A Financial Times headline reads “IMF Raises Russia Growth Outlook as War Boosts Economy” (January 30, 2024). The story (to use journalistic jargon) essentially reports on the International Monetary Fund’s January World Economic Outlook, and its headline does correspond to what the IMF claims about Russia:
Growth in Russia is projected at 2.6 percent in 2024 and 1.1 percent in 2025, with an upward revision of 1.5 percentage points over the October 2023 figure for 2024, reflecting carryover from stronger-than-expected growth in 2023 on account of high military spending [my underlines] and private consumption, supported by wage growth in a tight labor market.
In my post of yesterday, I explained the danger of confusing GDP growth with higher welfare for the country’s residents, especially when what grows is dictated by the state. It is even more obvious when war is what is decreed.
It may be, of course, that submission to a foreign tyrant would be more detrimental than a defensive war. In this case, we might want to say, in an impressionistic way, that the war is stimulating “the economy” compared to what it would be under the foreign tyranny. But this is not true if the economy we are referring to is that of the country whose rulers are the war aggressors—except for the eventual looting of the aggressed after the war. In the case under consideration, the tyrant aggressor has been the Russian state, and it cannot be sensibly argued that the war is benefiting the economy of its subjects even if the GDP numbers are up.
John Maynard Keynes is famously known for arguing that, during a recession with involuntary unemployment, “pyramid-building, earthquakes, even wars may serve to increase wealth” (The General Theory of Employment, Interest and Money [1936], p. 129). He did add, though, that doing useful projects would still be better. At any rate, Russia was not in a recession before the invasion of Ukraine. So the IMF’s line does not make much sense anyway.
If it were true that war promotes economic growth, I would advance the following proposal. Let every national state create a Special Growth Zone (SGZ) proportional to the size of the country. By law, the inventories of many commodities and materials, if not of consumer goods, would have to be stored there: wheat, steel for car manufacturing, plastic for baby cribs, wood for house building, etc. The government would also offer free land and other subsidies to companies interested in building their factories there. When the country’s rulers feel a need to boost the economy, the SGZ would be activated by an emergency declaration from the president. Adding to what is already in the SGZ, the government would move whatever is movable (at reasonable cost) by air, water, and road: tanks, airplanes, air defense batteries, etc. Then, the country’s own armed forces would reduce the SGZ to rubble with artillery and missiles. In case of serious economic underperformance, tactical nuclear weapons could be used. Gladiator fights could be organized on the rubble to destroy some human capital too. Would the IMF say that GDP growth was stronger than expected on account of the (fake) war?
READER COMMENTS
Craig
Feb 3 2024 at 12:19pm
I have some suspicion the Russians are trying to hide the economic pains of the conflict.
Professor Hanke wrote: “According to the Central Bank of the Russian Federation, Russian inflation expectations jumped to 11.1% in July. Today I measure inflation at 60%/yr, ~5.5x the central bank’s data point. The expectations appear to be way too optimistic,” the economist said in a tweet.”
So perhaps the Russian economy is nominally growing and if one’s estimate of inflation is off it might appear that Russia real GDP growth is growing. And of course let us not forget propaganda, the Russians necessarily need to hide economic pain to appear strong to try to get a better bargain at the negotiating table.
https://markets.businessinsider.com/news/currencies/russia-economy-inflation-60-percent-falling-ruble-steve-hanke-2023-7#:~:text=Russian%20inflation%20is%20soaring%20at%20extreme%20levels%20thanks,times%20the%20level%20reported%20by%20the%20central%20bank.
Pierre inquires: “In case of serious economic underperformance, tactical nuclear weapons could be used. Gladiator fights could be organized on the rubble to destroy some human capital too. Would the IMF say that GDP growth was stronger than expected on account of the (fake) war?”
There never seems to be a shortage of advocates for military Keynesianism. Personally my favorite anecodote is that instead of fighting a war we could launch an expedition to take care of the penguin threat in Antarctica. Military Keynesianism should be considered some kind of economic heresy, instantly stained by the genuine glee peace brings as economies shift from a war footing to a period of peeace.
Here’s a toast to #worldpeace we surely need more of it.
Pierre Lemieux
Feb 3 2024 at 2:18pm
Craig: I agree with your doubts on Russian GDP figures, and I actually had a related parenthesis in my post draft which I deleted at the last minute. One would think that the IMF would have taken this into account, but I did not try to check this.
Matthias
Feb 4 2024 at 4:09am
Instead of talking about the penguin threat, you might want to mention the real life Emu Wars that Australia fought (and lost).
See https://en.wikipedia.org/wiki/Emu_War
Though I have to admit, they didn’t have any Keynesian pretensions as far as I can tell.
Jim Glass
Feb 4 2024 at 1:08am
The Russian Ministry of Defense in recent days has released a surprising number of announcements amusingly along the lines of…
“Yesterday Ukraine launched 24 missiles at our facilities is Crimea. All the missiles were successfully intercepted and destroyed. Wreckage from them fell on a naval fuel depot, S-400 missile defense battery, and the regional military defense headquarters.” They’re becoming a meme on Twitter/X/whatever-it-is these days.
Their official economic data is likely about as candid. Even so, it is not pretty. Here’s a presentation of the latest official data, with links to the Russian Ministry of Finance web site.
The Russians are burning through their finite reserves (they can’t borrow internationally) to pay for booming war spending. If one counts all that big new spending on artillery shells and other stuff that gets blown up in a couple months as an addition to GDP, while ignoring the conflagration of reserves, I guess one could say the economy is “still growing, resilient”.
