The Economic Cost of Armed Conflict

Abstract

This paper estimates the distribution of the effect of armed conflict on real GDP per capita and investment. For each conflict, we construct a synthetic control from a set of conflict-free countries that closely resembles the conflicted country in the pre-conflict period. The economic evolution of this counterfactual country is then checked against the real evolution of the treated country to measure the GDP and investment gap that occurs during the conflict and post-conflict periods. We find that the size of the effect of armed conflict is very heterogeneous and varies widely depending on the type and intensity of the conflict episode being analyzed, as well as the number of years after onset. Conducting the analysis in levels instead of growth rates reveals that there is an economic loss even when there is a peace dividend effect. Our empirical exercise also serves as an illustration of a procedure to estimate the distribution of a heterogeneous treatment effect by means of the synthetic control method.