If we look at history, war has done little to no good for anyone. They come with a heavy cost to pay. And we don’t simply mean the economic cost but also the human cost. It’s hard to account for the true human cost, from losing your family members to losing your home city. With the current war between Ukraine and Russia, not only citizens of those countries were impacted, rather the entire world experienced its impact. In this article, we will look at how war impacts the economy.
Inflation
In most cases, war leads to inflation. The infrastructure is most likely to be damaged hence reducing the overall country’s ability to manufacture and export goods. Infrastructural damage also directly hits the import capability of a country. This will directly raise the price of goods and commodities. Loss of infrastructure directly links to job loss. Also, many people migrate to different countries as well.
During the second world war due to the economy being nearly at capacity, high levels of government expenditure, and a labor shortage there was an increase in inflation in the United States. Cost-push inflation can occur during a conflict as a result of a lack of products and services and increased prices for basic commodities like oil.
Higher oil price
Oil by far is one of the most important resources for a country. Russia is one of the largest oil exporters. Since the beginning of the war, the oil export took a hit. This meant a shortage of oil supply in other countries. For a common person, it would mean a higher fuel price. This will increase the transport cost for goods suppliers and if the fuel cost is not brought down then it would mean a rise in commodities prices as well.
To make the situation worst, the economic sanction laid by countries makes things even more complex. This reduces the market size for the nations to import their oil and thus increases oil demand which in turn increases its cost.
A country’s debt
There is hardly anything to win in a war but a lot to lose. The war cost money, a ton of it. Ammunition, food supply, and fuel supply drastically increase in a short period. This forces the country involved in the war to borrow large sums of money in a short period. This can exponentially increase a country’s debt.
Increase in Interest rates
During times of inflation and recession, the banks increase their rate of interest. This means it will cost you more to borrow money from the bank. We have written a dedicated article on the recession, to know more click here.
Increasing rates in banks is a thin line to balance. By doing so it can help to control inflation due to war. But if the rates are increased beyond a certain value it can further push the country into debt. That could make people lose trust in the banking system and more and more people will start to withdraw money from banks.
Risk of deglobalization
Today we live in a world of globalization. This means every country is dependent on each other in one or many ways. Some are major oil exporters while some are major food exporters. Some lead in technology while others in manufacturing. With the current example of the Russia and Ukraine war, Russia is a major oil exporter. With weeks oil supply reduced drastically impacting almost every country. Let’s say a country is a major food exporter, but as the full price has increased it will export food at a higher rate and this will set off a chain reaction.
Deglobalization simply means a less interconnected world. Here every country tries to self-produce its necessities. It may sound good on paper but it simply isn’t practical. Natural resources are distributed based on geography. In addition, if a country is technologically dependent then it cannot become independent overnight. Deglobalization will simply do more harm to the economy and eventually, people’s life and this is one of the major risks in a war situation.