IDEAS home Printed from https://ideas.repec.org/p/qld/uq2004/453.html
   My bibliography  Save this paper

Economic Consequences of War: Evidence from Sri Lanka

Author

Abstract

We propose a theoretical and econometric framework to evaluate the impact of war on economic growth of a developing country with an open economy. The theoretical framework encompasses both the neoclassical and endogenous growth models. The econometric model is derived from the theoretical framework and an Autoregressive Distributed Lag framework is used for the estimation. We test this framework using Sri Lankan data. The war had significant and negative effects both in the short and long-run (annual average of 9% of GDP). High returns from investment in physical capital did not translate in sizable positive externalities. No significant effects of openness on growth in the long-run are found; however, effects are significant in the short- run. Inconsistent politically driven policies towards openness are the likely reason. As the ethnic conflict has finally come to an end, a policy framework with appropriate institutional reforms is needed for rapid growth and development.

Suggested Citation

  • Kumudini R. Ganegodage & Alicia N. Rambaldi, 2012. "Economic Consequences of War: Evidence from Sri Lanka," Discussion Papers Series 453, School of Economics, University of Queensland, Australia.
  • Handle: RePEc:qld:uq2004:453
    as

    Download full text from publisher

    File URL: http://www.uq.edu.au/economics/abstract/453.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Pesaran, M. Hashem & Shin, Yongcheol & Smith, Richard J., 2000. "Structural analysis of vector error correction models with exogenous I(1) variables," Journal of Econometrics, Elsevier, vol. 97(2), pages 293-343, August.
    2. Siyan Chen & Norman V. Loayza & Marta Reynal-Querol, 2008. "The Aftermath of Civil War," World Bank Economic Review, World Bank Group, vol. 22(1), pages 63-85, February.
    3. Arunatilake, Nisha & Jayasuriya, Sisira & Kelegama, Saman, 2001. "The Economic Cost of the War in Sri Lanka," World Development, Elsevier, vol. 29(9), pages 1483-1500, September.
    4. Charles I. Jones, 1995. "Time Series Tests of Endogenous Growth Models," The Quarterly Journal of Economics, Oxford University Press, vol. 110(2), pages 495-525.
    5. Lau, Sau-Him Paul & Sin, Chor-Yiu, 1997. "Observational equivalence and a stochastic cointegration test of the neoclassical and Romer's increasing returns models," Economic Modelling, Elsevier, vol. 14(1), pages 39-60, January.
    6. Biswas, Basudeb & Ram, Rati, 1986. "Military Expenditures and Economic Growth in Less Developed Countries: An Augmented Model and Further Evidence," Economic Development and Cultural Change, University of Chicago Press, vol. 34(2), pages 361-372, January.
    7. Balamurali, N. & Bogahawatte, C., 2004. "Foreign Direct Investment and Economic Growth in Sri Lanka," Sri Lankan Journal of Agricultural Economics, Sri Lanka Agricultural Economics Association (SAEA), vol. 6, pages 1-15.
    8. Ganegodage, K. Renuka & Rambaldi, Alicia N., 2011. "The impact of education investment on Sri Lankan economic growth," Economics of Education Review, Elsevier, vol. 30(6), pages 1491-1502.
    9. Valerie Cerra & Sweta Chaman Saxena, 2008. "Growth Dynamics: The Myth of Economic Recovery," American Economic Review, American Economic Association, vol. 98(1), pages 439-457, March.
    10. Prema‐chandra Athukorala & Sisira Jayasuriya, 2000. "Trade Policy Reforms and Industrial Adjustment in Sri Lanka," The World Economy, Wiley Blackwell, vol. 23(3), pages 387-404, March.
    11. Tallman, Ellis W. & Wang, Ping, 1994. "Human capital and endogenous growth evidence from Taiwan," Journal of Monetary Economics, Elsevier, vol. 34(1), pages 101-124, August.
