Economic Effects of the Syrian War and the Spread of the Islamic State on the Levant Elena Ianchovichina and Maros Ivanic The World Bank Group 10th Defence and Security Economics Workshop Carleton University, Ottawa, Canada 6 th November 2015
Problem The Levant conflict represents a huge shock to the economies of the Levant, especially the economies of Iraq and Syria The Levant war refers to the Syrian war and the subsequent spread of ISIS in Iraq and Syria Yet, no systematic evaluations of its economic effects
Effects of the Levant war Direct effects though loss of life, injuries, displacement, destruction, trade restrictions, and inefficiencies Spillover effects on neighboring countries and rest of world through refugee movements and increase in trade costs Indirect effects through derailed and reversed integration process in the region On the eve of the Arab Spring, the greater Levant economies were considering reforms that would have deepened their trade ties Negotiations among Turkey, Syria, Jordan, and Lebanon were particularly advanced as reflected in the Joint Declaration on Establishing Close Neighbors Economic and Trade Association Council (CNETAC), signed in July 2010 Benefits of deep trade integration were expected to be sizable as discussed in a World Bank (2014) report on the New Levant
Objectives Address this gap and quantify the economic impact of the Levant war Assess the direct, indirect, and spillover effects of war on Syria, Iraq, and neighboring countries Capture in detail the six countries in the greater Levant and their trade links: Syria, Iraq, Lebanon, Turkey, Jordan, and Egypt Embed the regional and country analysis in a global economy context in order to enable extensions
Links to the literature First paper to undertake a systematic general equilibrium simulation analysis of the Levant war s country-specific, regional, and global effects Paper combines features of two distinct literatures On trade reform and restrictions (Trela and Whalley, 1990; de Melo and Winters, 1992; Ianchovichina and Martin, 2004; Walmsley et al., 2006) On natural disasters & wars (Grobar & Gnanselvam, 1993; Collier, 1999; Rose and Liao, 2005; Okuyama, 2007)
The model The multi-sector, multi-country CGE model (Hertel, 1997) is most suitable to produce comprehensive estimates of the various effects The accounting relationships and behavioral linkages constrain outcomes in ways not possible in other types of models Aggregate output determines aggregate income in each country; Each country s exports of a good equal total imports of this good in other countries, net of shipping costs; global investment equal global savings; global supply and demand for individual goods balance; Demand equals supply for each factor in a country; The model allows for interaction of markets which in turn can give rise to feedback effects in response to equilibrium price changes Simpler linear approaches would misstate the true effects of the war Factor inputs are mobile across sectors but not across countries, except for labor which enables us to study the effects of refugee movements
Data modifications We start with the GTAP 8 - a global database linking the 2007 IO tables of 129 country/regions through bilateral trade information, transport costs and protection barriers. Modify the database to Include the countries of interest missing in GTAP 8 Lebanon, Jordan, Syria, Iraq, the Palestine Territories, Algeria and Libya Sectoral GDP, household consumption, and government consumption come from the United Nations National Accounts database Sectoral trade data from the United Nation s Comtrade database Include a realistic representation of initial protection in Levant using applied tariffs from the WTO We made sure initial protection rates reflect PAFTA, the bilateral Euromed Association Agreements (AAs) and the FTA with Turkey
Final aggregation focuses on the economies in the greater Levant Countries Turkey Algeria* Egypt EU Jordan* USA Palestine* Japan Lebanon* Other newly industrialized Syria* China Iraq* India Iran Russia Yemen* Rest of Asia GCC countries Africa Morocco Latin America Tunisia OECD Libya* Rest of Europe Sectors Primary agriculture Equipment/vehicles Processed food Ferrous metals Gas distribution Other manufacturing Oil Construction Water Transport Other natural resource Trade Processed fuel Communications Electricity Financial/insurance Chemical/metal Government Textile & apparel Other business services Other manufacturing Recreation
Baseline scenario Pre-simulation scenario includes deep trade integration reforms that the Levant countries negotiated prior to the war and that would have been implemented in the absence of a war Removal of tariffs on intra-levant trade in food and agricultural products Improvements in transport costs within the greater Levant based on the lowest cost importer and exporter in the region according to the Doing Business database Cross-border services liberalization represented as an efficiency improvements proportionate to the improvement in openness allowing the Levant countries sectoral STRIs to reach the minimum of the sectoral STRIs in the Euromed areas (based on the World Bank s STRI database) A gradual convergence in the value-added productivity levels in the nongovernment service sectors of the Levant economies to the highest value added per worker in the region over a 20-year period; calculate the average annual change, and cumulate the annual changes to obtain the change expected over a 3-year period
The war scenario Direct impacts of the war reflect the intensity and scope of the conflict between mid-2011 and mid-2014 Loss of life and refugee flows (based on UNHCR Population STATISTICS and ILOSTAT Database) Skilled and unskilled workers are assumed to be equally affected by the war Labor force participation rates are set at the minimum of these rates in refugee receiving countries and Syria Increase in trading costs among the Levant partners, represented as deterioration in the efficiency of shipping goods within the greater Levant Transport efficiency change Population Labor force Turkey Egypt Jordan Lebanon Syria Iraq Turkey 0.9 0.8 0.0 3.5-18.3-35.2-18.4-11.1 Egypt 0.2 0.1 5.9 0.0 12.2-10.2 2.5 3.6 Jordan 2.5 2.3-19.5 11.1 0.0-32.9-15.7-8.5 Lebanon 19.5 15.4-16.2 10.9-11.3 0.0-13.4-7.3 Syria -20.7-19.0-23.8-4.9-20.2-33.4 0.0-12.5 Iraq 7.3 7.6-9.2 4.2-6.5-15.0-8.1 0.0 Source: Ianchovichina and Ivanic (2014); Note: Number are in % calculated based on data from UNHCT Population STATICS, ILOSTAT Database and Doing Business Indicators 2011-14.
