Through history, wars have been fought among nations and between factions within the same national boundary. Several countries including the United States (U.S.), Korea, and Britain have experienced civil war within their borders. Moreover, almost every country in the world has had physical confrontation with another country or countries. The World War I and II, the U.S. invasion on Iraq and the Cold War are some of the few examples of wars that have been fought beyond borders. Whichever the scenario, these wars have impacted upon the economies of the participating nations. What is more, wars have been advancing with years. Aspects of economic management have been applied in the events of wars with the intended goal of stimulating economies. Some economists argue that the World War Two helped nations to recover from the Great Economic Depression. All in all, war may “stimulate economic growth or weigh down a country with burdensome costs” (Francis).
Background of wars and economies
In history, several nations have engaged in war against each other. Normally, wars are funded by governments, or the treasury which get funds mostly through taxation. In the nineteenth century governments printed money to fund their military engagement in wars, notably the World War One and World War Two. In addition, they borrowed heavily from the public coffers. Worse is that these governments including the United States’ lacked comprehensive plans for reconstruction. As a result, these actions increased inflations in the economies leading to shortage of money supply and ultimately the Great Depression. Nonetheless, John Maynard Keynes economics emerged as a result of these events. It is was the Keynes’s hypothesis on money, interest rate and employment and creation of huge infrastructure such as spending on military that helped governments, more so the U.S., to step out of the economic recession during the World War II after implementing conducive fiscal policies. Elsewhere, the Korean War and the Vietnam War resulted ultimately into inflation. The effects of all these wars have had both beneficial and destructive contributions to the economies involved.
Benefits of war to the economy
Economists and historians have observed that wars contribute to the economy in terms of employment. The World War II, for instance, resulted to an increase in employment and growth of U.S. economy (War: Effects of War on the Economy). In fact, this war is linked largely to the development of the Keynesian economics, which is credited as having influenced greatly the United States’ formulation of the fiscal policies that saw it emerge out of the great Depression. Consequently, these policies contributed to increases in employment, high incomes, and redistribution of earnings as a result of outlays on military. In other words, the spending contributed to the rapid growth of the U.S. economy. Similarly, some critics of war have agreed that the Vietnam War bore some benefits where employment was boosted in the 1960s as a result of the war (Sandler and Hartley, 20). Obviously, war involves recruitment of service-men, which is a form of employment. Basic knowledge tells us that employment is one of the factors that stimulate economic growth. In addition, war builds economies not only due to the paycheck earned by the serving men and women in the battle fields but since it creates infrastructures for investment.
Government expenditures for basic war supplies boost certain sectors of the economy. It is common knowledge that military weapons including tanks, body armor, guns and ammunition are essential in most wars. The expenditure by the government on these items is beneficial to the relevant industry. Thus, not only does the manufacturing industry and other sectors of economy associated with it gains in terms of capital and revenues, but more employment is created. In addition, constant supply of food, medical services, clothing, and shoes – vital items for soldiers at war – are also significant to the growth of particular sectors of economy. It is estimated that out of the 3.1 % annual growth rate of the U.S. economy experienced in 2004, one percentage was as a result of outlays in defense (Francis). At the time, U.S. was engaged in war against terrorism where governments and nations suspected of involvement in terrorism were confronted by the U.S. soldier. It is widely believed that the World War Two created an opportunity for the U.S. government to “stimulate domestic demand” (Hoy).
The achievement of the desired goal of a war might boost an economy. For instance, some countries have engaged in war in order to secure borders with valuable resources that would be used as raw materials. Several opponents of the U.S. war against other nations, especially the war on Iraq, have argued that its engagement is to control their resources; and in this case oil. The advantage of having sufficient raw materials for the production sector is that importations are reduced, export sector is boosted, and jobs are created. The growth and development of the British economy has in the past relied to a large extent on the colonies they once possessed. The possession of these territories was through battles, most of which Britain won. Subsequently, their control increased their resource base including human capital that was instrumental in the growth of the industrial sector.
Deleterious effects of war on trade
War affects the economy in several aspects, more so, the exchange of goods and services. Trade, which is the exchange of goods and services, is one of the components of economy. Its disruption reflects directly on the economy; in other words it would be impossible to talk of an economy without trade. The nature of wars is diverse; and through history there has been no evidence where war results to a complete stall of the economic activities. Nonetheless, war curtails the process of exchanging goods and services. Generally, therefore, the expectation for reduced trade is slow growth of the economy. A weaker economy has fewer employment opportunities.
War, especially civil war, places a country at a disadvantage in regard to trade with other nations. It causes phantom destruction of resources including material possession that are useful in growing an economy. On top of that, it creates an environment that is non-conducive in conducting day to day activities that are essential for an economy to grow. So a country is left with an option of seeking external assistance and importing. A lot of imports with no much to export would substantially hurt an economy; and result to an increase in economic deficit.