    12. Albert Wijeweera & Matthew Webb, 2009. "Military Spending And Economic Growth In Sri Lanka: A Time Series Analysis," Defence and Peace Economics, Taylor & Francis Journals, vol. 20(6), pages 499-508.
    13. Alberto Abadie & Javier Gardeazabal, 2003. "The Economic Costs of Conflict: A Case Study of the Basque Country," American Economic Review, American Economic Association, vol. 93(1), pages 113-132, March.
    14. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
    15. Julide Yildirim & Selami Sezgin & Nadir Ocal, 2005. "Military Expenditure And Economic Growth In Middle Eastern Countries: A Dynamic Panel Data Analysis," Defence and Peace Economics, Taylor & Francis Journals, vol. 16(4), pages 283-295.
    16. Sharif, Iffath A., 2011. "Does political competition lessen ethnic discrimination? Evidence from Sri Lanka," Journal of Development Economics, Elsevier, vol. 94(2), pages 277-289, March.
    17. Lee, Tae-Hwy & Tse, Yiuman, 1996. "Cointegration tests with conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 73(2), pages 401-410, August.
    18. Binder, M. & Pesaran, M.H., 1996. "Stochastic Growth," Cambridge Working Papers in Economics 9615, Faculty of Economics, University of Cambridge.
    19. Lau, Sau-Him Paul & Sin, Chor-Yiu, 1997. "Public Infrastructure and Economic Growth: Time-Series Properties and Evidence," The Economic Record, The Economic Society of Australia, vol. 73(221), pages 125-135, June.
    20. Wijeweera Albert & Webb Matthew J., 2010. "A Peace Dividend for Sri Lanka: The Case for a Return to Prosperity Following the End of Hostilities," Global Economy Journal, De Gruyter, vol. 10(2), pages 1-11, May.
    21. Baharumshah, Ahmad Zubaidi & Mohd, Siti Hamizah & Mansur M. Masih, A., 2009. "The stability of money demand in China: Evidence from the ARDL model," Economic Systems, Elsevier, vol. 33(3), pages 231-244, September.
    22. Grossman, Herschel I & Kim, Minseong, 1996. "Predation and Accumulation," Journal of Economic Growth, Springer, vol. 1(3), pages 333-350, September.
    23. Junttila, Juha, 2001. "Testing an Augmented Fisher Hypothesis for a Small Open Economy: The Case of Finland," Journal of Macroeconomics, Elsevier, vol. 23(4), pages 577-599, October.
    24. Hannah Galvin, 2003. "The impact of defence spending on the economic growth of developing countries: A cross-section study," Defence and Peace Economics, Taylor & Francis Journals, vol. 14(1), pages 51-59.
    25. Blomberg, S. Brock & Hess, Gregory D. & Orphanides, Athanasios, 2004. "The macroeconomic consequences of terrorism," Journal of Monetary Economics, Elsevier, vol. 51(5), pages 1007-1032, July.
    26. Alberto Abadie & Javier Gardeazabal, 2001. "The Economic Costs of Conflict: A Case-Control Study for the Basque Country," NBER Working Papers 8478, National Bureau of Economic Research, Inc.
    27. Christopher Blattman & Edward Miguel, 2010. "Civil War," Journal of Economic Literature, American Economic Association, vol. 48(1), pages 3-57, March.
    28. Paresh Kumar Narayan, 2005. "The saving and investment nexus for China: evidence from cointegration tests," Applied Economics, Taylor & Francis Journals, vol. 37(17), pages 1979-1990.
    29. Benoit, Emile, 1978. "Growth and Defense in Developing Countries," Economic Development and Cultural Change, University of Chicago Press, vol. 26(2), pages 271-280, January.
    30. Athukorala, Prema-chandra & Rajapatirana, Sarath, 2000. "Liberalization and Industrial Transformation: Lessons from the Sri Lankan Experience," Economic Development and Cultural Change, University of Chicago Press, vol. 48(3), pages 543-572, April.
    31. Stewart, Douglas B, 1991. "Economic Growth and the Defense Burden in Africa and Latin America: Simulations from a Dynamic Model," Economic Development and Cultural Change, University of Chicago Press, vol. 40(1), pages 189-207, October.
