Conflict ranks as the greatest danger facing the world, with war economies reshaping global priorities at an alarming rate. What was once considered the eighth most important risk has now claimed the top position among 33 global threats, according to a survey of over 900 government, business, and civil society leaders. The economic consequences are devastating. The average large conflict reduces GDP by more than 30% within five years of its start.
Beyond the immediate human tragedy, wars trigger persistent inflation spikes of approximately 15 percentage points in the first year alone. The economic impact of war extends far beyond battlefields, creating unprecedented uncertainties that potentially cascade into critical shortages and escalating costs. In fact, while some might perceive war as beneficial for creating demand and innovation, the true cost is staggering; the Iraq War alone carried an opportunity cost estimated at $860 billion by the end of 2009.
Currently, governments across Europe are taking steps to become “war-capable,” including upgrading bunkers and stockpiling provisions, highlighting how modern conflicts fundamentally alter economic priorities. This article examines what constitutes a war economy, its devastating global effects, and how international complicity sustains these destructive systems, along with potential pathways toward economic stability and peace.
Understanding the Modern War Economy
“Industrial mobilization for World War II was not the boon to the economy romanticized by many historians. The United States managed to increase military industrial output in a short period of time, but doing so ultimately hampered U.S. economic prospects because the United States had little use for weapon production facilities after the war ended.” — Alexander Field, Professor of Economics, Santa Clara University; economic historian
A nation transitions to a war economy when it mobilizes its resources, manufacturing capabilities, and workforce to support military preparations and production. This economic shift fundamentally alters how a country operates, creating a system that prioritizes sustaining military operations over civilian needs.
What is a war economy?
War economies represent a strategic reallocation of national resources toward conflict sustainability. As described by Philippe Le Billon, they function as “systems of producing, mobilizing and allocating resources to sustain violence”. During wartime, governments typically increase interest rates and implement resource allocation programs. Additionally, many states enhance planning in their economies, sometimes extending to rationing essential goods and even conscripting civilians for defense-related work. The absence of an official definition highlights how war economies emerge through practical necessity rather than theoretical design.
How modern conflicts reshape economic priorities
Contemporary conflicts dramatically transform economic structures. The most visible change involves redirecting industrial production from consumer goods to military equipment such as weapons, ammunition, and technology. Furthermore, governments exercise increased centralized control over industries and resource allocation, allowing them to prioritize raw materials for war-related production. This reorientation often leads to fuel or food rationing to ensure military needs are met first. Russia’s adaptation to its conflict with Ukraine demonstrates this transformation, as it has devoted a significant portion of its industrial capacity to sustaining a war of attrition.
The role of military spending in national budgets
Military expenditures consume substantial portions of national budgets globally. In 2023, the United States spent approximately $820.30 billion on national defense, representing 13.3% of the federal budget. Nevertheless, this figure was below the decade’s average of 15%. Operation and maintenance constituted the largest spending category at $318 billion, followed by military personnel at $184 billion. Since the fall of the Berlin Wall in 1989, the United States has managed to reduce its military budget by 3% of GDP. Conversely, some European nations now face increasing their defense spending by potentially 1% of GDP annually.
The Economic Fallout of Global Wars
Wars devastate economies far beyond battlefield destruction, creating long-lasting financial consequences that ripple through global markets. Typical conflicts erode GDP by approximately 9% relative to pre-war levels, although more destructive wars can slash economic output by 40-70%.
GDP contraction and inflation spikes
Armed conflicts consistently trigger severe inflation. World War I caused inflation to peak at 47% in 1918, whereas the Korean and Vietnam wars, combined with oil embargoes, fueled inflation reaching double digits in the 1970s. Moreover, the recent Russia-Ukraine conflict has exacerbated post-pandemic inflation that had already reached multi-decade highs, potentially pushing inflation above 10% in affected economies.
Impact on trade, oil prices, and supply chains
Global trade typically drops by 1% during major conflicts, consequently lowering global GDP by 0.7%. The Russia-Ukraine war specifically reduced Ukrainian exports by 47.3% ($19.4 billion) through August 2022. Simultaneously, oil prices often spike during conflicts, rising 7% within hours after Israel attacked Iran, though markets have become more resilient to geopolitical shocks over time.
Rising national debt and opportunity costs
War financing historically drives massive debt increases—U.S. debt grew over 4,000% during the Civil War and reached 112% of GDP after World War II. Beyond direct costs, opportunity costs remain substantial—the resources devoted to maintaining 35 soldiers in Afghanistan could alternatively have funded education for a million young people.
Post-war recovery challenges
Post-conflict recovery proves exceptionally difficult when peace remains fragile, with approximately 53% of civil wars followed by another conflict within six years. Even with substantial aid, reconstruction requires sufficient local administrative capacity alongside lasting peace. Economic activity frequently requires decades to return to pre-war trends.
