The catastrophic clash between Russia and Ukraine has been in the headlines for the past few weeks. Russia has spoiled peace with Europe and has declared war against Ukraine, followed by dreary bloodshed. However, aside from the physical casualties and deaths from war, a particular aspect of this event often gets neglected. The economy.
What do you think happens to the economy when a country goes through a war? Obviously, devastation.
Impacts of War
Aside from lives, the impacts of war on the economy can be fatal— from damaged infrastructures to shortages, working population decline, debt hike, economic activities disturbance, and uncertainty.
From some perspectives, wars also have their fair share of benefits when it comes to creating employment, innovation, demand, and even business profits. This is especially true when the war doesn’t take place in the very country capitalizing on it.
Nevertheless, the broken window fallacy comes about every war despite all the so-called economic benefits talks. It’s true that whenever we use up money on a war, a demand gets created. Still, it’s important to not forget that it represents a tremendous opportunity cost. If you would come to think of it, the funds that are flooded to rebuild destroyed towns could have been allotted to improve health care and education.
There has been an uphill trend in armed conflicts around the world since World War II.
In 1989, a Romanian revolution occurred to oust the leader communist party to acquire democratic freedom. The execution that happened ended a decade-long communist leadership rule.
The war led to a devastated economy but eventually recovered even at a slow pace. Even though that is the case, its effects can still be observed to this very day.
The Costs of A War
Wars can truly be beneficial in some cases, but let’s neglect the negative impacts they can bring in many different aspects of our lives.
Hyperinflation
Wars can cost inflation which eventually leads to flopping savings, loss of citizens’ confidence in the financial system, and intensified feelings of uncertainty.
Let’s take the US civil war for example.
To meet the costs of the war, the Confederacy began printing a lot of money to compensate for soldiers’ salaries. This resulted in inflation, and the value of money they printed drastically declined. The high inflation rate pounded the middle-income savers the most, devaluing their hard-earned savings.
There was also a rise in inflation in the United States during the Second World War. The US economy was nearing to reach full capacity with the shortage of workers and an astronomical level of government spending.
During the war happened the cost-push inflation because of the lack of services and goods, as well as the increasing prices of raw materials. Interestingly, rationing and price control limited inflation in the Second World War.
If a country is devastated by war and the capacity to produce goods is sharply reduced, it can create the circumstances of hyperinflation as governments desperately print money to try and deal with the lack of goods. For example, with a devastated economy, in 1946, Hungary and Austria experienced the highest rates of hyperinflation on record.
The ability of a country to produce goods is nattily reduced whenever a country gets devastated by war. As governments desperately print money to deal with the shortage, hyperinflation kicks in.
Austria and Hungary hold the record of having the highest inflation rate back in 1946.
National Debt
The patriotic backing for the war effort pushes the government to willingly borrow a lot of money than usual during a war, driving a swift rise in the public sector debt. Reconstruction and rebuilding of the welfare of the state during the post-war period makes the national debt rose very sharply.
The First and Second World Wars took a huge toll on a lot of countries, especially to the United Kingdom. UK’s national debt spiked to 150% by the end of world war two but rose enormously by the early 1950s. The economic devastation drove the UK to rely on a loan from the United States, which took quite a lot of decades to be paid off.
On the other hand, the war did better for the United States than harm. Since they were not involved in the past two years of the war, the increase in the country’s national debt was not as severe. Rather, they greatly profited from selling equipment and arms to the United Kingdom through generous lend-lease terms.
Unstable Oil Prices
Major conflicts like a war trigger the threat to supplies. Leading to oil prices fluctuation.
Back in 1990, the Gulf war ushered an astronomical increase in oil prices from $21 during the post-invasion times, peaking at $46 just in mid-October. The prices immediately fell after, though.
Now, the Russian invasion of Ukraine this 2022 led not affected the prices of oil in both countries, but also prices all over the globe. Because Russia is a prime supplier of gas and oil, the economic sanctions within the country with regard to the invasion will diminish supply and dump upward pressure on gas prices.
Psychological Cost
The economic expense of war can be measured but determining the psychological cost of war is rocket science. Hunger aside, wars can bring so much fear, agony, pain, disability, and death. Armed conflict leaves a deep scar and trauma on soldiers and civilians alike for the rest of their lives.
In the past years, post-traumatic disorders brought by war gets more accepted, and treatments with the help of VR technology and psychedelic drug treatments are getting widespread. Although identifying the psychological cost of war is next to impossible, there’s no denying the expense is over the top.
Financial Cost
Wars cost an exceedingly large amount of money, from military spending to the reconstruction of infrastructures and citizens’ healthcare costs. Not to mention that the financial cost varies on the kind of war, its duration, and how it was fought.
War and Its Aftermath
War ushers a country’s legacy of debt and demobilized military force. The Second World War didn’t restrain the growth of the United States, but in fact, led to the lengthiest periods of economic expansion on record.
However, a war’s aftermath isn’t always constructive and equal for warring countries.
After the end of the Napoleonic War and First World War, the United Kingdom toiled with unemployment for a long period. The returning troopers found wretched employment prospects. Meanwhile, the United States and Europe took delight in satisfactory employment rates.
The German economy also faced repercussions from the First World War and was propelled to make reparation payments. With insufficient funds to meet reparation expenses, Germany resorted to large-scale printing of money, leading to hyperinflation, which then lead to conflict. The dispute around the German hyperinflation back in the 1920s planted the seeds for political extremism and more wars.
The cost of war is more expensive now in the modern era. First, modern technologies are expensive to run and modern armies need ammunition, fuel, and food. Secondly, because of the internet and global trade, the world is much more interconnected than it’s been before. Hence, if a certain country ventures into an illegal war (like Russia), it can face distressing economic sanctions.
