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Do Wars bring Economic growth and development?

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Written by qasim

Do Wars bring Economic growth and development?

What does Economic growth mean? It’s an increase in the amount of goods and services produced per head of the population. There is a difference between development and growth. Economic growth can be without development but development can’t be without the growth. Development means investing in amenities such as Health and Education. So coming to the main point, Do wars really affect the economic growth and development. There are multiple answers and opinions regarding it.

Economics is the Study of Economic Growth And Economic Development.

I would like to quote an example of one of the least developed countries with low middle income, Pakistan.

Pakistan has been the hot favorite alley for different countries in the past. After the 9-11 attack, the USA started a war against Terrorists in Afghanistan. Since Afghanistan is in a neighborhood of Pakistan, the USA needed the support of Pakistan to fight and defeat them. So for this purpose, USA gave ransom amount of aid to Pakistan for its military. So during these years, Pakistan’s Economy was boosting at a rapid rate and GDP was thriving at a 7.55% rate. This means that war affected Pakistan’s economy positively, but the Government didn’t invest in necessities or to eradicate poverty so it remains one of the least developed countries.

Wars also bring an increase in spending on Military goods. Heightened military spending during conflict creates employment, additional economic activity and contributes to the development of new technologies which can then filter through into other industries. These are some often-discussed positive benefits of heightened government spending on military outlays. One of the most commonly cited benefits for the economy is higher GDP growth.

Whether the largest economies in the world can affect world economics?

However, there are many disadvantages of wars. It can fund the war in a combination of three ways:

  • Increasing taxes
  • Decrease spending in other areas
  • Increasing the debt

Increasing taxes reduces consumer spending, which does not help the economy improve. Suppose we decrease government spending on social programs. First, we’ve lost the benefits those social programs provide. The recipients of those programs will now have less money to spend, so the economy will decline as a whole. Increasing the debt means that we’ll either have to decrease spending or increase taxes. Plus, there are all those interest payments in the meantime.

If you’re not convinced, imagine that instead of dropping bombs, the army was dropping refrigerators in the ocean. The army could get the refrigerators in one of two ways:

  • They could get every Russian to give them $50 to pay for the fridges.
  • The army could come to your house and take your fridge.

 

Does anyone seriously believe there would be an economic benefit to the first choice? You now have $50 less to spend on other goods, and the price of fridges will probably increase because of the added demand. So you’d lose twice if you were planning on buying a new fridge. The appliance manufacturers would love it, and the army might have fun filling the Atlantic with Frigidaires, but this would not outweigh the harm done to every Russian who is out $50 and all the stores that will experience a decline in sales because of the decline in consumer disposable income.

As for the second one, do you think you’d feel wealthier if the army came and took your appliances? That idea might seem ridiculous, but it’s not different from increasing your taxes. At least under this plan, you get to use the stuff for a while, whereas with the extra taxes, pay them before you spend the money. So in the short run, a war will hurt the economies of a country and its allies.

 

We summarize different periods of Wars and economic conditions below:

  • World War II was financed through debt and higher taxes, by the end of the war, U.S. gross debt was over 120% of GDP and tax revenue increased over three times to over 20% of GDP. Although GDP growth skyrocketed to over 17% in 1942, both consumption and investment experienced a substantial contraction. One of the key causes was government control of raw resources and materials. Trend lines taken from before the war and dating from 1933 onwards show that for investment, consumption, and GDP growth there was no increase in the trend lines after the war had finished. While it virtually eliminated unemployment was virtual, recovery was well underway prior to the war, and the key counterfactual is whether similar spending on public works would have generated even more growth. The stock market initially dropped and once victory was foreseeable, then rose to be higher than at the start of the war.
  • Higher tax rates largely financed the Korean War with GDP averaging 5.8% between 1950 and 1953 with GDP growth peaking at 11.4% in 1951. During this period, however, investment and consumption stalled. The government needed to implement price and wage controls in response to inflation which had increased because of the additional stimulus that was created by government spending. Notably, both consumption and investment resumed growing after the war; however, the growth was below the trend rate prior to the war. The stock market rose during the war.
  • The Vietnam War was unlike World War II and the Korean War, as it ramped up slowly with American troop deployments starting in 1965. Increases in tax rates funded this war, but also with an expansive monetary policy which then subsequently led to inflation. Increases in non-military outlays also had a role to play. Unlike prior wars, consumption remained unaltered because of expansionary monetary policy although investment fell during the war. Again, as with the two prior wars, GDP growth increased and peaked at 7.3% of GDP in 1966. At the beginning of 1965, the Dow Jones index was at 900 and it wasn’t till after October 1982 that it stabilized above the 900 marks.
  • We can categorize the Cold War period as running from the late 1970s through to 1989. This period saw sustained increases in military spending alongside tax cuts which then resulted in a blowout in the budget deficit. Although there was a boom in consumption a combination of increased deficit spending and higher government debt which also caused interest rates to increase fueled it. A substantial trade deficit, and a bull run with the Dow Jones index, also accompanied this increase from 1,121 in February 2003 to 2,810 in January 1990.
  • The Afghanistan and Iraq Wars were accompanied by weak economic conditions right from their beginning and corresponded with the bursting of the high-tech asset bubble which led to the 2001-2002 recession. This was also the first time in U.S. history where taxes were cut during a war which then resulted in both wars completely financed by deficit spending. They also implemented a loose monetary policy was also while they kept interest rates low and they relaxed banking regulations to stimulate the economy. These factors have contributed to the U.S. having severe unsustainable structural imbalances in its government finances.

So in short, war has more harmful effects on the economy than it has any positive ones. We witness history whenever there is a war, the economy of that country is harmed and faced serious consequences.

“There was never a good war or a bad peace.” -unknown.

Courtesy,

Hassan Raza Qaisrani

 

 

 

 

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