End beneficiaries of the war economy

While wars ultimately hit the economies of the countries at war, the sudden economic activity can push growth in the short term.
For representational purposes
For representational purposes

KOCHI: War is a racket. It has always been. It is possibly the oldest, easily the most profitable, surely the most vicious. It is the only one international in scope. It is the only one in which the profits are reckoned in dollars and the losses in lives.

Nothing much seems to have changed since Major General Smedley Butler, one of the most decorated US marines of all times, wrote his hard-hitting treatise ‘War is a Racket’ in 1935. Wars continue to break out and a select few stakeholders of the war economy keep profiteering from mass human suffering, even as the countries that go to war suffer huge economic setbacks. Conflicts can also trigger supply shocks and hit trade, thereby denting the world economy.

While wars ultimately hit the economies of the countries at war, the sudden economic activity can push growth in the short term.

How it works

The characteristics of a war economy are increased military spending, higher utilization rates of labour and capital, production and sale of military equipment, and other goods and services needed for war. It also encompasses the economic activity generated by the military, such as the construction of military bases and the provision of logistical support to troops.

Armed conflicts also generate employment opportunities in the defence industry and other sectors that support the military. Government spending invariably benefits military contractors, armament manufacturers, and allied sectors that supply arms to the military. For example, the Israel-Hamas conflict has led to a surge in demand for weapons and military equipment, benefiting Israeli defence firms such as Elbit Systems and Rafael Advanced Defense Systems. Elbit has developed a precision munition system called Iron Sting for the IDF to target specific Hamas targets. Iron Sting is said to have the ability to penetrate double-reinforced concrete, making it an ideal weapon for urban warfare. Rafael has teamed up with American firm Raytheon to set up a new facility in Arkansas in the US to produce the Tamir missile for the Iron Dome Weapon System and its US variant, SkyHunter.

Stakeholders of armed conflicts

Apart from the government, defence companies, and military contractors, commodity dealers are also big stakeholders in war. Conflicts usually lead to a shortage in the supply of commodities and these dealers come into play, leading to higher prices for consumers and higher revenues for the traders. The four big commodity traders—ADM, Bunge, Cargill, and Louis Dreyfus—have seen large profits as a result of the war in Ukraine and rising food prices.

Similarly, military contractors—businesses that supply products or services to the military –benefit immensely from armed conflicts. For example, companies that supplied arms and weapons to the coalition forces during the Iraq war, such as Bechtel, KBR, Blackwater and
Halliburton were accused of overcharging for their services.

Then there are politicians, who use wars to rally public support and gain political capital. By coincidence or design, both Russian President Vladimir Putin and Israeli Prime Minister Benjamin Netanyahu have managed to deflect attention from other burning domestic issues and bolster their image as war-time leaders.

Risks of ongoing wars

Two wars are raging currently in different parts of the world. Russia launched a full-scale invasion of Ukraine on February 24, 2022 and the war is still on. Israel’s offensive against Hamas in Gaza started after the militant outfit killed over 1,400 Israelis on October 7 this year. While the Russian-Ukraine war has impacted the world economy by disrupting food supplies and causing oil prices to soar, the Israel-Hamas war is still in its early days to know if it poses significant geo-political risks.

Impact on Israel economy

The war has already hit Israel’s economy with the shekel sinking to its lowest level against the dollar in more than a decade, prompting the country’s central bank to sell $30 billion worth of foreign exchange reserves to prop up the currency. Many businesses have shut shop, forcing the government to provide for those pushed out of work. While experts predict a slowdown for Israel’s economy this year, the country has tremendous experience in fighting costly wars and coming out of it. Even now, its defence industry is going strong. According to recent data released by Israel’s defence ministry, the country exported a record $12.5 billion in defence products in 2022 with its new Arab partners—UAE, Bahrain, and Morocco—under the US-sponsored 2020 Abraham Accords accounting for 25% of the business.

Russia still going strong

Russia has paid the price for invading Ukraine as it was diplomatically isolated internationally and slapped with sanctions. However, Moscow has also gained economically from the conflict, earning billions from selling energy despite sanctions. In September 2023 alone, it pocketed $7 billion from selling oil.

According to the Washington-based Center for Strategic and International Studies, Russia made a mockery of sanctions and the oil price cap imposed by US-led Western governments by gaming the system. It found new intermediaries to sell its crude oil and traded in local currencies bypassing the dollar. In order to avoid sanctions, the sellers of Russian oil adjusted their pricing by inflating shipping and other costs to keep headline-free-on-board prices below the $60 per barrel cap. Russia’s GDP is expected to expand by 2.2% this year, according to the International Monetary Fund’s most recent prediction. This is a huge upward revision from IMF’s February forecast, which said Russia would grow by just 0.7% in 2023.

Russia has increased its defence budget to 3.9% of GDP this year from 2.7% in 2021, the year before the invasion of Ukraine. According to projections, it will witness a 70% jump in 2024, reaching 6% of GDP. The actual figures could be much higher though because other types of war spending – such as new construction in the occupied territories – are hidden in the budget.

The US war on terror

The US, the world’s largest weapons manufacturer, and exporter, offers a classic example of the defence industry driving foreign policy. The US defence industry spent $144 million on lobbying and donated over $22.6 million to congressional candidates in 2010. It is a matter of record that large defence firms such as Lockheed Martin, Boeing, BAE Systems, General Dynamics, and Raytheon clocked huge profits after the 9/11 Twin Towers attack period.

According to a report from the Costs of War project at Brown University, 20 years of post-9/11 wars in Iraq and Afghanistan have cost the US as much as $8 trillion. The figure includes Department of Defense Overseas Contingency Operations funding; State Department war expenditures and counterterror war-related costs, including war-related increases to the Pentagon’s base budget; care for veterans to date and in the future; Department of Homeland Security spending; and interest payments on borrowing.

The report notes that the costs of war, foreign assistance, and reconstruction by the US and its allies such as the UK, Italy, Australia, South Korea, and Poland, and non-US multilateral assistance would amount to an additional $174 billion.


What worries economists is the repercussions the two ongoing wars can have on the global economy. In its latest report released on October 30, the World Bank warns that an escalation of the Israel-Hamas conflict -- which comes on top of disruptions caused by the Russian invasion of Ukraine – could "push global commodity markets into uncharted waters".

Under the World Bank’s baseline forecast, oil prices are expected to average $90 a barrel in the current quarter before declining to an average of $81 a barrel next year as global economic growth slows. "Policymakers will need to be vigilant. If the conflict were to escalate, the global economy would face a dual energy shock for the first time in decades — not just from the war in Ukraine but also from the Middle East," World Bank’s chief economist Indermit Gill said.

The world today is highly interconnected. Therefore, any war in any part of the world will not only threaten the region where it is unfolding but will also send shock waves in the form of supply constraints and stoppage of trade and people movement.

No right-thinking leader will push his country to war as armed conflicts are sure to kill people, maim economies, disrupt lives, and leave life-long scars on the minds of the survivors. But, then, perspectives will continue to clash. And wars may happen again.

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