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

29 Pages Posted: 31 Jan 2006

See all articles by Sanjeev Gupta

Sanjeev Gupta

International Monetary Fund (IMF) - Fiscal Affairs Department

Benedict Clements

International Monetary Fund (IMF) - African Department

Rina Bhattacharya

International Monetary Fund (IMF)

Shamit Chakravarti

International Monetary Fund (IMF)

Date Written: August 2002

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.

Keywords: Fiscal policy, growth, armed conflict, terrorism

JEL Classification: O15, O23, O55, H56

Suggested Citation

Gupta, Sanjeev and Clements, Benedict and Bhattacharya, Rina and Chakravarti, Shamit, Fiscal Consequences of Armed Conflict and Terrorism in Low- and Middle-Income Countries (August 2002). IMF Working Paper No. 02/142, Available at SSRN: https://ssrn.com/abstract=879939

Sanjeev Gupta (Contact Author)

International Monetary Fund (IMF) - Fiscal Affairs Department ( email )

700 19th Street, NW
Washington, DC 20431
United States

Benedict Clements

International Monetary Fund (IMF) - African Department ( email )

1700 19th Street, NW
Washington, DC 20431
United States

Rina Bhattacharya

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Shamit Chakravarti

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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