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Fiscal Consequences of Armed Conflict and Terrorism in Low- and Middle-Income Countries

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  • Mr. Benedict J. Clements
  • Mr. Sanjeev Gupta
  • Shamit Chakravarti
  • Ms. Rina Bhattacharya

Abstract

This paper analyses the fiscal effects of armed conflict and terrorism on low- and middle-income countries. An analysis of 22 conflict episodes shows that armed conflict is associated with lower growth and higher inflation, and has adverse effects on tax revenues and investment. It also leads to higher government spending on defense, but this tends to be at the expense of macroeconomic stability rather than at the cost of lower spending on education and health. Our econometric estimates are consistent with the hypothesis that conflict and terrorism have a significant negative impact on growth through changes in the composition of government spending. On the revenue side, the fiscal accounts are affected only through reduced real economic activity. Thus there is potential for a sizable "peace dividend" for countries that are able to resolve conflict and terrorism.

Suggested Citation

  • Mr. Benedict J. Clements & Mr. Sanjeev Gupta & Shamit Chakravarti & Ms. Rina Bhattacharya, 2002. "Fiscal Consequences of Armed Conflict and Terrorism in Low- and Middle-Income Countries," IMF Working Papers 2002/142, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2002/142
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    Cited by:

    1. Freytag, Andreas & Krüger, Jens J. & Meierrieks, Daniel & Schneider, Friedrich, 2011. "The origins of terrorism: Cross-country estimates of socio-economic determinants of terrorism," European Journal of Political Economy, Elsevier, vol. 27(S1), pages 5-16.
    2. Maïmouna DIAKITE & Souleymane DIARRA & Sampawende J.-A. TAPSOBA & Tertius ZONGO, 2019. "Foreign Aid and Domestic Revenue Mobilization in Conflict-affected Countries," Working Papers P248, FERDI.
    3. Nasser Saidi, 2003. "Promesses Chatoyantes, Pietre Performance: Aide Et Cooperation Dans Les Pays Sortant D?un Conflit," Working Papers 0331, Economic Research Forum, revised 10 2003.
    4. Ibrahim Elbadawi & Raimundo Soto, 2013. "Aid, Exchange Rate Regimes and Post-conflict Monetary Stabilization," Working Papers 751, Economic Research Forum, revised May 2013.
    5. Stephen Smith, 2016. "The Two Fragilities: Vulnerability to Conflict,Environmental Stress, and Their Interactions as Challenges to Ending Poverty," Working Papers 2016-1, The George Washington University, Institute for International Economic Policy.
    6. Malcolm Chalmers, 2007. "Spending To Save? The Cost-Effectiveness Of Conflict Prevention," Defence and Peace Economics, Taylor & Francis Journals, vol. 18(1), pages 1-23.
    7. Mr. Nicholas Staines, 2004. "Economic Performance Over the Conflict Cycle," IMF Working Papers 2004/095, International Monetary Fund.
    8. Shantayanan Devarajan & Lili Mottaghi, "undated". "MENA Quarterly Economic Brief, January 2016," World Bank Publications - Reports 23705, The World Bank Group.

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