06 November 2020

Targeting the Cash Funding of Armed Groups: The Indian Demonetization as a Counter-Insurgency Policy

How do the finances of armed groups influence their activities and structural organisation? Do restrictions on mobility curb conflict across countries? Are labour market conditions related to intimate partner violence – and if so, how? Such are the questions that Dr Nathalie Monnet takes up in the four chapters composing her PhD thesis in International Economics. Without limiting herself to analysing the determinants of violent behaviour, she also investigates the impact of armed groups’ violence on economic activities. In this interview, Dr Monnet focuses on “Hit Them in the Wallet! An Analysis of the Indian Demonetization as a Counter-Insurgency Policy”, a paper co-authored with Edoardo Chiarotti that provides the first study on the importance of cash in illegal activities and an ex-post evaluation of a policy countering illicit cash flows.

Can you describe the main question underlying your chapter “Hit Them in the Wallet! An Analysis of the Indian Demonetization as a Counter-Insurgency Policy”?

I wrote this chapter with Edoardo Chiarotti, fellow PhD candidate in International Economics. Its main research question is: How does the cash nature of the finances of armed groups influence their violent activities? Cash is indeed a key element of illegal activities as it is easy to access but difficult to trace.

However, the identification of a causal impact is not a trivial task, due to the inability to quantify such funding flows. To overcome this challenge, we use the 2016 Indian Banknote Demonetization as a unique opportunity to observe the importance of cash. This policy led to a sharp and sudden cash shortage by declaring 86% of the cash in circulation worthless within a night, with new notes introduced in replacement. Our analysis focuses on the Maoist Insurgency, an armed conflict based on a cash funding structure. In the aftermath of the demonetization, the Maoists were badly hit: their cash reserves were instantaneously worthless, preventing them to fund both their daily expenses and violent activities.

What is your methodological strategy?

To study the impact of the demonetization on organized armed groups, we construct a unique and rich dataset of daily violent events, fatalities and surrenders of the Maoist insurgents in India between 2006 and 2018, as well as the timing and the intensity of the cash shortage caused by the demonetization. We follow an econometric strategy called difference-in-differences, allowing us to compare pre and post-policy trends in violent activities and surrenders, between districts severely and weakly affected by the shock.

What are your major findings?

Our results suggest that there is a general reduction in violence after the policy in districts experiencing more severe cash shortage, and a positive impact on surrenders of Maoist extremists. Furthermore, we find that the increase in the trend of surrenders is mitigated where Maoists have higher abilities to raise alternative funding. We explore three traditional sources of revenue: the extortion of public work contractors, mineral and forest resources.

We identify two main channels that explain the reaction of the insurgency in the aftermath of the Indian demonetization. While at the armed-organization level, the Maoist Insurgency diverts its usual violent activities towards rent-seeking practices in order to rebuild its lost finances (the appropriation channel), at the individual level, insurgents exit the illegal market for legal occupations unless there are potentially appropriable resources (the opportunity-cost channel). Overall, our results highlight that the effectiveness of the policy is closely linked to economic incentives driving the Maoist Insurgency. The analysis of the demonetization as a counter-insurgency policy shows that policies which target the cash finances of armed groups can be effective, in the presence of rehabilitation programs.

Could you expand on the policy implications of your essay?

Organized armed groups play a central role in conflicts and are a major obstacle to economic development. Understanding the underlying functioning of armed organizations is a necessity in designing key policies to counter both the human and economic losses. Sustaining violent activities is costly and cash is the most common mean of payment for illegal activities. While there exists a wide variety of funding sources for illegal enterprises, such as drugs smuggling, illegal mining and extortion, they are largely based on cash rather than easily traceable means involving banks (Rogoff, 2017). Despite a global effort to fight all forms of violence, economic research focusing on the financing of criminal and illegal activities remains scarce. Our essay, which investigates whether policies targeting the cash funding of organized armed groups reduce their subsequent violence, provides the first study on the importance of cash in illegal activities and an ex-post evaluation of a policy countering illicit cash flows.

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Nathalie Monnet defended her PhD thesis in International Economics in September 2020. Professor Jean-Louis Arcand presided the committee, which included Professor Cédric Tille and Professor Mathieu Couttenier, thesis co-supervisors, and Professor Mathias Thoenig, Department of Economics, University of Lausanne.

Full citation of the PhD thesis:
Monnet, Nathalie. “Essays on the Economics of Conflict and Violence.” PhD thesis, Graduate Institute of International and Development Studies, Geneva, 2020.

Good to know: members of the Graduate Institute can access Dr Monnet’s PhD thesis via this link of the Institute’s repository.
Her co-authored essay “Hit Them in the Wallet! An Analysis of the Indian Demonetization as a Counter-Insurgency Policy” is also available as an International Economics Department Working Paper on this page of the repository.

Interview by Nathalie Tanner, Research Office.
Banner picture: excerpt from an image by Reserve Bank of India, GODL-India, via Wikimedia Commons.