The war scenario Direct impacts of the war (contd.) Destruction of capital in Syria (assume 20% of Syria s capital stock is destroyed) Imposition of trade embargos by the USA and the EU on Syria Oil production and exports from Syria decline dramatically due to sanctions and loss of infrastructure Assume that the advance of ISIS leads to a 5% decline in total factor productivity in Iraq Indirect effects: reversal of deep integration reforms captures the opportunity cost of foregone deep trade integration initiatives
Who loses and how much? Direct v. indirect aggregate income effects of war (% change) 10 5 0-5 -10-15 -20-25 -30-35 -40-45 Turkey Egypt Jordan Lebanon Syria Iraq Indirect trade disintegration effects Direct aggregate effects of war Source: Ianchovichina and Ivanic (2014).
Aggregate v. per capita income effects? Income effects of the Levant war (% change) 10 5 0-5 -10-15 -20-25 -30-35 -40-45 Turkey Egypt Jordan Lebanon Syria Iraq Aggregate effect Per capita effect Source: Ianchovichina and Ivanic (2014).
Syria Iraq Lebanon Jordan Egypt Turkey Decomposition of direct per capita results Direct per capita effects of the war -14.0-16.1-10.6-1.4-0.1-0.5 Output effects -6.3-12.6-0.1 0.0 0.0 0.0 Capital destruction -5.4-0.1 0.0 0.0 0.0 0.0 Trade cost escalation -0.1-0.2-0.1 0.0 0.0 0.0 Trade embargo on Syria -15.4 0.0 0.0 0.1 0.0 0.0 Labor force effects of refugees -7.5 2.8 6.0 1.0 6.0 0.4 Population effects of refugees 20.8-6.1-16.4-2.5-16.4-0.9
The war s distributional effects Real factor returns (% change) 40 30 20 10 0-10 -20-30 -40-50 Turkey Egypt Jordan Lebanon Syria Iraq Land Unskilled Labor Skilled Labor Physical Capital
Direct output effects of war by sector in Syria Sectoral output changes (%) Tourism and others Other Business services Public services FIRE Communications Trade Transport Construction Other manufactures Metal products Equipment and vehicles Resource based manufactures Textiles and apparel Chemicals and metallurgy Electricity Petroleum and coal Other natural resources Water Oil extraction Gas extraction & distr. Processed food Primary Agriculture -60-50 -40-30 -20-10 0 10 20 30
Concluding remarks The spread of the war in Syria and Iraq has led to large economic losses, especially for Iraq, Syria, and their neighbors The world has lost in output an estimated US$40 billion in 2007 price Most of these losses affect the Levant economies, and Syria and Iraq in particular Price tag of war much larger possibly above US$100 billion for the greater Levant
Caveats Analysis does not factor in: Cost of rebuilding infrastructure in Syria Cost of delivering basic services and infrastructure to refugees in receiving countries Cost of foregone investments which could have modernized and augmented the output capacity The direct costs have grown over time and affect a larger number of countries: The war has raged for an additional year The spillover effects have reached Europe (the effects on individual countries are expected to be nontrivial) The direct costs would be bigger if: The war increases in intensity ISIS managed to capture the main oil extractive facilities in Southern Iraq and spread beyond Iraq and Syria The conflict grows into a regional one (more countries get involved)