Every war we choose to fight costs us. The cost can be much greater than the benefit. We may then erroneously conclude that peacetime brings prosperity. But that conclusion would also be false.
War has an economic burden that must be weighed against the future benefits that the war may bring. War destroys capital that has been accumulated through prior economic activity. The true purpose of war, however, is not to destroy prior economic activity, but to gain from it.
Defence economics is an area of national defence that concerns itself with the economic costs and benefits of military expenditure. This encompasses the management of economics in wartime as well as peacetime. Even in peacetime, defence spending can take up a sizeable portion of government expenditure.
Reconstruction after war can lead to either an economic burden or an economic boom. When a country is reconstructed from the ashes of war, there exists enormous potential to create new industries and jobs that had previously been destroyed by war. The finance, imported capital and labour used in reconstruction can not only restore the losses a country has sustained, but even multiply it.
The East Asian Miracle
The economic journey of eight nations in Asia: Japan, South Korea, Taiwan, Hong Kong, Singapore, Thailand, Malaysia and Indonesia; has been dubbed as a ‘miracle’ because of the dramatic economic growth that transpired post-WWII.
In these eight economies, real per capita GDP rose twice as fast as in any other regional grouping between 1965 and 1990. Even more impressive is the simultaneous significant reduction in poverty and income inequality. The improvement in the quality of life that accompanied the economic transformation in these nations has abolished extreme poverty in some of these societies.
Despite the extensive number of research papers, books and articles published in recent decades about the high-performing East-Asian economies, there is very little agreement among scholars regarding the main determinants and ingredients of their success. Pessimism has even led some scholars to compare the economic strides of East Asia to the collapse of the Soviet economy in the 1990s–after what was considered an economic success in prior decades.
Among some economists, the argument is that the Soviet economy ran into inevitable diminishing returns after many decades of extensive growth caused by massive accumulation of capital which was not accompanied by technological progress.
The most important source of wealth creation in East-Asian countries was capital accumulation: which accounted for between 48 and 72 per cent of their economic growth. If the ‘secret’ to the East Asian miracle is capital accumulation; will East Asian economies end up going down the same route as the now defunct Soviet economy?
The conclusion that emerges when one studies the data is that in East Asia; accumulated capital and increased labour participation occurred at a much faster rate than other economies. The increase in these two factors, however, does not fully explain why these particular nations had a dramatic recovery after WWII, while other economies continued to struggle and blame the colonial era.
Perhaps a small set of initial conditions can ‘explain’ a large fraction of the growth rates in the following period. A study has found that, ceteris paribus, countries that were poorer but had good primary education and less income and land inequality enjoyed significantly higher rates of growth in the period 1960–85. This prognosis, however, is neither robust nor cohesive enough to explain all the other factors that had to come together to create an unprecedented era of financial growth and stability.
Furthermore, the implications of these findings remain moot. If, for instance, we assume, ceteris paribus, that land equality is indeed beneficial for economic growth; does that mean that land redistribution is a good policy to promote growth? The answer, obviously, is: it probably is not.
The redistribution of land could be extremely damaging on certain groups. It could have a negative effect on property rights, political stability and other factors that may also be important for economic growth: like education and export.
The same argument is true in the case of low fertility rates. A lower fertility rate has been determined as one of the key factors of economic growth. At the same time, however, these policies could have negative repercussions later on as the population ages and immigration becomes a necessity to maintain population growth.
As to why certain economies recovered so quickly after the war, while others continue to ‘lag’; to me, the answer comes down to the priorities of the leadership and the people during that era. As priorities change, or perhaps as new priorities come to the fore; we will see a completely different era emerge.
The conclusion that I came down, especially when I studied the economies that are still ‘lagging’ is that; when newly independent nations went on to engage in civil war or internal conflict; the costs of an ongoing war began to become untenable. Civil war is what held these economies back and led to continued financial duress.
While conflict can be constructive, prolonged conflict can lead to economic burdens and the exploitation and depletion of the resources that a country possesses. After the independence movements, many countries went on to engage in a civil war.
This is ultimately what differentiated the miracles from the messes.