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The Economic Impact of Violence

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Chart: The Economic Impact of Violence

The Economic Impact of Violence

The Chart of the Week is a weekly Visual Capitalist feature on Fridays.

When you regularly buy goods or services, it helps fuel the economy at both the local and national level.

But what if you live in a place like Syria, that is torn apart by a seven-year long civil war?

Aside from the obvious humanitarian costs, these dire circumstances would ultimately change your spending behavior, how businesses operate, and how capital gets utilized. The fact is that conflicts, homicides, terrorism, and other types of violence can hinder productivity and wealth creation, and this ultimately has an impact on families around the world.

Calculating an Economic Impact

In today’s chart, we use data from the Global Peace Index 2018 report, which tries to put a figure on the expenditures and economic effects related to “containing, preventing and dealing with the consequences of violence”.

According to the report, the economic impact of violence to the global economy was $14.76 trillion in 2017 in constant purchasing power parity (PPP) terms. This is roughly 12.4% of world gross domestic product (GDP), or $1,988 per person.

While those figures themselves are quite staggering, how it all breaks down is even more interesting.

Violence by Type

Violence comes in many forms, so how does factor into the economic impact?

The Institute for Economics and Peace, the non-profit think tank that has authored the report for the last 12 years, breaks down economic impacts as follows:

Type of economic impactShare of total
Military expenditures37.2%
Internal security & incarceration27.4%
Homicide16.6%
Conflict8.0%
Private security5.5%
Violent & sexual crime4.0%
Other1.3%

The vast majority of impact comes from military and security spending, which are both aimed at the prevention or containment of violence. Meanwhile, homicide and conflict – two more direct violent actions – are the next two biggest factors.

Here’s how this breaks down by region:

Economic impact of violence by region

Dollars are going to military and security spending in North America, Asia-Pacific, and Europe. Meanwhile, it’s actual violence like homicides, conflict, and terrorism that cause economic havoc in South America, Central America, and Africa.

The Countries Most Affected

Which countries are impacted the most by violence, as a percentage of their GDP?

Here are the top 10, as per the report:

RankCountryEconomic impact (% of GDP)
#1Syria68%
#2Afghanistan63%
#3Iraq51%
#4El Salvador49%
#5South Sudan49%
#6Central African Republic38%
#7Cyprus37%
#8Colombia34%
#9Lesotho30%
#10Somalia30%

Syria, which has been in its civil war for seven years now, is the country most affected by the economic impact of violence. Meanwhile, war-torn Afghanistan is not far behind.

Interestingly, the cost of violence in Latin American countries is comparable to regions that have been at war for years. El Salvador ranks a surprising fourth place, due to its issues with gang activity and a sky-high homicide rate, and Colombia makes the list as well.

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Markets

3 Reasons Why AI Enthusiasm Differs from the Dot-Com Bubble

Valuations are much lower than they were during the dot-com bubble, but what else sets the current AI enthusiasm apart?

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Two bubbles sized according to the forward p/e ratio of the Nasdaq 100 Index during the dot-com bubble (60.1X) and the current AI Enthusiasm (26.4x).

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The following content is sponsored by New York Life Investments

3 Reasons Why AI Enthusiasm Differs from the Dot-Com Bubble

Artificial intelligence, like the internet during the dot-com bubble, is getting a lot of attention these days. In the second quarter of 2023, 177 S&P 500 companies mentioned “AI” during their earnings call, nearly triple the five-year average.

Not only that, companies that mentioned “AI” saw their stock price rise 13.3% from December 2022 to September 2023, compared to 1.5% for those that didn’t.

In this graphic from New York Life Investments, we look at current market conditions to find out if AI could be the next dot-com bubble.

Comparing the Dot-Com Bubble to Today

In the late 1990s, frenzied optimism for internet-related stocks led to a rapid rise in valuations and an eventual market crash in the early 2000s. By the time the market hit rock bottom, the tech-heavy Nasdaq 100 Index had dropped 82% from its peak.

The growing enthusiasm for AI has some concerned that it could be the next dot-com bubble. But here are three reasons that the current environment is different.

1. Valuations Are Lower

Stock valuations are much lower than they were at the peak of the dot-com bubble. For example, the forward price-to-earnings ratio of the Nasdaq 100 is significantly lower than it was in 2000.

DateForward P/E Ratio
March 200060.1x
November 202326.4x

Source: CNBC, Barron’s

Lower valuations are an indication that investors are putting more emphasis on earnings and stocks are less at risk of being overvalued.

2. Investors Are More Hesitant

During the dot-com bubble, flows to equity funds increased by 76% from 1999 to 2000.

YearCombined ETF and Mutual Fund Flows to Equity Funds
1997$231B
1998$163B
1999$200B
2000$352B
2001$63B
2002$14B

In contrast, equity fund flows have been negative in 2022 and 2023.

YearCombined ETF and Mutual Fund Flows to Equity Funds
2021$295B
2022-$54B
2023*-$137B

Source: Investment Company Institute
*2023 data is from January to September.

Based on fund flows, investors appear hesitant of stocks, rather than overly exuberant.

3. Companies Are More Established

Leading up to the internet bubble, the number of technology IPOs increased substantially.

YearNumber of Technology IPOsMedian Age
19971748
19981137
19993704
20002615
2001249
2002209

Many of these companies were relatively new and, at the peak of the bubble in 2000, only 14% of them were profitable.

In recent years, there have been far fewer tech IPOs as companies wait for more positive market conditions. And those that have gone public, the median age is much higher.

YearNumber of Technology IPOsMedian Age
20204812
202112612
2022615

Ultimately, many of the companies benefitting from AI are established companies that are already publicly traded. New, unproven companies are much less common in public markets.

Navigating Modern Tech Amid Dot-Com Bubble Worries

Valuations, equity flows, and the shortage of tech IPOs all suggest that AI is different than the dot-com bubble.

However, risk is still present in the market. For instance, only 33% of tech companies that went public in 2022 were profitable. Investors can help manage their risk by keeping a diversified portfolio rather than choosing individual stocks.

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