Economic Cost of War

Readers Question: War may seem to benefit the economies of the first world countries which are rich to begin with, or countries which initiated the war. But does war benefit the economy of third world countries, for example, Iraq, Afghanistan, Pakistan? (from Economics of War) I think it is a mistake to see war as benefiting countries of the developed world. It is true that war often gives a boost to domestic demand. But, war invariably makes a country worse off. And it is important to remember the boost to domestic demand need not come from war. Costs of War include:

• Cost of servicing army / military
• Cost of Rebuilding destroyed areas
• Human Cost. In one sense you cannot put an economic cost on the personal loss felt by the families involved. But, in another sense you can put an economic cost on lives lost. It is a waste of a scarce resource labour; it reduces the productive capacity of the economy. This attempt may always underestimate the true social cost, but, there is a definable economic cost.
• Opportunity Cost. - The opportunity cost of going to war is what we could have done instead. The cost of the Iraq war estimated at $860 billion by end of 2009 (source: NY Times) could easily have funded health care reform or education spending. Education and better health care is investing in a nations future. It can increase the productive capacity of the economy which can lead to higher tax revenues in the future. War is generally not an investment in the productive capacity of the economy.
• Another opportunity cost is that the government have less funds to pursue expansionary fiscal policy in a recession. I don't believe the Iraq war caused the recession, but, the higher military spending did reduce the ability of the government to bailout banks and inject money into the economy when it needed to.
• Spending on military does increase domestic demand, but there is going to be significant leakage's as countries spend part of it abroad in areas where they are fighting. There are more effective ways to boost demand than fighting a war in foreign countries.
• War may also increase the cost of oil, (if temporarily) and this can worsen living standards.

Costs of War In Developing Countries.

• Clearly the cost of war is going to be much greater in the areas where the war actually occurs. Civil war has been one of the most significant factors in impoverishing many developing coutntires.
• There is also the cost of rebuiliding destroyed areas. The difficulty of attracting foreign investment into a former war zone.
• Often it depends on the nature of the war. Is the war short lived with a clear cut outcome? Or does the war drag on, with long held bitterness encouraging terrorist / guerrilla action.

Estimates of Costs Government estimations of war costs invariably underestimate the final costs. Also the costs are often spread amongst different budgets. E.g. the Iraq war led to higher health costs, higher widow pension costs e.t.c which didn't come from defence budget. There are also undefinable costs such as the lost human capital, the loss to trade and confidence. The divertion of resources from more productive areas such as education / transport. Interesting piece written by the great economist Kenneth Galbraith - The Economic Cost of War Published on Monday, March 24, 2003 by Boston Globe

Further reading

Cost of war