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Rediff.com  » Business » How wars are good for an economy

How wars are good for an economy

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July 14, 2005 16:01 IST

If we would address Swami Vivekananda as 'an economist of highest order', we would surely be termed as insane by one and all. But halt, lend your ears to what he had to say: "You tell me how much you have suffered and I will tell you how great you are."

Whether these words mean philosophy of economy may be debatable but surely there can be no two ways about the fact that they can be uttered in context to the progress made by countries which suffered mass destruction due to wars.

The list of examples is unending -- Japan, India, Britain, America, Iraq, etc, etc.

Bullets are fired, cities are shelled and troops march on, marking the beginning of a war, a word synonymous for destruction, devastation, agony and loss of hope. But in case we were to take a journey through history, we would see that countries that have achieved economic prosperity have in fact fought the biggest wars.

Further if the track record and statistics of such countries were taken into account, it would prove beyond doubt that the foundation stones of their success and prosperity were laid in the times of war. Is it because 'it is so' or is it because it is the war that led them to economic prosperity?

Right from the era of World Wars to the Korean war, Vietnam war, Indo-Pak wars, the Gulf War to the attacks on the World Trade Center, why is it that skirmishes of wars have brought about some major restructuring within the countries involved, thereby leading to an era of greater mobility of resources, liquidity in the market and economic prosperity?

The September 11 attacks on the World Trade Center marked the crashing of the twin symbol of capitalism on earth blowing an air of pessimism throughout the world, indicating that it was heading towards the worst ever economic recession.

People had nightmares about sky-high fuel prices and rocketing insurance premiums, but somehow the twin towers proved themselves to be great martyrs, who even while coming down to rubbles paved way for many optimistic news not only for America but for the world on the whole.

In fact the 'First war of the 21st Century' as the American President described it, would prove to be the first defeat of a rising recession in the 21st Century.

One thing that will prove that the above quoted lines are factual rather than optimistic hallucination is simple statistics. The US government had started spending in all spheres thereby paving way for a much-needed push to the US economy. The Federal Reserve pumped in $100 billion into the financial markets in days after the attack. The US Congress gave the green signal to a $40 billion relief package and all this even before firing a single bullet.

Further, this led to the US central bank, the Federal Reserve, loosen its monetary policy, the end result of which was the lowering of US interest rates to their historically high levels of 1%. While such low interest rates gave birth to certain 'evils' like the present high US current account deficit and sowed seeds of the housing bubble like situation in the US, it was a boon in disguise for the equity markets in emerging nations, including India.

These markets gained immensely from the high levels of foreign money flows chasing relatively attractive assets than the US T-bills and bonds, yields on which had reached their all time lows.

Bang for the buck!

While we are not saying that the world needs wars to propel economic growth, what we are indicating here are certain long-term consequences arising out of such events.

Time and again there have been wars where the world economy is struggling with an economic slump or depression, but spare a thought, never has a war led to an economic depression.

The sole reason lies in the activities during and after the war. The basic requirement for progress and prosperity is mobility, mobilisation of financial resources, human resources. A war compels a nation to mobilise its resources, driving every individual to work for his/her nation. The nation stands as one, as it has a dream and will of a better tomorrow.

The recent bombings in London were a clear case in example. While these have surely shaken the belief of the Londoners that theirs was a city safe from terrorism, the way the global financial markets reacted and bounced back the next day is something that is indicative of the changing world.

In fact, over the years, it has taken lesser and lesser time for the financial markets to bounce back from the lows recorded on the day of devastation. This is surely a lesson for the investors in equity markets.

While short-term after-effects of events (good or bad) surely shake the markets, in the long-term good stories (stocks) are bound to move up and give good returns on investment. Happy investing!

Equitymaster.com is one of India's premier finance portals. The web site offers a user-friendly portfolio tracker, a weekly buy/sell recommendation service and research reports on India's top companies.

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