    32. Grobar, Lisa Morris & Gnanaselvam, Shiranthi, 1993. "The Economic Effects of the Sri Lankan Civil War," Economic Development and Cultural Change, University of Chicago Press, vol. 41(2), pages 395-405, January.
    33. Paul Collier & V. L. Elliott & Håvard Hegre & Anke Hoeffler & Marta Reynal-Querol & Nicholas Sambanis, 2003. "Breaking the Conflict Trap : Civil War and Development Policy," World Bank Publications - Books, The World Bank Group, number 13938, December.
    34. McAleer, M. & McKenzie, C.R. & Pesaren, M.H., 1993. "Cointegration and Direct Tests of the Rational Expectations Hypothesis," Cambridge Working Papers in Economics 9306, Faculty of Economics, University of Cambridge.
    35. Eicher, Theo & Turnovsky, Stephen J, 2000. "Scale, Congestion and Growth," Economica, London School of Economics and Political Science, vol. 67(267), pages 325-346, August.
    36. Oxley, Les & McAleer, Michael, 1993. "Econometric Issues in Macroeconomic Models with Generated Regressors," Journal of Economic Surveys, Wiley Blackwell, vol. 7(1), pages 1-40.
    37. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-247, February.
    38. Kwabena Gyimah-Brempong & Marva E. Corley, 2005. "Civil Wars and Economic Growth in Sub-Saharan Africa1," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 14(2), pages 270-311, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jitendra Sharma & Subrata Kumar Mitra, 2021. "Asymmetric relationship between tourist arrivals and employment," Tourism Economics, , vol. 27(5), pages 952-970, August.
    2. Babajide, Adedoyin & Ahmad, Ahmad Hassan & Coleman, Simeon, 2021. "Violent conflicts and state capacity: Evidence from Sub-Saharan Africa," Journal of Government and Economics, Elsevier, vol. 3(C).
    3. Lopes da Fonseca, Mariana & Baskaran, Thushyanthan, 2015. "Re-evaluating the economic costs of conflicts," University of Göttingen Working Papers in Economics 246, University of Goettingen, Department of Economics.
    4. 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.
    5. Peter Josef Stauvermann & Ronald Ravinesh Kumar & Syed Jawad Hussain Shahzad & Nikeel N. Kumar, 2018. "Effect of tourism on economic growth of Sri Lanka: accounting for capital per worker, exchange rate and structural breaks," Economic Change and Restructuring, Springer, vol. 51(1), pages 49-68, February.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ganegodage, K. Renuka & Rambaldi, Alicia N., 2011. "The impact of education investment on Sri Lankan economic growth," Economics of Education Review, Elsevier, vol. 30(6), pages 1491-1502.
    2. Stergios Skaperdas, 2011. "The costs of organized violence: a review of the evidence," Economics of Governance, Springer, vol. 12(1), pages 1-23, March.
    3. Tiwari, Aviral & Shahbaz, Muhammad, 2011. "Does Defence Spending Stimulate Economic Growth in India?," MPRA Paper 30880, University Library of Munich, Germany, revised 18 Apr 2011.
    4. Muhammad Nasir & Muhammad Shahbaz, 2015. "War on terror: Do military measures matter? Empirical analysis of post 9/11 period in Pakistan," Quality & Quantity: International Journal of Methodology, Springer, vol. 49(5), pages 1969-1984, September.
    5. Abdul Jalil & Hafiz Khuram Nadeem Abbasi & Nazia Bibi, 2016. "Military expenditures and economic growth: allowing structural breaks in time series analysis in the case of India and Pakistan," Quality & Quantity: International Journal of Methodology, Springer, vol. 50(4), pages 1487-1505, July.
    6. Muhammad Shahbaz & Talat Afza & Muhammad Shahbaz Shabbir, 2013. "Does Defence Spending Impede Economic Growth? Cointegration And Causality Analysis For Pakistan," Defence and Peace Economics, Taylor & Francis Journals, vol. 24(2), pages 105-120, April.
