I can’t help wondering: Did Joe Biden send his secretaries of defense and state to Kyiv recently to show just how totally “into” the war in Ukraine his administration is? So into it, in fact, that it’s hard to express (not in weaponry, perhaps, but in words). Still, Secretary of Defense Lloyd Austin did make it clear enough that Washington’s objective in sending ever more weapons Kyiv’s way isn’t just to help defend the Ukrainians from a nightmarish aggression — not anymore. There’s a deeper purpose now at work — that being, as Austin put it, to ensure that Russia is eternally “weakened” by this war. In other words, the world is increasingly to be involved in a bad take two of the Cold War of the last century. And by the way, when it comes to actual diplomacy or negotiations, not a word was said in Kyiv, even with the secretary of state there.
At a moment when the Biden administration seems to be doubling down on the Ukraine conflict, TomDispatch regular Rajan Menon takes a hard look at just what that war is actually costing our world and, believe me, it’s a grim tale you don’t see told these days. Sadly, as the fighting goes on (and on and on), while Washington becomes ever more invested in that very ongoingness, the costs to the rest of us on this planet are only mounting.
And it’s not just a matter of pushing Vladimir Putin’s all-too-nuclearized back up against a wall or heading, as the Russian foreign minister recently put it, for a possible World War III. Keep in mind that focusing so totally on the crisis in Ukraine means again ensuring that the deepest peril to this planet, climate change, could take an eternal backseat to Cold War II.
And mind you, the war isn’t working out well domestically either. It’s already clear that, in the eyes of many Americans, Joe Biden will never be the “war president” they should rally around. Research suggests that most of us are, at best, “tepid” about his role in the war so far and split on what to make of his actions (as on so much else). And don’t count on the war helping the Democrats at the polls in November, not with inflation soaring. An increasingly chaotic planet that seems ever more out of control might put the Trumpists of the Republican Party in the saddle for years to come — yet another nightmare of the first order. With that in mind, consider with Rajan Menon just what a disaster the invasion of Ukraine is already proving to be for so many on this wounded planet of ours. Tom
The Economic Consequences of the War
Why the Conflict in Ukraine Is a Disaster for the Poor of This Planet
In 1919, the renowned British economist John Maynard Keynes wrote The Economic Consequences of the Peace, a book that would prove controversial indeed. In it, he warned that the draconian terms imposed on defeated Germany after what was then known as the Great War — which we now call World War I — would have ruinous consequences not just for that country but all of Europe. Today, I’ve adapted his title to explore the economic consequences of the (less than great) war now underway — the one in Ukraine, of course — not just for those directly involved but for the rest of the world.
Not surprisingly, following Russia’s February 24th invasion, coverage has focused mainly on the day-to-day fighting; the destruction of Ukrainian economic assets, ranging from buildings and bridges to factories and whole cities; the plight of both Ukrainian refugees and internally displaced people, or IDPs; and the mounting evidence of atrocities. The war’s potential long-term economic effects in and beyond Ukraine haven’t attracted nearly as much attention, for understandable reasons. They’re less visceral and, by definition, less immediate. Yet the war will take a huge economic toll, not just on Ukraine but on desperately poor people living thousands of miles away. Wealthier countries will experience the ill effects of the war, too, but be better able to cope with them.
Some expect this war to last years, even decades, though that estimate seems far too bleak. What we do know, however, is that, even two months in, Ukraine’s economic losses and the outside assistance that country will need ever to achieve anything resembling what once passed for normal are staggering.
Let’s start with Ukraine’s refugees and IDPs. Together, the two groups already make up 29% of the country’s total population. To put that in perspective, try to imagine 97 million Americans finding themselves in such a predicament in the next two months.
As of late April, 5.4 million Ukrainians had fled the country for Poland and other neighboring lands. Even though many — estimates vary between several hundred thousand and a million — have started returning, it’s unclear whether they will be able to stay (which is why the U.N.’s figures exclude them from its estimate of the total number of refugees). If the war worsens and does indeed last years, a continuing exodus of refugees could result in a total unimaginable today.
That will put even more strain on the countries hosting them, especially Poland, which has already admitted nearly three million fleeing Ukrainians. One estimate of what it costs to provide them with basic needs is $30 billion. And that’s for a single year. Moreover, when that projection was made there were a million fewer refugees than there are now. Add to that the 7.7 million Ukrainians who have left their homes but not the country itself. The cost of making all these lives whole again will be staggering.
