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The Ukrainian War

Paper Session

Friday, Jan. 5, 2024 8:00 AM - 10:00 AM (CST)

Convention Center, 223
Hosted By: Peace Science Society International & American Economic Association
  • Chair: Carlos Seiglie, Rutgers University

True Cost of War: The Conflict in Eastern Ukraine

Erhan Artuc
,
World Bank
Nicolas Gomez-Parra
,
Inter-American Development Bank
Harun Onder
,
World Bank

Abstract

Measuring the economic impact of a war is a daunting task. Common indicators like
casualties, infrastructure damages, and gross domestic product effects provide useful
benchmarks, but they fail to capture the complex welfare effects of wars. This paper
proposes a new method to estimate the welfare impact of conflicts and remedy common
data constraints in conflict-affected environments. The method first estimates how
agents regard spatial welfare differentials by voting with their feet, using pre-conflict
data. Then, it infers a lower-bound estimate for the conflict-driven welfare shock
from partially observed post-conflict migration patterns. A case study of the conflict
in Eastern Ukraine between 2014 and 2019 shows a large lower-bound welfare loss
for Donetsk residents equivalent to between 7.3 and 24.8 percent of life-time income
depending on agents’ time preferences.

Spatial Disaster Risk

Jonathan Federle
,
Ludwig Maximilian University of Munich
André Meier
,
Tudor Capital Europe LLP
Gernot Müller
,
University of Tübingen, CEPR and CESifo
Victor Sehn
,
Ludwig Maximilian University of Munich

Abstract

Examining violent disasters since 1991, I find spillovers in disaster risks stress equity prices of firms headquartered in uninvolved but geographically exposed countries. Being neighbor to violent disasters is associated with negative returns of 1.49 percentage points on impact. This is attenuated by 0.21 percentage points per 1,000 kilometers of distance from the disaster site. The relationship holds within countries and is robust to controlling for trade and international linkages. Option-implied risk reversals reveal market concerns regarding pronounced downturns consistent with heightened disaster risk straining asset prices nearby disaster sites. Besides, I document sizable pricing effects of conflict-induced trade disruptions.

Gallup Democracy in Exercising the NATO Membership Option: The Cases of Finland and Sweden

Vesa Kanniainen
,
University of Helsinki

Abstract

The article asks whether the exercising of the NATO membership option is justified for Finland and Sweden in the light of their geopolitical state after Russia’s attack on Ukraine. It was the Gallup democracy, which launched the political moves toward the membership. In both countries, the majority of people turned to favor the membership within 2–3 months. Finland activated first. Sweden was fast in catching up with the Finnish process. The theory of option pricing is employed to analyze the optimal timing of exercising the option when the uncertainty regarding the value of the membership is rapidly diluting. The Turkish intervention in the membership process after the membership applications of Finland and Sweden were delivered suggests a bargaining phase once the application is delivered. Finally, the effects of the Gallup surveys on the political equilibrium are analyzed in a voter–politician model.

The Reconstruction and Development of Ukraine’s Financial Sector after the War

Ralph De Haas
,
European Bank for Reconstruction and Development, CEPR and KU Leuven
Alexander Pivovarsky
,
Harvard University

Abstract

Before Russia’s February 2022 invasion, Ukraine’s financial sector was small, fragmented and overly reliant on state banks. The sector has nevertheless weathered the initial shock of the war relatively well, reflecting the central bank’s restructuring efforts over the past decade. Even now, the authorities can start preparing for the post-war reconstruction and repositioning of the financial sector. Preparations should include the comprehensive asset quality review that will be needed straight after the war; subsequent bank-specific recapitalizations; and designing a (centralized) mechanism for resolving non-performing loans. State banks should be put on a credible privatization path while ensuring they become less reluctant to write off or restructure loans. Ukraine’s EU candidacy will guide its regulatory alignment and (re)engagement with foreign investors. To develop capital markets, priorities include consolidating the fragmented equity market infrastructure; introducing a financial collateral law; and legally recognizing modern financial instruments to adjust the balance between debt and equity risks. Ukraine may continue to face elevated geopolitical risks after the war. Financial deepening will then benefit from risk-sharing arrangements with the EU, bilateral donors and/or multilateral development institutions.

Discussant(s)
Solomon Polachek
,
Binghamton University
Todd Sandler
,
University of Texas-Dallas
Elena Stancanelli
,
Paris School of Economics
Daria Sevastianova
,
University of Southern Indiana
JEL Classifications
  • F5 - International Relations, National Security, and International Political Economy
  • H5 - National Government Expenditures and Related Policies