mostly focused on how formal economies shape or are shaped by conflict and overlooked the informal sector. In this article, we posit that intrastate conflicts are likely to fuel the growth of shadow economies by harming the formal economic sector, undermining governments' ability to regulate their economies, and fostering illicit trade. We also hypothesize that the effect of internal conflicts spreads across national boundaries, increasing the amount of shadow sector activity in neighboring states. Results from a global analysis spanning from 1971 to 2012 provide significant evidence that internal conflicts positively contribute to the growth of informal economies in conflict states and their neighbors. Additional analyses also show that the growth of shadow economies does not contribute to the outbreak of intrastate conflicts. Our findings have important implications for understanding the transformative economic consequences of violent conflicts and the longer-term economic legacies they might leave.

Publication Title

Journal of Global Security Studies