July 25, 2024

Implications of War on the Global Economy

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By: Harshit Tokas, Research Analyst, GSDN

The 1991 Gulf War: source Internet

War, with its very real human cost, also brings with it serious economic implications. Beyond the devastation of infrastructure and the decline in the working population, war unleashes a wave of economic consequences that resonate for years to come. This includes inflation, shortages of essential goods, heightened uncertainty, increased public debt, and severe disruption to normal economic activities. Examining the economic effects of war reveals a complex interplay of gains and losses, ultimately making the case for peace and diplomacy even more compelling.

While some may argue that war can stimulate economic activity by creating demand, employment opportunities, fostering innovation, and boosting business profits, it’s essential to consider the concept of the ‘broken window fallacy.’ This fallacy illustrates that spending money on war does create demand, but it represents a massive opportunity cost. Resources spent on war could instead have been directed towards investments in education or healthcare, promoting long-term economic growth. The Iraq War, for instance, was estimated to have an opportunity cost of $860 billion by the end of 2009, highlighting the potential for alternative uses of these resources.

In many cases, war contributes to inflation, which erodes people’s savings, increases economic uncertainty, and undermines confidence in the financial system. For instance, during the US Civil War, the Confederacy struggled to finance its war efforts. To meet its financial obligations, they resorted to printing money to pay soldiers’ salaries. However, the increased money supply led to the devaluation of currency, particularly affecting middle-income savers who saw their savings dwindle.

Similarly, the World War II saw inflationary pressures in the United States due to a booming economy operating at near full capacity. High government spending, labor shortages, and a scarcity of goods and services contributed to this inflation. Additionally, war can lead to cost-push inflation, driven by shortages of essential goods and services and increasing prices of raw materials such as oil. It is worth noting that during the World War II, inflation was mitigated by price controls and rationing measures.

In cases where war devastates a country’s ability to produce goods, hyperinflation can occur. Governments, grappling with economic turmoil, resort to printing money to manage the scarcity of goods, as witnessed in Hungary and Austria in 1946.

Major conflicts can disrupt global oil supplies, causing oil prices to surge. For example, the Gulf War in 1990 led to a sharp rise in oil prices. Prices increased from US$ 21 a barrel in July to a post-invasion peak of US$ 46 in mid-October, although they subsequently fell. The 2022 Russian invasion of Ukraine also led to increased oil and gas prices, resulting in higher global fuel costs. With Russia being a significant oil and gas supplier, economic sanctions against Russia further strained global energy markets, leading to higher gas prices.

War frequently results in a rapid escalation of public sector debt. Governments are more willing to borrow heavily during wartime, benefiting from patriotic support for war efforts. Both World Wars caused a substantial increase in the United Kingdom’s national debt. By the end of World War II, UK national debt stood at 150%, eventually rising to 240% in the early 1950s. The US, while not engaged in the war during its initial years, also saw its national debt rise. It was ultimately sustained by selling arms and equipment to the UK on generous lend-lease terms. These loans took many decades to repay.

Although war can provide a temporary boost to domestic demand and some sectors of the economy, the broader economic costs are substantial. The opportunity cost of military spending, the human toll of lives lost, and the post-war reconstruction costs are significant factors. The impact of war also depends on the nature and duration of the conflict, its location, and how it is fought. For instance, while the US experienced economic growth during the World Wars, the most significant destruction occurred in Asia and Europe.

Civil wars can have a devastating impact on a country’s economic development. They often result in a collapse of tourism, foreign and domestic investment. Civil wars also lead to a decrease in life expectancy and a reduction in GDP. In Africa, the cost of war is estimated to be equivalent to the amount of international aid. Countries like the Democratic Republic of Congo have borne a substantial economic cost due to prolonged conflicts, including a loss of around 29% of its GDP and millions of lives. These conflicts also increase armed violence and organized crime rates.

The consequences of war are not always uniformly positive or negative. The post-war period following major conflicts can differ significantly. After World War II, despite a substantial debt, the UK experienced a prolonged period of economic expansion. The US, which didn’t participate in the early years of the conflict, saw a less pronounced increase in national debt. The post-World War II era was marked by extensive US aid to Western Europe, facilitating the region’s remarkable economic recovery, particularly in Germany.

In contrast, after the World War I, the UK struggled with prolonged unemployment, and returning soldiers faced limited job prospects. However, after the World War II, the US and Europe enjoyed a period of full employment.

The aftermath of war can yield both positive and negative economic outcomes. Successful recovery depends on a variety of factors, including post-conflict government policies and international support.

Beyond the economic toll, war exacts a profound psychological cost, encompassing the pain of death, suffering, fear, and disability. War leaves soldiers and civilians traumatized, often with lifelong psychological scars. Estimating the economic value of the psychological costs of war is complex, making it difficult to assess the full extent of war’s impact.

While war may seem to offer potential economic advantages, it’s crucial to recognize that most of these benefits could be achieved without resorting to conflict. Such advantages include achieving full employment, higher economic growth, increased innovation through government investments in technology, and changing social attitudes. For example, the participation of women in the labor market increased after the World War I.

It is noteworthy that in the 1950s and 1960s, the US’s involvement in conflicts like the Korean War, Vietnam War, and Cambodia generated high military spending, fostering strong domestic demand and economic growth. Companies involved in arms production witnessed increased demand and profitability. However, we must not forget that these wars occurred outside the US, with the most significant devastation concentrated in Asia and Europe.

Historically, there was a time when war could bring about economic benefits. In an era of limited trade, countries could improve their economies by plundering wealth and land from others. For example, Viking invasions likely increased the wealth of Scandinavia. While there were casualties in the fighting, the gains in wealth, slaves, and booty outweighed the losses. Wars during this time were relatively inexpensive as armies were self-sufficient.

However, modern warfare significantly differs. It is costly, technologically advanced, and highly interconnected in a globalized world. Today, a nation’s economic well-being relies heavily on international trade, making wars risky due to potential economic sanctions. Moreover, the resurgence of nationalism and resistance to foreign occupation makes occupying armies susceptible to local opposition.

In 1909, British author Norman Angell published “The Great Illusion,” arguing that war in the twentieth century would result in a net economic cost rather than economic gain. While countries may still be willing to engage in war for various reasons, such as political objectives, economic consequences often prove detrimental. The economic benefits of peaceful diplomacy and cooperation far outweigh the gains from warfare.

In conclusion, war’s economic impact is multifaceted, encompassing inflation, increased debt, and potential benefits such as short-term demand and employment. Nevertheless, the long-term costs, the opportunity cost of military spending, and the immense human suffering far outweigh these benefits. History shows that war can result in hyperinflation, significant loss of life, and economic devastation. Moreover, economic costs extend to the psychological toll on individuals and societies. Modern warfare is marked by its complexity, high costs, and the interconnectedness of the global economy. Ultimately, this underscores the importance of seeking peaceful alternatives to conflict and fostering international cooperation to address global challenges.

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