93881 January 2015, Number 140 THE ECONOMIC IMPACT OF THE SYRIAN WAR AND THE SPREAD OF ISIS Elena Ianchovichina and Maros Ivanic1 improving transport logistics within the greater Levant, and liberalizing intra-Levant trade in Introduction: The Syrian war and the subsequent services. The indirect effect is important to consider emergence and spread of the Islamic State (ISIS) because the war put an end to plans for deepening have transformed the Levant in ways one could not intra-regional trade ties as envisioned by the have imagined prior to 2011. As the numbers of “Levant Quartet” agreement in 2010. The benefits of dead and of refugees and internally displaced kept deep trade integration reforms, especially the climbing, and as families were torn apart and liberalization of services trade, were expected to be neighborhoods were turned into war zones, sizable, reflecting significant economic economies slumped and regional economic ties complementarities among the six Levant countries broke down. The shock of these events, henceforth and possibilities to generate productivity gains and referred to as the Levant conflict or war, has attract foreign investments (World Bank, 2014).2 changed the region in profound ways, yet there are no systematic evaluations of its economic impact. Our objective was to address this gap and quantify both the direct and indirect economic effects of the war on the countries in the greater Levant--Turkey, the Syrian Arab Republic, Iraq, Jordan, Lebanon, and the Arab Republic of Egypt. The direct effect stems from the decline in the size and skills of Syria’s labor force due to loss of life, and refugee outflows, infrastructure destruction, Syria’s trade embargo, increases in the costs of Syrian Refugees in Jordan conducting business, and a decline in productivity. The indirect effect captures the opportunity cost of Who Loses and How Much? Our assessment foregone deep trade integration initiatives aimed at suggests that the three years of war (from mid-2011 liberalizing agricultural trade with Turkey, to mid-2014) have cost the greater Levant an estimated US$35 billion in output, measured in 2007 prices. However, these losses have been unevenly 1 Elena Ianchovichina, Chief Economist’s Office, the Middle East and North Africa Region, The World Bank and Maros distributed within the region. Those countries most Ivanic, Development Economics Group, Agriculture affected by the war, Syria and Iraq, have borne the (DECAR), The World Bank. The MENA K&L Quick Note was cleared by Shanta Devarajan, Chief Economist, Middle brunt of the economic costs of it (Figure 1). Their East and North Africa Region, The World Bank. This Quick economies could have been respectively a third and Note summarizes a paper by Ianchovichina and Ivanic (2014) “Economic Effects of the Syrian War and the Spread a quarter larger in real terms had they avoided the of the Islamic State on the Levant, Policy Research Working Paper #7135, The World Bank, Washington, D.C. 2World Bank (2014) Over the Horizon: A New Levant, the World Bank, Washington, D.C. conflict. In the case of Syria, most of the costs are Source: Ianchovichina & Ivanic (2014) Economic Effects of the Syrian War & the Spread of the Islamic State on the Levant, World Bank associated with the direct costs of war and the trade Policy Research Working Paper #7135, Washington, D.C. embargo is a major factor behind these costs. In the case of Iraq the split between direct and indirect The difference between aggregate and per capita costs is even and the direct cost are associated welfare effects are most pronounced in Lebanon mostly with the deteriorating environment and the (Table 1), where the increase in the number of resulting decline in productivity. refugees relative to the population is greatest, and minimal for Turkey and Egypt, where refugees Other Levant countries’ losses mainly reflect the account for a small share of the population. In Syria, foregone benefits of deep trade integration, while the difference between aggregate and per capita the direct effects lead to declines in average per welfare effects is also sizable because of the effect of capita incomes, but not declines in aggregate output Syrian refugees and war casualties on the (Table 1). Why is this? The inflows of refugees have population count. boosted consumption of goods and services, investment, and labor supply, and therefore the size Table 2: Real factor returns (percent) of these economies (Figure 1). But in all cases, aggregate output has increased less than the size of Unskilled Skilled Physical Natural Land Labor Labor Capital Resources the population so the war has hurt household Turkey Indirect effects -4.1 0.2 -0.6 -1.1 -4.8 incomes. Direct effects 1.6 -0.5 -0.5 0.2 1.8 Egypt Indirect effects -19.3 -7.3 -8.3 -7.7 -12 Figure 1: Direct v. indirect welfare effects of war Direct effects -0.8 -0.1 -0.1 0.1 0.5 Jordan Indirect effects -17.9 -5.1 -6.4 -5.3 -17 (percent) Direct effects -2.5 -1.5 -1.3 0.7 3.1 Lebanon Indirect effects -4.1 -2.2 -2.4 -2.5 -8.6 10 Direct effects 39.5 -9 -9.7 3.4 30.1 5 Syria Indirect effects -15.1 -4.5 -6.9 -2.2 -18 0 Turkey Egypt Jordan Lebanon Syria Iraq Direct effects -48.4 -18.6 -19 -18.2 -16.4 -5 -10 Iraq Indirect effects -34.7 -5.9 -11.2 -7.2 -12.8 -15 Direct effects -6.7 -20.6 -20.2 -12.3 5.3 -20 -25 -30 Source: Ianchovichina and Ivanic (2014) Economic Effects of the -35 Syrian War and the Spread of the Islamic State on the Levant , World -40 -45 Bank Policy Research Working Paper #7135, Washington, D.C. Indirect trade disintegration effects Direct aggregate effects of war The average welfare effects of the Levant war are not indicative of its incidence within countries. In Source: Ianchovichina and Ivanic (2014) Economic Effects of the Syrian War and the Spread of the Islamic State on the Levant, World Syria, almost every economic sector has been Bank Policy Research Working Paper #7135, Washington, D.C. affected negatively, but real estate ownership has been particularly badly hurt as demand for land Table 1: Aggregate v. per capita welfare effects declined steeply because of the huge numbers of of war (percent) refugees leaving the country. By contrast, in Lebanon and Turkey, land and business owners Turkey Egypt Jordan Lebanon Syria Iraq have benefited but workers have suffered because Aggregate direct and indirect effect -1.1 -8.8 -4.7 3.9 -38.3 -23.4 the arrival of Syrian refugees has increased local Direct aggregate effects of war 0.3 0.1 1.0 6.4 -30.7 -10.7 demand for goods and services, raising prices, and has augmented the labor supply, lowering wages. Indirect trade disintegration effects -1.4 -8.9 -5.7 -2.5 -7.5 -12.7 With quality of services deteriorating and real wages Per capita direct and indirect effect -2.0 -9.1 -7.2 -12.8 -22.6 -28.1 falling due to intense competition for jobs, all in all many people, especially the poor and the unskilled, January 2015 · Number 140· 2 have suffered and poverty rates have increased Syria and Iraq, which experience the largest shocks. throughout the region. This finding validates the value added of using the global general equilibrium framework in this In conclusion: It is important to note that the assessment and suggests that conventional (linear) analysis in our paper does not factor in several types approaches would misstate the “true” effects of the of costs. We do not assess the cost of delivering basic war shock, making it difficult to determine the services to refugees in receiving countries; these direction of bias, especially for those countries most costs could be substantial for Jordan, Lebanon, and affected by the shock. Turkey. The costs of replenishing depleted human and physical capital in Syria would also be sizable. We also ignore important dynamic investment- growth links that may amplify the effects discussed here. These simulation results indicate the qualitative changes likely to occur as a result of the conflict and regional trade disintegration, mainly associated with the failed services trade liberalization. The magnitudes of the direct effects of the war reflect the intensity and scope of the conflict as of mid-2014 and could change depending on the course of the war. In this assessment, we assume that ISIS has not captured the main oil extractive facilities in Southern Iraq. If this were to happen, the impact on Iraq would be much larger in magnitude than the one portrayed in the paper. We also assume that the spread of ISIS remains contained within Iraq and Syria. This assessment relies on a global computable general equilibrium (CGE) framework3 updated with economic and trade data pertinent to the Levant economies and accurately reflecting trade preferences on the eve of the Syrian war. Unlike less formal methods of assessment, the CGE approach ensures consistency, includes important behavioral considerations, industry, trade and factor input details, and captures second-order feedback effects, which are most significant for Syria and Iraq. The accounting relationships and behavioral linkages constrain outcomes in ways not possible with partial equilibrium models. We find that the pure general equilibrium effects of war and foregone deep trade liberalization differ in sign and size and are large for 3Hertel (1997) Global Trade Analysis: Modeling and Applications, Cambridge University Press. January 2015 · Number 140· 3