In many ways the story of Punjab is anomalous to the stylized facts of civil war literature. Empirical literature on civil wars points to a negative correlation between income and likelihood of conflict. There is also cross-country evidence to suggest that rough terrain contributes to greater possibility of violence. Both these facts did not hold in the case of Punjab. However, recent research on terrorism supports the view that terrorism is not correlated with poverty and lower education levels. This is consistent with terrorism in Punjab, where terrorists on average were moderately educated and came from families owning small and medium sized farms.
Having a rural base in Punjab was essential to the terrorist movement as this helped them remain hidden from the police forces. This was despite not having forest cover or rugged terrain. The key to inducing the local population not to denounce the rebels is local knowledge or information about who is doing what at the village level. Local knowledge allows the rebels to credibly threaten retribution for informing the police. Evidence from Algeria by Kalyvas (1999) suggests that ethnic insurgents use this informational advantage to a great extent, often threatening and inflicting harsh sanctions on their own people. In Punjab, kidnapping was an efficient technology used by terrorists to extract their rents and terrorism was informationally extremely localized, especially in villages. This suggests that farmers were deeply affected by terrorism and were acutely aware of the attacks due to a high degree of social capital locally.
The year 1984 saw the Indian Army being deployed in the state because of several incidents of terrorism. A separatist group, Khalistan Commando Force proclaimed the independence of Punjab (calling it "Khalistan") and they along with Bhindranwale took refuge in the Golden Temple, the holy shrine for the Sikhs. In April, extremists simultaneously attacked thirty nine local railway stations located in twelve different districts. On 2nd June, the army sealed off Punjab from the rest of India and seven tanks rolled into the Golden Temple. As has been observed elsewhere, specific events suddenly mobilize large numbers through grievance and coordination and this seems to have been the case after Operation Bluestar. A couple of months later, Indira Gandhi was shot dead by two of her Sikh bodyguards.
In 1985, President’s rule was lifted with the Rajiv Gandhi-Longowal Peace Accord, which referred all contentious issues to several commissions. But the accord was never fully implemented by the central government. In May 1987, due to political instability, President’s rule was imposed again. It has been shown through a theoretical argument that a peace pact may increase conflict in later years because the extremist faction of the separatists would want to grab power from the moderates who signed the accord. This appears to have happened in Punjab.
The death toll due to terrorist violence rose from 1,333 in 1987 to 5,265 in 1991 and tapered to 871 in 1993. By 1994, the police under the leadership of K.P.S. Gill declared that terrorism had been defeated and that normalcy had returned. Along with an increase in police personnel, changes in foreign support due to sealing of borders with Pakistan and the curtailing of ISI funding by Benazir Bhutto contributed to usher in peace. This eventually resulted in both internally generated terrorism and external abetment being wiped out.
In the rationalist strand of explanations for civil conflict, the theory of commitment problems seems to fit the scenario of Punjab. Despite a series of negotiations, there was no breakthrough between the Centre and the separatists. This may have been because of two reasons. First, there were commitment problems, i.e. no credible commitment mechanism for the separatists to believe in the centre’s offers. This would mean that once the extremists handed over their weapons, there would be an incentive for the government to renege on its promises. This commitment problem is prevalent in many civil conflicts and usually can be solved through a credible third-party commitment agency or if the movement is crushed completely as was done in Punjab. Second, issue indivisibilities namely, river water sharing and Chandigarh being made capital of Punjab were issues that did not seem to have a bargaining equilibrium as there may have not been enough alternatives for the groups to choose from. This problem was accentuated by the divisions among the militant groups themselves despite trying to forge alliances through committees. Which of these reasons was more important is an open question, but I think that issue indivisibilities could have been resolved using monetary transfers, but trustworthiness of the government would have always been suspect (which is rational for the terrorists).
During 1987 to 1992, the agricultural growth rate plummeted from 6% to 2%. To analyze how terrorism impacted Punjab’s economy, it is critical to understand how violence affected investment decisions of firms and farmers. A likely mechanism through which terrorism affects investment is through firms facing the threat of extortion of their employees (human capital losses) or loss of property (physical capital losses). The threat of extortion may increase especially if the investment is visible to outsiders, for instance if the farmer has a tractor or a firm has a huge plant. Another mechanism could be through the risk of migration. Due to deterioration of such property rights, investment is likely to decrease. Also, as conflict increases, land would be more difficult to collateralize (and interest rates set higher). This would lead to a reduction in land investment. Terrorism may increase the risk of a regime change and the accompanying redistribution of land would make long-term investment unprofitable. An increase in the probability of dying would also make investment less attractive. Finally, an increased risk of migration would negatively impact investment.
Which of these factors was responsible for a decline in agricultural investment and shutting down of several factories can only be found out by ruling out the others. As of now, because of data availability issues, it is difficult to say which channel was the most important. However, regression analysis shows that violence leading to an increase in the probability of kidnapping (proxying for threat of extortion) turns out to be a significant channel. Such a channel has been ignored earlier in the empirical literature on conflict. It reinforces the anthropological stylized fact that individuals were well informed about terrorist activities. And this knowledge helped them better predict future kidnappings and reduce their investment accordingly.
Prakarsh Singh is a Researcher at the London School of Economics and currently a visiting scholar at the Institute for Defence Studies and Analyses, New Delhi. This comment is based on his LSE mimeo “Impact of Terrorism on Investment.”