Once the war ends and those 12.8 million uprooted Ukrainians begin to try to rebuild their lives, many will find that their apartment buildings and homes are no longer standing or not habitable. The hospitals and clinics they depended on, the places they worked, their children’s schools, the shops and malls in Kyiv and elsewhere where they bought basic necessities may have been razed or badly damaged, too. The Ukrainian economy is expected to contract by 45% this year alone, hardly surprising considering that half of its businesses aren’t operating and, according to the World Bank, its seaborne exports from its now embattled southern coast have effectively ceased. To return even to pre-war levels of production will take at least several years.
About one-third of Ukraine’s infrastructure (bridges, roads, rail lines, waterworks, and the like) has already been damaged or demolished. Repairing or rebuilding it will require between $60 billion and $119 billion. Ukraine’s Finance Minister reckons that if lost production, exports, and revenue are added in, the total damage done by the war already exceeds $500 billion. That’s nearly four times the value of Ukraine’s gross domestic product in 2020.
And mind you, such figures are approximations at best. The true costs will undoubtedly be higher and vast sums in assistance from international financial organizations and Western countries needed for years to come. At a meeting convened by the International Monetary Fund (IMF) and the World Bank, Ukraine’s Prime Minister estimated that the rebuilding of his country would require $600 billion and that he needs $5 billion a month for the next five months just to bolster its budget. Both organizations have already swung into action. In early March, the IMF approved a $1.4 billion emergency loan for Ukraine and the World Bank an additional $723 million. And that’s sure to be just the beginning of a long-term flow of funds into Ukraine from those two lenders, while individual Western governments and the European Union will doubtless provide their own loans and grants.
The West: Higher Inflation, Lower Growth
The economic shock waves created by the war are already hurting Western economies and the pain will only increase. Economic growth in the wealthiest European countries was 5.9% in 2021. The IMF anticipates that it will fall to 3.2% in 2022 and to 2.2% in 2023. Meanwhile, between just February and March of this year, inflation in Europe surged from 5.9% to 7.9%. And that looks modest compared to the leap in European energy prices. By March they had already risen a whopping 45% compared to a year ago.
The good news, reports the Financial Times, is that unemployment has fallen to a record low of 6.8%. The bad news: inflation outran wages, so workers were actually earning 3% less.
As for the United States, economic growth, projected at 3.7% for 2022, is likely to be better than in leading European economies. However, the Conference Board, a think tank for its 2,000 member businesses, expects growth to dip to 2.2% in 2023. Meanwhile, the U.S. inflation rate reached 8.54% in late March. That’s twice what it was 12 months ago and the highest it’s been since 1981. Jerome Powell, chair of the Federal Reserve, has warned that the war will create additional inflation. New York Times columnist and economist Paul Krugman believes that it will drop, but if so, the question is: When and how rapidly? Besides, Krugman expects price increases to get worse before they begin to ease. The Fed can curb inflation by jacking up interest rates, but that could end up further reducing economic growth. Indeed, Deutsche Bank made news on April 26th with its prediction that the Fed’s battle against inflation will create a “major recession” in the U.S. late next year.
Along with Europe and the U.S., the Asia-Pacific, the world’s third economic powerhouse, won’t escape unscathed either. Citing the effects of the war, the IMF cut its growth forecast for that region by another 0.5% to 4.9% this year compared to 6.5% last year. Inflation in the Asia-Pacific has been low but is expected to rise in a number of countries.
Such unwelcome trends can’t all be attributed to the war alone. The Covid-19 pandemic had created problems on many fronts and U.S. inflation was already creeping up before the invasion, but it will certainly make matters worse. Consider energy prices since February 24th, the day the war started. The price of oil was then at $89 a barrel. After zigs and zags and a March 9th peak of $119, it stabilized (at least for now) at $104.7 on April 28rd — a 17.6% jump in two months. Appeals by the U.S. and British governments to Saudi Arabia and the United Arab Emirates to increase oil production went nowhere, so no one should expect quick relief.
Rates for container shipping and air cargo, already hiked by the pandemic, rose further following the invasion of Ukraine and supply-chain disruptions worsened as well. Food prices also rose, not only due to higher energy costs but also because Russia accounts for nearly 18% of global exports of wheat (and Ukraine 8%), while Ukraine’s share of global corn exports is 16% and the two countries together account for more than a quarter of global exports of wheat, a crucial crop for so many countries.
Russia and Ukraine also produce 80% of the world’s sunflower oil, widely used for cooking. Rising prices and shortages of this commodity are already apparent, not only in the European Union, but also in poorer parts of the world like the Middle East and India, which gets nearly all of its supply from Russia and Ukraine. In addition, 70% of Ukraine’s exports are carried by ships and both the Black Sea and the Sea of Azov are now war zones.
