Does economic growth reduce the odds of civil conflict? Miguel, Satyanath, and Sergenti (2004) used an instrumental variables approach to assess the relationship between economic growth and civil war. They provided data (available in RainIV.dta) on 41 African countries from 1981 to 1999 , including the variables listed in Table 9.7.

(a) Estimate a bivariate OLS model in which the occurrence of civil conflict is the dependent variable and lagged GDP growth is the independent variable. Comment on the results.

(b) Add control variables for initial GDP, democracy, mountains, and ethnic and religious fractionalization to the model in part (a). Do these results establish a causal relationship between the economy and civil conflict?

(c) Consider lagged rainfall growth as an instrument for lagged GDP growth. What are the two conditions needed for a good instrument? Describe whether and how we test the two conditions. Provide appropriate statistical results.

(d) Explain in your own words how instrumenting for GDP with rain could help us identify causal effect of the economy on civil conflict.

(e) Use the dependent and independent variables from part (b), but now instrument for lagged GDP growth with lagged rainfall growth. Comment on the results.

(f) Redo the 2SLS model in part (e), but this time, use dummy variables to add country fixed effects. Comment on the quality of the instrument in the first stage and the results for the effect of lagged economic growth in the second stage.

(g) (funky) Estimate the first stage from the 2SLS model in part (f), and save the residuals. Then estimate a regular OLS model that includes the same independent variables from part (f) and country dummies. Use lagged GDP growth (do not use fitted values), and now include the residuals from the first stage you just saved. Compare the coefficient on lagged GDP growth you get here to the coefficient on that variable in the 2SLS. Discuss how endogeneity is being handled in this specification.

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TABLE 9.7 Variables for Rainfall and Economic Growth Data Variable name InternalConflict Lagged GDP Growth InitialGDP percap Description Coded 1 if civil war with greater than 25 deaths and 0 otherwise Lagged GDP growth GDP per capita at the beginning of the period of analysis, 1979 A measure of democracy (called a "polity" score); values range from -10 to 10 Percent of country that is mountainous terrain Democracy Mountains Ethnic Frac Religious Frac Religious fractionalization Ethnic-linguistic fractionalization LaggedRainfallGrowth Lagged estimate of change in millimeters of precipitation from previous year