    7. Manamperi, Nimantha, 2016. "Does military expenditure hinder economic growth? Evidence from Greece and Turkey," Journal of Policy Modeling, Elsevier, vol. 38(6), pages 1171-1193.
    8. repec:ipg:wpaper:2014-380 is not listed on IDEAS
    9. Shahbaz, Muhammad & Leitão, Nuno Carlos & Uddin, Gazi Salah & Arouri, Mohamed & Teulon, Frédéric, 2013. "Should Portuguese economy invest in defense spending? A revisit," Economic Modelling, Elsevier, vol. 35(C), pages 805-815.
    10. Syed Ali Raza & Muhammad Shahbaz & Sudharshan Reddy Paramati, 2017. "Dynamics of Military Expenditure and Income Inequality in Pakistan," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 131(3), pages 1035-1055, April.
    11. Innocent.U. Duru & Millicent Adanne Eze & Bartholomew.O.N. Okafor & Abubakar Yusuf & Lawrence.O. Ede & Abubakar Sadiq Saleh, 2021. "Military Outlay and Economic Growth: The Scenarios of Lake Chad Basin Countries of the Republic of Chad and Nigeria," Growth, Asian Online Journal Publishing Group, vol. 8(1), pages 12-26.
    12. Raza, Syed Ali & Shahbaz, Muhammad, 2014. "To Battle Income Inequality, Focus on Military Expenditures: Lesson from Pakistan," MPRA Paper 57773, University Library of Munich, Germany.
    13. Michael A. Akume & Gylych Jelilov & Benedict Akanegbu, 2019. "The Impact of Military Spending on Economic Wellbeing in Nigeria," International Journal of Business, Economics and Management, Conscientia Beam, vol. 6(4), pages 186-200.
    14. Chang, Hsin-Chen & Huang, Bwo-Nung & Yang, Chin Wei, 2011. "Military expenditure and economic growth across different groups: A dynamic panel Granger-causality approach," Economic Modelling, Elsevier, vol. 28(6), pages 2416-2423.
    15. Albert Wijeweera & Matthew J. Webb, 2012. "Using the Feder-Ram and Military Keynesian Models to Examine the Link Between Defence Spending and Economic Growth in Sri Lanka," Defence and Peace Economics, Taylor & Francis Journals, vol. 23(3), pages 303-311, May.
    16. Dimitrios PAPARAS & Christian RICHTER & Alexandros PAPARAS, 2015. "Fiscal Policy and Economic Growth, Empirical Evidence in European Union," Turkish Economic Review, KSP Journals, vol. 2(4), pages 239-268, December.
    17. Shahbaz, Muhammad & Shabbir, Muhammad Shahbaz & Malik, Muhammad Nasir & Wolters, Mark Edward, 2013. "An analysis of a causal relationship between economic growth and terrorism in Pakistan," Economic Modelling, Elsevier, vol. 35(C), pages 21-29.
    18. Samer Matta & Simon Appleton & Michael Bleaney, 2019. "The Impact of the Arab Spring on the Tunisian Economy," World Bank Economic Review, World Bank Group, vol. 33(1), pages 231-258.
    19. Vincenzo Bove & Leandro Eliay & Ron P Smith, 2014. "The relationship between panel and synthetic control estimators of the effect of civil war," BCAM Working Papers 1406, Birkbeck Centre for Applied Macroeconomics.
    20. Olaf J de Groot & Carlos Bozzoli & Anousheh Alamir & Tilman Brück, 2022. "The global economic burden of violent conflict," Journal of Peace Research, Peace Research Institute Oslo, vol. 59(2), pages 259-276, March.
    21. Syed Hasanat Shah & Hafsa Hasnat & Mohsin Hasnain Ahmad, 2016. "The Effects of the Human Cost of Terror on National Income, Private Consumption and Investment in Pakistan," South Asia Economic Journal, Institute of Policy Studies of Sri Lanka, vol. 17(2), pages 216-235, September.

    More about this item

    JEL classification:

    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:qld:uq2004:453. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/decuqau.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: SOE IT (email available below). General contact details of provider: https://edirc.repec.org/data/decuqau.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.