Conflict today has captured the worlds' attention as we directly or indirectly bare witness to the growing reach of terrorism and civil unrest. While the devastating human suffering caused by war is the most obvious impact, the long-term cost to the economy can be crippling for a region's infrastructure and stability.

While the physical, emotional, and societal benefits that would result from improvements in peace seem self-evident, the potential economic benefits of peace are continually overlooked in economic debates.

In light of this gap in understanding, the Institute for Economics and Peace has just released a report solely focused on estimating the economic impact of violence and conflict on the global economy. The research provides an empirical basis to calculate the potential economic benefits from improvements in peace.

Released in December, the Economic Value of Peace report uses a complex methodology to account for the economic impact of violence and conflict based on 16 separate expenditure categories. The selection of the 16 expenditure categories is based on the definition of activities related to “containing, preventing and dealing with the consequences of violence”.

Image: IEP

The numbers are broken down into either direct or indirect costs; the direct costs associated with violence are accounting losses which occur in the current year, such as government spending on the military, judicial systems, healthcare and police. Indirect costs are economic losses as a consequence of violence perpetuated within the current year. These may include, for example, the decreased productivity resulting from an injury, lost life-time economic output from a murder, pain and trauma stemming from being a victim of violence, and the yearly reduced economic growth resulting from a prolonged war or conflict. The methodology also includes a multiplier effect which calculates the additional economic activity that would have been accrued if the direct costs of violence had been avoided.

It is important to note, however, that the figures presented by IEP are conservative: only variables of violence for which reliable data could be obtained are included. Areas such as domestic violence, household out-of-pocket spending on safety and security, the cost of crime to business, self-directed violence and the cost of intelligence agencies are not included due to an absence of reliable date.

The $13.6 trillion price tag

The findings of this report highlight the total economic impact of violence on the world economy comes with a hefty price tag. For 2015 the figure has been estimated to be $13.6 trillion and is expressed in purchasing power parity (PPP) terms. This is equivalent to 13.3% of world GDP or $1,876 PPP per annum, per person. To further break it down, that figure is $5 per person, per day, every day of the year. When you consider that according to the most recent World Bank estimates 10.7% of the worlds’ population are living on less than $2 per day, it shows an alarming market failure.

Violence costs (at least) 13.3% of world GDP - compare that to the 0.7% commitment in official development assistance (ODA). To put this into perspective, a 10% reduction in the economic impact of violence is equivalent to ten times the value of ODA, more than the total value of global food exports in 2014 or more than total global foreign direct investment in 2014. Given the enormity of these figures, it is essential that we analyse where the expenditures are occurring and what could be done to reduce them.

Overall, the major contributor to global violence containment costs is military expenditure, which reached $6.16 trillion PPP, or 45% of the economic impact of violence in 2015. This figure decreased slightly, by one percent, from the previous year.

Internal security expenditure is the second largest category, which encompasses mostly containment and preventative expenditures involving police, judicial and prison system spending among other factors. It was over $3.5 trillion dollars PPP in 2015, which is approximately 26% of global violence costs.

Homicide, at 13%, is the third largest category. The economic impact of homicide in 2015 was approximately $1.79 trillion PPP, this is an 8% increase between 2007 and 2014. However, on a positive note, this upward shift has reverted in 2015, dropping 7%. This decrease was seen in advanced economies. Direct costs of homicide and violent crime include medical costs, lost earnings and damages to the victim and the perpetrator. Indirect costs include lost productivity of the victim, as well as family and friends due to psychological trauma. Economic costs arising from intentional homicides are greater than the costs of any other category of crime or conflict.

The prevention of violence is an essential element to any functioning society: spending on a police force or on personal security is indeed necessary, while military costs when used for protection against external threats are a justifiable expense.

However, unless we look at what is being spent, we cannot clearly understand if and where there are misallocations. Why is this important? Some investments are more productive than others and investments in violence are not that productive. Your dollar goes further if used to build a school than a jail. If we can reduce the amount of money tied up in violence and invest it in elements that sustain peace – then this would lead to a virtuous cycle of less violence and stronger economies.

The world continues to spend vastly disproportionate resources on creating and containing violence compared to what it spends on peace. In 2015 alone, UN peace-keeping expenditures of $8.27 billion totaled only 1.1% of the estimated $742 billion of economic losses from armed conflict.