An International Analysis of the Economic Cost for Countries Located in Crisis Zones

Abstract

We study the impact on a country’s economy of sharing a direct land border with a country experiencing conflict. Through analysing sixty-three major episodes of regional instability during the period between 1990 and 2016 by using panel data methods applied to unrestricted error correction model, the opportunity cots of such regional conflict is examined. The resulting estimates of GDP loss are most profound for countries in Africa, Asia and the Middle East. Regional turmoil resulting from conflict has been found to have significantly reduced GDP growth in Angola, China, Kuwait, Mauritania, Saudi Arabia, Sudan and Tanzania, with estimates ranging from over 3% to 7% average reductions in GDP growth rate using both pooled OLS and fixed effects estimations (with an international average of 0.95% and 1.18% respectively). This considerable opportunity costs of military expenditure raise an important and challenging question to the concerned governments about the economic and social rightfulness of this expenditure and whether their people ultimately pay the price for the government decisions of increasing military spending.