The economic cost of Middle East conflict is a daunting thing to calculate

As the battle continues to extricate jihad­ists from their last stronghold in the country holding Africa’s largest oil reserves, Libya, calculating the cost of war is often a daunting task. The challenge of conflict and violence is widespread and not confined to low-income countries. Empirical evidence shows that the impact of conflict typically varies with the type, intensity, duration and geographical scope.

In the past few years there has been a spike in conflicts and almost 60 million people are displaced globally. Between 1946 and last year, 12 out of 59 conflict episodes in the Mena area were more than eight years long and in about half of these episodes the ensuing peace lasted less than 10 years. As a result, the region accounts for 40 per cent of the estimated global ­total of battle-related deaths since 1946, according to the Uppsala Conflict Data Program, and for about 60 per cent of all casualties since the turn of the millennium.

Most recently, the IMF has tried to estimate the cost of conflict in the Mena region. It’s not surprising it found that Syria’s GDP has been halved in four years of fighting and the output of Yemen and Libya has declined by more than a quarter. Even with a relatively high annual growth rate of 4.5 per cent, it would take Syria 20 years or more just to rebound to its 2010 pre-conflict GDP level.

A World Bank report last year found that the Palestinian economy remained almost stagnant for the past 20 years, while Mena economies grew by 250 per cent. According to the Virginia-based Center of Systemic Peace, the average growth rate experienced by a broad range of post-conflict countries between 1970 and 2014 that maintained peace for at least 10 years after conflict ended is about 4 per cent rate.

Beyond the empirical evidence, the IMF provides certain policy recommendations, although it admits that it’s difficult to implement when political systems disintegrate. Protecting the effectiveness of economic institutions such as central banks, prioritising public spending to protect human life and stabilising macroeconomic and financial developments through effective monetary and exchange rate policies are viewed by the IMF as important policies that can minimise the harm to economic activity.

That is easier said than done, however, as public spending is often hard to control when defence spending in times of conflict takes priority coupled with declining revenue, which leads to rising deficits. Macroeconomic stability is almost impossible to maintain as inflation rises very quickly and leads to a fast-depreciating local currency.

Syria’s inflation rate rose by more than 300 per cent between 2011 and last year and its currency depreciated to one-tenth of its pre-civil war value against the US dollar. Moreover macroeconomic stability is dependent on other broad aspects of economic policymaking, which vary and can be less predictive. However, micro-adjustments can be made at the level of central bank intervention, such as measured foreign capital controls. This is a policy that has worked well in Libya as well as Iraq over the years. Despite the war in Libya, its foreign reserves to imports fell from 41 months to 26 months between 2011 and this year, which is good by any standard. In contrast, Yemen’s reserves during the same per­iod have been depleted and the central bank provides foreign currency to import wheat and rice only.

Spillover effects for those bordering civil war zones have been considerable for countries that have already been facing an increasingly challenging macro environment owing to falling oil prices. Jordan, Lebanon and Tunisia could be facing an annual cost of 1 per cent of GDP as a result of the refugee crisis, according to the IMF. For the longer term, the impact of conflicts on economic performance is challenging to estimate. Spillover shocks could decrease GDP by 4 per cent in Mena.

Recovering to pre-conflict growth levels takes a long time and it always depends on the country’s ability to attract the talent to return, manage the reconstruction process well, allowing investors to feel safe and for the politicians to start building institutions. According to the 2013 Costs of War Project by the Watson Institute for International Studies at Brown University, the US$212 billion reconstruction effort in Iraq was largely a failure, with most of that money spent on sec­urity or lost to waste and fraud, it said. It’s worth keeping in mind that political institutions are often erected on violent foundations and maintained through implicit and explicit threats of bloodshed should obedience be withheld. Time will tell if these institutions are well built and if peace holds.

John Sfakianakis is the director of economic research at the Gulf Research Centre in Riyadh

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