How to Spend $50 Billion to Make the World a Better Place
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Van der Gaag challenges Mills and Shillcutt’s recommen-
dations for increased spending on health service provisions.
In his view, there is a very small effect of such spending on health. The more important factors, such as income, education, and access to safe water and sanitation, have been
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ignored. This means that the benefit-cost ratio for increased public health care spending is actually far lower than stated.
He also makes the point that, in most developing coun-
tries, the vast majority of publicly provided healthcare services are consumed by the better-off and do not reach the
poor. At the same time, private suppliers are not allowed
to compete. The seriousness of the disease burden – much
of it avoidable – is such that all alternatives to the current options should be tried. Costs may be higher, but benefits also may be much greater.
Evans, in his opposition paper, takes a more favorable
view of the opportunities that form the basis of the chal-
lenge paper. However, he casts doubt on some of the figures used in the analysis. In particular, he questions the appropriateness of making comparisons between different inter-
ventions, since some are based on the impact of health on
GDP (macroeconomic effect) and some on the estimated
monetary value of welfare benefits (microeconomic anal-
ysis). In many cases, health care programs may do little
for economic growth, and may therefore be rejected. Evans
believes that analysis based on cost-effectiveness criteria (how much welfare is created for a given input) is more
reliable and useful for policy makers.
The Cost Of Illness framework seeks to include all
direct costs (treatment, transport, etc.) and indirect costs (loss of earnings, etc). However, this leads to an imperfect assessment of the true burden of disease on house-
holds, and is even more misleading when projected in
terms of overall GDP loss. Although accurate estimates of
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How to Spend $50 Billion to Make the World a Better Place monetary costs are difficult to make, the destruction of
households and the social fabric caused by disease (AIDS
in particular) is all too real. The effects on labor are also substantial: Life expectancy at birth in Southern Africa was 43 years in 2002, but in the absence of AIDS would have
been 56.
Evans agrees with van der Gaag that the challenge paper
underestimates the costs of AIDS interventions, because it does not take account of treatment costs in countries where the emphasis is on prevention. This would add significantly to the cost. Nevertheless, the benefit-cost ratio is so large that the extra costs would be easily justified.
Evans also makes the same point as van der Gaag about
government spending on health: There is little evidence to show that this has a significant impact, whereas money
spent on health education has much more effect. Although
not proposing the more radical approach advocated in the
other opponent paper, he still believes that intense effort is needed to ensure health services can deliver results. One aspect of this is to develop new and better ways for government and non-government sectors to work together and to
look at new ways of organizing and delivering services.
There are still large funding gaps to be filled – nearly $4
billion to treat half the total number of HIV/AIDS sufferers by 2005 – even without dealing with the associated problem of TB. There are additional costs associated with pro-
viding the basic healthcare infrastructure needed to deliver the potential benefits.
Evans makes one final point about the ethical dimension
of using economic analysis to prioritize programs to fight
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disease. Implicitly, they value human life in poor countries less than in richer countries. On a global scale, this is likely to focus attention on fighting diseases primarily of the developed world, such as cardiovascular disease, rather than
scourges such as HIV/AIDS and malaria.
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PAUL COLLIER AND ANKE HOEFFLER1
3
The Challenge of Reducing the
Global Incidence of Civil War
Introduction and overview
Although wars between nations have become less common
in recent decades, the frequency of civil wars around the
world has increased. These two types of conflict cannot sensibly be analyzed together, so this chapter focuses entirely on reducing the incidence of civil wars.
Three main approaches are discussed:
r Conflict prevention.
r Shortening conflicts.
r Post-conflict policies.
Since the post-conflict period actually presents particularly high risks, the biggest opportunity lies in preventing wars from recurring.
1 Centre for the Study of African Economies, Department of Economics, Oxford University.
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How to Spend $50 Billion to Make the World a Better Place The benefits of reducing the incidence of civil war
Benefits from reducing conflict and war accrue at three distinct levels: national, regional and global.
