FEATURE STORY

By the Numbers: The Cost of War & Peace in the Middle East

February 4, 2016

“There's a huge pay-off if we're able to move from non-democracy to democracy, particularly in the MENA region,. The growth rate in MENA would go from what is currently expected to be about 3.3% for the next four or five years to 7.3% as a result of democracy”- Shanta Devarajan, World Bank Chief Economist for the Middle East and North Africa region.


STORY HIGHLIGHTS
  • In 2016, about 87 million people from four MENA countries directly affected by war—Iraq, Libya, Syria, and Yemen—represented about one third of the region’s population. Every aspect of people’s lives has been affected by the intensity of the fighting in these separate conflicts.
  • If, hypothetically, MENA countries had shifted to democracy in MENA in 2015, GDP per capita could reach at 7.8% in five years, against 3.3% in its absence. This contrasts with estimates of an economic growth rate of 2.6% for MENA in 2015, and short-term prospects described as “cautiously pessimistic.”

Wars cause devastating human suffering as well as long-term damage to a country’s economy and its infrastructure. Sounds obvious, but just how bad are the consequences of conflict? Quantifying how much better-off people in parts of the Middle East and North Africa (MENA) would have been without today’s wars can give us some idea. 

The latest MENA Quarterly Economic Brief analyses the far-reaching impact of war on human and physical capital, and explores how economic fortunes can be turned around if there is peace.

In 2016, about 87 million people from the four MENA countries directly affected by war—Iraq, Libya, Syria, and Yemen—represent about one third of the region’s population. In these countries, every aspect of people’s lives—home, clinic, school, work, food, water—has been affected by the intensity of the fighting in these separate conflicts.

The statistics are startling: about 13.5 million people need humanitarian aid in Syria; in Yemen, 21.1 million; in Libya, 2.4 million; and in Iraq, 8.2 million.

  • In Yemen, 80% of the country’s population—20 million out of 24 million people—is now considered poor, an increase of 30% since April 2015, when fighting escalated.
  • In Syria and Iraq, per capita income is 23% and 28% less respectively, or roughly a quarter, of what it might have been had conflict not broken out, with the direct effects of war accounting for 14% and 16% drops in per capita GDP respectively.
  • Political tension between Saudi Arabia and Iran casts a shadow across the region.

Yet, five years ago, everyone hoped that new governments would move towards more equitable, inclusive growth, creating more jobs for MENA’s legions of young unemployed. Instead, the reverse has happened, with the region estimated to have lost as much as US$35 billion (measured in 2007 prices) in lost output or foregone growth because of the Syrian crisis—the equivalent to Syria’s GDP in 2007.

MENA’s wars have affected countries neighboring them. Turkey, Lebanon, Jordan, and Egypt, already constrained economically, have been under tremendous budgetary pressure. The World Bank estimates that the influx of more than 630,000 Syrian refugees in Jordan has cost it more than US$2.5 billion a year. This amounts to 6% of GDP, and one-fourth of the government’s annual revenues.

The conflicts in Syria have affected not just neighboring governments but their citizens, too, with average per capita incomes estimated to be 1.5% lower now than they would have been (without Syria’s turmoil) for many Turks, Egyptians, and Jordanians, and by 1.1% for many Lebanese.

Unemployment among Syrian refugees, especially women, remains high and, when there is work, pay is low. About 92% of Syrian refugees in Lebanon are without job contracts; more than half are paid weekly or by the day.  Syria’s war has displaced half its population—more than 12 million people—both internally and externally. A total of 6.5 million more have been internally displaced in Iraq and Yemen.  In Libya, about 435,000 people have been displaced, among them 300,000 children.

Although farmers and businessmen in Lebanon and Turkey may have been able to profit from cheap labor, local workers have lost out. Nor has Lebanon’s economy benefited from cheap oil prices because of the pressure of hosting more than 1 million Syrian refugees, with the Bank estimating a fall in real GDP growth of 2.9 percentage points each year from 2012–14, pushing more than 170,000 more Lebanese into poverty, and doubling the country’s unemployment rate to above 20%.

Despite all this, can the economic damage from the wars in the MENA region be reversed?

An end to the conflicts would improve macro-economic indicators. Shifting public resources from military spending to education and health lifts social indicators, too. The pace of recovery is altered by natural resources: Lebanon’s economy took 20 years to recover from war in the past, Kuwait’s only seven, and Iraq’s only one. Oil-rich economies recover more quickly because oil output is relatively easy to revive. But if oil prices remain low, and international help slight, Libya, Syria, Iraq and Yemen—all oil exporters —will find it harder to recover from their current situation. Private investment will be needed.

In this, property rights are key. They are also used as an indicator of economic freedom; the more solid and secure property rights are, the safer local and foreign investors will feel risking their money in war-torn economies. Permanent improvements in land and property rights are associated with per capita GDP increases of up to 1.7% a year later and, in time, by as much as 13.5%.

”Observing that these conflicts and wars followed the Arab Spring, and part of the Arab Spring was a desire for citizens in the Arab world to promote greater democracy in their societies,” said Shanta Devarajan, World Bank MENA chief Economist, “we asked the question: supposing there is peace, and they go back to trying to promote democracy and they achieve democracy, by how much will growth be higher then? What is the 'democracy dividend'?”

Switching from non-democracy to democracy would be likely to increase per capita GDP, largely by encouraging all the things war-ravaged nations need to get back on their feet—investment, schooling, economic reforms, the provision of public good. In the long run (about 30 years), GDP per capita will be about 20% higher in a nation with democracy than one without it. If, hypothetically, MENA nations had shifted to democracy in 2015, GDP per capita could have reached at 7.8% in five years, against 3.3% in its absence.

Instead, its estimated economic growth rate for 2015 is 2.6%, revised downwards from 2.8% last October, with “cautiously pessimistic” prospects in the short-term. Low oil prices, terrorist attacks, and wars have all played their part in this. Once the fighting stops, more democracy (and the economic freedoms it entails) may be the region’s best way out of economic decline.