Embedded Files
Helpful prior knowledge and learning objectives
Helpful prior knowledge and learning objectives
Helpful prior learning:
Section 1.1.1 The economy and you, which explains what an economy is and how it is relevant to students’ lives
Section 1.1.2 The embedded economy, which explains the relationship between the economy and society and Earth’s systems
Section 1.3.9 Power in the economy, which explains where power comes from and how it shapes economic relationships
Section 7.1.1 Global exchange as a system, which describes global exchange as a system with parts, relationships, functions and emergence
Section 7.1.2 History of global exchanges, which describes how global exchange systems have evolved over time, shaped by changes in technology, power, and environmental factors
Section 7.1.3 What moves across borders? which describes what flows across borders and explains how visible global flows are linked to less visible social and ecological effects
Section S.1 What are systems?, which explains what a system is, the importance of systems boundaries, the difference between open and closed systems, and the importance of systems thinking
Section S.2 Systems thinking patterns, which outlines the core components of systems thinking: distinctions (thing/other), systems (part/whole), relationships (action/reaction), and perspectives (point/view)
Section S.5 Causal loops, feedback and tipping points, which explains the feedback loops that can stabilise or destabilise systems
Section S.9 System traps, which explains how system structures, like reinforcing feedback, too weak or late balancing feedback, and/or pursuing flawed goals, can create persistent problems.
Learning objectives:
explain why economic decisions, such as government budgets, aid agreements, and tax systems, shape whether peace holds after a war ends.
distinguish between the drivers of conflict between states and the drivers of conflict within states.
In 1991, a civil war ended in El Salvador after twelve years of fighting that killed around 75,000 people in a country of five million. When peace came, the economists advising the government of El Salvador focused on familiar goals: reduce the budget deficit, control inflation, attract foreign investment, and grow the economy. The peace agreement had promised land to former fighters, a new civilian police force, and stronger democratic institutions. These were expensive commitments that the economists had left out of their calculations. The government, under pressure to keep its budget deficit within limits set by the International Monetary Fund (IMF), was slow to fund the democratic priorities.
Figure 1. The Chapultepec Peace Accords, signed on 16 January 1992 in Mexico City, ended El Salvador's civil war and opened the way for a transition to democracy.
(Credit: EDH / Archivo)
James Boyce, an American economist who worked in El Salvador during those years, found that international financial institutions, including the IMF and the World Bank, had not pressed the government to honour its peace commitments. They had treated the peace process as a political matter, separate from their economic work. Boyce later found the same pattern after wars in the Balkans, Cambodia, and Guatemala.
Most economists, he argued, respond to war and peace in one of two ways. The first treats war as a political problem, separate from economics. The second assumes that standard economic policy automatically produces the conditions for peace. In both cases, economists end up treating war and peace as outside their area of concern.
Many of the worst wars of the past hundred years, including El Salvador's, have been fought within a single country rather than between two states. Yet international actors are often involved. Foreign states, international lenders, and global markets for weapons and resources shape internal conflicts. This happens before conflicts start, while they are underway, and after they end, as the case of El Salvador shows. This is why war and peace are part of the global exchange story, even when the fighting itself is internal. Not all conflicts work the same way, though, as the sections below explain.
How large are the costs of war?
How large are the costs of war?
In 2024 alone, more than 35 countries experienced conflict in their own territory, and around 45 per cent of the world's population lived in a country affected by conflict. The costs are very high, and economists typically classify them into three categories: human and social, financial, and environmental.
Human costs include deaths and injuries among soldiers and civilians. In the Balkan wars of the 1990s, more than half of those killed were civilians. In the Iraq war of the early 2000s, an estimated two-thirds of deaths were civilians. Physical and psychological injuries affect many more people than those killed, and many survivors carry these injuries for the rest of their lives. In Afghanistan, Vietnam, Zimbabwe, and Cambodia, unexploded bombs and buried mines continue to kill and injure people many years after peace agreements were signed.