Taking the national level first, one clear cost of civil war is a reduction in economic growth. Using a conservative
estimate, one year of conflict reduces a country’s growth
rate by 2.2%. Since, on average, each civil conflict lasts for seven years, the economy will be 15% smaller at the end
of the war than if the war had not taken place. During
the post-war recovery, even though the economy on aver-
age grows at an annual rate of more than 1% above the
norm, it will take roughly 10 years to return to its pre-war growth rates (that is, 17 years after the conflict started).
21 years after the start of the original war, the GDP has
returned to the level it would have achieved if no war had occurred. The total economic cost, expressed as a present
value at the start of the war (using a 5% discount rate),
is 105% of the GDP at that point. This seems to be a fairly conservative estimate, as a more detailed analysis shows the actual figure to lie in the range 41–305% (90% confidence
limits).
The welfare of a country’s population is further reduced
because of increased military spending during and after
the war. It is estimated that military spending increases
by about 1.8
% during the war, and only falls back by 0.5%
once the conflict has ended. Assuming that this higher level of spending lasts for only 10 years after the conflict, the additional cost (expressed again as present value when the conflict started) is 18% of GDP.
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Cost
Benefit
Net benefit
conflict
Peace-keeping
forces following
rnational issues.
conflict
Aid following
goods
ertified C
y
conflicts
Costs and benefits of conflict opportunities
**
Transparenc
reducing
of
e
benefits
and
General increas
Cost
in development aid
5
0
3.1.
-5
30
25
20
15
10
-10
Billion USD yearly
*) The costs are difficult to quantify and is largely made up of the opportunity costs by not investing the funds in other inte Figure
41
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How to Spend $50 Billion to Make the World a Better Place In addition, conflict has a severe effect on human health.
One way of summarizing this effect is to express the cost in terms of Disability Affected Life-Years (DALYs): a measure of the total number of people affected and the period for
which their disability lasts. An average war causes an estimated 0.5 million DALYs each year. Assuming they decline
smoothly to zero in the 21st year, and discounting them at 5% as for the direct economic costs, gives a figure of 5 million DALYs as the net present value of health costs when hos-tilities start. If each DALY is valued at $1,000 (roughly the per capita income in many at-risk countries), the economic cost of harm to human health in a typical war is around
$5 billion.
At the regional level, analysis shows that the growth rate of neighboring countries not directly involved in the conflict is reduced by 0.9% during the war. If they subsequently recover at the same rate as the conflict country, the additional cost (as a present value at the start of the conflict) is 43% of initial GDP. On average, each country has 2.7 neighbors, so the direct effect of a typical civil war on neighboring countries is 115% of the initial GDP of one country: greater than the direct effect in the conflict country itself.
There is also an effect on military spending in adjoining
countries: a neighborhood arms race often ensues. In the
average case considered so far, a 1% rise in military expenditure in the country at war would increase the average spending of bordering countries by 0.23%. In a typical conflict, that means military spending will increase by 0.4% of GDP
during the war, and by 0.3% during the post-conflict period: a total net present value of 4.3% of the country’s initial
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The Challenge of Reducing the Global Incidence of Civil War 43
GDP. On average, there are 2.7 neighboring countries; thus the total extra cost of the regional arms race is about 12%
of one country’s GDP.
Other costs which are too difficult to quantify are
incurred both in the country at war and in the region as a whole, including forced migration. With the proviso that the figures so far are therefore underestimated to some degree, the total benefit of averting a single “typical” civil war can be calculated. The various national and regional costs covered so far amount to 250% of initial GDP. The average GDP of
conflict-affected low-income countries (excluding India and China) just prior to war is $19.7 billion. Therefore, the cost of a single war is around $49 billion. To this we must add $5 billion of health costs, giving a total cost of $54 billion for a single low-income country.
This is already a significant figure, but in addition there is the “conflict trap”: Countries that have just experienced a civil war are more likely to have further conflict. Looking at the 21 countries in which wars started and ended in the period 1965–99, the risk of conflict over the five years before the war averaged 22.3%, but this rose to 38.6% post-war.
