The Mashreq region has seen more than its share of deaths, economic losses, and instability for the last decade. The region has braved massive economic and social shocks that would challenge even the most advanced economies in the world. The conflict in Syria has contributed to the region’s challenges, but the region’s problems have other causes, too. As countries in the Mashreq look toward recovery, a new approach is needed that not only accounts of the region’s interconnectedness but also seeks to build on it in order to provide better prospects for people across the Mashreq region. Adopting such an approach will require a scaled-up international effort.
The Fallout of War: The Regional Consequences of the Conflict in Syria identifies the impact of the Syrian conflict on economic and social outcomes in Iraq, Jordan, and Lebanon. It combines a large number of data sources, statistical approaches, and a suite of economic models that isolate the specific impact of the Syrian conflict among numerous global and regional factors that contributed to the economic and regional trends in the last decade.
THE NATURE OF THE IMPACT
1. The conflict in Syria has imposed a heavy economic and social toll on the country’s neighbors in the Mashreq region. From 2011 onward, average annual gross domestic product (GDP) growth rates were reduced by 1.2 percentage points in Iraq, 1.6 percentage points in Jordan, and 1.7 percentage points in Lebanon in real terms solely because of the conflict in Syria. Cumulatively, these reductions correspond to 11.3 percent of the combined preconflict (2010) GDPs across the three countries.
2. The fallout was transmitted through multiple channels. With decreasing transit trade through Syria and stalling service exports like tourism, the marginal effect of the trade shock on GDP reached –3.1 percentage points in Jordan and –2.9 percentage points in Lebanon. In comparison, the demographic shock (refugee arrivals) boosted GDP by 0.9 percentage points in both countries by increasing aggregate demand and labor supply.
3. GDP effects are only a relatively small share of the overall impact. Despite some unquantifiable effects, the conflict had far-reaching consequences in the Mashreq:
- The GDP impact of the conflict pushed up poverty rates by 4.0 percentage points in Jordan, 7.1 percentage points in Lebanon and, with internal displacement, 6.0 percentage points in Iraq.
- Labor market conditions for locals, especially women, deteriorated in all three countries after 2011. These dynamics are correlated with overall economic slowdown but not necessarily with subnational refugee intensity.
- The arrival of refugees boosted demand for public services, resulting in a mix of congestion and fiscal effects. In education and water, adaptations in service provision largely prevented congestion. In transport, health, and energy, congestion was observed (with fiscal costs through built-in energy subsidies).
- The demographic shock has unambiguously increased municipal solid waste, but refugee-driven increases of pollution in water and air bodies have been detected only in some local settings.
- Many other dimensions of the impact, including those in political, cultural, and security areas, are equally, if not more, important; but these dimensions could not be analyzed in the absence of relevant metrics or data.
THE PRECONDITIONS
4. The overall economic impact of the Syrian conflict on Iraq, Jordan, and Lebanon has been disproportionately high compared to similar situations elsewhere in the world in the last few decades. This difference is driven by three factors: (i) the sheer scale of the Syrian conflict and ensuing forced displacement, (ii) the high exposure of neighboring countries to a possible fallout, and (iii) the low institutional resilience in neighboring countries, which propagated the shock further.
5. The high exposure stemmed from unconventional channels. Although bilateral merchandise trade with Syria was low in all countries, the conflict still affected their external balances. Lebanon and Jordan relied heavily on foreign direct investments and service exports (tourism), which reacted strongly to instability. Iraq’s exposure also materialized through a bolstered Islamic State insurgency.
6. Institutional resilience was low in the three countries for different reasons. Before 2011, Iraq had one of the lowest state capacities in the world. Jordan had one of the best in the Middle East and North Africa region, but its fiscal space was narrowing as revenues decreased. Lebanon had both problems: driven by a complex political economy, its state capacity suffered from years of underinvestment; and an excessive public debt burden, along with an ineffective tax system, suffocated its fiscal space.
GOING FORWARD
7. In the medium term, a strong economic recovery in Syria and an associated positive fallout are unlikely. In the three security and service restoration scenarios analyzed in this report, economic recovery in Syria remains modest with limited effects on neighboring countries, not exceeding a percentage point even in the best-case scenario. In the top-five materials that would be required for reconstruction, all three neighboring countries are net importers themselves.
8. Regardless of what happens in Syria, neighbors can unilaterally improve upon the current outcomes. The complex political economy dynamics in the region have so far restrained building better institutional resilience and mitigating the Syrian crisis shock more effectively. A persistent short-termism in both cases has led to costly and ineffective service provision, lost economic opportunities, and underfunded programs. A medium-term strategy is needed to both address own structural problems and mitigate the adverse effects of the conflict. These two objectives can be pursued in a joint manner because the synergies between them are high, especially in the following areas:
- Enhancing social safety nets. Potential complementarities are strong between refugee assistance systems and national assistance mechanisms.
- Improving service access for all. Significant overlaps exist between building delivery capacity for own constituents and replacing ad hoc solutions for refugees.
- Investing in state capacity. While exploiting the above two synergies, and building capacity, authorities can benefit from civil society and international organization participation.
9. A regional approach can generate a better equilibrium. In the Mashreq region, both problems and opportunities are transboundary. As the conflict in Syria has shown, instability expands beyond borders, but so do public goods (connectivity for transit trade). Thus, a regional approach can help better internalize these spillovers to minimize public bads and maximize public goods.
- Gains from a regional perspective. Intraregional complementarity of merchandise trade is limited; however, potential gains from service market integration and infrastructure cooperation are large. Scale economies in energy, transport, and information and communications technology are particularly promising
- Barriers against regionalism. Major asymmetries within countries (elite capture and exclusion) and across countries (imbalances in economic power) can trigger protectionist reflexes. Breaking these constraints often requires major changes.
- Lessons from the region’s long history. A review of successful regional cooperation episodes in the Mashreq (from the 7th to the 19th century) shows that demographic shocks can provide an opportunity to overcome unilateralism by facilitating economic interlinkages. Similarly, factors like major openings of external markets (bottom-up) or third-party promotion of stability and infrastructure cooperation (top-down) can also help. In all cases, a balance between intraregional competition and cooperation is essential for a dynamic regional economy.
10. Adopting a regional focus for stability and prosperity necessitates a concerted international effort. A supranational commitment to stability at the regional level can potentially make decision-makers feel safe enough to perform deep social and economic reforms, relaxing economic exclusion and alleviating the inherently interdependent fragility. Can such consensus be mustered? This report is optimistic, because the alternative is in no one’s interest.