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Wave of “events of turmoil” like Afghanistan could become a drag on global growth (IMF)

The surge in COVID-19 infections, combined with mass uprisings around the world, is destabilizing the world order – and new research from the International Monetary Fund (IMF) suggests that collective dynamics are likely to hamper a fragile recovery.

A working paper published by IMF researchers Luca Antonio Ricci, Metodij Hadzi-Vaskov, and Samuel Pienknagura, PhD, recently explored the macroeconomic impact of social unrest, concluding that “events of unrest” are correlated with declining global economic output, while having a negative impact on “the lives and livelihoods of millions of people around the world.”

The IMF’s latest Global Peace Index, published with the Institute for Economics & Peace, noted that the number of riots, general strikes and anti-government protests around the world has skyrocketed “244%” over the course of the year. last decade.

“Another breakdown of the data shows that the number of riots increased by 282% while the number of general strikes increased by 821%,” the authors wrote.

The study only covered the years up to 2019, so the coronavirus pandemic was not taken into account, nor were recent cases of violent clashes and cascading political unrest in places like Afghanistan. , Cuba and South Africa torn apart by war.

However, “recent trends could be further accentuated by the COVID-19 pandemic,” the authors wrote – suggesting that the current upheaval in the world could become a drag on global growth.

Amid socio-economic ills like racism, poverty, wealth inequalities, and wage stagnation, the resurgence of protests in developed and emerging economies has triggered what IMF authors have called “considerable associated economic costs. episodes of social unrest, but the effects depend on country characteristics. and the nature of the event.

On average, “economic activity declines following spikes in the unrest index,” a new measure the researchers used to correlate economic performance with social disruption, according to the report.

IMF study gives new meaning to popular uprisings sweeping the world, which author and historian Niall Ferguson recently described as a “cascade of disasters”. In places as disparate as the United States, France, South Africa, Cuba and Haiti, social unrest – which is becoming increasingly violent in some parts of the world – has become the order of the day.

This raises questions about how economies fare in the face of worsening unrest.

The study found that the economic impact of the protests was affected, among other things, by “the strength of a country’s institutions and the ability to respond through economic policies – the political space,” the authors said. to Yahoo Finance in an email.

Nonetheless, these findings support a broad view of the general effect of unrest on the economy, and the criteria are not universal, the study authors warned. The extent to which social unrest negatively impacts economic performance varies depending on a number of factors.

“Assessing the impact of specific disorder episodes requires a granular understanding of the context in which the episode occurs, a task beyond the scope of our study,” they told Yahoo Finance. “Additionally, extrapolating the messages from our study to specific disorder episodes may lead to erroneous conclusions.”

Lessons from global hotspots

A protester (C) lifts his umbrellas in front of tear gas which was fired by riot police to disperse protesters blocking the main street of the central financial district outside the government building in Hong Kong, September 28, 2014 Hong Kong police first used tear gas on Sunday to break up pro-democracy protests and charged crowds blocking a key road in the government quarter after Hong Kong and Chinese officials warned against illegal demonstrations. REUTERS / Tyrone Siu (CHINA – Keywords: CIVIL DISORDERS TPX POLICY IMAGES OF THE DAY)

Movements like the Arab Spring, which began in 2011, and the Hong Kong protests that began in 2019 have contributed to the rise of social unrest around the world.

The series of protests and violent conflicts that unfolded across the Middle East in the early 2010s was one of the most notable incidents of social unrest of the past decade. Although the economic consequences of the spring varied from state to state, virtually all of the affected countries has experienced low economic growth and high unemployment in the short term.

In the months following the first Hong Kong protests against Beijing’s proposals to restrict freedoms on the island, one of Asia’s fastest growing economies fell into recession as the tourism industry faltered. Retailers and local businesses have suffered from property damage from the protests as well as lower consumer spending. Investment fell due to the deterioration in business confidence, and real estate demand has fallen sharply.

Separately, the IMF document also examined the protests that followed the election of former Mexican President Enrique Peña Nieto in 2012. In this case, tens of thousands of people took to the streets in Mexico City to protest allegations of corruption and vote buying.

The IMF study called the incident “a smaller shock equivalent to one standard deviation, which can reduce GDP by around 0.2 percentage point six months after the shock.”

How is social unrest measured?

A protester looks past a barricade during a demonstration demanding free education, at Vaal University of Technology in Vanderbijlpark, South Africa, October 13, 2016. REUTERS / Siphiwe Sibeko TPX IMAGES OF THE DAY

A protester looks past a barricade during a demonstration demanding free education, at Vaal University of Technology in Vanderbijlpark, South Africa, October 13, 2016. REUTERS / Siphiwe Sibeko TPX IMAGES OF THE DAY

To examine the level of social unrest caused by an event, the study creates a metric called the “Reported Social Disorders Index,” or RSUI. The RSUI calculates the level of social unrest in a country by taking into account the number of articles published in major English-language newspapers and networks in Canada, the United Kingdom and the United States.

The study looked at 89 countries, 32 of which were “advanced economies”, of which 57 were emerging markets / low-income countries, between 1990 and 2019. It excluded “fragile states”, or states referred to as fragile states. by the World Bank for at least a year since 2006. RSUIs for each country were then plotted against quarterly GDP figures to track correlations.

Although the conditions and mitigating factors may differ, social unrest clearly results in declines in production and consumption in a nation. IMF researchers found that “the unrest has a negative effect on economic activity … driven by sharp contractions in industry and services … and consumption.”

Some countries are more responsible for increasing social unrest than others and may depend on the type of governance. The follow-up to the global protests of the Carnegie Endowment for International Peace (CEIP) found that, since 2017, more than 110 countries have experienced large protests, with 78% of authoritarian or authoritarian-leaning countries having faced large protests.

Countries with weak institutions or experiencing significant political turmoil were more likely to experience a significant economic impact. Notably, advanced economies fared much better than emerging economies in terms of the impact of the RSUI.

The biggest protests followed by CEIP in recent years have been the aforementioned protests in Hong Kong, with over 2 million attendees at its peak, and the 2019 Evo Morales Protests in Bolivia and the South Korean candlelight protests of 2016-17, which each drew around 1.5 million protesters, respectively.

The report’s findings suggest that “the detrimental effects of social unrest are evident in all countries regardless of income level, but the effect is twice as large” in emerging / developing economies compared to their counterparts advances.

The underlying causes of social unrest can also have an impact on the economic effects. The report studied protests with economic, political and mixed causes, concluding that the three types of events analyzed lead to “persistent reductions in economic activity”.

However, differences in the severity of these effects exist between events of different causes.

“Episodes of turmoil motivated by socio-economic issues lead to sharper GDP contractions than episodes linked to politics / elections,” the report revealed. “Episodes triggered by a combination of socio-economic and political factors are associated with the largest contractions in GDP.”

Granted, not all manifestations are created the same – and in the long run, some may actually be beneficial. However, the IMF study underscores how the uprisings have clear interim implications for their respective countries.

“Public protests can be an important expression of the need for policy change,” the authors told Yahoo Finance. “Our study shows that they can come with economic costs in the short and medium term. However, protests can also have long-term economic consequences, which we do not quantify in our study. “

Ihsaan Fanusie is a writer at Yahoo Finance. Follow him on twitter @IFanusia.

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