Wars are frequently catastrophic for the economies of the countries involved. A key driver of the long-term damage is fragility within the financial systems of the warring countries, as this impedes the ability of a nation to mobilise capital and rebuild following a war’s conclusion.

The experience of several countries in the Middle East and North Africa region underscores the long-term value of building a financial system strong enough to limit the devastation wrought by conflict.

Much of how wars harm economies is common sense: physical capital is destroyed; workers are killed; funds are redirected from development to arms; and trade with the outside world is impeded. But a recent paper by Northwestern University’s Efraim Benmelech and Einaudi Institute’s Joao Monteiro analyses data from 115 conflicts in 145 countries over 75 years to identify some of the underlying factors that complicate recovery efforts.

Their study confirms the high economic cost of wars: real gross domestic product falls by 13 per cent on average, and – most importantly – there is no recovery even a decade after the war ends.

Israel and Hamas: A war with no winners 02:06

Dr Benmelech and Dr Monteiro gathered a wide range of macroeconomic data to assist in parsing the mechanisms, leading them to the conclusion that financial frictions are the main conduit through which wars cause persistent investment collapses.

In particular, when war destroys physical assets, it also destroys financial confidence, as such assets are usually a primary source of collateral for prospective borrowers. With collateral values collapsing, credit dries up, investment stalls and weakened balance sheets keep economies trapped in a slow-motion downturn.

Several of the recent and ongoing conflicts in the Middle East viscerally display the mechanisms analysed by Dr Benmelech and Dr Monteiro.