How Sound Economic Policy Can Help Prevent Conflict
Macroeconomic policy can play a key role in preventing armed conflict, in turn saving lives and avoiding injuries, forced displacement and migration, and vast damage to the economy.
That’s according to new IMF research, based on policy simulations incorporating machine learning-based predictions of conflict. The paper finds that every $1 invested in prevention—through policy efforts to promote macroeconomic stability and growth, strengthen institutions, and support local community development—can save between $26 and $103 in possible conflict-related costs. These include the cost of massive humanitarian needs as well as lost economic output.
As the Chart of the Week shows, those savings are particularly notable in high-risk countries suffering from recent violence.
Creating economic opportunities that can help foster peace and stability is more critical than ever. Last year, state-based conflicts rose to their highest level in half a century, according to the Uppsala Conflict Data Program at Sweden’s Uppsala University. Non-state violence also is at a high level. In this context, the IMF is paying greater attention to fragile and conflict-affected states, including through a dedicated strategy.
Recent IMF research shows that three areas of domestic macroeconomic policies are especially effective in reducing the risk of conflict, at reasonable costs:
- Healthier fiscal positions and improved state capacity. The risk of conflict is reduced when governments collect more than they spend, and use extra money to deliver better services and economic development.
- A resilient labor market and other hallmarks of a resilient economy. When unemployment is high, the likelihood and intensity of violence increases because when people have jobs, they are less likely to pick up arms.
- International engagement to improve state capacity. The analysis shows that IMF financial support to countries in need is associated with reductions in the likelihood of violence by 1.5-4.0 percentage points. In other words, macroeconomic support can complement peacebuilding efforts.
As benefits from prevention are highest where violence has not yet fully erupted, developing early warning systems will be crucial for policymakers. This is especially important in fragile states where social tensions and risks may be on the rise but are currently less visible.
These findings underscore the importance of well-tailored economic policies and capacity building not only for overcoming fragility, but also potentially to reduce the risk of armed conflict in fragile states.
