Private Sector Development in Conflict Affected States: A Report to the UK Department for International Development

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This Report presents evidence on the relationship between violent conflict and the industrial organization of firms and entrepreneurial decision-making in fragile states. The Report examines several conflict-affected countries using firm-level data, with an emphasis on Afghanistan, Pakistan and Iraq, and relevant regions (e.g. MENA and South Asia), to generate and test hypotheses about the systemic forces acting upon the private sector. Major findings include: (1) the presence of violence stunts the private sector through several different channels, including low investment, a misallocation of resources, and constraints on where firms can operate; (2) almost all large firms in conflict-affected countries pay for security but there is no clear correlation between conflict intensity and the share of revenues paid for security; (3) insecurity and violence reduce access to credit, consistent with creditors fearing political instability and the associated weak property rights; (4) the effects of violence are persistent, continuing to reduce private sector activity even after violence has abated.