Wars Impose Lasting Economic Costs, While More Defense Spending Means Hard Choices
IMF Blog, April 8, 2026
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Bibliographic details
- Authors: Hippolyte Balima, Andresa Lagerborg, Evgenia Weaver
- Published: April 8, 2026
Overview
- Wars and rising defense spending are reshaping policy priorities and macroeconomic outcomes globally.
- Research summarized from two analytical chapters of the April 2026 World Economic Outlook: “Defense Spending: Macroeconomic Consequences and Trade-Offs,” and “The Macroeconomics of Conflicts and Recovery.”
- Geographic focus and most-affected regions: sub-Saharan Africa, Europe, and the Middle East.
Economic losses (effects of conflicts)
- At conflict onset, output in countries where fighting takes place falls by about 3 percent and continues falling for years.
- Cumulative output losses reach roughly 7 percent within five years.
- Output losses from conflicts typically exceed those associated with financial crises or severe natural disasters.
- Economic scars persist even a decade later.
- Spillovers: neighboring economies or key trading partners often experience modest declines in output in the early years of a conflict.
- Definition of major conflicts in the analysis: those involving at least 1,000 battle-related deaths.
- Major-conflict dynamics:
- Government budgets deteriorate as spending shifts toward defense and debt increases.
- Output and tax collection collapse.
- Imports contract sharply because of lower demand; exports decrease even more substantially, producing a temporary widening of the trade deficit.
- Heightened uncertainty triggers capital outflows; both foreign direct investment and portfolio flows decline.
- Wartime governments rely more heavily on aid and, in some cases, remittances from citizens abroad to finance trade deficits.
- Sustained exchange rate depreciation, reserve losses, and rising inflation occur.
- Prices tend to increase at a pace higher than most central banks’ inflation targets, prompting monetary authorities to raise interest rates.
- Overall conclusion: major conflicts impose substantial economic costs and difficult trade-offs on economies within their borders and hurt other countries, with enduring consequences for economic potential and human well-being.
Spending trade-offs (effects of rising defense spending)
- Episodes studied: large buildups in defense spending in 164 countries since the Second World War.
- Typical characteristics of defense spending booms:
- Duration: typically last nearly three years.
- Size: increase defense spending by 2.7 percentage points of gross domestic product.
- Comparable benchmark: “broadly similar to what is required by North Atlantic Treaty Organization (NATO) members to reach the 5 percent of GDP defense spending target by 2035.”
- Aggregate macro effects:
- Ramping up defense spending primarily acts as a positive demand shock, boosting private consumption and investment, especially in defense-related sectors.
- Short-term raises in both economic output and prices; requires close coordination with monetary policy to temper inflationary pressures.
- Aggregate effects on output are likely modest: increases in defense spending typically translate almost one for one into higher economic output.
- Multipliers vary widely depending on how outlays are sustained, financed, allocated, and how much equipment is imported.
- Specific trade-offs and channels:
- Output gains are smaller and external balances deteriorate when stimulus is partly spent on imported goods (especially for arms importers).
- Buildups that prioritize public investment in equipment and infrastructure, less fragmented procurement, and more common standards can:
- expand market size,
- support economies of scale,
- strengthen industrial capacity,
- limit import leakages,
- support long-term productivity growth.
- Financing choices and fiscal consequences:
- Defense spending booms are mostly deficit-financed in the near-term; higher revenues play a larger role in later years and when the buildup is expected permanent.
- Near-term deficit financing can stimulate the economy but strain fiscal sustainability over the medium term.
- Empirical fiscal impacts:
- Deficits worsen by about 2.6 percentage points of GDP within three years of the start of a boom.
- Public debt increases by about 7 percentage points within three years of the start of a boom (14 percentage points in wartime).
- Higher public debt can crowd out private investment and offset initial expansionary effects.
- Mitigation options:
- Durable financing arrangements when the increase is permanent.
- Raising revenues (cost: reducing consumption and dampening demand boost).
- Re-ordering budget priorities (cost: reductions in spending on social protection, health, and education).
Policies for recovery (post-conflict recovery and policy recommendations)
- Recovery speed and pattern:
- Recoveries are often slow and uneven and crucially depend on the durability of peace.
- When peace is sustained, output rebounds but often remains modest relative to wartime losses.
- In fragile economies with renewed conflict, recoveries frequently stall.
- Recovery driven primarily by labor (reallocation from military to civilian activities and gradual return of refugees); capital stock and productivity remain subdued.
- Key policy measures to restore confidence and promote recovery:
- Early macroeconomic stabilization.
- Decisive debt restructuring.
- International support, including aid and capacity development.
- Domestic reforms to rebuild institutions and state capacity, promote inclusion and security, and address lasting human costs (lost learning, poorer health, diminished economic opportunities).
- Policy design principles:
- Comprehensive and well-coordinated policy packages are far more effective than piecemeal measures.
- Policies that simultaneously reduce uncertainty and rebuild the capital stock can:
- reinforce expectations,
- encourage capital inflows,
- facilitate the return of displaced people.
- Ultimate objective: successful post-war recovery should lay the foundation for stability, renewed hope, and improved livelihoods for communities affected by conflict.
Source: Hippolyte Balima, Andresa Lagerborg, Evgenia Weaver; April 8, 2026.
Content in this bundle
- Chapter 2
- Chapter 3