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Economic Value of Peace 2018

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Executive summary

This report is the latest release by the Institute for Economics and Peace (IEP) on the economic impact of violence and conflict to the global economy. It provides an empirical basis for understanding the economic benefits resulting from improvements in peace. Estimates of the economic impact of violence are provided for 163 countries and independent territories, covering over 99.5 per cent of the global population.

The economic impact of violence to the global economy was $14.76 trillion in 2017, in constant purchasing power parity (PPP) terms. This figure is equivalent to 12.4 per cent of global gross domestic product (GDP) or $1,988 per person. Given there are categories of violence that impose costs but where no reliable prevalence data is available, the estimates presented in this report are considered to be conservative.

The global economic impact of violence rose by two per cent during 2017, due to increases in cost of conflict and internal security spending. The rise in the economic impact of violence coincides with a 0.27 per cent deterioration in peace, as measured by Global Peace Index (GPI) 2018.
Since 2012, the economic impact of violence has increased by 16 per cent, corresponding with the start of the Syrian war and the rise of Islamic State. The intensification of conflicts in Afghanistan and Iraq have also added to the economic impact.

Violence has adverse implications for the broader economy, both in the short and long term, and imposes substantial economic costs on society. The economic impact of violence in the ten most affected countries was equivalent to 45 per cent of their GDP. This is approximately 19 times higher than the ten countries least affected by violence in which the average economic cost of violence is just over two per cent of GDP. This is also significantly smaller than the global average economic cost of violence, which amounts to 11 per cent of GDP.

The composition of the economic impact of violence varies across countries and regions. For instance, the cost of homicide and violent crime represents the highest proportion in South America and Central America and the Caribbean at 67 and 60 per cent respectively. Conversely, the cost of conflict as a proportion of the economic cost of violence is highest in the Middle East and North Africa at 28 per cent and South Asia at 24 per cent. Both forms of violence affect sub-Saharan Africa with homicide and violent crime constituting 57 per cent of the regional cost and violent conflict accounting for another 16 per cent. The countries with the highest economic impact of violence include conflict-affected countries — Syria, Iraq, Afghanistan, Colombia, South Sudan, Somalia, and the Central African Republic — and countries with high interpersonal violence such as El Salvador and Lesotho.

The single largest contributor to the global economic impact of violence, at over 37 per cent of the total, was military expenditure at $5.5 trillion PPP. Internal security spending was the second largest component, comprising over 27 per cent of the global economic impact of violence, totalling $3.8 trillion.

Internal security expenditure encompasses spending on police, judicial and prison system outlays.
Violence not only has a direct impact on the economy, it also reduces the positive benefits that peacefulness has on the macroeconomic performance of countries. In the last 60 years, per capita growth has been three times higher in highly peaceful countries when compared to countries with low levels of peace. The difference is more pronounced over the last decade, where GDP growth has been seven times higher among countries that improved in peace when compared to countries that deteriorated in peace.

IEP’s methodology for accounting the economic impact of violence and conflict aggregates 17 indicators that relate to public and private expenditure required to “contain, prevent and deal with the consequences of violence”. Using the underlying measurements in the GPI costs are calculated by totalling the scaled unit costs for different types of violence.

The model includes both direct and indirect costs of violence and divides them into three domains; (1) security services and prevention oriented costs, (2) armed conflict related costs and (3) consequential costs of interpersonal violence. Examples of direct costs include medical costs for victims of violent crime, capital destruction from violence and costs associated with security and judicial systems. Indirect costs are economic losses that result from violence. For example, this may include the decreased productivity resulting from an injury, lost life-time economic output of the victim of a murder, pain and trauma stemming from being a victim of violence and the yearly reduced economic growth resulting from a prolonged war or conflict. A ‘multiplier effect’ is also included to represent the lost opportunity cost of violence. When peacefulness improves, money saved from containing violence can be redirected to more productive activities, yielding higher returns and increasing GDP.

Analysis of the economic impact of violence for 2017 provides two important results. Firstly, it highlights the extent that armed conflict negatively affects the economy. The economic cost of violence in Syria, Afghanistan, and South Sudan, was equivalent to 68, 63 and 49 per cent of GDP respectively. Citizens of these countries are now among the most vulnerable and constitute a large percentage of the global refugee population.

The second major finding is that there has been a reduction in military and internal security expenditure, especially among the advanced economies. Global military expenditure has stayed constant since 2010 following a significant increase of 46 per cent between 2000 and 2009. The reduction coincides with austerity related policies implemented by countries affected by the global financial crisis in 2008. However, this trend may reverse in the coming years given commitments to increase military budgets in the US and Europe. At the same time, China is increasing spending on both its military and internal security.

Due to their large military and internal security budgets, Asia-Pacific, North America and Europe are the regions with the largest expenditures at $2.86, $2.72 and $2.31 trillion respectively in purchasing power parity terms.

The report compares losses from violence to the cost of containing and preventing it with the aim to assess the optimal level of spending on violence containment. The research shows a distinct link between the broader environment for Positive Peace and the level of spending required to contain violence.

The Positive Peace framework captures the attitudes, institutions, and structures which create and sustain peaceful societies. The analysis finds that countries with the highest levels of Positive Peace spend one to two per cent of GDP on internal security, whereas countries with median levels of Positive Peace tend to spend more. Switzerland, Iceland and Canada for example rank among the 15 most peaceful countries in the Positive Peace Index as well as having some of the lowest economic cost of violence.

Meanwhile, those countries with the lowest levels of Positive Peace and resilience generally spend less than one per cent of GDP on internal security, highlighting an underinvestment in violence containment. This is common among low income, fragile and conflict-affected countries which tend to spend onla fraction of the per capita costs relative to that of higher income countries.

In the absence of Positive Peace, reduced spending on violence prevention will likely result in higher costs from violence.

However, excessive spending on violence containment can lead to deteriorations in peacefulness. For instance, a larger than required military might lead a country to pursue larger geopolitical goals, creating violence elsewhere. Similarly, large investments in police forces might lead to repression in a society and limit the basic rights of the citizen. Evaluating the trade-off between prevention and costs from violence sheds light on optimal levels of spending to address violence effectively. The systemic interaction between violence containment, violence and Positive Peace is the subject of ongoing research.