Causes and consequences of Terrorism in Punjab: A Rationalist Perspective
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In many ways the story of Punjab is anomalous to the stylized facts of civil war literature. Empirical literature on civil wars points to a negative correlation between income and likelihood of conflict. There is also cross-country evidence to suggest that rough terrain contributes to greater possibility of violence. Both these facts did not hold in the case of Punjab. However, recent research on terrorism supports the view that terrorism is not correlated with poverty and lower education levels. This is consistent with terrorism in Punjab, where terrorists on average were moderately educated and came from families owning small and medium sized farms.
Having a rural base in Punjab was essential to the terrorist movement as this helped them remain hidden from the police forces. This was despite not having forest cover or rugged terrain. The key to inducing the local population not to denounce the rebels is local knowledge or information about who is doing what at the village level. Local knowledge allows the rebels to credibly threaten retribution for informing the police. Evidence from Algeria by Kalyvas (1999) suggests that ethnic insurgents use this informational advantage to a great extent, often threatening and inflicting harsh sanctions on their own people. In Punjab, kidnapping was an efficient technology used by terrorists to extract their rents and terrorism was informationally extremely localized, especially in villages. This suggests that farmers were deeply affected by terrorism and were acutely aware of the attacks due to a high degree of social capital locally.
The year 1984 saw the Indian Army being deployed in the state because of several incidents of terrorism. A separatist group, Khalistan Commando Force proclaimed the independence of Punjab (calling it "Khalistan") and they along with Bhindranwale took refuge in the Golden Temple, the holy shrine for the Sikhs. In April, extremists simultaneously attacked thirty nine local railway stations located in twelve different districts. On 2nd June, the army sealed off Punjab from the rest of India and seven tanks rolled into the Golden Temple. As has been observed elsewhere, specific events suddenly mobilize large numbers through grievance and coordination and this seems to have been the case after Operation Bluestar. A couple of months later, Indira Gandhi was shot dead by two of her Sikh bodyguards.
In 1985, President’s rule was lifted with the Rajiv Gandhi-Longowal Peace Accord, which referred all contentious issues to several commissions. But the accord was never fully implemented by the central government. In May 1987, due to political instability, President’s rule was imposed again. It has been shown through a theoretical argument that a peace pact may increase conflict in later years because the extremist faction of the separatists would want to grab power from the moderates who signed the accord. This appears to have happened in Punjab.
The death toll due to terrorist violence rose from 1,333 in 1987 to 5,265 in 1991 and tapered to 871 in 1993. By 1994, the police under the leadership of K.P.S. Gill declared that terrorism had been defeated and that normalcy had returned. Along with an increase in police personnel, changes in foreign support due to sealing of borders with Pakistan and the curtailing of ISI funding by Benazir Bhutto contributed to usher in peace. This eventually resulted in both internally generated terrorism and external abetment being wiped out.
In the rationalist strand of explanations for civil conflict, the theory of commitment problems seems to fit the scenario of Punjab. Despite a series of negotiations, there was no breakthrough between the Centre and the separatists. This may have been because of two reasons. First, there were commitment problems, i.e. no credible commitment mechanism for the separatists to believe in the centre’s offers. This would mean that once the extremists handed over their weapons, there would be an incentive for the government to renege on its promises. This commitment problem is prevalent in many civil conflicts and usually can be solved through a credible third-party commitment agency or if the movement is crushed completely as was done in Punjab. Second, issue indivisibilities namely, river water sharing and Chandigarh being made capital of Punjab were issues that did not seem to have a bargaining equilibrium as there may have not been enough alternatives for the groups to choose from. This problem was accentuated by the divisions among the militant groups themselves despite trying to forge alliances through committees. Which of these reasons was more important is an open question, but I think that issue indivisibilities could have been resolved using monetary transfers, but trustworthiness of the government would have always been suspect (which is rational for the terrorists).
During 1987 to 1992, the agricultural growth rate plummeted from 6% to 2%. To analyze how terrorism impacted Punjab’s economy, it is critical to understand how violence affected investment decisions of firms and farmers. A likely mechanism through which terrorism affects investment is through firms facing the threat of extortion of their employees (human capital losses) or loss of property (physical capital losses). The threat of extortion may increase especially if the investment is visible to outsiders, for instance if the farmer has a tractor or a firm has a huge plant. Another mechanism could be through the risk of migration. Due to deterioration of such property rights, investment is likely to decrease. Also, as conflict increases, land would be more difficult to collateralize (and interest rates set higher). This would lead to a reduction in land investment. Terrorism may increase the risk of a regime change and the accompanying redistribution of land would make long-term investment unprofitable. An increase in the probability of dying would also make investment less attractive. Finally, an increased risk of migration would negatively impact investment.
Which of these factors was responsible for a decline in agricultural investment and shutting down of several factories can only be found out by ruling out the others. As of now, because of data availability issues, it is difficult to say which channel was the most important. However, regression analysis shows that violence leading to an increase in the probability of kidnapping (proxying for threat of extortion) turns out to be a significant channel. Such a channel has been ignored earlier in the empirical literature on conflict. It reinforces the anthropological stylized fact that individuals were well informed about terrorist activities. And this knowledge helped them better predict future kidnappings and reduce their investment accordingly.
Prakarsh Singh is a Researcher at the London School of Economics and currently a visiting scholar at the Institute for Defence Studies and Analyses, New Delhi. This comment is based on his LSE mimeo “Impact of Terrorism on Investment.”
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