5 Major Impacts Of War On Economy Growth

There was a time when the conflict was economically advantageous. Before major trade, plundering money and territory from other countries was a strategy to enhance the economy in a mercantilist time.

5 Major Impacts Of War On Economy GrowthAs a result, the Viking raids in Scandanavia most likely boosted the Viking economy’s prosperity. Although some men were killed in the battle, they walked away with unbelievable money, slaves, and loot. The wars were very inexpensive because there was no need for armament and the army could be self-sufficient. As a result, the economic gains of raiding countries could outweigh the drawbacks.

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Modern warfare, on the other hand, is rather different. To begin with, with all of the technology, it is quite costly to operate. Fuel, weapons, and food are all necessities for modern militaries. Second, the world has become far more interconnected, with a country’s wealth becoming increasingly reliant on trade. If a country engages in an illegal war (like Russia did in 2022), it could incur severe economic repercussions.

A third issue is that since the nineteenth century, nationalism has been a more powerful force. Locals who reject being dominated by a foreign power are likely to resist occupying soldiers.

In 1909, British novelist Norman Angell published “The Great Illusion,” in which he argued that war in the twentieth century would result in a net economic cost, but conflict in the past would have resulted in a net economic gain. Of course, this does not imply that warfare ceased to exist in 1909. Countries may be willing to fight for a variety of reasons. However, it is usually negative news, at least from an economic standpoint.

War may appear to be good in terms of increasing demand, employment, innovation, and profits for businesses from some views (especially when the war occurs in other countries.)

However, we must be aware of the unforeseen negative effect when discussing the ‘economic benefits of war, spending money on war creates demand, but it also represents a significant opportunity cost rather than building bombs and rebuilding destroyed towns, we could have used this money to improve education or health care.

By the end of 2009, the opportunity cost of the Iraq war was estimated to be $860 billion (source: NY Times)

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Here Are The Economic Impacts Of War:

1. Inflation and war

In many cases, conflict causes inflation, which results in the loss of people’s savings, increased uncertainty, and a lack of faith in the financial system. The Confederacy, for example, struggled financially to fulfill the war’s costs throughout the American Civil War. As a result, they began printing money to pay the salaries of the soldiers. However, as more money was printed, the value of money began to fall. Middle-income savers were seriously affected by high inflation since their assets lose value.

The economy was nearing maximum capacity, with high levels of government spending, and a labor shortage and the United States experienced an increase in inflation during World War II. Due to shortages of products and services and increased prices of basic commodities such as oil, the economy may face cost-push inflation during a war. (Intriguingly, price controls and rationing helped to keep inflation in check throughout World War II.)

When a country is destroyed by war and its capacity to manufacture commodities is drastically curtailed, hyperinflation can result when governments hurriedly print money to make up for the shortage of goods. Consider the case of a shattered economy. Hungary and Austria had the highest rates of hyperinflation ever recorded in 1946.

Early modern wars, despite their frequency, caused little price inflation due to the modest demands on real resources. The invention of paper money, as well as the use of deficit finance to fund wars, transformed the situation. In recent centuries, wars have been the primary cause of inflation, though, since World War II, unmatched social welfare programs have also fueled inflationary flames.

2. Oil prices and war

Large conflicts might jeopardize oil supplies, war can often lead to higher oil prices.
The Gulf War of 1990, for example, resulted in higher oil prices. Prices jumped from $21 per barrel in July to $46 in mid-October, a post-invasion high. (However, prices dropped shortly after)

The Russian invasion of Ukraine in 2022 resulted in an increase in oil and gas prices, which will lead to higher worldwide gasoline prices. Economic penalties against Russia in response to the invasion will limit supplies and put upward pressure on gas prices because Russia is a significant supplier of oil and gas.

At one time, oil reached $139 a barrel, the highest level in over 14 years, while wholesale gas prices for next-day delivery more than doubled.

It happened as the US hinted at a ban on buying Russian energy as it sought to enhance supplies from other countries.

3. National Debt and War

We frequently observe a rapid increase in public sector debt during times of war. Because there is patriotic support for the war effort, the government is willing to borrow far more than usual.

Both the First and Second World Wars cost the United Kingdom a lot of money. The national debt increased dramatically in both cases. Due to reconstruction and the establishment of the welfare state, debt continued to climb throughout the postwar decades.

The national debt of the United Kingdom reached 150 percent at the end of World War II, but by the early 1950s, it had risen to 240 percent.

During World War II, the United Kingdom relied on loans from the United States and took decades to repay them.

The rise in national debt was less pronounced in the United States, which was not involved for the first two years. During the early years of the Cold War, the United States benefitted from the sale of weaponry and equipment to the United Kingdom (though on generous lend-lease terms)

4. The financial cost of war

Although war can temporarily raise domestic demand, it is vital to remember that war comes at a price. The opportunity cost of military spending, the human cost of lost lives, and the cost of rebuilding after a war’s devastation are all factors to consider.

It also depends on the type of war, how long it has lasted, and where and how it is waged. For example, the United States fought wars during World War II, the Korean War, and the Vietnam War, and it appeared that these conflicts resulted in an increase in domestic demand, with some manufacturing companies performing exceptionally well.

However, it is important to remember that these wars took place in countries other than the United States. The true carnage occurred in Asia and Europe.

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5. Cost of Civil War

Civil conflict can have a disastrous effect on a country’s economic prosperity. Tourism, international investment, and domestic investment will all suffer as a result of the civil war. It may result in a reduction in life expectancy and a reduction in GDP.

According to an Oxfam analysis titled “Africa’s Missing Billionaires,” the cost of conflict in Africa is equal to the amount of international aid. A country like the “Democratic Republic of Congo” has gone through a particularly tough conflict, which has cost it £9 billion, or 29 percent of its gross domestic product, in addition to killing about 4 million people.

According to the paper, continued war and greater weapon availability can lead to a rise in armed violence and organized crime.

The Aftermath

5 Major Impacts Of War On Economy GrowthWar always leaves a debt legacy and an army of demobilized warriors. After World War II, debt was no longer a barrier to growth and Britain enjoyed one of the longest periods of economic boom in history.

The aftermath of war, on the other hand, is not always so good. Following the end of the Napoleonic Wars and the First World War, the United Kingdom struggled. The United Kingdom had a long period of unemployment in the 1920s, with returning troops facing bleak job prospects. Nonetheless, the United States and Europe experienced full employment following WWII.

The aftermath of the First World War, as well as the need for reparation payments, wreaked havoc on Germany’s economy. In order to meet restitution payments, Germany printed money, resulting in hyperinflation. The squabbles over German hyperinflation in the 1920s sowed the roots for future political radicalism and wars.

The Allies, on the other hand, did not repeat this error after World War II. The United States provided considerable aid to Western Europe, assisting in the reconstruction process and resulting in Europe’s economic miracle, particularly in Germany.

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