{
  "title": "The Long-lasting Economic Shock of War",
  "sourceUrl": "https://www.imf.org/en/publications/fandd/issues/2022/03/the-long-lasting-economic-shock-of-war",
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  "summary": "Russia’s invasion of Ukraine is an unmitigated catastrophe for global peace and particularly for peace in Europe. But the war also greatly compounds a number of preexisting adverse global economic trends, including rising inflation, extreme poverty, increasing food insecurity, deglobalization, and w",
  "sections": [
    {
      "heading": "Immediate humanitarian and global economic impacts",
      "content": "- War in Ukraine described as \"an unmitigated catastrophe for global peace and particularly for peace in Europe.\"\n- Ukraine in a state of \"severe economic distress\" with destruction of physical capital, millions fleeing, and \"countless thousands\" killed or maimed.\n- COVID-19 pandemic raised the number of people living in extreme poverty by roughly 100 million to nearly 700 million; \"a significant share live in conflict regions.\"\n- The war compounds preexisting adverse global trends: rising inflation, extreme poverty, increasing food insecurity, deglobalization, and worsening environmental degradation.\n- Russia and Ukraine combined accounted for a quarter of global wheat exports prior to the conflict.\n- Russia is a major supplier of fossil fuels, especially to Europe; disruptions to these commodity supplies are driving up prices."
    },
    {
      "heading": "Inflation dynamics and monetary policy",
      "content": "- Post-pandemic inflation was already at \"multi-decade highs\" in most of the world; the war exacerbates fuel and food shortages and inflation.\n- Excessive and prolonged peacetime macroeconomic stimulus contributed to inflation; example cited for the United States:\n  - $900 billion fiscal stimulus at the end of 2020 followed by a $1.7 trillion package in March 2021.\n- Across advanced economies, \"more than half (including the United States and the euro area) had inflation rates of over 5 percent even before hostilities.\"\n- Federal Reserve expectations and market indicators:\n  - Fed officials predict raising the federal funds rate to 2.75 percent, from near zero in January.\n  - The first hike of 0.25 percent already came in March.\n  - Fed expects a fast-paced reduction in the size of its massive balance sheet.\n  - As of the first week of April, five-year forward inflation expectations stood at \"just under 2.4 percent.\"\n- Markets expect interest rate hikes to be transitory, with the Treasury yield curve inverting (short rates higher than long rates).\n- Risks highlighted:\n  - Prolonged high inflation could erode central bank credibility.\n  - Wage increases currently trail inflation in many countries, but persistent inflation raises the risk of destabilization.\n  - Public and private debt levels are \"vastly higher\" than in the 1980s tightening cycle; sharp monetary tightening could destabilize debt dynamics."
    },
    {
      "heading": "Fiscal policy and defense spending implications",
      "content": "- Short-term fiscal implications of the Ukraine war for advanced economies are \"quite modest\" compared with pandemic-era stimulus programs.\n- \"Cumulative long-term effects of a fading peace dividend\" could be substantial.\n- Europe could \"easily end up raising defense spending by 1 percent of GDP annually, if not more.\"\n- The resulting costs could exceed the \"ambitious, €807 billion NextGenerationEU stimulus during the pandemic.\"\n- Rebuilding Ukraine could \"amount to €100 billion or more.\"\n- Historical U.S. context: since 1989, the United States \"has been able to shrink its military budget by 3 percent of GDP.\"\n  - That 3 percent \"was more than enough to cover all of today’s government spending on nondefense consumption and investment.\"\n- Expectation that the U.S. will likely raise military spending by a similar amount to Europe over the next few years; Biden administration’s original goal of shifting military spending to social programs is \"already on hold.\"\n- Global reevaluation of defense needs driven by events such as the chaotic US retreat from Afghanistan and the war in Ukraine."
    },
    {
      "heading": "Deglobalization risks and long-term economic effects",
      "content": "- Deglobalization risks have risen since the invasion of Ukraine; pandemic-era discussions already emphasized supply-chain resilience and less reliance on imports for critical goods.\n- Exit from Asia’s zero-COVID policies is increasing supply disruptions, illustrating \"temporary deglobalization.\"\n- Russia is likely to be isolated for an extended period; a larger shock would occur if trade between advanced economies and China drops.\n- Canonical quantitative trade model estimates cited:\n  - About 2–3 percent lower GDP for the United States under substantial deglobalization.\n  - Perhaps 3–4 percent lower GDP for China.\n- These baseline estimates depend on many assumptions, including substitution of domestic for imported goods and the ability to trade with other partners.\n- Additional considerations:\n  - Higher local markups and less \"creative destruction\" could make costs significantly higher.\n  - Globalization may have dynamic effects not captured by existing models, including effects on institutional development.\n  - Deglobalization will likely hit some sectors much harder than others, potentially amplifying aggregate effects.\n- Argument that globalization was a key factor in disinflation during the 1990s and 2000s; deglobalization could exacerbate upward inflation pressures.\n- Reference to demographic pressures: Charles Goodhart and Manoj Pradhan argue that adverse demographics in east Asia and eastern Europe will increase global price pressures; similar themes were discussed in the author’s 2003 paper, “Globalization and Global Disinflation.”"