Social costs are also severe. War forces people from their homes. According to the United Nations refugee agency UNHCR, more than 123 million people were forcibly displaced by conflict and persecution at the end of 2024, the highest figure ever recorded (Figure 2). Children make up 40 per cent of those displaced, though they are only 29 per cent of the world's population. Displacement separates families, destroys communities, and interrupts education and healthcare for many years. Research shows that wars destroy industries and employment, leaving communities without the economic foundations needed to recover. The psychological effects of war, including trauma, anxiety, and depression, pass between generations and shape the life chances of people who were not yet born when the fighting ended.
Figure 2. Forcibly displaced people worldwide
(Credit: UNHCR)
Financial costs extend across military spending, destroyed infrastructure, lost businesses, and displaced workers. Economies experiencing conflict on their own territory typically lose about 7 per cent of their output within five years, a bigger and more lasting loss than economies typically suffer after a financial crisis or a severe natural disaster. The cost of rebuilding a country after war is often many times greater than the direct cost of the conflict itself.
Environmental costs are recorded even less consistently than social costs. Militaries are among the world's largest emitters of greenhouse gases, but are often not counted in official statistics. War damages the environment in a way that differs from most other causes of environmental harm. Much of the destruction is deliberate. During the Gulf War of 1990 to 1991, oil well fires and a massive oil spill into the Persian Gulf were direct military acts. During the Vietnam War of 1955 to 1975, the United States military sprayed Agent Orange, a toxic chemical designed to destroy forest cover, across southern Vietnam's territory (Figure 3). The contamination this caused is so severe that scientists estimate it will persist for at least a century.
Figure 3. Agent Orange, a herbicide, being sprayed on farmland during the Vietnam War, 1969.
(Credit: Brian K. Grigsby, from Wikimedia Commons, public domain)
What drives conflict between states and within states?
What drives conflict between states and within states?
Wars between states, such as Russia's invasion of Ukraine in 2022, are driven mainly by territory, resources, and rivalry between states. Wars within states, such as El Salvador's civil war, are driven by different pressures, including inequalities and exclusion within a single society. Since the 1960s, wars within states have become far more common, while wars between states have stayed comparatively rare (Figure 4). Because the two types of conflict have different causes, the sections below treat them separately.
Figure 4. Global post-WWII conflicts, number per year.
(Credit: IMF)
Conflict between states
Conflict between states
States may go to war over territory. Territory is often valuable because it provides access to resources such as oil, water, and minerals, or control of borders and trade routes. Firms and states with a direct economic stake in these assets have strong incentives to secure them, by force if necessary.
States also compete for geopolitical power, meaning influence over other states and over the wider international system. This kind of rivalry is partly about resources and partly about relative standing. A state may go to war to avoid losing ground to a rival, even where no specific resource is at stake.
A further driver is what researchers call the security dilemma. When one state builds up its military or forms an alliance with others, neighbouring states can see this as a threat, even where it was intended as defensive. Those states may then arm themselves in response. The first state can see this as confirming the original threat, and may arm further in turn. This creates a reinforcing feedback loop, in which each side's actions increase the other side's sense of threat. This is an example of the escalation system trap discussed in Section S.9, and illustrated in Figure 5.
Figure 5. The security dilemma as an escalation reinforcing feedback loop where military build-up by one state increases the perceived threat to another, prompting a matching response.
Scholars are divided on how much weight to give the security dilemma in Russia's invasion of Ukraine in 2022. Some argue that the eastward expansion of the North Atlatic Treaty Organisation (NATO) after the Cold War increased Russia's sense of threat and contributed to the invasion. Others see the invasion as driven mainly by Russian desire for more territory. Both territorial claims and control of Ukraine's gas fields in Crimea and the Donbas are widely agreed to have been factors.
These different drivers of conflict often combine. Competition over resources and trade routes can generate the mistrust that feeds an escalation spiral, and geopolitical rivalry can be driven by both.
Conflict within states
Conflict within states
Economists who study civil wars have identified two important drivers:
greed (economic opportunism): Some actors benefit financially from war. Warlords, arms traders, and firms extracting resources in conflict zones can profit from violence. Countries with large quantities of natural resources face a higher risk of civil war, since armed groups can seize and sell these resources to fund their fighting.
grievance (identity, inequality, or political injustice): People join armed movements when they believe their group is treated unjustly, whether through poverty, exclusion from political power, or discrimination based on ethnicity, religion, or region. This belief is not limited to groups that are genuinely disadvantaged. A dominant group can mobilise around a perceived threat to its status, and leaders can shape or amplify grievance narratives for their own ends. Unequal distribution of wealth, income, and power between distinct social groups is known as horizontal inequality. When one group consistently receives fewer resources and less political representation than others, grievances build and can eventually drive conflict.
