Why war does not pay for democracies

Published August 13, 2002

LONDON: War has been good for the United States economy. Only Vietnam bucked the trend that held sway from the Civil War to the Gulf conflict.

The Second World War rescued the country from the ravages of the Thirties depression. Between 1942 and 1945, the economy grew by an annual average of 7.7 per cent as idle resources were mobilised for military purposes.

Production of new ships was so rapid that they ran out of names for them. As Niall Ferguson, the Oxford University historian, points out in his book, The Cash Nexus, ‘The biggest American boom of the twentieth century occurred not in the much-vaunted Clinton era, but during the Second World War’.

Even the Clinton boom, supposedly the result of the ‘peace dividend’ from victory in the Cold War, has its foundation in successful militarism. US economists such as Robert Shiller suggest an intrinsic part of the rapid economic growth and stock market bull run in the Nineties was ‘triumphalism’ over that success and winning the 1991 Gulf War .

Whatever rationale is promulgated for war, it’s usually not hard to see in it some sort of competition for scarce resources. So war is, at least partially, an economic phenomenon.

A recent World Bank study refers to the ‘curse of natural resources’. More often than not, these putative building blocks of economic advantage — gold, oil, diamonds, metal ores, arable land — precipitate scraps in the host country.

The days of overt land seizures, such as Prussia’s lunge for Silesia in the eighteenth century and the East India Company’s takeover of South Asia, may have faded. But the civil war in the Democratic Republic of Congo is centred around mineral-rich areas, and the fighting has attracted the attention of the armies of several neighbouring countries.

This prospective sequel to the Gulf War, whatever the official rationale, is spoken of by economists as a means to secure a co-operative guard over the world’s second largest reserves of oil. Indeed, as well as the psychological boost provided by the Gulf war victory, the presence of 6,000 Allied troops in Saudi Arabia, the keeper of the oil production surplus and engine of the producers’ cartel, helped to temper prices — sending them as low as $8 a barrel of crude oil in 1990 — and boost the world economy.

Oil is still a vital issue, particularly for consumer confidence and business profitability. But, as the World Bank has discovered for developing countries, access to oil is not always the trump card it seems.

So has war proved a profitable endeavour? Napoleon achieved a healthy return on his adventures in the early nineteenth century. His campaigns of 1806-7 ‘were not only self-financing but covered at least a third of ordinary French government expenditure’, writes Ferguson. The reparations forced on losing powers in the twentieth century wars came nowhere near covering the war burden.

The Axis powers were asked to stump up $7 billion, less than 5 per cent of the combined war expenditure of the US and the UK. Russia failed to squeeze much value out of East Germany.

“For democracies, the lessons of history are clear: war does not pay. The economic costs of war are always likely to outweigh the benefits of subsequent reparations,” he says.

An autocracy, however, can always pass the cost of misadventures on to the suffering populace. Wars do have side effects and unintended consequences, however.

Mark Harrison, an economist at Warwick University, says there are three countervailing forces that determine the overall effect of large-scale war on the global economy — the Keynesian boost to effective demand from higher defence spending, the impact on the oil market and the collapse of co-operative economic institutions.

“In general, wars are good for demand because the government has clear and pressing demands, and floods markets with contracts. But, at least initially, it’s bad for confidence.

The postwar period saw the world economy grow faster than the sluggish depression of the interwar years, and also faster than the pre-war years, helped by new trade, monetary and financial institutions, and by Marshall aid from the US.

“Little wars can have more unintended consequences than you might expect. Vietnam was part of what created and transmitted the inflationary pressures of the early Seventies.

“It is the context of what made Opec important and (helped to bring about) the collapse of the Bretton Woods system of exchange rate management,” he says.

The Korean war, conversely, had ‘unintended positive consequences’ because it launched East Asia on its upwards economic trajectory.

Do wars bankrupt countries? History shows that economic ruin does not happen during wars, but after them. Hyperinflation reins in defeated countries — as it did in Eastern Europe and Germany after the Second World War — because losers have to rebuild, and don’t have the institutions to do so. Ferguson believes that development of efficient bond markets can greatly aid military victory.

This is just one of many uncertainties of war in the twenty- first century- along with a substantially bigger one, as Harrison points out: “A war against Iraq isn’t like the First and Second World Wars in its economic effects unless it triggers a huge conflict. Though, it should be noted that those wars started off by dealing with enemies one at a time.”—Dawn/The Guardian News Service.

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