The Economic Effects of Wars
- Sajeel Bhat
- May 25, 2022
- 4 min read
Updated: Jun 11, 2022
History has shown time and time again, the devastating economic effects of regional conflicts and large-scale wars. However, to quantify these effects, this essay will examine two specific events — firstly, World War I (WWI) which was responsible for the death of 20 million people, and the Kashmir conflict in India, which has been raging on since the 1947 partition between India and Pakistan and has since resulted in the death of over 48,000 Kashmiris. This periodical will explore the similarities and differences of economic effects that arise from regional and world wars.
Regional conflicts generally cause similar adverse effects to that of wars, however, the spillover from conflicts onto the global economy are minute in comparison to that of world wars. Conflicts lead to the destruction of infrastructure and human capital and disrupt normal economic activities. Even worse, violence creates uncertainty about the future of the region leading to drastic reductions in investment which constrains growth and investment. Furthermore, the poor provision of education and infrastructure at such times also damages the potential growth rates as the workforce will become less skilled and firms’ production process will become less efficient, reducing the total factor productivity of the regional economy.
The Kashmir conflict, unfortunately, serves as a perfect example of a regional war with devastating economic implications. On August 5, 2019, the Indian government stripped the region of its special status (which granted the state of Jammu and Kashmir a special autonomous status within the Indian union) and placed it under a communications lockdown. Jammu and Kashmir had their internet shut down for 213 days from August 2019 to March 2020, causing a large shortage of skilled labour as more than 400,000 migrants left the region during the period. Kashmir’s famous apple market had done business worth $197 million in the year previous and accounts for approximately 15 percent of GDP, the lockdown meant that more than half of the year's produce did not get plucked, causing businesses to incur large losses. During the latter period of the lockdown, COVID-19 surged, which had a particularly adverse effect on the educational outcome of students in Kashmir. Although many students across affluent areas in India were able to access online learning, such a luxury was not afforded to the majority of students in Jammu and Kashmir, which amounted to 1.5 million. The true effect of such poor education in Kashmir will only be seen in the future as this generation becomes the working population of the region. Estimates for the total economic loss as a result of this lockdown were placed at £4 billion, with the loss of 500,000 jobs. The cost of this lockdown only shows a snapshot of the overall economic effects of a 70-year-old conflict which is still ongoing.
World wars, on the other hand, multiply the effects of such regional conflicts and hold far larger opportunity costs. For example, the defence and military sectors are predictably prioritised and receive large portions of government spending, leaving other sectors at a detrimental state. Such funding comes from governments building up large national debts which are usually repaid after the war by taxpayers in a period of acute austerity. Wars also induce inflationary pressures which can be pinned down to wide-scale supply disruptions.
World War I lasted from July 28, 1914, to November 11, 1918. For example, the UK incurred more than 715,000 military deaths. The national debt of the UK government jumped from £650 million in 1914 to £7.4 billion in 1918. The British government borrowed from the US and sold war bonds, which were paid off only recently, in 2015. Following the war, the unemployment rate surged, averaging at 11.50 percent during 1921-1922. However, such mass unemployment was mainly cyclical as the government employed contractionary monetary and fiscal policy. The Bank of England’s base rate increased to seven percent in order to curb the high inflation rate during the war — in 1917, inflation peaked at 25.20 percent, and lowered only slightly into 1918 when it hit 22.00 percent. At the same time, government spending was cut by 75.00 percent in 1920 in order to repay the national debt. These policies caused Britain to experience deflation; in 1922 the inflation rate dropped to -14.00 percent. However, many argue that such deflation was necessary in order to attract savings into the country after the post-war period of high inflation. This was especially important as the US dollar became increasingly attractive in comparison to the British pound, which would further drain the UK with already low investment levels.
As shown by both examples, regional and world wars are disastrous for the regional and world economy. In 2019, the Institute for Economics and Peace placed the economic cost of violence and conflict at $14.4 trillion, equivalent to $1,895 per person.
However, it may not be all bad news. World War II (WWII) is in fact accounted for ending the Great Depression, increasing the world GDP, and reducing income and wealth inequality across countries. High levels of demand for labour meant that anyone seeking employment regardless of their skill level found immediate employment. Furthermore, extremely high income tax rates after WWII took larger proportions of income from the rich and allowed for a more equal distribution of income. The fall in inequality is supported by the fall in the Gini coefficient (an index which measures inequality) of major economies such as the US whose Gini coefficient dropped by seven to 10 points on a scale of one to 100. The graph below shows the percentage of income owned by the top one percent of the country.
Figure 1: Top 1% income shares in four countries, 1935-1975 (% of income).
It is clear to see as the US economy moves past WWII and into the 1950s, there were significant reductions in the income held by the top one percent, providing clear evidence for improvements caused by the war and the structural changes within the economy that followed thereafter. However, it is important to note that although the war did lead to these positive economic changes, they can be and should be arrived at through policy changes in normal economic circumstances and shouldn’t necessitate the need for such human suffering. As shown through the examples of the Kashmir conflict and World War I, regional and world wars have very similar economic effects however the magnitude of those effects is amplified in world wars.
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