War’s Impact On An Economy

War, according to the Oxford Dictionary refers to a state of armed conflict between different countries or different groups within a country. Throughout history, we have witnessed multiple wars, for example, the Battle of Plassey, World War I, World War II, the most recent Russian-Ukraine War, and like.

From the end of World War II to the early 1990s, the world experienced an upward trend of armed conflict in the world. Many of these were wars of independence, some were inspired by the struggle between communism and democracy. This characterized the Cold War period. Examples of the said wars are the French‐Indochina War and the U.N.-North Korea War. Following the fall of the Soviet Union, the number of ongoing wars fell as well.

The point of commonality between all these wars is the brutal consequences faced by the people as well as the planet. War causes damage to infrastructure, a decline in the working population, a rise in inflation, shortages of necessities, uncertainty, a rise in debt, and disruption to normal economic activity. The economic cost of wars is equivalent to 41% of a war-affected countries’ Gross Domestic Product (GDP) and 9% of a peaceful countries’ Gross Domestic Product (GDP).

We often hear about stories of death, destruction, and natural disaster. But is it possible that misery brings an opportunity for growth as well?

Hasn’t America, Japan, and South Korea risen out of the ashes of war, stronger and richer than ever before?

From the glass half full perspective, war can be beneficial too. It can create demand, employment, innovation, and profits for businesses. However, while talking about the ‘economic benefits of war we must not forget about the broken window fallacy. The broken window fallacy states that an event can have negative effects if money is used to repair broken items rather than building new goods and services. When a country spends money on war, it creates demand, but also creates a huge opportunity cost. Rather than building bombs and rebuilding destroyed towns, the country could have repurposed this money to develop other sectors of the country like education or health care.

There is an ambiguity when it comes to calculating war’s impact on the GDP of a country. This ambiguity has occurred due to the way national income accounting is calculated. National income accounting for producing weapons and munitions positively, while killing people and destroying things is not taken into account.

War can also have potential economic benefits like the following:

– Full employment

– Higher economic growth

– Increased rate of innovation because of increase in investment in new technology.

– Change in social structure, for example, women started working due to financial crisis in households.

Outcome of War

The outcome of the war is a mixture of immediate consequences and the responses to these direct effects. After the war, the following might occur:

– At the macroeconomic level:

Falling GDP per capita, reduced export earning, reduced imports, decrease in investment and savings, reduced government revenue and expenditure, higher budget deficits, and accelerating inflation. Government expenditure would switch from the economic and social sector to the military sector; from tradable to non-tradable, necessary items.

– At the microeconomic level:

Most claims are expected to drop on average, however direct and civic entitlements may grow to compensate. The end product can have disastrous ramifications for human survival. Vertical and horizontal entitlement distribution can also shift dramatically.

– Macro-policies that maintain output and employment, as well as meso-policies that safeguard public entitlements, employment, and food prices, can all contribute to alleviating human misery.

– International policies should support foreign exchange earnings, avoid sanctions, and continue to support development activities even when there is a conflict.

Economic Cost of War

Inflation

War can lead to inflation in many circumstances. Inflation causes a loss of people’s savings, a rise in uncertainty, and a loss of confidence in the financial system. Countries’ struggling financially due to war, often start printing money to pay soldiers’ salaries. But, as the supply of money increased, the value of money soon declined. High inflation impacts the middle-income savers the most as the value of their savings is wiped out. During the war, the economy sometimes experiences cost-push inflation due to shortages of goods and services and the rising price of raw materials. The capacity to produce goods gets reduced if a country is

devastated by war. There can be circumstances of hyperinflation if governments try to print money desperately.

Oil prices

War can often threaten the supply of oils; hence it can lead to higher prices of oil.

National debt

There is a rise in public sector debt during wartime. The government borrows a lot more than usual because of the patriotic emotions joined with war. Due to rebuilding and the establishment of the welfare state, debt continued to climb throughout the post-war decades.

Conclusion

At the end of major wars, there is a concern about returning soldiers struggling to find employment. After the First World War, there was a huge economic slump, and returning soldiers struggled to find new jobs that had been replaced during the tenure of the war.

Countries that experience war underperforms in terms of production and consumption. Their GDP per capita falls due to its low labor and total factor productivity. This happens due to the destruction of existing physical and human capital, the lack of government and/or foreign investment in new physical and human capital, and a reduction in gains from both internal and external trade.

War might help the economy in some way, but the net effect of war is undoubtedly negative. War has and always destroys a country’s as well as the global economy.

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