Greed and grievance operate together in many civil wars. Economic opportunism can create the conditions for grievance, when one group extracts wealth or power at another's expense. But grievance can also create opportunities for economic opportunism, when leaders mobilise a group around a perceived threat to its status and then profit from the conflict that follows. In both directions, leaders play a central role in turning economic interest and group identity into organised violence.
Greed and grievance can also be understood as two expressions of a common underlying logic, rather than separate causes. The global economy is built around continuous economic growth and resource extraction, as previous sections of Subtopic 7.3 have discussed. This gives powerful states and multinational corporations strong incentives to use force to secure access to resources, markets, and trade routes. Colonial borders were drawn to serve extractive interests rather than reflect the communities living within them, creating lasting divisions that continue to fuel conflict today. This extractive logic also connects back to the drivers of interstate war above, since competition for resources shapes conflict between states as well as within them.
What does it take for peace to hold?
What does it take for peace to hold?
The conditions discussed below apply mainly to internal conflicts that end with a negotiated agreement between groups within a state. Wars between states end differently, through ceasefires, armistices, or treaties, and raise separate questions that go beyond this section.
Peace does not hold automatically once fighting stops. In roughly 40 per cent of conflicts since the Second World War, fighting has started again within five years of the peace agreement. Economic policy plays a central role in whether a peace agreement survives or breaks down. Three factors are particularly important: the balance of power between groups, the distribution of the benefits of recovery, and the rebuilding of state institutions.
External actors, including donor governments and aid agencies, shape all three. Whether they support or undermine these conditions depends largely on whose interests they serve. Outside actors can have their own reasons for wanting a conflict to continue. A state may want a strategic ally in the region. A firm may want contracts for reconstruction work, or access to natural resources. In some countries, arms manufacturers and military institutions form a lasting network, sometimes called a military-industrial complex, whose income depends on conflict continuing.
The following sections look at these conditions in turn, and at how external actors can either support or undermine each one.
Balanced power and distributed benefits
Balanced power and distributed benefits
A peace agreement holds when all sides believe they gain more from peace than from returning to war. This requires two things (Figure 6). First, no single group should gain so much power or so many resources during recovery that others feel the peace has worked against them. Second, the benefits of recovery need to reach communities across former conflict lines. When recovery mainly benefits groups that were already powerful, excluded communities have less reason to support the agreement.
Figure 6. Peace agreements are more likely to hold when they deliberately balance power and distribute benefits. Economists can help with these designs.
Even when outside actors want peace to succeed, their efforts can fail if they do not work together. Bosnia's war of 1992 to 1995 was fought between three main groups: Bosniaks, Bosnian Croats, and Bosnian Serbs. In the city of Mostar, the fighting had left the Bosniaks and Bosnian Croats living on opposite sides of the river that runs through the city. After the war, the European Union (EU) administrator tried to rebuild the city's energy system in a way that supported peace. He wanted both sides to agree to share control of it before reconstruction began. This kind of agreement can take months or years to negotiate. Before it was reached, the World Bank separately funded the rebuilding of the same power plant, but placed it under the control of only one side. This angered the other side, who built a rival power plant of their own. The result was two separate electricity grids serving the two communities, rebuilt with international money but with no coordination between donors.
Outside actors do not always try to keep power balanced. Sometimes they help one side gain more power than the other, because it serves their own interests. During the Cold War, for example, the United States and the Soviet Union backed dictators in countries recovering from conflict across Latin America, Africa, and Asia, because those rulers served their own strategic interests. This kind of support let one side hold onto power at the expense of the other, working against the balance that peace requires.
Statebuilding
Statebuilding
Statebuilding means building a state that citizens trust and that can deliver public services reliably. Economists describe the relationship between states and citizens as a fiscal compact. States provide public services, and citizens pay taxes in return. This is a reinforcing feedback loop, of the kind introduced in Section S.5. Services build trust, trust makes citizens willing to pay taxes, and tax revenue lets the state provide more services. Once this loop is running, it strengthens itself over time (Figure 7).
