Civil war: Meaning, Criticisms & Real-World Uses

What Is Civil War?

A civil war is an armed conflict occurring within the borders of a single country, typically between the state and one or more organized non-state groups, or between two or more such groups. From a financial and macroeconomic perspective, civil wars represent a severe form of geopolitical risk that profoundly disrupts economic activity and stability. These conflicts often lead to the destruction of infrastructure, displacement of populations, and significant economic contraction. The financial consequences of civil war can be long-lasting, affecting everything from national Gross Domestic Product (GDP) to international trade and the functioning of financial markets.

History and Origin

Historically, civil wars have been a recurrent feature of human societies, driven by a complex interplay of political, social, and economic factors. While the direct origins of any particular civil war are unique, their economic impact has been a subject of increasing study, particularly in the modern era of interconnected global economies. For instance, research analyzing civil wars since 1960 indicates that they significantly reduce a country's annual growth rate, with a fifteen-year conflict potentially reducing per capita GDP by approximately 30 percent.¹⁴ The destruction of physical and human capital, alongside the erosion of institutions like property rights, directly contributes to this economic deterioration.¹³

Key Takeaways

Civil wars cause significant economic contraction, including reductions in GDP and per capita income.
They lead to widespread destruction of infrastructure, capital flight, and disruption of trade.
The economic fallout from a civil war can persist for many years beyond the cessation of hostilities.
These conflicts often exacerbate existing fiscal pressures and can contribute to high inflation.
International aid and coordinated reconstruction efforts are often necessary for post-conflict economic recovery.

Interpreting the Civil War's Economic Impact

The economic impact of a civil war is measured through various macroeconomic indicators, reflecting the severe disruption to a country's productive capacity and financial health. A key metric is the decline in Gross Domestic Product (GDP) and per capita income. For instance, civil conflicts in the Middle East and Central Asia have resulted in per capita output being about 10 percent lower on average a decade after a severe conflict.¹² This protracted decline contrasts with other regions where such effects might dissipate more quickly.¹¹ Beyond GDP, other critical indicators include elevated inflation, reduced investment, decreased exports, and lower fiscal revenues.¹⁰ The extent of these impacts depends on factors such as the duration and intensity of the conflict.⁹

Hypothetical Example

Consider a hypothetical country, "Economia," which experiences a five-year civil war. Before the conflict, Economia had a stable economy with steady Gross Domestic Product (GDP) growth and moderate inflation.

Scenario:

Initial Impact (Years 1-2): As the civil war escalates, infrastructure is damaged, and manufacturing output sharply declines. Foreign businesses cease new investment, and some existing capital flees the country. The central bank resorts to printing money to fund increased government spending on military operations, leading to hyperinflation.
Prolonged Conflict (Years 3-5): Trade routes are disrupted, and key supply chains break down. Agricultural production falls dramatically, causing food shortages. The national currency experiences significant currency depreciation, further eroding purchasing power. Tax revenues plummet, leading to a massive fiscal deficit.
Post-Conflict (Years 6+): Even after the fighting ends, the economy struggles. Unemployment is high, and the widespread destruction requires substantial resources for rebuilding. Economia relies heavily on humanitarian aid and international loans for initial economic recovery efforts, which are slow due to damaged institutions and lack of investor confidence.

This hypothetical case illustrates how a civil war systematically dismantles economic foundations, causing long-term damage that extends far beyond the period of active fighting.

Practical Applications

The economic ramifications of civil war are pervasive, affecting virtually all aspects of a nation's financial and commercial life.

