Echoes across Borders: Macroeconomic Spillover Effects of Conflict in Sub-Saharan African Countries

Abstract This paper quantifies the macroeconomic spillover effects of conflict within sub-Saharan African (SSA) countries using a new Foreign Conflict Proximity Index (FCPI), which accounts for conflict intensity and distance from conflict-affected countries. Our results suggest that proximity to conflict significantly and persistently hinders economic growth, while concurrently elevating inflation in the ‘home’ country. Conflict proximity shocks are also associated with increases in (current) government spending and government debt. Furthermore, the international trade transmission channel of conflict spillovers operates mostly through increased imports, while negative effects on FDI wind down over time. These results are robust to several checks, including alternative definitions of the foreign conflict proximity index. Moreover, state-dependent impulse responses underscore the importance of good governance, fiscal space and foreign aid in attenuating the adverse macroeconomic spillover effects of conflict. The detrimental impact of foreign conflict on output is more severe in environments with weaker governance and limited fiscal space. Government expenditures tend to rise following a conflict proximity shock in contexts of high governmental effectiveness, possibly reflecting the use of policy buffers to respond to shocks. In that context, the paper sheds light on important factors to promote resilience in SSA economies.