This paper assesses the long-term effects of temporary refugee inflows from Burundi (1993) and Rwanda (1994) on the welfare of the host population in Tanzania. The authors are particularly interested in whether the changes in the host economy after the departure of refugees result from a switch to a new (and better) equilibrium in a multiple-equilibrium setting or, alternatively, whether the changes are the consequence of post-shock investments that shift the supply curve and thus the equilibrium. The authors exploit Tanzanian household panel data (1991–2010), and find:
- A sizeable increase in welfare for villages more exposed to refugees long after these refugees returned to their home country. The refugee presence significantly increased real consumption per adult equivalent between 1991 and 2004 and between 1991 and 2010, although most refugees left between 1996 and 2000. The presence of refugees had a positive and persistent impact on the host economy, which did not fade over time.
- The most important channel of transmission for this persistent change in welfare is a sizable decrease in transport costs following increased road building. The presence of refugees had a positive and significant impact on road accessibility. The sizeable decrease in transport costs, due to large-scale investments in roads by international organizations, is strongly associated with the persistent welfare improvement in high-refugee areas. The welfare-improving impact of road accessibility in high-refugee areas is corroborated by the decreasing effect on good prices.
- No evidence that changes in the provision of local public goods, agglomeration economies, or enhanced trade with neighboring countries constitute an alternative explanation for the persistent increase in real consumption in high-refugee areas compared with other areas.
The authors conclude that the temporary population shock induced a persistent shift in the equilibrium through subsequent investments rather than a switch to a new equilibrium in a multiple-equilibrium setting. The findings undercut the view that refugees are a burden for host communities. The authors suggest several policy implications:
- In the short run, the priority should be to improve the ability of the local population to cope with changes in the price of final goods and factors.
- Progressively, humanitarian assistance should give way to long-term developmental efforts, capitalizing on road investments made by international organizations.
- Local integration of refugees into the local economy could act as a multiplier of the welfare-improving effects of better roads.
- Fostering regional integration with neighboring countries may be an interesting second best option to consider when repatriation (or resettlement) is favored as a solution to a protracted refugee situation.