Macroeconomic Costs of Conflict: Effects on GDP and Refugee Flows

Editors’ note: This column is part of a Vox debate on the economic consequences of war.

Estimates of the impact of the war in Ukraine are hampered by data availability and the evolving situation on the ground (Constantinescu et al. 2022). According to the latest forecast by the IMF (2022), Ukraine’s economy is expected to shrink by more than 35% in 2022. Given the high uncertainty, the recovery path may be prolonged (Blinov and Jankov 2022). To put this perspective into context, our recent paper on the macroeconomic costs of conflict (Novta and Pugacheva 2021) sheds light on the range of possible economic outcomes following the outbreak of large-scale war.1 We analyze all major conflict episodes over the past 30 years and estimate the macroeconomic costs of war in terms of impact on GDP and its components as well as refugee flows. Although outcomes can vary greatly, depending on the characteristics of individual conflicts and countries, we find that wars can be highly disruptive for at least a decade after they begin, affecting all sectors of the economy, in addition to incalculable human losses. .

Impact of conflict on GDP and its components

First, using local estimates (Jordà 2005), we find that the macroeconomic costs of conflict are large, with GDP per capita about 28% lower ten years after the onset of conflict (Figure 1).2 This is driven by excessive private consumption, which falls by around 25%. The conflict has also been associated with a dramatic decline in official trade, with exports estimated to be 58% lower and imports 34% lower ten years after the conflict began. Government spending does not systematically decline after the onset of conflict, perhaps due to increased military spending, combined with lower spending on other goods and services. Investments typically fall in the year a conflict begins, but the impact is unpredictable in subsequent years.

By disaggregating GDP into agriculture, manufacturing, and services, we see that frictions are associated with declining production in all sectors. Agricultural value addition declines by 6% in the year of conflict onset, with the effect remaining negative and statistically significant for the following five years. Production fell by 16% in the year after the conflict began and by 38% ten years after the shock. Services decline by 12% at impact and 30% ten years after the shock. Such lingering effects paint a grim picture given that Ukraine is a major producer and exporter of agricultural products, and its manufacturing sector is well integrated into international supply chains.

Figure 1 Impact of conflict on GDP and its components

formula: IMF, World Economic Outlook; World Bank, World Development Indicators; and enumeration of authors.
Disagree: The analysis includes 37 major conflict episodes in a sample of 188 countries between 1989-2018. The onset of conflict was defined as the year when at least 100 people were killed per 1 million population after at least 4 years of no conflict in the preceding period. Estimates are based on local estimates and are in year of conflict onset (0 on the x-axis), year of conflict onset (+1 on the x-axis), etc. Dashed line indicates 95% confidence interval.

Impact of conflict on refugee numbers

With 5.8 million Ukrainians registered as refugees by July 2022 (UNHCR 2022), the number of refugees at the start of the conflict has no precedent in Ukraine’s unfolding war in recent history (Figure 2a).3 This is partly because Ukraine, with a pre-war population of more than 40 million, is among the 40 most populous countries in the world. But in terms of the number of refugees as a share of the pre-war population, the situation in Ukraine is similar to that of Bosnia and Herzegovina, where about 10% of the population fled in the first year of the conflict, which almost doubled in the next four years (Figure 2b). The Ukraine War and the Yugoslav Wars are also the only two conflicts between continental Europe since World War II. If the Ukrainian refugee situation develops like that in Bosnia and Herzegovina, the total number of refugees in Ukraine could reach ten million people, a potential scenario for which the rest of the world must prepare.

Figure 2 Number of refugees by country

formula: UNHCR; and enumeration of authors.
Disagree: Refugee numbers for Ukraine as of July 13, 2022.

Looking at historical data, the onset of conflict often induces significant refugee outflows in the short term to neighboring non-developed countries (given the location of most conflict-affected countries), and usually small but very persistent refugee outflows to non-neighboring developed countries. After a large influx of refugees following the onset of a long-run conflict, the number of refugees in neighboring countries increased by 2.8% compared to pre-conflict levels and remained mostly stable over time (Figure 3a). This means that refugees usually arrive in neighboring countries within the first year of conflict and often stay for five years or more. Looking at refugees in advanced economies, the increase is highly persistent and continues five years after the onset of conflict (Figure 3b). For Ukraine, Europe’s advanced economies are geographically close, with many friends and family already working there and ready to help. In this context, Bosnia is perhaps Ukraine’s closest historical comparator.

