Essays on economic and social barriers to long-term development: a Colombian case study

This thesis consists of three empirical studies which analyse key socioeconomic barriers to a country’s prospects of long-term development and growth. Using Colombia as a case study, the following analyses focus on deepening our understanding of crucial issues, ranging from financial literacy and economic behaviour, to the effect of conflict-related violence on social preferences and youth’s wellbeing. The first empirical study assesses financial literacy levels amongst Colombian consumers and its role in promoting optimal economic behaviour. Following the approach developed by Lusardi and Mitchell (2008; 2009; 2011a), this chapter examines individuals’ understanding of three financial concepts, including interest rate compounding, inflation rates and risk diversification. Moreover, it relies on two novel instruments, namely local development funds and the number of schools at the locality level, to control for the potential endogeneity of financial literacy. The results indicate that financial illiteracy is widespread across our sample, with only 52% of respondents understanding interest rate compounding and less than half of individuals grasping both inflation rates and risk diversification. Most importantly, the findings show a positive relationship between financial illiteracy and welfare-reducing economic practices. Specifically, those who are financially savvy are not only less likely to rely on informal borrowing methods but are also significantly less likely to incur debt as a means to make ends meet. The second empirical study examines the impact of Colombia’s 58-year-long armed conflict on individual-level social outcomes, including political polarisation and attitudes towards the use of violence, vigilantism and iron-fist policies. To address potential sources of endogeneity, the identification strategy relies on a difference-in-differences model that exploits variation in the geographical and temporal distribution of municipality-level violence during 2013-2016. The findings show that conflict exposure is a key determinant of social preferences. In particular, respondents living in areas highly exposed to violence are significantly less likely to support the use of violence, relative to their counterparts in lower exposure municipalities. Interestingly, whilst individuals living in conflict-ridden areas are significantly less likely to support iron-fist policies that erode the rule of law, high exposure to threats is also associated with a greater likelihood of individual-level political polarisation. Building on the analysis of the previous chapter, the final study examines the impact of conflict-related violence on the probability of risk behaviour amongst 9-16-year-old children and adolescents. While the analysis focuses predominantly on alcohol use, it also examines the effect of violence on additional measures of externalising behaviours. Using a child fixed effects model, the results show that changes in exposure to threats and forced displacement increase the probability of alcohol use, particularly amongst 13-16-year-old adolescents. By contrast, we find no significant effects of conflict exposure amongst 9-12-year-old children. This evidence is consistent with research from developmental neuroscience which highlights mid-adolescence as a critical period for the emergence of risk behaviour. Additionally, we find no gender differences in the impact of violence, with both older female and male adolescents experiencing a significant increase in their likelihood of alcohol use. Finally, we also find a significant effect of changes in conflict exposure on our additional measures of externalising behaviours and index scores that summarise adolescents’ maladaptive outcomes.