Economic costs of war
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WEDNESDAY, AUGUST 17, 2022
Economic costs of war

Analysis

Titu Datta Gupta
26 February, 2022, 12:15 pm
Last modified: 26 February, 2022, 02:40 pm

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Economic costs of war

In the worst-case scenario, Europe might see gas supply cut off triggering a recession, while the US would see significantly tighter financial conditions, a bigger hit to growth

Titu Datta Gupta
26 February, 2022, 12:15 pm
Last modified: 26 February, 2022, 02:40 pm
Illustration: Collected
Illustration: Collected

A day after the Russian missile attack, the Ukraine president said he was "left alone" to fight Russia and his appeals to 27 European nations seeking to join NATO remain unanswered. His frustrations were aired at a time when Russian convoy of tanks was within 10km of capital Kyiv, thousands of Ukrainian people were displaced and took shelter in subway stations to shield themselves from bombs that destroyed buildings and caused deaths.

There have been weeks of talks, warnings which only heightened tensions. The war broke out, finally. Russian attack on Ukraine bore special significance as Europe has seen the first war since World War II. But for Asia and Africa too, war is not so far away.

Grounds are always there. Only a pretext is needed to rage a war. Be it the 1982 British airstrike on Argentina, or 2013 France air force strike in Mali, US air or drone strike in Libya and Syria, or full-scale war in Iraq and Afghanistan – pretexts were crafted for every attack, as in the case of Russian invasion of Ukraine.

But, once hooked into a war, you will see yourself fighting all alone. Invaders are mighty, no matter whether they are alone or in a group. The situation is worse for the victim, Ukraine in this case. "We have been left alone in defending our nation. Who is ready to fight with us? I don't see anybody,"  Ukraine's President Volodymyr Zelensky said on Friday.

In theory, no one wants a war. But in practice, it happens. The UN, high-profile diplomacy involving the big powers, talks – all efforts fail, and a war becomes inevitable.

And with every war comes a huge cost to be paid primarily by the parties at war, then the neighbours and the rest of the world – directly or indirectly.

War means blood, destruction, massacres, displacement, refugees, famines. These are human costs. There are economic costs too. In most wars, public debt, inflation, and tax rates increase, consumption and investment decrease, and military spending displaces more productive government investment in hi-tech industries, education, or infrastructure – all of which severely affect long-term economic growth rates.

5 cigarettes for an egg

The last century had two worst wars in human history, the second one being the most destructive and expensive, ruining much of Europe and Asia, and parts of Africa.

Apart from taking a staggering toll in both military and civilian lives, World War II combat and bombing flattened cities and towns, destroyed bridges and railroads, and scorched the countryside.

Shortages of food, fuel, and all kinds of consumer products persisted and, in many cases, worsened after peace was declared. War-ravaged Europe and Japan could not produce enough goods for their own people, much less for export.

Countries spent more money on World War II than in all previous wars put together. By 1945, exhausted countries faced severe economic problems such as inflation, debt, trade deficits and balance of payments deficits, frustrating reconstruction efforts.

Gold and dollar supplies depleted. Many countries retreated from the market. The Communist Eastern Europe abandoned it altogether. The world's multilateral financial and trading system faced a serious threat.

The United Kingdom went from being the world's greatest creditor to the world's greatest debtor. Countries sold off most of their gold and dollar reserves, as well as their foreign investments to pay for the war. Severe inflations plagued the weakened economies. By 1948, wholesale prices were 200% higher in Austria, 1,820% higher in France, and a massive 10,100% higher in Japan than they had been before the war, according to the International Monetary Fund.

In 1948, the French government devalued the franc by 80%, making a 5,000 franc note practically worthless. In some countries like Germany, the monetary system collapsed. People resorted to barter, often using cigarettes as money.

Both the First and Second World Wars were very costly for the UK, raising its national debt sharply due to reconstruction and the creation of the welfare state.

UK national debt rose to 150% at the end of World War II, making it rely on US loans which took many decades to be paid back.

Who gained?

Not everyone was in loss.

Only the United States had emerged from WWII with the strength and resources to help. Global debts were mostly owed to the US. The IMF says by 1947, the United States accumulated 70% of the world's gold reserves. Most of the global debts were owed to the US.

WWII appeared to be an economic success story for the US, which gained an economic stimulus from increases in spending because so little of the war was fought on American soil. It saw the most rapid economic growth in history not in recovery from the Great Depression, but after the great war when the country was almost at full employment. Private and women employment rose, and industrial productivity grew.

Europe, too, became more prosperous than ever and returned to pre-war levels of output within five years.

Wars make famine more likely. The Soviet Union, one of WWII's warring powers, suffered the most in mass starvation, losing about 7 million citizens to hunger. Ukraine lost over 3 million, or nearly 8% of its population, to famine caused by WWII, according to a Vox debate on the economics of WWII.

War means deaths and destructions, and gains made out of a war, if there are any, would never be worth the cost of human lives and sufferings.

Now, with Russia and Ukraine at war, the world is assessing the possible impact of the war. The US and its allies are announcing a raft of sanctions with a view to snapping Russia from global transactions.

The war has impacted the already volatile crude oil market and the global commodity market is feared to take the hit, too. The whole world has been in its toughest battle against the Covid-19 pandemic and struggling to recover from the economic shocks. The war will definitely add to global woes, despite the call of the British defence secretary that they would not trigger a European war while helping Ukraine "fight in every street."

While casualties are being reported, leaders of the World Bank and the IMF warned that Russia's invasion will have repercussions for the global economic recovery and add significant economic risk for the region and the world.

Bloomberg Economics forecasts three scenarios from the crisis. Firstly, a swift end to fighting will prevent a further upward spiral in the commodity market.

In the second scenario, a prolonged conflict with a tougher Western response and disruptions to Russia's oil and gas exports would deliver a bigger energy shock and a major blow to global markets.

In the worst-case scenario, Europe might see gas supply cut off, triggering a recession, while the US would see significantly tighter financial conditions, a bigger hit to growth.

Wars are unpredictable, and their real outcomes might be even messier.

Bangladesh has also trade and investment relations with both Russia and Ukraine, which would take a hit if the crisis prolongs or spreads into a wider war. Today's world is much more integrated than in the era of world wars, and no country can stay far away from the fallouts of a war at a time when the global war against the coronavirus is not yet over.

Economy / Top News

war / Economy / Global economy / war costs

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