    },
    {
      "heading": "Policy lessons and recommendations",
      "content": "- Policymakers must incorporate resilience into monetary and fiscal policy responses to major macroeconomic shocks, not just adopt \"maximalism.\"\n- Key trade-offs to consider:\n  - Central bankers must balance the risk of losing the inflation anchor against the risk of causing a major recession.\n  - Fiscal authorities must re-evaluate priorities in light of higher defense spending needs and a fading peace dividend.\n- Implicit policy priorities highlighted:\n  - Preserve central bank credibility to prevent persistent high inflation.\n  - Manage public and private debt vulnerabilities when considering the pace and extent of monetary tightening.\n  - Prepare for potentially higher and more persistent inflation pressures if deglobalization and adverse demographics persist.\n  - Anticipate reallocations of fiscal resources toward defense in advanced economies and the fiscal cost of rebuilding in conflict-affected regions.\n\nKENNETH ROGOFF, \"The Long-lasting Economic Shock of War,\" F&D Magazine\n\n---\n\n\nSource: https://www.imf.org/en/publications/fandd/issues/2022/03/the-long-lasting-economic-shock-of-war"
    }
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    "Authors: KENNETH ROGOFF",
    "Published: April 11, 2022",
    "War in Ukraine described as \"an unmitigated catastrophe for global peace and particularly for peace in Europe.\"",
    "Ukraine in a state of \"severe economic distress\" with destruction of physical capital, millions fleeing, and \"countless thousands\" killed or maimed.",
    "COVID-19 pandemic raised the number of people living in extreme poverty by roughly 100 million to nearly 700 million; \"a significant share live in conflict regions.\"",
    "The war compounds preexisting adverse global trends: rising inflation, extreme poverty, increasing food insecurity, deglobalization, and worsening environmental degradation.",
    "Russia and Ukraine combined accounted for a quarter of global wheat exports prior to the conflict.",
    "Russia is a major supplier of fossil fuels, especially to Europe; disruptions to these commodity supplies are driving up prices.",
    "Post-pandemic inflation was already at \"multi-decade highs\" in most of the world; the war exacerbates fuel and food shortages and inflation.",
    "Excessive and prolonged peacetime macroeconomic stimulus contributed to inflation; example cited for the United States:",
    "Across advanced economies, \"more than half (including the United States and the euro area) had inflation rates of over 5 percent even before hostilities.\"",
    "Federal Reserve expectations and market indicators:",
    "Markets expect interest rate hikes to be transitory, with the Treasury yield curve inverting (short rates higher than long rates).",
    "Risks highlighted:",
    "Short-term fiscal implications of the Ukraine war for advanced economies are \"quite modest\" compared with pandemic-era stimulus programs.",
    "\"Cumulative long-term effects of a fading peace dividend\" could be substantial.",
    "Europe could \"easily end up raising defense spending by 1 percent of GDP annually, if not more.\"",
    "The resulting costs could exceed the \"ambitious, €807 billion NextGenerationEU stimulus during the pandemic.\"",
    "Rebuilding Ukraine could \"amount to €100 billion or more.\"",
    "Historical U.S. context: since 1989, the United States \"has been able to shrink its military budget by 3 percent of GDP.\"",
    "Expectation that the U.S. will likely raise military spending by a similar amount to Europe over the next few years; Biden administration’s original goal of shifting military spending to social programs is \"already on hold.\"",
    "Global reevaluation of defense needs driven by events such as the chaotic US retreat from Afghanistan and the war in Ukraine.",
    "Deglobalization risks have risen since the invasion of Ukraine; pandemic-era discussions already emphasized supply-chain resilience and less reliance on imports for critical goods.",
    "Exit from Asia’s zero-COVID policies is increasing supply disruptions, illustrating \"temporary deglobalization.\"",
    "Russia is likely to be isolated for an extended period; a larger shock would occur if trade between advanced economies and China drops.",
    "Canonical quantitative trade model estimates cited:",
    "These baseline estimates depend on many assumptions, including substitution of domestic for imported goods and the ability to trade with other partners.",
    "Additional considerations:",
    "Argument that globalization was a key factor in disinflation during the 1990s and 2000s; deglobalization could exacerbate upward inflation pressures.",
    "Reference to demographic pressures: Charles Goodhart and Manoj Pradhan argue that adverse demographics in east Asia and eastern Europe will increase global price pressures; similar themes were discussed in the author’s 2003 paper, “Globalization and Global Disinflation.”",
    "Policymakers must incorporate resilience into monetary and fiscal policy responses to major macroeconomic shocks, not just adopt \"maximalism.\"",
    "Key trade-offs to consider:",
    "Implicit policy priorities highlighted:"
  ],
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