The Economic Fallout of Warfare: Why War is Bad for the Economy
War has profound and far-reaching consequences, and one of the most significant impacts is its adverse effect on the economy. While it may seem counterintuitive that governments and nations spend enormous sums on their military endeavors, the economic costs of war are often underestimated.
In its recent article, “Israel’s war economy is working—for the time being”, The Economist
discusses the negative economic impact the war between Israel and Hamas is having on Israel’s economy. The article notes how the Israeli shekel has depreciated significantly against the U.S. dollar, reaching its lowest level in over a decade. To stabilize the currency, Israel’s central bank had to sell $30 billion in foreign-exchange reserves.
War is expensive. Governments must allocate a substantial portion of their budgets to finance military operations, including personnel, equipment, and logistics. These expenditures are funded through taxation or borrowing, which can lead to increased national debt and higher interest rates. High levels of public debt can hamper economic growth and burden future generations with the responsibility of repayment.
The Economist notes that for Israel, the cost of insuring the country’s debt against default has sharply increased, and many businesses, from builders to restaurants, have been forced to shut down due to the ongoing conflict. In response to these challenges, the finance ministry unveiled plans to increase defense spending and provide support to those who lost their jobs. The central bank also revised down its growth forecast for the year from 3% to 2.3%.
The Economist points out that war is not just fought by military forces but also by economic ones. Israel’s previous clashes with Hamas, especially since its withdrawal from Gaza City in 2005, did not pose a significant threat to the country’s economy, which has traditionally boasted one of the highest incomes per person in the Middle East.
However, the scale of Hamas’s recent attacks and the expected duration of the conflict have raised concerns among economists. It draws parallels with historical instances such as the 1973 Yom Kippur War, where the cost of weapons and mobilizing army reservists brought Israel to the brink of financial collapse. It also references the 2002 intifada, a period of Palestinian uprisings that cost Israel 3.8% of its GDP.
The Economist notes three key challenges facing Israeli officials:
- Employment: The mobilization of over 360,000 reservists, including many productive tech workers, has created a labor shortage, and replacing these workers is difficult. War takes a toll on the workforce. Young, able-bodied individuals who would typically be contributing to the economy are drafted into the military or become war casualties. This results in a loss of human capital and a decrease in labor productivity. Additionally, the psychological and physical trauma experienced by veterans can lead to long-term economic costs in the form of healthcare and support services.
- Collapse of Private Consumption: People have changed their consumption habits due to fear and uncertainty, with restaurants and shopping malls remaining empty, and tourism, a significant part of Israel’s economy, coming to a halt.
- Managing Fiscal Costs: Rescuing businesses, compensating reservists, and accommodating displaced populations will require substantial financial resources. An increase in defense spending is necessary to finance a ground invasion and stockpile weapons.
While Israel’s debt-to-GDP ratio remains relatively modest, the longer the conflict persists, the more economic risks grow. The primary deficit is expected to jump significantly in 2024, with rising costs of borrowing and a deteriorating tax base. The article concludes that conflict is draining labor, capital, and expertise from Israel’s economy faster than it can be replaced, posing significant economic challenges alongside the military ones.
War has profound and detrimental economic consequences that extend beyond the battlefield. The diversion of resources, government expenditure, human capital loss, infrastructure destruction, trade disruption, economic uncertainty, inflation, and fiscal sustainability issues all contribute to the economic costs of war. Understanding these costs highlights the importance of diplomacy, conflict resolution, and peacekeeping efforts to maintain economic stability and growth. In the long run, nations and economies fare better without the burden of warfare.
The Peace Economy Project is dedicated to educating the public about the negatives of an unchecked military-industrial complex because we firmly believe in the intrinsic value of peace. We understand that the unchecked growth of the military industry complex not only diverts precious resources from vital social and humanitarian needs but also perpetuates a culture of conflict and aggression. By shedding light on the detrimental consequences of excessive military spending, we aim to promote the idea that redirecting these resources towards peaceful initiatives, education, healthcare, and sustainable development can pave the way for a more harmonious world where the dividends of peace benefit all of humanity.
