Lasting economic costs of war

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According to a recent International Monetary Fund blog jointly written by Hippolyte Balima, Andresa Lagerborg and Evgenia Weaver,war is again defining the global landscape. After decades of relative calm following the Cold War, the number of active conflicts has surged in recent years to levels not seen since the end of World War II.

At the same time, they noted, rising geopolitical tensions and heightened security concerns are prompting many governments to reassess their priorities and spend more on defense.

Wars, they point out, impose large and lasting economic costs, and pose difficult macroeconomic trade-offs, especially for those countries where the fighting is taking place. Even without active conflicts, rising defense spending can raise economic vulnerabilities in the medium term. After the war, governments face the urgent post-conflict task of securing durable peace and sustaining recovery.

In an era of proliferating conflicts, the IMF research highlighted the deep and prolonged economic harm inflicted by war. It also showed that rising defense spending – which can boost demand in the short term – imposes difficult budgetary trade?offs that make good policy design and lasting peace more important than ever.

For countries where wars occur, economic activity drops sharply. On average, output in countries where fighting takes place falls by about three percent at the onset and continues falling for years, reaching cumulative losses of roughly seven percent within five years. Output losses from conflicts typically exceed those associated with financial crises or severe natural disasters. Economic scars also persist even a decade later.

Wars, the IMF research showed, also tend to have significant spillover effects. Countries engaged in foreign conflicts may avoid large economic losses – partly because there is no physical destruction on their own soil. Yet, neighboring economies or key trading partners with the country where the conflict is taking place will feel the shock. In the early years of a conflict, these countries often experience modest declines in output.

And that is where the Philippines is significantly affected because of our high dependence (of up to 90 percent) on energy product imports comprised of petroleum oils (crude), refined petroleum products, liquefied propane as well as gold/precious metals and telecommunication apparatus, and remittances from our overseas Filipino workers based in the affected Gulf Cooperation Council (GCC) countries of the United Arab Emirates, Saudi Arabia, Kuwait, Qatar, Oman and Israel.

Because of our dependence on energy imports and remittances, the World Bank has already sharply downgraded its growth outlook for the Philippines this year.

In its East Asia and Pacific economic update, the Washington-based international lending institution said it now expects the Philippine economy to expand by a lower 3.7 percent this year, 1.6 percentage points lower than its earlier 5.3 percent forecast.

World Bank East and Asia Pacific senior economist Ergys Islamaj said the downgrade reflects the Philippines’ multiple transmission channels to the conflict.According to Ergys, the Philippines is exposed to (the) conflict not only through energy and fertilizer imports, but also through remittances, citing that 18 percent of remittances to the Philippines last year came from the GCCs. He pointed out that as long as the geopolitical tensions continue, the Philippines’ growth could be at greater risk as a long conflict would hurt the economy further.

The Department of Economy, Planning and Development (DepDev) had earlier wisely projected a growth range of between 3.5 to 5.3 percent this year, based on its projection of higher fuel costs, lower remittances and likewise lower tourism receipts due to the higher cost of air travel.

The IMF blog also warned that based on their analysis, economic recoveries from war are often slow and uneven, and crucially depend on the durability of peace. When peace is sustained, output rebounds but often remains modest relative to wartime losses. By contrast, in fragile economies where conflict flares up again, recoveries frequently stall. These modest recoveries are driven primarily by labor, as workers are reallocated from military to civilian activities and refugees gradually return, while capital stock and productivity remain subdued.

Early macroeconomic stabilization, decisive debt restructuring and international support – including aid and capacity development, the IMF blog article said, play a central role in restoring confidence and promoting recovery. Recovery efforts are most effective when complemented by domestic reforms to rebuild institutions and state capacity, promote inclusion and security, and address the lasting human costs of conflict, including lost learning, poorer health and diminished economic opportunities.

Importantly, effective post-war recovery requires comprehensive and well-coordinated policy packages. Such an approach is far more effective than piecemeal measures. Policies that simultaneously reduce uncertainty and rebuild the capital stock can reinforce expectations, encourage capital inflows and facilitate the return of displaced people. Ultimately, successful post-war recovery lays the foundation for stability, renewed hope and improved livelihoods for communities affected by conflict.

Disconnect

Perhaps because we are so far away from the Middle East conflict and because of our optimistic outlook in life, Filipinos at face value seem to be taking the conflict in stride. Based on my own observations, a lot of Filipinos are just keen on ignoring the conflict and going about life as usual – malling, eating out and enjoying life and not worrying about the economy.

My own household help can’t seem to be bothered even when I ask them about the Middle East turmoil. They are more concerned about the next ayuda that the local government will hand out. Our houseboy is not concerned about the price of fuel because he relies on the bicycle we provide, while our stay-out maid has multiple clients and sidelines competing for her services.

However, the effect of higher LPG prices has affected our neighborhood laundry service which has now increased its laundry charge by P2 per kilo because they rely on LPG to power their washing machines, while the ironing service has increased by P30 per kilo due to higher electricity prices.