Figure 7. A reinforcing feedback look showing the impact of the fiscal compact.
In the years after a conflict, this loop can run in the opposite direction instead. State institutions are often weak and underfunded. Large amounts of foreign aid flow in at the same time, and donors may find it easier to deliver services directly, through international organisations and non-governmental organisations (NGOs), rather than working through a struggling state. When this happens, the state does not build the capacity to deliver services itself. Citizens then have less reason to pay taxes to a state that plays little role in their daily lives, which leaves the state with even fewer resources to build capacity. Armed movements often find support in communities caught in this weakening spiral, where trust in the state keeps falling.
This is not automatic. Some post-conflict governments have managed to start the loop running in the strengthening direction instead. After Rwanda's 1994 genocide and Côte d'Ivoire's 2010–11 political crisis, both states made rebuilding the fiscal compact a priority. Rwanda created a new national tax authority and introduced a value-added tax. Côte d'Ivoire improved tax compliance and moved tax revenue collection online. In both countries, the share of tax revenue collected relative to the size of the economy rose from around 9 or 10 per cent to about 13 per cent within a few years. Alongside debt relief and anti-corruption policies, this helped rebuild the state's ability to fund its own services rather than relying on aid donors indefinitely.
What role should economists play in peacebuilding?
What role should economists play in peacebuilding?
The opening of this section described how economists in El Salvador treated the peace process as separate from their economic work. That divide is still common today. Decisions about who benefits from recovery, whether people trust the state, and how power is shared between groups are often treated as political questions. Economists tend to leave them for others to answer.
This section has shown why that divide does not hold up. Whether power and the benefits of recovery are shared fairly is shaped by economic decisions, such as state budgets and aid agreements. Whether a state can raise revenue and deliver services its citizens trust is shaped by economic decisions too, such as tax systems. These decisions, and not just the ceasefire itself, determine whether peace lasts. This is true even for conflicts fought entirely within one country, as El Salvador showed at the start of this section. Foreign governments, lenders, and aid agencies are involved throughout such conflicts, which is why war and peace are part of the story of global exchange.
Regenerative economics treats rebuilding trust between communities, sharing recovery fairly, and strengthening state institutions as economic work. These are not separate political tasks for someone else to handle. Economists who take this wider view of their role are better placed to help peace last.
Activity 7.3.9
Activity 7.3.9
Concept: Systems, power
Skills: Thinking skills (transfer, critical thinking)
Time: 25-30 minutes each
Type: Individual, pairs, or small group
Activity 1: Greed and grievance
Read the four short scenarios below. Each describes a fictional armed conflict. For each one, decide whether it is driven mainly by greed (economic opportunism), grievance (identity, inequality, or political injustice), or both. Write one or two sentences explaining which details in the text led to your answer.
Scenario A – Kavara. A small armed group has taken control of remote diamond mines. It sells the diamonds to buy weapons and pays its fighters from the profits. The group has made no demands about political rights or state reform.
Scenario B – Boravia. An ethnic minority region has almost no representation in the national government and receives a much smaller share of public spending than other regions, despite paying similar taxes. After decades of exclusion, a rebel movement has formed there, demanding a fairer share of political power.
Scenario C – Talmara. An oil-rich region has long complained about being excluded from national decision-making and receiving little of the oil revenue generated there. A rebel movement has emerged demanding regional autonomy, while its leaders have also begun selling oil from territory under their control to buy weapons.
Scenario D – Feridan. A group that holds most political and economic power fears losing its position to a growing population of a different ethnicity. Its leaders have organised an armed movement, arguing that their group's way of life and status are under threat.
You can check your ideas with sample responses by clicking on the arrow. But give it a go yourself or with a partner first!
Scenario A: Greed. The group profits directly from selling diamonds and makes no political demands.
Scenario B: Grievance. This is horizontal inequality, unequal political representation and public spending between groups, with no mention of profit-seeking.
Scenario C: Both. Grievance drives the demand for autonomy and a fairer share of revenue, while greed appears in the group's use of oil sales to fund weapons.
