Yamarik, Johnson and Compton on War

As my students know, I question the common conclusion that the United States government’s economic response to World War II lifted the country out of the Great Depression.  I don’t believe that the United States has benefited economically from any war beginning with the Spanish American War and our wars were or are being fought off our shores.  My conclusion is more one-sided than the economic literature.

Yamarik, Johnson and Compton in “War! What Is It Good For? A Deep Determinants Analysis of the Cost of Interstate Conflict” (Peace Economics, Peace Science and Public Policy, Vol 16, No 1, 2010) write that

…there is no clear consensus on the economic consequences of interstate wars.One line of reasoning argues that war is harmful to the economy. Simply put, war kills people, destroys property, restricts trade, and retards capital formation. Marwah and Klein (2005) find that military expenditures reduced private investment and thus lowered the growth rate for the Southern Cone of Latin America. Blomberg, Hess, and Thacker (2006) estimate that major external conflict in the previous two years has a negative contemporaneous impact on growth. Sevastianova (2009) finds that international war has a negative impact on the one- and two-year growth rate, but an insignificant impact on the longer five-year growth rate. Glick and Taylor (2010) also find a negative short-run relationship between war and growth. They estimate that the indirect cost of World Wars I and II stemming from lost trade was even greater than the direct costs associated with the loss of life.

An alternative line of reasoning argues that the macroeconomic effect of war is ambiguous, or even positive. In the short-run, wartime expenditures increase aggregate demand and the level of real GDP.4 Military research and production can increase innovation and technological progress in the long-run (Alchian, 1963; Kuznets, 1964; and Ruttan, 2006). Similarly, war can eliminate distributional coalitions, thereby reducing rent seeking, especially for the “losers” of the conflict (Olson, 1982). For the U.S., conventional wisdom is that the Second World War saved the U.S. economy from an even longer depression and planted the seeds for future prosperity.

Their empirical research adds to the literature that concludes that war is bad for an economy.  They conclude

We find that a one standard deviation increase in fatality-weighted conflict results in an average reduction in real GDP per capita of between 0.09 and 0.14 of a standard deviation. Our estimate is consistent with common sense and is fairly stable across different specifications of our cross-country regression. Most surprisingly, these results suggest that the costs of war stay with a country much longer than is implied by previous studies. Even if an economy grows quickly after a war is over, our results imply that this will not be enough to return standards of living to where they would have been in the absence of conflict. War is more than a transitory supply shock, it permanently alters the economic potential of the country.

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Sevastianova on War and Economic Growth

In "WWII and the Economy," I hypothesized that war was not good for the economy and stated three conditions that I believed would not hold to "prove" my hypothesis in a type of proof by contradiction.  The conditions were that consumers do not mind the consumption of armaments, that the war is fought on foreign soil, and that little value is placed on the value of lost lives. 

Daria Sevastianova address the impact of war on a country's economy in "Impact of War on Country per Capita GDP: A Descriptive Analysis" which was published in Peace Economics, Peace Science and Public Policy, Vol. 15, 2009.  Her conclusion reads   

This paper applies empirical growth framework to study the effect of war on economic growth. We model growth over one, two-, and five-year time periods, as well as check robustness of findings with OLS and FE estimation. Along with a standard set of explanatory variables included in growth regressions, COW data on civil and international war are used to code war incidence during 1970-2000 in a panel of 90 countries.

Regression analysis demonstrates that the average effect of civil and international war is to decrease income growth. Civil war harms all economies, while international war might boost growth in some countries. The findings in this paper point to the fact that economies with low growth rates are involved in civil war, whereas faster growth economies are involved in international wars. In addition, the negative effects of war are more pronounced in the short run growth models based on annual and biannual data (where we find negative and statistically significant coefficients), whereas the effect of war on five-year growth rates is statistically insignificant. 

The study also provides a descriptive analysis of how civil and international wars affect income per capita level, where war incidence is plotted against real GDP per capita in a sample of countries. A visual examination of data corroborates the results of regression analysis: while civil war mostly reduces income, there is much more ambiguity in the effect of international war. Some countries, in fact, are able to sustain economic growth throughout the duration of war.

Preliminary results obtained from graphing war data on an individual country basis from 1970 to 2000 point to the fact that there is a considerable amount of variation in the economic effects of political instability. The impact of war appears to vary considerably with conflict severity, time period, and by country. The wide variation in these results warrants a more detailed multivariate analysis in order to ascertain how intra- and interstate conflict affects real income per capita. Focus on different levels of conflict intensity, as well as sample heterogeneity might prove productive for future investigation, where conflict data collected by political scientists are applied in the empirical growth framework.

The model that she employs is tested with data, making it more than a story like the one I told.  It does not directly contradict my conclusions although it demonstrates that some countries are able to sustain growth through a conflict.  For example, income could grow, but the availability of consumer goods could stagnate or decline.

In attempting to contact Sevastianova about her article, I found an interview taken from the Evansville Business Journal (EBJ), October 2008.  I liked her response to one question because it deals with a strange demographic in economics faculties, they are dominated by men.  When asked what she enjoys about her current position she replied

I like sparking people's interest in economics, and I really like it when girls see they can learn economics and are aware of all the various job opportunities there are in the field.

Hear, hear.
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