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CONFLICT RESOLUTION PROCESSES, UNCERTAINTY AND INVESTMENT DYNAMICS: EVIDENCE FOR THE BASQUE COUNTRY

In this article, the economic impact of diminishing levels of uncertainty on investment, as a result of conflict resolution processes, is tested by means of a case study on a European region largely affected by political violence. For this purpose, the response of Basque investment during conflict resolution attempts is used as a natural experiment with which to evaluate the effect of reduced uncertainty on productive investment. Thus, it is found that productive investment in the Basque Country increased considerably when credible peace talks directed towards the end of the conflict were undertaken. Accordingly, when compared with other subsets of comparable Spanish provinces, the truces declared in 1988 and 1998 propelled the growth rate of investment in this region by 21.2 and 25.8 percentage points, respectively. This finding gives an idea on the magnitude of the potential peace dividend to be reaped in the event of an eventual conflict resolution and a complete cessation of political violence in the region.