The Elusive Peace Dividend
Author | Sanjeev Gupta, Benedict Clements, Rina Bhattacharya, and Shamit Chakravarti |
Position | Assistant Director/Deputy Division Chief/Economist/Senior Research Officer |
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How armed conflict and terrorism undermine economic performance.
The end of the Cold War was supposed to bring with it a "peace dividend" that would release resources for more productive purposes. Instead, we are witnessing an era of scattered conflicts, while terrorist groups have become more sophisticated and destructive. Between 1989 and 2000, more than 4 million people are estimated to have died in violent conflicts, while international terrorist attacks increased from about 342 a year between 1995 and 1999 to 387 between 2000 and 2001. Low- and middle-income countries have borne the brunt of the violence: almost 70 percent of major conflicts and more than 20 percent of international terrorist attacks between 1996 and 2000 took place in Asia and Africa.
Countries' short- and medium-term growth prospects are likely to suffer as a result of conflict and terrorist acts, as suggested by this paper and several country case studies:
* The total economic cost of the conflict in Sri Lanka between 1983 and 1996 amounted to about $4.2 billion, twice the country's 1996 GDP.
* Per capita GDP in the Basque region declined by about 10 percent, compared with a synthetic control region without any such violence, with the difference in per capita GDP widening in response to spikes in terrorist activity.
* The economies of Greece, Israel, and Turkey were adversely affected by terrorist incidents, and their market shares of tourist trade also fell, with spillover effects for other Mediterranean countries.
* Terrorist acts and large-scale violence during 1960-93 hurt bilateral trade flows in a large number of countries.
* Tighter security precautions put in place in the wake of the terrorist attacks of September 11, 2001, have been estimated to cost the world about $75 billion. The IMF's World Economic Outlook, December 2001: The Global Economy After September 11 indicated that the long-term cost could be as high as 0.75 percent of world GDP.
However, little analysis has been done to show how conflict and terrorism affect macroeconomic performance and public finances either within or across a large number of countries. Our research is intended to fill this gap. We first assess the impact of armed conflict within countries by examining the evolution of macroeconomic and fiscal variables (such as growth, inflation, government revenues, expenditures, and budget balances) before (three years, on average), during, and after (three years, on average) 22 episodes in up to 20 conflict-afflicted countries between 1985 and 1999. Six of these are in Africa, three in Latin...
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