Over the 15-year period needed for the risk to reach the
pre-war level again, the additional discounted cost is $10.2
billion. Thus the total national and regional cost of a single war is more than $64 billion.
There are additional, global impacts of civil wars, mas-
sive in scale but difficult to assign a cost to. Three world scourges over the last 30 years have had civil conflicts
as contributory factors: hard drug production, AIDS, and
international terrorism.
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How to Spend $50 Billion to Make the World a Better Place Based on these estimates (and bearing in mind the
unquantified but significant global effects of conflict), we can look at the benefits of reducing the number of countries at war at any one time. At present, an average of two civil wars start each year. The net cost of these would be $128 billion. So, an initiative which reduced the chance of a new war by 10%, for example, would generate benefits of
around $13 billion each year.
Another class of opportunities are those which shorten
wars rather than prevent them. The benefit of shortening
the typical war by one year – from seven to six years – turns out to be surprisingly large: nearly $11 billion. For the average of two new conflicts per year, this would generate benefits of about $22 billion annually. There would also be a one-off gain from shortening the present 17 significant civil conflicts by one year. A discounted value of this figure (comparable to the year-on-year benefit) is around $9 billion, so the total annual benefit of shortening civil wars by one year is over $30 billion.
Opportunities for conflict prevention
Analysis shows that a country’s political and social characteristics are much less important than economic factors in determining the risk of war. The three most significant char-acteristics are level of income, its rate of income growth, and the degree of dependence upon primary commodity
exports.
Of the two wars that on average start annually, 0.7
occur in the poor, relatively small countries with no recent
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The Challenge of Reducing the Global Incidence of Civil War 45
history of war (China and India are excluded because or
their sheer size). Here we look at the benefits of preventing some of these. Post-conflict situations represent a separate opportunity.
Raising the economic growth rate reduces the risk of
conflict both directly and by increasing incomes. As a
point of reference, a 1% increase in annual growth rate
for a period of 10 years was modeled. For the first five
years, the model shows a red
uction in the risk of war
from 13.8% to 12.7% as the average risk of a war break-
ing out in a poor country with no recent war. During
the second five-year period, the additional income level
effect reduces the risk further, to 12.2%. Assuming that the growth rate returns to normal after the 10 year period, the longer term effect of higher income leaves the risk of conflict at 12.7%, as a permanent reduction over the initial
level.
In financial terms, the benefit in the first five years is an 8% reduction in the chance of a civil war starting. Since
each war costs $64 billion, and on average 0.7 start each
year, the annual benefit is $3.6 billion. In the second five-year period, this gain rises to $5.4 billion annually (a 12%
reduction in the risk of conflict starting). After 10 years, the annual benefit falls back to $3.6 billion. The present value (discounted at 5%) is around $79 billion. To put this large figure in perspective, remember that this is purely a benefit of conflict reduction, over and above the direct benefits of poverty reduction.
Two major policy options might deliver these benefits:
aid and better utilization of income from natural resources.
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How to Spend $50 Billion to Make the World a Better Place Aid
The effect of aid will depend to a large extent on the political and institutional situation. Additional aid as a means to boost growth is also subject to the law of diminishing
returns. On average, for a single country from the group of 32 poor, relatively small, and generally peaceful states, an extra 2% in aid would raise their annual growth rates by
only 0.2%. The benefits of aid in terms of conflict reduction would therefore be one-fifth of that from the model of 1%
additional GDP growth: $16 billion.
At purchasing power parity rates, the combined GDPs
of the countries in this group amount to $1,200 billion, so the overall cost of the additional aid amounts to $24 billion annually. The net present value of this over a decade is $195
billion. This indicates that unselective aid programs are not a cost effective way of reducing conflict: The benefits are less than 10% of the costs. This is not to say that the aid may not be justified; after all, its main purpose is poverty reduction.
However, conflict reduction should not be expected to be a major outcome.
Improved governance of income from natural resources