How War Affects the Economy

How War Affects the Economy
September 15, 2022 Chrissy Goodwin
Photo of soldiers heading to war.

In addition to the human and societal costs of war, engaging in warfare also has high economic costs. How wars affect the economy is multi-pronged, but costs commonly include the following: infrastructure damage (roads, bridges, ports), a reduction in the population that can work, shortages of food, raw materials, and finished goods indented for the domestic population or export, an increase in a country’s debt burden and the resulting inflation, and the general anxiety that comes with any disruption to economic activity.

Some politicians and members of the business community offer opinions on how war affects the economy in a positive way when the fighting occurs in other people’s countries. They cite how warfare can create production demand, technological innovation, and business profits. However, it’s important to remember two things when presented with such arguments. First, war has a significant cost for all countries involved. Money that must be spent on military expenses and rebuilding destroyed infrastructure could have been spent on improving living conditions and boosting economic innovation. Second, is that modern-day warfare is no longer limited to the two or three countries involved in the on-the-ground fighting. We live in a global economic community that is deeply intertwined and dependent on one another. One only has to look at how the Russia-Ukraine war has disrupted supply chains and the availability of raw materials. If there are positive outcomes for how the war affects the economy, they are not ones benefiting most independent business owners and the general population.

Wars and Global Trade Wars

Global trade wars happen when one country or a group of countries impose tariffs (taxes) or quotas (limits) on imports from another country or groups of countries. These tariffs and quotas create a domino effect where the countries they are designed to curtail retaliate with their own forms of trade protectionism. As a result, these global trade wars ultimately reduce international trade. In some instances, the trade limits and higher prices foster domestic growth and innovation, but in cases where raw materials are not widely available (crude oil, uranium, diamonds) or a country that cannot bootstrap “homegrown” solutions, global trade wars can create disastrous trickle-down effects including inflation and a general depression of economic growth. While global trade wars do happen without the influence of war, they are another example of how wars affect the economy. All too often, outside countries impose trade sanctions and boycotts as part of their efforts to quell the fighting and limit the power of the aggressor. These mechanisms are the most extreme forms of tariffs and quotas and, when used against countries like Russia, can create economic instability worldwide.

Photo of container ships docked at a port.

How Wars Affect the Economy: Shipping Services

Shipping services are critical in keeping the global economy moving. Unfortunately, the Russia-Ukraine war has severely impacted all shipping, including international cargo shipping via ocean transport, air freight and travel, and land transportation by rail and vehicles. Shipping routes have been destroyed or cut, and many transportation firms are curtailing services or experiencing significant delays. As a result, shipping rates have skyrocketed. In addition, some freight and transportation insurers have exponentially increased premiums due to the dangerous conditions at many shipping ports and transportation hubs in areas experiencing bombing and active fighting.

If those conditions weren’t bad enough, citizens of Russia and Ukraine comprise nearly 15% of the seafarers in the global shipping workforce. As a result, shipping companies around the globe are now dealing with a significant employee shortfall in hiring and retaining crew members due to the war.

How Wars Affect the Economy: Oil Prices

Regardless of where a person lives, everyone has been impacted by rising oil prices. While the current Russian-Ukraine has disrupted the oil supply chain from Russia and created a global trade war, this is not the first time the United States has experienced sticker shock at the gas station. The Gulf War of 1990, which involved Iraq attempting to annex Kuwait, increased oil prices. Prices more than doubled in three months, from $21 to $46 per barrel. When a country is a major oil or natural gas producer, sanctions and supply chain disruptions put pressure on gas prices, regardless of where one lives. For countries that are major oil/gas producers, this is another example of how wars affect the global economy.

Psychological Costs

While it’s possible to estimate how war affects the economy and its associated costs, it is much harder to determine the psychological impacts and how the pain, suffering, and fear can traumatize soldiers and civilians. This personal and collective trauma ultimately affects how a country is or is not able to recover and rebuild when the conflict ends. Some countries, such as Germany, Vietnam, and Rwanda, exhibited remarkable resiliency following prolonged and horrific wars and were able to rebuild. However, there are still many places throughout the world where wars have only brought more violent conflicts and increasing levels of destabilization and economic insecurity for people residing in those areas.

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