Rationality as a barrier to peace: micro-evidence from Kosovo.(Report)

INTRODUCTION

Economists have often viewed social conflict as an outcome of competition to control natural resources (Hirshleifer, 1995) in contexts where collective action is costly or infeasible. Others have argued that such competition does not necessarily explain the existence of armed conflicts, given that armed conflicts inflict significant damage on all parties involved. If, however, there is a breakdown of the social contract involving redistribution of resources among different groups of individuals using fiscal mechanisms, and if this breakdown results in increasing uncertainty about the share of these competing groups in society's resources, armed conflict may be an outcome (Skarperdas, 1992; Azam and Mesnard, 2003). The intensity of the conflict is exacerbated in an environment where past grievances are well entrenched within one or more of the competing groups (Collier and Hoeffler, 1999). On the other hand, if the gains from the absence of conflict are clearly observable, for example, in a period of economic growth, there is a significant reduction in the likelihood of social or civil conflict (Miguel et al., 2004).

Addison and Murshed (2001) argue that, even though elimination of conflict is socially optimal, it is often not a feasible option because it is in the interest of one or more of the parties involved in the conflict to renege on a peace agreement. The final outcome depends on factors such as the payoff to these parties on account of the conflict and the extent to which they discount the future. Esteban and Ray (1999, 2008) demonstrate that a conflict can be aggravated by, among other factors, an increase in within-group inequality. Relatively affluent sections of the groups are then in a position to induce members of the relatively poor sections to join the conflict somewhat inexpensively, given that the poorer people in these groups have low opportunity costs of time. In their framework, an increase in the average income of one group relative to the other, however, has an ambiguous impact on the extent of the conflict. On the one hand, the group whose income increases is in a better position to bear the monetary cost of intensifying the conflict. On the other hand, to the extent that this increase in income is across the board within the group, there is an increase in the opportunity cost of the group members such that fewer among them might want to get involved in the conflict. However, others have argued that between-group inequality may also be an important source of conflict, especially if the groups are formed along ethnic lines (Stewart, 2002).

While social scientists have examined the rationale for and economic cost of social conflicts (eg, Azar et al., 1978; Colletta and Cullen, 2000; Abadie and Gardiezabal, 2001), there have been few systematic attempts to link the above theoretical literature on social conflicts to the available micro-level information about the people who are involved in these conflicts, if any. Much of the empirical analysis has involved the use of cross-country data to identify covariates of civil war and the impact of such wars on macroeconomic variables like capital stock and gross domestic product (Collier and Hoeffler, 1998; Collier, 1999). This lacuna in the literature possibly owes its origin to the paucity of detailed individual or household-level data in most contexts of active civil conflict. Yet, to the extent that at least some of the conflicts are a consequence of optimal decisions of individuals and/or socio-economic groups, often resulting in failure of rival groups to arrive at a mutually acceptable bargaining outcome, it is necessary to understand the factors that influence the reservation payoffs of these individuals or groups during conflicts. In this paper, we address this lacuna using micro-level data from a context where pre-conditions for conflict like grievance and failure of social contract exist, such that an externally enforced peace contract is fragile, and yet for which the relevant data are available.

We use household-level data from Kosovo to attempt to reconcile some of the theories associated with social conflict with the empirical evidence. Kosovo is an interesting case where it is not difficult to explain the reason for the conflict (see, eg, Waller et al., 2001), and it is also relatively easy to explain the intransigence of Serbia, which has been presented with a fair accompli in the form of the acceptance of the unilateral declaration of independence by Kosovar Albanians (henceforth Albanians) by a number of major European Union (EU) countries and the United States of America (USA). But it is more difficult to explain the persistence of resistance to a final solution by the Kosovar Serbs (henceforth Serbs), as well as the absence of any magnanimous gesture on the part of the Albanians given that both the Serbs and the Albanians are likely to reap peace dividends. (1) On the basis of our empirical findings, and drawing on other literature on Kosovo, we comment on the likelihood of a mutually acceptable political resolution of the conflict in Kosovo in the foreseeable future. (2)

It should be noted that this paper does not aim to provide a comprehensive political analysis of the Kosovo conflict. The conflict provides a backdrop in which the two parties that are at odds share mutual mistrust born out of actual and perceived grievances that makes bargaining difficult. There are political dimensions to these grievances and the resultant mistrust that are not analysed in this paper. Instead, it focuses on economic aspects of the crisis. Recent economic literature, cited above, has identified various economic factors such as income distribution that can help prolong conflicts. We first estimate measures of poverty and income inequality to see whether they can explain the persistence of the conflict. Next, we examine the proposition that both the Serbs and Albanians are able to prolong the stalemate, which indicates that their reservation utilities are high such that neither is able to make concessions that would make bargaining attractive to the other party, thereby bringing the latter to the table and enabling the two to proceed to a mutually acceptable endgame. Specifically, we use regression analysis to identify possible reasons that would either make the status quo acceptable to the Serbs and Albanians, relative to an uncertain post-settlement future, and/or factors that would help sustain their consumption levels even during the current conflict, thereby making their positions entrenched and increasing their reluctance to make concessions that can lead to meaningful discussions and negotiations. The empirical analysis in this paper provides an economic rationale for high reservation utilities that are possibly playing a role in forestalling such negotiations. As in the case of any economic study, it takes as given the political complexities in Kosovo, and this ceteris paribus nature of the analysis has to be kept in perspective while drawing policy conclusions from it.

Our results indicate that comparable levels of intra-group inequality and poverty are found among Serb and Albanian households. As Serbs constitute a very small proportion of the overall population, the comparability of inequality and poverty outcomes should be firm groundwork for conflict resolution. However, analysis of intra- and inter-group variations in consumption indicate that much of the variation within and between groups is not easily accountable for by observable factors, making it difficult to target policies aimed at reducing poverty and inter-group differences in living standards. This makes it plausible for both ethnic groups to stake a claim to victimisation and unfair treatment, such that the neutrality of the United Nations Mission in Kosovo (UNMIK), which started administering the province after NATO intervention in 1999, is brought into question. Finally, while Serb households have a good reason to prefer the status quo under UNMIK governance over an Albanian-dominated independent Rosovo, the Albanians have an equally good reason to not make the magnanimous gestures involving resource transfers that might elicit a peace-oriented response from the Serbs. In view of the analysis, a political resolution of the Kosovo conflict in the immediate future might remain elusive unless an external agency like the EU makes a credible commitment, such as fast-track EU membership, that can significantly increase the benefits of bringing an end to the conflict while simultaneously ensuring that EU institutions would guarantee that agreements about sharing of resources made by the Serbs are honoured ex post.