In addition to higher and inefficient public spending, violence has both short and long term adverse effects on the economy of affected nations. Violence reduces investment in capital intensive sectors, lowering productivity and reducing returns. Also, businesses tend to shift investment to conflict related goods instead of investing in the production of consumption and exportable goods.
Similarly, investors shift from high risk, high return long term investment to low risk, low return and short term projects. Foreign direct investment also declines due to risks associated with violence and the higher cost of crime to businesses. In the cases of high intensity conflict, capital flows out of the country. These adverse effects lead to a vicious circle of economic effects such as lower economic growth, high volatility, uncertainty and high unemployment.
The relationship between conflict and economic performance is not one way, lower economic performance combined with social and political fragmentation in a vulnerable context can contribute to the deterioration of peace. For instance, lack of opportunities due to weak economic growth has the potential to aggravate violence.
The relationship between conflict and economic performance is not one way; low economic performance with social and political fragmentation in a vulnerable context can contribute to the deterioration of peace.
Economic growth is slower in fragile countries compared to non-fragile countries with a similar level of national income. Furthermore, economic growth also varies greatly between the two groups. As an example, economic growth in the MENA region has slowed considerably since 2009 following the events of the Arab Spring and the high level of violence resulting from it. Regional GDP per capita growth in MENA grew faster than world economy between 2000 and 2009 and suffered less compared to the global economy from the effects of global financial crisis (GFC). However, the average growth has been lower compared to global growth since 2010. The post Arab spring growth in Egypt also shows a greater fluctuation. Figure 1 shows MENA GDP growth compared to world economic growth from 2000 to 2014.
Both positive and negative peace have deteriorated in MENA since 2009. The conflicts in Iraq, Syria, Yemen and Libya and the social unrest resulting from Arab spring are the primary drivers of this deterioration. This decrease in the level of peacefulness has had a severe macroeconomic impact. The economic impact of violence increased by 21 per cent between 2007 and 2014 reaching $1.7 trillion.
From 2000 to 2009 the MENA economy grew at an average yearly rate of 2.98 per cent. While it is not possible to fully separate out other economic trends like the impact on oil prices during this period, violence and conflict has significantly contributed to a negative economic climate leading to an average regional contraction of 0.2 per cent between 2009 and 2014.
A more ambitious goal in the research focused on measuring the cost of violence, is to determine the optimal level of violence containment spending. The size of such spending will depend on the level of violence in a society. From a purely economic perspective, after a certain point there are decreasing returns on violence containment expenditure. Therefore, finding the optimal level of violence containment spending can aid the allocation of scarce economic resources.