War is one of the main causes of economic underdevelopment. Yet economic analysis of developing countries at war is rare. How do economies operate during conflict? This study from Oxford University addresses the issue for the first time and suggests policies that would reduce suffering and economic losses during conflict and bring it to an end. The study is based on general analysis and eight case studies.
At best, armed conflicts in or between developing countries are seen by international agencies as temporary interruptions to an established economic development path, despite war conditions being a major reason why the adjustment programmes they recommend fail. The greater part of the human costs does not result from battle deaths and injuries, but indirectly from lost livelihoods caused by dislocation of the economy and society. Civilian deaths are usually far greater than military losses, due to lack of food and weakening health facilities. Understanding the processes that occur during an economy at war is essential– especially the way it affects economic activity and institutional behaviour at the international, macro and meso levels – to identify how people are affected and find measures that would protect them. The human cost of conflict (other than from fighting) can be seen as arising from the effects on a range of entitlements, including market, direct, public, civic and non-legal. Some important general findings include:
- The economic effects of war are the result of an interaction between a particular type of war and the economy in which it takes place, which defines its vulnerability.
- The characteristics that determine a country’s vulnerability are: average income level and the proportion of the population at or near poverty; the degree of self-subsistence of the population; the economy’s reliance on essential imports; and the flexibility of the production system.
- The economic consequences are also dependent on the nature of the war itself, especially its intensity, duration and location.
- There are complex interactions in an economy during war, resulting from the direct impact of conflict and the compensating behaviour of economic agents in their attempt to moderate or offset the negative impacts of war.
- War leads to the creation of entitlements for some groups and losses for others. Any gains then provide an economic motive for prolonging the conflict.
- There are significant distributional changes during war. It is important to monitor horizontal inequalities to be able to design policies to reduce them, since they form one of the causes of conflict.
The outcome of conflict is a combination of immediate consequences and the reaction to these direct effects. Broadly, the following is likely to occur, compared with what might have been expected in the absence of conflict:
- At macroeconomic level: Falling GDP per capita, reduced export earnings and often lower imports, a lower investment and savings ratio, reduced government revenue and expenditure, higher budget deficits and accelerating inflation.
- At mesoeconomic level: Switches in government expenditure from economic and social to the military; from tradable to non-tradable items, from marketed output to subsistence production and from formal to informal sectors. In some economies, however, governments are able to protect social services.
- At microeconomic level: Average levels of most entitlements are likely to decline, although direct and civic entitlements may rise to compensate. The result sometimes has catastrophic consequences for human survival. There can also be sharp changes in vertical and horizontal entitlement distribution.
- Macro-policies that sustain output and employment; meso-policies to protect public entitlements, employment and regulate food prices; can help reduce human suffering.
- International policies should aim to support foreign exchange earnings, avoiding sanctions, and should continue to support development activities even during conflict.