Macroeconomic Effects of the War in Mozambique

The aim of this paper is to analyse some macroeconomic channels operating in a war economy. At the theoretical level, the effects of such war on the key economic variables capital, technology, uncertainty, and the government’s fiscal deficit are discussed before proceeding to the analysis of individuals, firms and the government. These elements are combined in a dynamic macroeconomic model to study a war’s impact on output, growth, consumption, welfare and the national debt. The final section of this paper considers economic policy implications for a government at war, and for donors supporting a war economy. Both the theory and the evidence, drawn from Mozambique, suggest that while capital destruction is the most obvious cost of conflict the long-term development potential of a war economy is more severely damaged by increases in the fiscal deficit, uncertainty and transactions inefficiency. Furthermore, economic policies implemented during a war will determine the size and nature of the country’s long-term peace dividend.