Explained: What is the economic impact of geopolitical unrest?

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While geopolitical tensions can act as catalysts of reforms, they can also give way to potentially long-lasting economic consequences, a study by the International Monetary Fund has found.

Explained: What is the economic impact of geopolitical unrest?
In 2020, the world lost nearly $15 trillion to violence. This is equivalent to 11.6 percent of the total world gross domestic product (GDP), as per the Institute for Economics and Peace (IEP) shown via its Global Peace Index (GPI).
To put it into perspective, if we distribute this amount within the world’s population (8 billion people), everyone would get $1,942. An average American earns $215 a day.
Furthermore, the report says that if we decrease the violence even by 10 percent, it would result in saving  $1.496 trillion. This 10 percent reduction is equivalent to the size of Switzerland, Denmark, and Ireland’s economies put together.
But from Cuba to South Africa, social unrests are on the rise, once again, across the world. Over the last decade, riots, strikes, and anti-government demonstrations across the globe have risen by nearly 250 percent, according to the GPI report.
While lockdowns due to COVID-19 contagion marked a temporary lull, demonstrators are making a comeback. For example, Cubans took to the streets this weekend calling for a change of guard and better access to COVID-19 vaccines.
While geopolitical tensions can act as catalysts of reforms, they can also give way to potentially long-lasting economic consequences, a study by the International Monetary Fund (IMF) has said.
The causes of these tensions range from the government’s management of the COVID-19 pandemic (like in Cuba) to mounting inequality and corruption (South Africa).
The protesters have their reasons to come on the road, but it also triggers short to medium-term economic setbacks.
Such effects are more pronounced in emerging markets and developing economies due to weak institutions and limited economic policy space. The report by IMF defined limited policy space as policies that have “run of out space or lack the power to raise growth or deal with the next negative shock.”
By the numbers
The IMF study has found that the GDP remains about a percentage point below year-on-year, till 1.5 years after a major protest.
The July 2019 protests in Hong Kong and the 2018 yellow vest protests in France resulted in a decrease of a percentage point in their GDP. The factors such as sharp contractions in manufacturing and services and consumption drove the economic downfall.
The factors
The IMF research also shows that social unrest attacks people’s confidence and increase uncertainty.
The study also found that the economic impact of unrest depends on the type of event. “Protests motivated by socio-economic concerns result in sharper GDP contracts compared to those associated with mainly with politics/elections,” the report said.
However, tensions triggered by a combination of both socio-economic and political factors have the biggest impact.
The COVID-19 impact
The study by Global Peace Index suggested that countries with lesser social unrest have greater chances of recovering from the after-effects of the COVID-19 pandemic. The more peaceful a country is, the higher are its chances to recover from the pandemic, the report said.
Accordingly, The Czech Republic, Estonia, Germany, Lithuania, the Netherlands, Norway, Singapore, Slovenia, and Switzerland are best placed for a post-COVID-19 recovery.
It also showed that countries with sustainable levels of peace managed to keep the unemployment rates under wraps.
For example, OECD countries—Organisation for Economic Cooperation and Development countries with 38 members including Australia, Austria, Canada—are known to foster peace. The unemployment levels in such countries were below 7 percent. The unemployment rate in the countries more prone to unrest reached as high as 23 percent.
What can we do? IMF says...
Public protests are an important form of expression in a democracy and can lead to a horde of fiscal and monetary policy changes. But governments need to listen and respond.
To boost employment, contain the long-term impact of crises, both socially and economically IMF recommended open dialogue.
“A recent IMF staff research notes that reforms require a broad social dialogue on the role of the state and how to sustainably finance budget pressures. Otherwise, the economic costs of the pandemic will likely be compounded by those ensuing the unrest,” the study said.

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