Scenario D: Grievance, but from a dominant group. This matches the section's point that grievance is not limited to groups that are genuinely disadvantaged. A powerful group can mobilise around a perceived threat to its status.
Activity 2: Design a reconstruction plan
In this activity, you will design a reconstruction plan for a city recovering from civil war, using ideas from this section.
A civil war has just ended in a fictional city called Vestara. The city is divided between two communities, who fought on opposite sides. The only water treatment plant in the city was destroyed during the fighting, and international donors have offered to fund its reconstruction.
Before you start, remind yourself of three conditions important for lasting peace after a conflict:
Balanced power
Distributed benefits
Statebuilding
Using these three ideas, write a short plan (5 to 8 bullet points) for how the reconstruction and running of the water treatment plant should be organised, so that it supports lasting peace rather than working against it.
You can check your plan against some additional prompting by clicking on the arrow, but give it a go based on what you remember from the section first!
Does your plan avoid giving one community control over the plant at the expense of the other?
Does your plan make sure both communities actually benefit from the rebuilt plant?
Does your plan help the Vestaran state build its own capacity to run services and collect revenue?
If you can answer yes to all three questions, your plan reflects all three conditions that support lasting peace described in this section. If not, revise your plan until it does.
Activity 3: Economics or politics?
The start of this section explained that economists in El Salvador treated the peace process as separate from their economic work. This section shows why we cannot separate politics from economics. To help you think this through, complete the following, individually, with a partner or small group.
Find three examples from this section of a decision that might seem political, but is actually economic. For each one, write one sentence explaining why it counts as economic.
In your own words, write a short paragraph (4 to 6 sentences) justifying this claim:
Peacebuilding is economic work, not just political work.
Use at least one of your examples from Part 1 to support your answer.
Ideas for longer activities and projects are listed in Subtopic 7.5
Checking for understanding
Checking for understanding
Further exploration
Further exploration
The Economics of War & Peace – A seven-part Institute for New Economic Thinking (INET) video lecture series by economist James Boyce, the same source used throughout this section. Covers the costs of war, the history of plunder and colonial-era resource extraction, greed and grievance in civil wars, balances of power in war-to-peace transitions, and the dilemmas donors face in postwar reconstruction. Each episode includes an "After Class" reading list and a timestamped guide to sources. Goes well beyond this section in depth and detail, since it's aimed at university-level students. Difficulty level: medium.
Costs of War – A research hub from Brown University's Watson Institute, tracking the human, economic, social, and environmental costs of war since 2001. Focuses specifically on the costs of US military operations and spending, rather than war in general, so it complements this section's global view with a detailed single-country case. Includes short research briefs alongside longer academic papers. Difficulty level: medium.
Maps of forcibly displaced and stateless people – An interactive world map from UNHCR showing where forcibly displaced and stateless people are, filterable by country of origin or country of asylum, and by population group (refugees, internally displaced people, stateless people, and others). Useful for exploring the scale and geography of displacement discussed in this section's costs-of-war statistics. Difficulty level: easy.
War and Peace – A data hub from Our World in Data, with charts on where conflicts happen, how many people die in them, and how these numbers have changed over time. Includes interactive Data Explorers covering six different conflict datasets, so students can compare how researchers measure war differently. A good complement to this section's costs-of-war statistics, since it lets students explore long-term trends rather than single figures. Difficulty level: medium
Global Peace Index interactive map – An interactive world map from the Institute for Economics and Peace, ranking countries by peacefulness using 23 indicators, from military spending to political stability. Students can click any country to see its ranking and how it has changed over time. Good for connecting this section's "what does it take for peace to hold" discussion to present-day, country-level data. Difficulty level: easy.
UCDP Conflict Encyclopedia – An interactive database from Uppsala University, the same research group behind the conflict data used in Figure 4. Students can look up any country or conflict and see a timeline of violent events, fatality totals by type, and a map of where the fighting happened. Built as a research tool rather than a teaching resource, so it takes more digging than the other links here, but it's a good way to see the raw data behind the chapter's claims. Difficulty level: medium to advanced.
Sources
Sources
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Terminology
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