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.
International Monetary Fund
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