Global Complicity in Sustaining War Economies
“As RAND analysts note, supporters of Pentagon budget increases don’t typically see tradeoffs between security spending and economic growth.” — Bryan Rooney, Grant Johnson, Miranda Priebe, Defense policy analysts, RAND Corporation
Behind every protracted conflict lies a network of external enablers that fuel war economies through financial, political, and material support. The global arms trade alone generates approximately USD 95 billion annually, with powerful economic incentives perpetuating this deadly commerce.
Arms trade and international suppliers
The United States dominates the global arms market, accounting for 43% of all exports between 2020-2024, nearly as much as the next eight largest exporters combined. Following the US are France (9.6%), Russia (7.8%), and China (5.9%). Notably, the US supplied major arms to 107 states during this period, with European imports from America increasing by 233%. Despite the existence of the Arms Trade Treaty since 2014, which aims to regulate international arms transfers, the global weapons trade continues to flourish because major exporters like Russia and the USA have not ratified it.
Economic alliances that enable conflict
Economic integration once thought to safeguard peace, has proven “spectacularly wrong”. Instead, military alliances significantly influence trade patterns and economic welfare, as demonstrated by NATO’s collective security benefits outweighing its 2% defense spending requirement. Economic warfare has emerged as “the continuation of politics by other means,” with countries like China deploying unilateral, punitive tariffs as geopolitical weapons. Hence, democratic nations increasingly require mutual aid systems to defend against such economic coercion.
Failures of global institutions like the UN
The United Nations has systematically failed to prevent conflicts due to structural flaws, particularly the Security Council veto power that allows a single member state to defeat the will of the majority. For instance, the US has used its veto over 30 times to protect Israel against UN action seeking to halt its aggression. Indeed, authoritarian regimes have learned to exploit UN agencies’ humanitarian mandates, as evidenced by the Assad regime extracting unprecedented compromises from aid organizations and diverting resources.
The role of the private sector and corporations
Financial institutions have become crucial tools in sustaining conflict, with banks establishing operations in occupied territories to consolidate control. Beyond direct military involvement, businesses operating in conflict zones frequently impact food systems by destroying agricultural infrastructure or financing conflicts through crop trade. First and foremost, corporate complicity extends to arms manufacturers like Lockheed Martin, Boeing, and Elbit Systems, whose weapons enable human rights violations. Despite recognition that companies have a responsibility to respect human rights, there remains no binding international legal framework holding them accountable.
Together, these patterns reveal a structural dependency on conflict, one maintained not just by governments or multilateral institutions, but by entire corporate ecosystems that benefit from sustained instability. Perhaps nowhere is this dynamic clearer than in the case of foreign military aid to Ukraine and Israel, where the cycle of funding, arms procurement, and geopolitical alignment converges into a self-reinforcing war economy.
War Funding as a Profit Center: The Case of Ukraine and Israel
While wars are often framed as humanitarian emergencies or national security imperatives, they also serve as profit engines for donor states, particularly those with powerful defense industries. Since 2022, the United States has allocated over $175 billion to Ukraine, with more than 60% of that amount remaining within U.S. borders to fund arms production and defense contracts. This has fortified key players like Lockheed Martin, Raytheon, and Northrop Grumman, effectively turning foreign aid into an industrial stimulus package.
Similarly, the $3.8 billion in annual U.S. aid to Israel is largely tied to purchases of U.S.-made military equipment, benefitting contractors like Boeing and General Dynamics. These weapons are frequently deployed in Gaza and the West Bank, giving real-world exposure to arms technology while fueling regional instability. The arrangement also reinforces political ties and economic dependencies, allowing aid to function as both a geopolitical lever and a business subsidy.
In effect, Ukraine and Israel operate as key nodes in a globalized defense supply chain, offering battle-tested markets for arms while providing political justification for sustained investment. This reflects a broader truth: war economies aren’t accidental byproducts of conflict; they are structured, incentivized systems with deeply embedded beneficiaries.
Pathways to Peace and Economic Stability
First and foremost, dismantling war economies requires coordinated global action across multiple fronts. Sustainable peace demands institutional reforms, diplomatic engagement, strategic investments, and inclusive participation from all sectors of society.
Reforming global institutions for conflict prevention
The United Nations’ conflict prevention agenda emphasizes that prevention saves lives, safeguards development gains, and proves cost-effective over time. Currently, the Joint UNDP-DPPA Programme operates in more than 60 countries, providing critical support to national stakeholders on conflict prevention. Yet meaningful reform remains essential, including addressing the outdated use of veto powers in the Security Council. Above all, reform must prioritize inclusive representation, especially for the 60 countries that have never held Security Council seats.
Strengthening multilateral trade and diplomacy
The multilateral trading system has contributed to peace and stability in the post-war world for over 75 years. The WTO’s Trade for Peace Programme, launched in 2017, specifically assists fragile and conflict-affected states in using trade integration as a lever for building sustainable peace. For instance, Afghanistan and Liberia’s WTO memberships have inspired other conflict-affected applicants like Somalia and South Sudan. Eventually, trade becomes a powerful transformative force that raises incomes against a background of peaceful coexistence.
