The Cost of Conflict

• Author: Phil de Imus, Gaëlle Pierre, and Björn Rother

The Cost of Conflict Finance & Development, December 2017, Vol. 54, No. 4

Phil de Imus, Gaëlle Pierre, and Björn Rother

Middle East strife is exacting a heavy toll on regional economies

Nowhere in the world has conflict been as frequent or as violent over the past 50 years as in the Middle East and North Africa. On average, countries in this region have experienced some form of warfare every three years. Today, rarely a day passes without media reports of violence, large-scale human suffering, and major destruction in such countries as Iraq, Syria, and Yemen.

These conflicts have enormous human and economic costs, both for countries directly involved and for their neighbors. Libya, Syria, and Yemen experienced deep declines in their economies with sharp increases in inflation between 2010 and 2016. Iraq’s economy remains fragile owing to the conflict with the Islamic State (ISIS) and the fall in oil prices since 2014. Clashes have also spilled over to other countries, causing problems that are expected to persist—such as economic pressures from hosting refugees. Violent conflict has worsened conditions for a region already facing structural deficiencies, low investment, and, more recently, the oil price drop, which has had a substantial impact on oil-producing economies.

Key channelsThere are four major channels through which conflict affects economies.

First, death, injury, and displacement seriously erode human capital. While the figures are difficult to verify, half a million civilians and combatants are estimated to have died from the conflicts in the region since 2011. Moreover, as of the end of 2016, the region accounted for almost half of the world’s population of forcibly displaced people: 10 million refugees and 20 million internally displaced people from the region have had to abandon their homes. Syria alone has nearly 12 million displaced people, the largest number of any country in the region.

Conflict also reduces human capital by spreading poverty. Poverty in conflict countries, even outside regions directly affected by violence, tends to rise as employment declines. The quality of education and health services also deteriorates, a problem that deepens the longer a conflict continues. Syria provides a dramatic example. Unemployment jumped from 8.4 percent in 2010 to more than 50 percent in 2013, school dropout rates reached 52 percent, and estimated life expectancy fell from 76 years before the conflict to 56 years in 2014. Since then, the situation has deteriorated even more.

Second, physical capital and infrastructure are damaged or destroyed. Houses, buildings, roads, bridges, schools, and hospitals—as well as the water, power, and sanitation infrastructure—have been hit hard. In some areas, entire urban systems were virtually wiped out. In addition, infrastructure related to...