Economic Impact of Peace

At the beginning of the 21st century the economic benefits of peace are not well understood and not enough research is carried out into the economics of peace. At the same time it seems intuitive that peace creates more economic benefits to a society than violence.

The great 18th century French philosopher Montesquieu in his dissertation on the separation of powers, 'The Spirit of the Laws' states:

"The natural effect of commerce is to bring about peace. Two nations which trade together render themselves reciprocally dependent; if the one has an interest in buying and the other has an interest in selling; as all unions are based on mutual needs."

Additionally Professor Jeffrey Sachs noted that "widening violence will disrupt trade lines; raise insurance costs and shipping tariffs; ... undercut tourism and business travel; ... It will make international commerce and investment more expensive, thereby shifting production away from long supply lines that are more efficient and economic under stable political circumstances". (Sachs, Jeffrey D. "Smart Money: What Military Power Can't Do." The New Republic. March 3, 2003.)

If it could be demonstrated that peaceful environments had a better propensity for stability, could long-term debt be more aggressively priced? If there was a relationship between peacefulness and growth, would more capital inflows result? If there were a relationship between peace and growth, would new investment funds be created that invested in areas of the world that had the fastest improving prospects of peace? These are only some of the questions that could be posed.

The relationship between peace and business needs to be further analyzed. If it is possible to draw conclusions about the economic benefits of peace then it may be possible to transform the world through business-led initiatives.

Looking at the attributes of economies during peace rather than at war or suffering from high levels of violence, we can observe that:

• The risk to investment is lowered. Peace provides more certainty for the investor by eliminating uncertainty around a range of high impact events beyond the investor's control.
• As capital is freed up from security and defensive concerns, more capital becomes available for industries that thrive in peace as well as for developing the infrastructure which further enhances productivity. Professor James Galbraith, Chair of Economists for Peace and Security, stated: "War destroys prosperity ... people do make profits out of war but the profits that are lost, the profits that are never realized, the opportunities that are never taken up, vastly exceed the profits that are gained."
• As future uncertainty decreases, interest rates and discount rates on future earnings for investments are lower. With lower interest rates, and lower discount rates, projects that pay off over long periods will be competitive.
• Portfolios of investment become larger and contain more stable investments. This will enable families and business to consider their long-term plans and governments to spend more on infrastructure of general usefulness, such as roads, schools and universities.

Foreign Direct Investments

Companies are more likely to invest in regions of stability than in regions of conflict. The existing research on the relationships between Foreign Direct Investment (FDI) and peace shows that FDI is greater in countries that are peaceful towards each other.

A study carried out by the Federal Reserve Bank of San Francisco (Federal Reserve Bank of San Francisco, Working Paper Series, Collateral Damage: Trade Disruption and the Economic Impact of War. Reuven Glick, Federal Reserve Bank of San Francisco and Alan M. Taylor University of California, Davis, NBER, and CEPR) estimates that historically wars have resulted in a decline in trade of about 80 to 90 percent between belligerents and that war creates negative externalities on trade even for neutral countries. Their trade with belligerents is also adversely affected, being subject to a decline of about 5 to 12 percent. Lastly, both of these effects persist for almost ten years.

Capital Markets

When war occurs within a country it dramatically reduces the capital infrastructure and the size of the GDP of the nation, thereby reducing the size of its exports and imports. Capital flight affects the export market by diminishing manufactured goods, commodities and service exports, which provide not only the necessary foreign currency for the country's stability but also comprise an important part of the labour group. (Collier Paul, 2007, 'The
bottom billion: why the poorest countries are failing and what can be done about it'. Oxford University Press) Capital that flows out of the country will result in a deficiency of work for the labour force, which becomes unproductive to the economy and exacerbates the situation.

The flight of capital is likely to find a new home in a neighbouring country that may offer similar logistics and skill base, rather than be repatriated to its original source. Thereby the more peaceful nation's long-term regional competitiveness will improve at the expense of the more violent nations.

Migrants and Outsourcing

It is increasingly apparent that the most advanced economies of the world cannot supply enough intellectual talent to fuel the full growth of their industries. Highly skilled immigrants have become a necessity for growth. War, as well as violence, hinders growth by creating barriers to immigration and dramatically decreasing the level of education in the affected areas.

Violence-affected regions become ineligible for outsourcing. Unable to meet the demands and conditions that make the country attractive to foreign investment, the country becomes more prone to social/political instability. As the risk of instability increases, foreign companies withdraw their investments. This capital flight is also costly for the companies that are required to relocate. The loss of capital and jobs intensifies the country's unrest.

Rule of Law and Corruption

There is a strong correlation between peace, justice and the rule of law. Business is built upon the legal contract and the rule of law. Increasing levels of peace can help to build the foundations of a predictable and stable business environment.

Economist Jane Jacobs has concluded that those countries where there are strong commercial values are those countries where there are more peaceful regimes. (Jacobs J., Systems of Survival, 1993) In fact, one of the lessons from Eastern Europe after the fall of communism was that those countries that prospered were those countries that had this legal and moral infrastructure. ('Does Business Impact Peace?', Fort, Timothy L., 2002)

The Global Peace Index (Global Peace Index 2007, correlations with Corruption Perception Index) has found that there is an inverse relationship between corruption and peace. Corruption, assessed in the form of bribes, becomes an obstacle to economic efficiency that permeates general society, with effects on law enforcement, the judiciary, all the way through to the education system.


Infrastructure

Case studies carried out by the Department of Peace Studies at Bradford University revealed that the heavy financial cost of armed violence meant that the share of government expenditure going to the security sector invariably rose, and public provision of social services fell. In Rio de Janeiro, Brazil, for instance, investment in security is twice that of education, five times that of health, and 50 times that of housing (O Globo, Brazil, 13 April, 2002).

During conflicts, physical infrastructure and public good are often the first to be destroyed. Schools, hospitals, airports, roads and bridges, needed for the economy to function, are lost.