Investing in peacebuilding and development
The UN Peacebuilding Fund has allocated nearly $1.47 billion to 62 recipient countries between 2006 and 2020. In essence, this financial instrument serves as the organization’s first line of defense to sustain peace in at-risk situations. Alongside this, innovative financing approaches, such as the Investing for Peace (I4P) initiative, are developing concrete options for peace-positive investments in fragile contexts. The German Federal Foreign Office is providing €12 million in start-up funding to establish a new investment institution dedicated to investing in fragile states.
The importance of civil society and business engagement
Civil society fulfills seven crucial peacebuilding functions: protection, monitoring, advocacy, socialization, social cohesion, facilitation, and service delivery. Research shows that civil society involvement reduces the risk of peace failing by 64%. In parallel, the Business for Peace initiative enables companies to implement responsible practices in conflict areas while advancing peace. Colombia’s peace process demonstrates this potential—business groups provided essential resources for dialogue, acting from both economic self-interest and dedication to national recovery.
Final Thoughts
History reveals that economic warfare stands at the center stage in conflicts, not on the sidelines. Unlike conventional thinking, economic measures and military actions function as complements rather than alternatives. This interconnection underlines why policies focused solely on economic sanctions without military deterrence often invite violent escalation rather than resolution.
The Russia-Ukraine conflict offers sobering lessons about global economic vulnerability. While workarounds exist for energy disruptions, agricultural goods face severe impacts, creating cascading effects throughout regional economies. The human cost—in lives lost—remains immeasurable.
Looking ahead, policymakers must remember that conditions can deteriorate substantially following catastrophic shocks. Therefore, monetary and fiscal approaches require built-in resilience rather than maximalist strategies that have recently gained popularity.
At this critical juncture, nations should prioritize constructive collaboration to promote stable trade environments while addressing domestic policy gaps. This balanced approach helps secure both internal and external economic stability.
Ultimately, global integration should not be viewed as an end in itself. Rather, it serves as a means to support improved living standards for all. Without understanding these fundamental principles, many will continue embracing the dangerous zero-sum perspective where one party’s gains only come at another’s expense.
FAQs
1. What is a war economy?
A war economy occurs when a nation restructures its industries, workforce, and budget to prioritize military production and operations over civilian needs. This often involves rationing, resource allocation, and centralized control to sustain armed conflict.
2. Why are war economies considered dangerous for global stability?
War economies destabilize global priorities by redirecting resources from essential services like healthcare and education toward military goals. They create long-term inflation, GDP contractions, and supply chain disruptions while incentivizing prolonged conflict.
3. How do modern conflicts affect national budgets and economies?
Large conflicts reduce GDP by more than 30% within five years. They also drive inflation spikes of around 15 percentage points, raise oil prices, shrink exports, and trigger soaring national debt due to military spending.
4. What are some real-world examples of war economies today?
Russia’s economy has increasingly shifted toward sustaining its war in Ukraine. Western nations like the U.S. and EU states are also ramping up defense spending and stockpiling essentials in preparation for potential future conflicts.
5. Do wars stimulate economies through innovation and demand?
While wars can create demand for innovation in defense, the long-term economic costs, including opportunity costs, far outweigh the benefits. For example, the Iraq War’s opportunity cost was estimated at $860 billion by 2009.
6. How do countries like the U.S. benefit economically from funding wars abroad?
Military aid to Ukraine and Israel primarily circulates back to U.S. defense contractors. Over 60% of U.S. aid to Ukraine remains in the U.S. economy, boosting companies like Lockheed Martin and Raytheon, making aid a domestic industrial stimulus.
7. Why has global military aid become so controversial?
Because it often sustains conflicts rather than resolving them. Aid is frequently tied to weapons purchases from donor countries, turning humanitarian assistance into a geopolitical and economic tool that benefits military-industrial complexes.
8. What role do corporations play in sustaining conflicts?
Corporations profit through arms manufacturing, resource extraction in war zones, and post-conflict reconstruction contracts. Some also operate in occupied territories or benefit from food shortages and disrupted supply chains.
9. Has the United Nations failed to prevent wars?
Structural flaws like the Security Council veto power have repeatedly prevented decisive action. For instance, the U.S. has vetoed over 30 resolutions on Israel, blocking efforts to de-escalate violence or hold parties accountable.
10. What are the long-term effects of war on recovery and peace?
Post-war recovery is extremely fragile. Over half of civil wars reignite within six years. Even with aid, reconstruction depends on sustained peace, local governance, and international cooperation, factors often lacking in conflict zones.
11. What are potential solutions to dismantle war economies?
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Reforming global institutions like the UN
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Strengthening fair trade and diplomacy
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Investing in peacebuilding and development
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Holding corporations accountable through legal frameworks
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Empowering civil society to mediate and advocate for peace
12. How should global leaders prepare economically for a conflict-prone future?
Policymakers should focus on building resilient fiscal and monetary systems, avoiding maximalist policies, and promoting inclusive, equitable international cooperation that disincentivizes war while fostering economic stability.