The Economic Benefits of Peace

By Camilla Schippa, Director, Institute for Economics & Peace

War and violence extract huge costs from the global economy. In the aftermath of conflict, private sector development is critical for peace in the long run. However, all too often, business perceives the risks in post-conflict settings as too great, locking many fragile countries in aid dependence and economic instability. Not only could business activity build peace in the right settings, business can also gain significant profits from high-opportunity post-conflict contexts. Targeted investments towards identified drivers of peace in fragile states could therefore trigger virtuous cycles where peace and prosperity mutually reinforce each other.

As highlighted by a recent Comres survey, risks around conflict and war are the ones that concern us the most. Usage of weapons of mass destruction is ranked as the global risk needing the most urgent response by 62 percent of respondents in eight countries, followed by politically motivated violence (57 percent) and climate change (56 percent).

This is not surprising as the world has become less peaceful in the last decade. Global conflict and violence is at a 25 ­year high, with increases in the number of deaths from conflict, the levels of terrorism, and the emergence of new conflicts that, even in the most optimistic scenarios, will take years to solve and rebuild from. Consequently, the world faces its most severe humanitarian crisis since World War II, with over 65 million people now refugees, asylum seekers or internally displaced – equivalent to almost one percent of the global population.

In addition to the obvious human and social costs, this is having a dramatic impact on our economies.

In 2016 the global economy lost $14.3 trillion to violence and conflict in purchasing power parity (PPP) terms (Global Peace Index 2017). This is equivalent to 12.6 percent of the world Gross Domestic Product (GDP), or 12.6 percent of everything the world produces and consumes. An enormous amount of economic activity goes towards creating, containing and dealing with the consequences of violence – with a yearly cost of $1,953 for every person on the planet.

Images of any major Syrian city in 2017 show the extent of damage in modern warfare. Not only are private houses and businesses destroyed, but critical infrastructure – electricity, water supply, telecommunications, schools and health facilities – have been turned to rubble. Yet while the economic impact of war is somewhat understood, the potential benefits from violence reduction have traditionally been overlooked.

Redirecting a mere 10 percent of the global economic impact of violence would be enough to address many of the most fundamental challenges of our time. After all, this would represent $1.43 trillion. Imagine transferring such an amount to increase Official Development Assistance, and multiplying by almost ten times the funds directed from rich to poor countries to achieve the UN’s Sustainable Development Goals. Alternatively, this amount could triple the flow of resources invested to address climate change.

Most critically, we may be conditioned to think that the realization of peace will add further costs to the global economy through peacekeeping budgets and humanitarian assistance. While this is largely true in the short term, there is an overlooked part of the equation which involves not just the positive benefits that business activity can bring to peace, but also the surprising opportunities for profitable business activities in fragile and conflict-affected contexts over the medium term.

Often, opportunities for business in fragile and less peaceful, post-conflict contexts are under-appreciated. But post-conflict and fragile states are among the fastest growing economies in the world. More than half the countries projected to deliver economic growth of more than five percent in 2018 are either fragile or extremely fragile.

Research by the World Bank and the Institute for Economics & Peace shows that while many post-conflict and fragile states carry higher levels of risk, the rate of return on capital is on-average three times higher than the global average. Interestingly, data suggests that the risk premium in many of these countries may be overpriced. According to the World Bank’s Enterprise Business Survey, average business losses to crime were $15,957 in very high peace countries compared to $9,478 in very low and $7,921 in low peace countries.

Policymakers should encourage key financial institutions to address these market failures where they exist, and potentially incentivize investment in key countries in order to demonstrate the potential benefits to other investors. Financial instruments such as development impact or social impact bonds have a role to play here.

These facts ought to throw into sharp relief the potential virtuous cycle between business and peace. While there are important circumstances where business activity can create the conditions for conflict, as in the case of extractives, there is a counter-narrative that is also important to acknowledge – business can play a positive role for societal peacefulness and reap significant financial returns.

Improving governance and the business environment go hand in hand. Business can improve based on government action to provide regulatory certainty and macroeconomic stability, control corruption, and protect property rights. These factors have important systemic and societal benefit for other drivers of peace. Realizing this virtuous cycle may be the key to lowering the $14.3 trillion yearly economic losses from violence and to building long term peace, all the while boosting business profits – a tantalizing win-win scenario.

This piece forms part of the Global Challenges Foundation’s report, Global Governance for Global Citizens, to be published on September 13.

Camilla Schippa is Director of the Institute for Economics and Peace in Sydney, which produces the Global Peace Index. She is also a member of the UN’s expert reference group for the Global Consultation on Conflict, Violence and Disaster in the Post-2015 Development Agenda, the Club de Madrid’s Shared Society expert group, and the GCERF Policy, Think & Do Tanks Constituency. She formerly served at the UN Secretariat for over a decade, and currently sits on the Board of Directors of the Centre for Armed Violence Reduction.

Image credit: Flickr / Trocaire