Faiz Ur Rehman
WHAT does prolonged conflict actually cost a country? A landmark 2026 study in the American Economic Review, drawing on 150 years of data across 60 countries, found that an average-intensity conflict can shrink an economy by up to 30 percent over five years, raise inflation by 15 percentage points and even harm neighbouring countries. The damage compounds as conflict drives borrowing, borrowing becomes debt and rising interest payments crowd out spending on schools, hospitals and infrastructure, slowing growth further. Pakistan ranked first globally for terrorism impact in 2025, with more than 1,000 attacks and over 1,100 deaths. That destructive cycle has persisted for more than two decades.
The violence has come in repeated waves. Attacks rose from around 150 incidents in 2000 to nearly 4,000 in 2013, while more than 11,000 people were killed in 2009 alone. A sustained security response sharply reduced fatalities to 365 by 2019, but the Taliban’s return to power in Afghanistan in 2021 reversed the trend, with deaths rising to 2,200 in 2024. Each resurgence has left behind greater economic damage and debt. Sri Lanka offers a telling contrast: after ending its 26-year conflict with the Tamil Tigers in 2009, its economy grew by 8 percent the following year. Pakistan’s prolonged insurgency has denied it a similar peace dividend.
The toll is measurable. Pakistan’s Economic Survey 2017–18—the last official estimate—put the direct and indirect cost of terrorism at $126.79 billion over the 17 years from 2001 to 2018, roughly one-third of the country’s economic output at that time. That figure does not count the investment that never arrived: foreign direct investment peaked at $8 billion in 2008 and then collapsed by nearly 90 percent as violence intensified. The factories that could have been built in Karachi or Peshawar were instead built in Vietnam and Bangladesh. Conflict does not just destroy what exists. It prevents what could have been.
The most lasting damage falls on people. Pakistan’s total education spending, across all levels of government, is below 2 percent of the size of the economy, against a world average of 4 percent. The World Bank estimates that a child born in Pakistan today will reach only 41 percent of their productive potential as an adult. In East Asia, that figure is 67 percent. This is not a warning. It is a measurement of harm already done to people already alive.
The AER paper also shows what resolution is worth. Because the researchers tracked recoveries after conflicts ended, they found that the gains from peace are large and arrive quickly: investment returns, borrowing costs fall and growth accelerates. The same compounding loop that destroys an economy in conflict runs in reverse when peace comes. Applied to Pakistan, the difference between continued conflict and genuine resolution could amount to well over $100 billion in the next decade alone. The research gives us the tools to calculate this with precision. The country has been paying this price for twenty-five years. The cost will not fall until the conflict does.
—The writer is a faculty of Economics at the Institute of Business Administration, Karachi.