It is worth to note that war also creates uncertainty in an economy. Consequently, business investments and consumer spending are slowed down. The ultimate result of an economy with less participation by the people in consumption and investment is stalled growth.
How spending on military hurts the economy
Gains on the economy experienced as a result of war are short term, and prolonged spending on military normally hurts the economy. In the short-run, military outlays provide stimulation to the economy. These outlays create a rise in demand that contributes to increased GDP output and employment. Nonetheless, these benefits are usually experienced for a while before high inflation starts to bite on the economy.
Increased inflation rates have a profound effect on the sectors of economy that rely heavily on interests. It is worth to note that higher inflation rates cause long term interest rates to shoot up. Consequently, sectors such as the bank, securities, fixed-investment, housing, and other areas that depend significantly on interests would be significantly hurt in the long-run. The U.S. wars and military outlays have caused a reduction in vehicle production. In a study conducted by Global Insight on the Iraq war and its consequences to the U.S. economy (Center for economic and Policy research), the projection was that “non-residential” and “residential fixed investment” would drop by 1.0 percent and 1.3 percent respectively as a result of high interest rates caused by expenditure on war (6). The study further links the war to the increased long-term interest rates. Furthermore, higher rates of interest also affect the industrial production.
Higher interest rates have the tendency of raising the value of the local currency which would affect the export and import sectors. Higher currency value would make imports cheaper while reducing the competitiveness of exports. Therefore, people in the affected country would purchase more imports while the exports decline. The resultant effect of feeble exports and elevated imports is an increase in the “current account deficit” (Center for economic and Policy research, 4). Subsequently, the affected country treasury would be forced to seek assistance thereby increasing its foreign and public debt burden.
The most disconcerting drawback regarding the impact of war on an economy revolves around the rapid increase of public debt. In America, for instance, there was a huge public debt in the 1970s that was linked mostly to war. At that time, the government treasury allocated a lot of funds to the defense operations while at the same time allowing significant tax cuts. In addition, the 1990s saw the United States incur very high public debts, which were caused mostly by its war (War: Effects of War on the Economy). High levels of public debts results in rise in actual interests rates, slows down the buildup of private resources, and limit to standards of living (International Monetary Fund). So accumulating debts to a level which is unsustainable is unhealthy to the economy.
Military spending is normally perceived to create employment, nonetheless, in a typical economic model, loss of jobs is inevitable. With wars and military spending, resources are diverted from their uses, where in normal economic models the market dictates the direction to go. As a result of this redirection, the economy operates below the optimal level thereby leading to slower economy growth and reduced employment. All in all, the rise in interest rates is the main cause of job loss and sluggish economy.
Table 1: Loss of jobs in the United State as a result of military spending on Iraq war
|5 years||10 years||15 years||20 years|
(Adopted from Center for Economic and Policy Research, 7)
War and the price of Oil
Most economies depend on oils as a commodity. Almost all sectors of any economy rely on oil. It is used in the transportation industry including cars, trucks, ships, and aircrafts; in the manufacturing industry; and in production of many goods as well as in provision of several services. The prices of oils have been linked to the performance of economies around the world.
When countries with large economies such as the United States engage in war, they create a huge demand for oil; the military operations definitely requires substantial supply of oil to operate the tanks, military trucks and cars. As a result of this demand, the prices of oil go up. Since oil is vital, occurrences of such wars have the debilitating impacts of increasing the costs of production and commodities as well as the cost of living standards. Higher oil prices means less money in the people’s pockets which is not healthy for an economy.
Wars have been a reality. They have been fought through history, and nations as well as interest groups continue to engage in wars to date. It is vital to note the consequences of war, more so to the economy, which dictates the standard of living to the population it serves. Mostly, wars fought between nations are funded by the government. Therefore, the treasury must establish ways to ensure money is available. Borrowing from the public and outside sources are some options. Elsewhere, nations experience civil wars that occur within their borders. All in all wars have both positive and negative impacts to an economy. The benefits range from stimulating an economy to creating jobs. However, the long-term effects are debilitating and may lead a country to economic turmoil – typically slower growth of economy, higher trade deficits, fewer investments, and less employment.
Baker, Dean and Center for economic and Policy research, The Economic Impact of the Iraq War and Higher Military Spending, (2007). Web.
Coates, Ben, The Impact of the English Civil War on the Economy of London, 1642-50, Ashgate Publishing, Ltd., London, 2004.
Francis, R. David, The price of war and peace for US economy, (2002). Web.
Geiger, Till. Britain and the Economic Problem of the Cold War, Ashgate Publishing, London, 2002.
Hoy, Greg, Impact of war on economy, Transcript, 2003.
International Monetary Fund, World Economic Outlook 1996, Focus on Fiscal Policy.
Sandler, Todd and Hartley, Keith The Economics of Defense, 1995.
War: Effects of War on the Economy, The Oxford Companion to American Military History, Oxford University Press, Inc., 2000. Web.