Investment and Capital: Civil wars deter both domestic and Foreign Direct Investment (FDI). Investors withdraw capital due to heightened risk and uncertainty, leading to capital flight and a severe decline in new projects. Research indicates that firms cut back on capital investments in response to geopolitical risk, with the effect being stronger for firms with more irreversible investments and foreign operations.⁸
Fiscal Stability: Governments engaged in civil war face immense pressure on their fiscal policy. Revenues decline sharply due to disrupted economic activity, while military expenditures surge. This often leads to large fiscal deficits and increased national debt.
Trade and Supply Chains: Internal conflicts severely disrupt international trade and domestic supply chains. Borders may close, infrastructure like roads and ports can be destroyed, and security concerns hinder the movement of goods and services. This contributes to shortages and higher prices, fueling inflation.
Financial Markets: Financial markets in conflict-affected regions become highly volatile and often cease normal functioning. Asset prices can collapse, and the national currency depreciation significantly. For instance, a potential armed conflict can lead to a "flight-to-safety" in asset markets and significant disruptions in international trade and banking.⁷
Post-Conflict Reconstruction: After a civil war, the focus shifts to economic recovery and reconstruction. This typically involves massive infusions of humanitarian aid and development assistance, often coordinated by international bodies like the World Bank and the United Nations Development Programme (UNDP). Rebuilding efforts in countries like Syria, following prolonged internal conflict, highlight the complexities of post-war economic restructuring and the role of various actors in attempting to stabilize a fractured economy.⁶

Limitations and Criticisms

While the negative economic impacts of civil war are well-documented, specific outcomes can vary, and recovery is not always straightforward. One limitation in assessing the full impact is the difficulty in accurately measuring economic activity during times of conflict. Data collection becomes challenging, and informal economies may grow, which are not always fully captured in official statistics.

Furthermore, the duration of a civil war can influence the post-conflict economic trajectory. Some research suggests that while short wars may lead to continued post-war decline, sufficiently long wars might eventually give rise to a phase of rapid growth, implying a complex adjustment of capital stock and potential for reversal of capital flight.⁵ However, despite potential long-term recovery, the immediate human and economic costs are immense, including destroyed physical and social capital, distorted economic incentives, and widespread poverty.⁴

Another challenge lies in the political economy of post-conflict settings. Rebuilding requires strengthening state capacity, enforcing the rule of law, and restoring confidence in institutions, which can be particularly difficult when former warlords or criminal networks resist relinquishing power.³ External assistance, such as humanitarian aid, is crucial, but its effectiveness depends on various factors, including the governance quality of the recipient country.²

Civil War vs. Geopolitical Risk

While a civil war is a specific type of armed conflict, it is also a significant component of broader geopolitical risk. Geopolitical risk encompasses any risk associated with political upheavals, inter-country tensions, terrorism, and wars, influencing both the occurrence of such events and the escalation of their probability. Civil war, by definition, focuses on internal strife within a single nation. However, its economic consequences often extend beyond national borders, affecting regional trade, migration flows, and global supply chains.

The key distinction lies in scope: civil war is a direct event, whereas geopolitical risk is a broader category of uncertainty that includes internal conflicts like civil wars, as well as international conflicts, political instability, and policy uncertainties. Investors and businesses assess geopolitical risk to understand potential impacts on investment decisions, asset prices, and overall market stability, with civil wars being a critical factor within this assessment.

FAQs

What are the immediate economic effects of a civil war?

The immediate economic effects of a civil war typically include a sharp decline in Gross Domestic Product (GDP), disruption of critical infrastructure, reduced international trade, high inflation, and a significant increase in government spending on military efforts. Essential services may collapse, and populations can face severe shortages.

How long do the economic consequences of a civil war last?

The economic consequences of a civil war can be long-lasting, often extending for many years or even decades after the conflict ends. While some economies may experience a rebound in the immediate post-war period, factors such as destroyed infrastructure, capital flight, loss of human capital, and weakened institutions can impede sustainable economic recovery.¹

How do civil wars affect global financial markets?

Civil wars, particularly in key economic regions or those involving major commodity producers, can introduce significant volatility to global financial markets. They can lead to spikes in commodity prices (like oil or food), impact global supply chains, and trigger a "flight-to-safety" among investors, causing shifts in asset prices and currency valuations.