Figure 3 Impact of conflict on refugee numbers

formula: UNHCR; and enumeration of authors.
Disagree: X-axis shows years, where -1 refers to the year before the conflict started, 0 to the year the conflict started, +1 to the year after the conflict, etc. Dashed line indicates 95% confidence interval.

Conclusion

With the potential for such large refugee flows, European countries will need comprehensive long-term policies for the integration of refugees into local labor markets, as well as support for families with children and the elderly (Angrist et al. 2022, Becker 2022, Blinov and Djankov 2022). Post-conflict reconstruction often requires different policies than those used for stabilization after other serious economic shocks, such as banking or currency crises. Chami et al. (2021) and the United Nations and World Bank (2018) discuss ways to adjust macroeconomic stabilization policies to address specific challenges facing individual fragile and conflict-affected states. They focus on strengthening good governance, rebuilding trust in institutions, restructuring tax powers for revenue collection and providing a fully functioning formal economy. International organizations such as the International Monetary Fund, as well as European partners, have an important role to play, as outlined in the potential blueprint for Ukraine’s reconstruction in Becker et al. (2022). With Ukraine’s high level of human capital and the help of the international community, it is hoped that rapid reconstruction and recovery is possible.

Author’s Note: The views expressed herein are those of the authors and should not be attributed to the IMF, its Executive Board, or its management.

reference

Angrist, N, S Jankov, P Goldberg and H Patrinos (2022), “Ukraine’s loss of human capital”, VoxEU.org, 27 April.

Becker, SO (2022), “Lessons from history for our response to Ukrainian refugees”, VoxEU.org, 29 March.

Becker, T, B Eichengreen, Y Gorodnichenko, S Guriev, S Johnson, T Mylovanov, K Rogoff and B Weder di Mauro (2022), “A Blueprint for the Reconstruction of Ukraine”, VoxEU.org, 07 April.

Blinov, O and S Djankov (2022), “Ukraine’s Population Depth Challenges”, VoxEU.org, 28 June.

Chami, R., R. Espinoza and P. Montiel (2021), Macroeconomic Policy in Fragile StatesOxford University Press, UK.

Constantinescu, M, K Kappner and N Szumilo (2022), “Estimating the Short-Term Impact of War on Economic Activity in Ukraine”, VoxEU.org, 21 June 2022.

International Monetary Fund (2022), World Economic Outlook: War Delays Global RecoveryApril

Jordà, Ò (2005), “Estimation and Estimation of Impulse Responses by Local Estimation”, American Economic Review 95(1): 161–182.

Muller, H (2016), “Growth and Violence: Arguments for the Per Capita Measurement of Civil War”, economic 83: 473–497.

Novata, N and E Pugacheva (2021), “The Macroeconomic Costs of Conflict”, Journal of Macroeconomics 68.

Sundberg, R and E Melander (2013), “Introducing the UCDP Georeferenced Event Dataset”, Journal of Peace Research 50(4): 523-532.

United Nations and World Bank (2018), “Pathways to Peace: Inclusive Approaches to Preventing Violent Conflict”, World Bank, Washington, DC.

United Nations High Commissioner for Refugees (UNHCR) (2022), “Operational Data Portal: Ukraine Refugee Situation”, accessed 13 July 2022.

Endnote

1 We define conflict onset based on the share of the population killed, as in Muller (2016). We focus on conflicts where 100 people were killed per million population in the first year of conflict, defined as no conflict in the preceding four years. Our analysis indicates that the impact of conflict is underestimated if the more standard definition of 1,000 deaths is used to define a conflict episode. If several distinct conflicts occurred in a country in the same year, we add the numbers for a country-year observation. There are 37 such episodes in our sample over the period 1989–2018. Data on the number of casualties are taken from the Uppsala Conflict Data Program (UCDP) georeferenced event dataset (Sundberg and Melander 2013).

2 When using real GDP per capita we use population data from the same year as the GDP data.

3 We focus on refugee numbers reported by UNHCR. Many more people are internally displaced or registered as asylum seekers.

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