4.4.1 GDP Growth 25

4.5. Foreign Direct Investment 30

V. HISTORICAL AND REGIONAL BACKGROUND 32

5.1. An Overall Trend of the Middle East Region 32

5.2. Iran-Iraq War (1980-1988) 34

5.3. The Gulf War (1990-1991) 35

5.4. The Iraq War (2003-2011) 35

VI. EMPIRICAL ANALYSIS 37

6.1. An Overall Trend of the Middle East Region 37

6.2. The Gulf War (1990-1991) 37

6.3. The spillovers in Iraq – negative externality of the war 40

6.3. Invasion of Iraq 43

6.5. Analysis of Results 44

VII. ONCLUSION 47

VIII. EFERENCES 48

CHAPTER I

1. INTRODUCTION

Conflict reveals itself in several forms, from strikes, demonstrations, and riots to partisan warfare, terrorism and civil war. In turn, these forms of conflict have economic, social and other types of costs. Notwithstanding the importance of the other types of costs, this paper emphases on measuring the economic costs of conflict at the summative level. Valuing the economic cost of conflict is a challenging task. It amounts to computing what a given economic extent, say GDP, would have been in the deficiency of conflict - a counterfactual calculation that is difficult to achieve. Conflict itself is an unobservable degree, which makes statistical inference problematical, as scholars have to resort to proxy indicators of the level of conflicts such as the number of fatalities in a war or the number of political eliminations.

Consequently, it is not surprising that, despite its relevance, the issue has received little attention relative to other issues. Latest events, such as 9/11 and the invasion of Iraq have generated a new flood in this area of research. While estimating the extent of the economic costs of conflict remains an unsettled problem, the empirical evidence surveyed in this article proposes that the costs are substantial and great. In studying the economic cost of conflict, we will differentiate among several types of costs. Economic costs can be categorized into direct and indirect costs. For example, a civil war has a direct economic cost add up to all property wrecked plus an indirect cost, which contains the production loss during and following the conflict as the result of casualties and capital destruction during the conflict. Examining the temporal dimension, we can classify the economic costs of conflict into coexistent and added costs. The contemporaneous costs, normally known as impact costs, are the ones experienced in the similar period of the conflict.

The methods used are different and vary from time series methods to cross-section and panel data methods. The methods used in the literature are dependents on the objective of the research and data availability. When the objective is to assess the economic cost of conflict in a nominated country, region or sector, time series methods mostly used, while when the purpose is to estimate the economic influence of conflict for a group of countries, researchers use panel data methods. In this survey, we analysis multiple methods used in the literature to estimate the economic effect of conflict.