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How much do wars cost? With this tool you can estimate the consequences

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How much do wars cost?  With this tool you can estimate the consequences

Houses destroyed by Russian attacks in Ukraine. Picture Alliance

How much do wars cost? Researchers at the Kiel Institute for the World Economy (IfW) examined this question using data from 150 wars since 1870.

In their study they also estimated the economic consequences of the war in Ukraine. You can use an online tool to estimate the costs of possible wars for different countries.

Peace in one’s own country also has a high economic value, concludes IfW President Moritz Schularick. This could make the expenditure on military strength and deterrence economically sensible.

How much do wars cost? What are the economic consequences and who bears the costs? To find out, economists from the Kiel Institute for the World Economy (IfW Kiel) evaluated data from 150 wars over the past 150 years. The Studie „The Price of War“ shows that the costs for the country that is the theater of war are the highest. Buildings, machines and infrastructure are destroyed there and growth collapses for many years. But neighboring countries also pay a large part of the war costs through higher inflation and lower growth.

“In the current era of heightened geopolitical tensions, the economic impact of armed conflict becomes an issue that economists must understand,” the authors write. Assumptions for the Ukraine war are also derived from the historical data.

The experience of wars since 1870 suggests that Ukraine will lose around 120 billion US dollars in economic output by 2026. The capital stock will fall by almost a trillion dollars. Third countries not involved in the war are expected to record GDP losses of around 250 billion dollars. The European Union accounts for $70 billion. 15 to 20 billion dollars on Germany alone.

IfW Kiel

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“The Russian attack on Ukraine caused enormous economic damage in Ukraine, but also in neighboring countries and in Germany,” says IfW president and co-author Moritz Schularick.

Peace also has great economic value

“Overall, the calculations show once again how high the economic value of peace is and how catastrophic a war on your own soil is in every respect.” And “Military strength and credible deterrence, which make external attacks unlikely, also make sense from an economic perspective.”

Based on their study, the researchers have developed a tool that can be used to estimate the economic consequences of wars. The Price of War Calculator is freely available.

Price of War Calculator des IfW Kiel

The Price of War Calculator (PCALC) is a freely accessible online tool of the Kiel Institute for the World Economy (IfW Kiel). It is intended to make it possible to estimate the economic effects of a war on the country in which the war is taking place, as well as the economic effects on other countries. According to the IfW Kiel, the tool is based on the Studie „The Price of War“ and condenses the experiences from wars of the past 150 years. The tool refers only to direct economic consequences and does not include the humanitarian consequences of war. The calculations are derived from the past, so for the future they can only be viewed as estimates or approximations.

Wars usually have devastating humanitarian consequences. Economic consequences also occur. The economic damage is usually also immense. In countries that are theaters of war, the capital stock is destroyed – that is, economic assets such as machines or buildings. At the same time, economic output collapses by an average of around 30 percent. Inflation is rising by around 15 percentage points over five years, the data show.

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But third countries not involved in the war also bear high costs, especially the neighboring countries of the theater of war: real economic output here falls by an average of 10 percent after five years. Inflation rises by 5 percentage points. Wars have negative effects on neighbors. For countries further away, however, the economic effects can be positive: “There are winners and losers from wars in the economy too,” the economists write.

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Take Ukraine for example – the war could cost that until 2026

Based on past wars, the authors estimate that the Russian invasion of Ukraine will result in a GDP loss of about $120 billion by 2026. The capital stock will fall by more than 950 billion dollars. At the same time, the economic burden on third countries not involved in the war is significant at around $250 billion.

“The calculations are based on the costs of ‚typical†interstate wars in the past. Depending on the duration and intensity of the war, less or more serious scenarios are conceivable,” says IfW economist Jonathan Federle. “The transfer effects we calculate to other countries primarily take into account the trade links caused by geographical proximity and the size of the respective economy in which a war breaks out.“

Examples of Taiwan and Iran – importance of world trade

If an economy is strongly integrated into the global economy, like Taiwan, the estimates tend to represent the lower end of the expected war costs. In this case, the researchers expect global GDP losses of around $2.2 trillion within five years.

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For example, if Iran were to become the scene of a war, the cost could be up to $1.7 trillion in lost GDP over a five-year period. Iran is also not as involved in world trade due to sanctions. Therefore, the external costs estimated by the researchers in this case are probably at the upper end.

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