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By Mthuli Ncube
State fragility and breakdown, along with violent conflict, pose significant risks to global and regional security. Most contemporary armed conflicts take place within states, and the majority of their victims are civilians. Conflict and fragility impede efforts to reduce poverty, and the prevention of conflict through development is cheaper than dealing with the aftermath of conflict. When violent conflict breaks out, development is derailed and conflict is development in reverse. Conflicts not only cause a contraction of output, they also destroy infrastructure. Financial and human capital tends to leave countries, but to quantify the phenomenon is difficult without a counterfactual analysis.
In the second half of the 20th century, the African continent, more than any other part of the world, suffered enormously from violent conflict within and between States. This took a heavy toll on Africa in terms of human suffering and lost development opportunities with devastating impact on political, social and economic development. The contagion effects on the neighbouring states had significant negative consequences. African leaders have recognized the imperative of preventing and tackling conflict and in recent years the continent has become increasingly stable although new forms of instability such as the post-2011 fall of autocracies and the unsteady transition to democracy in North Africa are being observed.
Measuring the cost of fragility is of interest because the amount of aid that is available from donors is coming under increasing fiscal pressure and it will be useful to come up with instruments that can address the resurgence of fragility as has recently been experienced in Mali and the Sahel region. States do not operate in isolation, and will be affected by events in neighbouring countries. In the Mano River region of West Africa, the Horn of Africa, the Sahel region and the Great Lakes region, the outbreak of national conflicts created regional security issues.
The costs of conflicts are numerous and widespread. Some are direct and can be broadly quantified: deaths, casualties, diseases, internally displaced people, and mass migrations. Some are indirect, with conflicts disrupting economic activity, shifting public expenditures from health and education to the military, and reshuffling public revenues. Conflicts can also increase unemployment, especially among young males, increasing the likelihood of crime and the appeal of extremism. Some costs of conflict cannot be quantified: citizens are often traumatized long after the end of conflicts, but the costs of psycho-social trauma are not easily measured.
A recent paper entitled “Estimating the Economic Cost of Fragility in Africa” (M. Ncube, B. Jones and Z. Bicaba, 2013) evaluates and quantifies the economic costs of fragility using two methodologies: a simple convergence model and synthetic counterfactual approach. They allow for the estimating the evolution of the growth path or trajectory under fragility and under stability (no-fragility). The economic cost in terms of GDP and per capita GDP is computed over several time horizons.
According to the baseline convergence model, the cost after 30 years of exposure to fragility is equal to 110.14 per cent, which means that, on average, fragile states could have potentially doubled their initial GDP per capita level in 1980 if they had not been in fragility/conflict. Second, they convert the growth opportunity cost in terms of loss of GDP per capita. Based upon on several specifications and time horizon, their simulations show that the equivalent loss of GDP per capita goes from US $84 to US $442 and increases exponentially reaching a loss in terms of GDP per capita of between US $178 and US $818 when the exposure to fragility is prolonged over 21 years.
The synthetic counterfactual approach is applied to seven fragile states: Liberia, Sierra Leone, Guinea, Guinea-Bissau, Eritrea, Central Africa Republic (CAR) and Burundi. The economic cost of fragility is measured in terms of the loss of GDP per capita and in USD value terms for these countries. This approach allows for evaluating the opportunity cost of fragility as the difference between the actual level of GDP per capita of each fragile state and the potential level of GDP per capita that would have been observed without the exposure to fragility/conflict (counterfactual). It is this difference in trajectory (or gap) that is used to compute and quantify the economic cost of fragility.
The results show that for Liberia, after five years of the conflict, the per capita GDP loss is US $318, increasing to a loss of US $897 per capita GDP after 20 years, compared to the synthetic evolution. Similarly for Sierra Leone the potential loss in GDP per capita after 20 years is US $450 and in Burundi it was US $361. In countries with a shorter duration of conflict, the commulative loss of per capita GDP after 10 years in Guinea, Eritrea and CAR amounted to US $691, US $101 and US $259, respectively.
In addition, using the dynamics of population, this paper show that in 20 years of fragility, the cumulative economic cost of fragility in Liberia, Sierra Leone and Burundi amounted to US $31.8 billion, US $16.0 billion and US $12.8 billion, respectively. In Guinea, CAR and Eritrea, after 10 years of fragility, the loss is US $24.5 billion, US $3.37 billion and US $9.18 billion, respectively.
The costs of fragility are also gauged using the duration of time necessary for a full recovery of the economy. It is shown, for example, that if Central Africa Republic, Liberia and Sierra Leone had growth rates equivalent to those of the synthetic country in the model in 2010, it would take 34.5 years,19.2 years and 20.8 years, respectively, to recover the level of GDP per capita had these countries not been exposed to fragility.
The past few years have seen increasing international engagement in fragile states as well as a growing convergence of development, security, peace-building, state-building and related agendas. What seems to unite international opinion is that the risks of failing to engage in these contexts – both for the countries themselves and for the international community – outweigh most of the risks of engagement. The question is not whether to engage but how to do so in ways that do not cause harm and do not come at an unacceptable cost.
Professor Mthuli Ncube is the former Chief Economist and Vice-President of the African Development Bank, and holds a PhD in Mathematical Finance from Cambridge University, UK, on “Pricing Options under Stochastic Volatility”.