The Plight of “Low-Income” Countries
The slower growth, price hikes, and higher interest rates resulting from the efforts of central banks to tame inflation, as well as increased unemployment, will hurt people living in the West, particularly the poorest among them who spend a far larger proportion of their earnings on basic necessities like food and gas. But “low-income countries” (according to the World Bank’s definition, those with an average per-capita annual income below $1,045 in 2020), particularly their poorest denizens, will be hit so much harder. Given Ukraine’s enormous financial needs and the West’s determination to meet them, the low-income countries are likely to find it far more difficult to get the financing for the debt payments they’ll owe because of increased borrowing to cover the rising costs of imports, especially essentials like energy and food. Add to that reduced export earnings owing to slower global economic growth.
The Covid-19 pandemic had already forced low-income countries to weather the economic storm by borrowing more, but low interest rates made their debt, already at a record $860 billion, somewhat easier to manage. Now, with global growth ebbing and the costs of energy and food rising, they’ll be forced to borrow at far higher interest rates, which will only increase their repayment burden.
During the pandemic, 60% of low-income countries required relief from their debt-repayment obligations (compared to 30% in 2015). Higher interest rates, along with higher food and energy prices, will now worsen their predicament. This month, for instance, Sri Lanka defaulted on its debt. Prominent economists warn that that might prove to be a bellwether, since other countries like Egypt, Pakistan, and Tunisia face similar debt problems that the war is aggravating. Together, 74 low-income countries owed $35 billion in debt repayments this year, a 45% increase from 2020.
And those, mind you, are not even considered low-income countries. For them, the IMF has traditionally served as the lender of last resort, but will they be able to count on its help when Ukraine also urgently needs huge loans? The IMF and the World Bank can seek additional contributions from their wealthy member states, but will they get them, when those countries are also coping with growing economic problems and worrying about their own angry voters?
Of course, the greater the debt burden of low-income countries, the less they’ll be able to help their poorest citizens handle higher prices for essentials, especially food. The Food and Agricultural Organization’s food price index rose 12.6% just from February to March and was already 33.6% higher than a year ago.
Soaring wheat prices — at one point, the price per bushel nearly doubled before settling at a level 38% higher than last year — have already created shortages of flour and bread in Egypt, Lebanon, and Tunisia, which not long ago looked to Ukraine for between 25% and 80% of their wheat imports. Other countries, like Pakistan and Bangladesh — the former buys nearly 40% of its wheat from Ukraine, the latter 50% from Russia and Ukraine — could face the same problem.
The place suffering the most from skyrocketing food prices may be Yemen, a country that has been mired in civil war for years and faced chronic food shortages and famine well before Russia invaded Ukraine. Thirty percent of Yemen’s imported wheat comes from Ukraine and, thanks to the reduction in supply created by the war, the price per kilogram has already risen nearly five-fold in its south. The World Food Program (WFP) has been spending an extra $10 million a month for its operations there, since nearly 200,000 people could face “famine-like conditions” and 7.1 million in total will experience “emergency levels of hunger.” The problem isn’t confined to countries like Yemen, though. According to the WFP, 276 million people worldwide faced “acute hunger” even before the war began and if it drags on into the summer another 27 million to 33 million may find themselves in just that precarious position.
The Urgency of Peace — And Not Just for Ukrainians
The magnitude of the funds needed to rebuild Ukraine, the importance the U.S., Britain, the European Union, and Japan attach to that goal, and the increasing cost for critical imports are going to put the world’s poorest countries in an even tougher economic spot. To be sure, poor people in wealthy countries are also vulnerable, but those in the poorest ones will suffer so much more.
Many are already barely surviving and lack the array of social services available to the poor in wealthy nations. The American social safety net is threadbare compared to its European analogues, but at least there is such a thing. Not so in the poorest countries. There, the least fortunate scrape by with little, if any, help from their governments. Only 20% of them are covered in any way by such programs.
The world’s poorest bear no responsibility for the war in Ukraine and have no capacity to bring it to an end. Other than the Ukrainians themselves, however, they will be hurt worst by its prolongation. The most impoverished among them are not being shelled by the Russians or occupied and subjected to war crimes like the inhabitants of the Ukrainian town of Bucha. Still, for them, too, ending the war is a matter of life or death. That much they share with the people of Ukraine.
Copyright 2022 Rajan Menon
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