Economic impact of war

Putting aside the very real human cost, war has serious economic costs – loss of buildings, infrastructure, a decline in the working population, uncertainty, rise in debt and disruption to normal economic activity. Yet, from some perspectives war can also be beneficial in terms of creating demand, employment, innovation and profits for business. To a large extent, it depends whether the war takes place in your country or another.



Costs of war

War and inflation

In many circumstances, war can lead to inflation – which leads to loss of people’s savings, rise in uncertainty and loss of confidence in the financial system. For example, in the US civil war, the Confederacy struggled financially to meet the cost of the war. Therefore, they started printing money to pay soldiers salaries. But, as they printed money, the value of money soon declined. High inflation hits middle-income savers the most as they see the value of their savings wiped out.

Hyperinflation is often a result when the war ends. For example, with a devastated economy, in 1946, Hungary and Austria experienced the highest rates of hyperinflation on record.

War and National debt

During war we often see a rapid rise in public sector debt. The government is willing to borrow a lot more than usual because – there is patriotic support for the war effort.

Both the First and Second World Wars were very costly for the UK. In both cases, the national debt rose very sharply. In the post-war period, debt continued to rise due to reconstruction and the creation of the welfare state.


UK national debt rose to 150% at the end of World War Two – but then rose to 240% by the early 1950s. (However, this level of national debt was not a problem for the long period of economic expansion post World War.)

The UK relied on loans from the US during the Second World War and took many decades to pay them off.

For the US, which was not involved for the first two years, the rise in national debt was not as pronounced. The US profited from selling arms and equipment to the UK during the early years (though on generous lend-lease terms)

Financial cost of war

Although war can provide a temporary boost to domestic demand, it is important to bear in mind the cost of war. In particular the opportunity cost of military spending, the human cost of lost lives, the cost of rebuilding after the devastation of war. Also, it depends on the kind of war, how prolonged it was, where and how it is fought.

See: Cost of War

Cost of civil war

Civil war can have a devastating impact on the economic development of countries. Countries experiencing civil war will see a collapse in tourism, foreign investment and domestic investment. It can lead to shorter life-expectancy and lost GDP. A report entitled “Africa’s missing billions”  (Oxfam, 2007) estimates the cost of war in Africa has been equal to the amount of international aid. A country like the “Democratic Republic of Congo” has experienced a particularly difficult war, which besides causing the deaths of about 4 million people, has cost it £9bn, or 29% of its gross domestic product.

The report also notes that ongoing war and increased availability of weapons can lead to increase in rates of armed violence and organised crime.


This is an example of projected loss of GDP for Burundi during the civil war. It is calculated by an estimated pre-war trend of GDP and actual GDP. It shows that a decade of conflict is a major cause of falling GDP.

But, also it is worse than graph shows because, during war, a large percentage of GDP is spent on destructive military hardware. The decline in health services and education are likely to be even greater.

Aftermath of War?

War invariably leads a legacy of debt and an army of demobilised soldiers. After the Second World War, the debt was not a constraint to growth and we had one of the longest periods of economic expansions on record. (Post-War Britain)

However, the aftermath of war is not always so positive. The UK struggled after the end of The Napoleonic war and after the end of The First World War. In the 1920s, the UK struggled with a long period of unemployment – returning soldiers found very poor employment prospects. Yet, after the Second World War, the US and Europe experienced full employment.

The German economy was ravaged by the aftermath of the First World War and the demand for reparation payments. Struggling to meet reparation payments, Germany resorted to printing money – leading to hyperinflation. The discord around the German hyperinflation of the 1920s sowed the seeds for political extremism and future wars.

However, after the Second World War, the Allies didn’t make the same mistake. The US gave a generous aid to Western Europe – helping the rebuilding process and leading to the economic miracle of Europe, and Germany in particular.

Opportunity cost of war

It is worth briefly mentioning the opportunity cost of war. If a government spends an extra $300bn on military spending, that is $300bn that could have been spent in building hospitals and schools. According to a report by the Watson Institute (reported by Reuters), the cost of the Iraq War was $2 trillion.  This $2 trillion could equally have been spent on more constructive development projects.

Psychological costs

It is possible to estimate economic costs of war – cost of military, e.t.c. However, it is harder to estimate the psychological costs of war – the pain of death, suffering, fear and disability. A conflict can leave soldiers and civilians traumatised for the rest of their lives. In recent years, post-traumatic stress syndrome is more widely accepted, but putting a cost on how war negatively affects those involved, is difficult to do.

Economic benefits of wars

Just briefly war can have potential economic benefits.

  • Full employment
  • Higher economic growth
  • Increased rate of innovation as the government invests in new technology, e.g. development of radar/jet engine in Second World War could be used for peaceful purposes.
  • Change in social attitudes. For example, women entering labour market after First World war.

Domestic demand and unemployment

In the 1930s, J.M. Keynes advocated government borrowing and government spending to reduce the mass unemployment of the great depression. However, it was only the onset of the Second World War, where there was the political impetus to pursue sufficient spending. In both UK and US, the economy soon reached full employment – often with shortages in key areas as men joined the army.

Graph showing sharp fall in unemployment at the start of the First World War.

In fact, one side effect of the First and Second World War was the growth in female employment. In 1914-18, women took on jobs, previously the sole reserve of men; this helped to change cultural attitudes and gain women the vote, shortly after the end of the First World War.

Possible unemployment

However, at the end of major wars, there is the danger that returning soldiers may struggle to find employment. After the end of the First World War, there was a major economic slump, and returning soldiers struggled to find jobs which had been replaced during the war.


A sharp rise in unemployment after the end of the First World War. The Versailles Treaty which demanded reparations from Germany did not help as it contributed to lower trade

1960s economic boom

In the 1950s and 1960s, the US was involved in major conflicts in Korea, Vietnam and Cambodia. Military spending took an increasing share of GDP and was partly responsible for strong domestic demand and high rates of economic growth. Companies involved in the manufacture of arms saw a rise in demand and profit.

See: War and the Economy


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