(Much like China is doing so well hitting its GDP target every year by incurring as much new debt as it takes to build as many award-winning bridges to nowhere, high speed trains that can’t pay their own electric bills, and apartment buildings nobody will ever live in, as it takes.)
Matthias
Feb 4 2024 at 4:11am
There’s a lot of wasteful investment in the PRC. However, the most prototypical example often cited, the so called ghost cities, are actually anything but.
They typically fill up over a few years.
Jim Glass
Feb 4 2024 at 1:19pm
They used to fill up after a few years. That’s how the CCP and the Evergrandes got addicted to building them.
Not any more….
Cough, um…
Craig
Feb 4 2024 at 11:21am
As it is often said the first casualty of war is truth.
Knut P. Heen
Feb 5 2024 at 7:56am
The problem with the GDP concept is that it lacks a balance sheet for anything but the corporate sector. If something destroys a factory, the corporation write down the balance sheet and the write-down appears as a cost in the income statement. If something destroys a public building, a public road, or even a private home, they count the rebuild cost as production without any offset from the destruction (pay-outs from insurance companies may partially offset some of the destruction because it is a cost to these companies). This incorrect measurement leads straight to the broken window fallacy. Destruction leads to growth because they systematically do not measure the destruction correctly. It does not matter whether the destruction comes from war or nature.
Pierre Lemieux
Feb 5 2024 at 7:26pm
Knut: I think you have a wrong definition of GDP. But you are not the only one: some economists make similar errors. GDP is meant to measure gross production of final market goods and services (each single italicized word is important). Of course, if one wants to measure something else than gross production of final market goods and services, GDP is not the right thing to measure. The GDP methodology does not make a broken window error. In brief: repairing a broken window in an office or a home is an input (to some final good or service) and, for this reason, does not appear in GDP. I discuss what GDP is in a Regulation article: “What You Always Wanted to Know about GDP But Were Afraid to Ask; this article does raise some real problems about GDP. A good macroeconomics textbook may be an easy solution to understand the basics; the BEA’s NIPA Handbook: Concepts and Methods of the U.S. National Income and Product Accounts provides more exhaustive explanations (they also have a useful primer).
Robert EV
Feb 6 2024 at 9:35pm
Free market price = marginal utility only when items providing less utility can be returned without friction. I’ve thrown more than one item immediately in the trash or recycle bin because it’s non-returnable, or prohibitive to return it. For other items the cost of returning the item is a “broken window”, but I presume it is captured in GDP (postage or gasoline + vehicle maintenance).
Jose Pablo
Feb 5 2024 at 9:23pm
stronger-than-expected growth in 2023 on account of high military spending
How can be “military spending” included in any measure of welfare (or attempted measure of welfare)?
Military spending is the ultimate Keynesian pyramid building (what’s the difference?)
Economy A produces 3 Gerald R Ford class aircraft carriers with a total value of $40 b
Economy B produces potatoes, beef, wine, olive oil, dresses, cars and dry martinis with a total market value of $40 b
Have people in Economy A and people in Economy B a somehow similar level of welfare?
Craig
Feb 5 2024 at 10:35pm
Hmmm and I’m not seeing Gavin MacLeod pointing me to the all you can eat buffet either, Jose.
Pierre Lemieux
Feb 6 2024 at 9:52am
Jose: GDP is not even an attempted measure of welfare, although it provides one indicator over long periods of time or when it shows very large differences. It is, at best, a measure of the standard of living (average income). Now, if the aircraft carriers protect a free society against invasion by foreign tyrants or thugs, they must be worth their weight in potatoes. Anthony de Jasay considers foreign invasion the only reason why liberal anarchy may not survive and thrive.
Jose Pablo
Feb 6 2024 at 2:31pm
“Standard of living” is probably closer to what I meant, Pierre. Certainly, having the ability to produce more goods and services per capita should help with that.
My point is that to this end (living “better”), “some goods and services are better than others”. “Keynesian wasting of resources” is not a 1 / 0 situation but a continuous. Digging holes and immediately filling them up is on one side of the continuous, producing potatoes is on the other side. Building and operating 11 aircraft carriers and tearing them down later on, mostly unused for “defensive purposes”, is closer, in that “wasteful Keynesian stimulus scale”, to digging holes and filling them up than it is to producing potatoes.
And the “fending a foreign invasion” argument always sounds to me like a convenient excuse and a probe of lack of imagination. A very “primitive” solution.
First, it is cynical, it is very difficult to argue that having 11 aircraft serves the purpose of “defending against tyranny”. That is stretching the meaning of “defensive” to the point of rendering it meaningless.
The pyramids also had a deterrence purpose. They were a way of showing how powerful a society was when it could waste such a huge amount of resources. Like aircraft carriers. Kind of a “peacock tail strategy”.
Second, it is a self-defeating strategy. Your “only for defensive purposes army” build up will sure make others feel threatened. And for very good reasons. Afterall any country is just one January 6th away from tyranny (Reagan has been probed an optimistic when he said “one generation away”). The only response that is left to other countries is to built up their own army, further threatening your own country, which should respond wasting more resources on more weapons. And it is just a matter of time before you don’t have the bigger army (as probed by Egypt, Sparta, Macedonia, Mongolia, Rome, Spain, France, UK …). What a Sisyphean waste of resources!
Third, it is a “transition problem”, not an “end game” problem. You don’t need to defend against armies if “countries” doesn’t exist. It doesn’t make any logical sense to say that the only justification for governments is that they protect individuals against governments. Get rid of all governments and problem solved!
We have an unjustified, primitive, religious believe in the god of war. And we keep wasting resources to pray to this awful, blood thirsty, god. For an animal capable of writing symphonies and poetry and developing AI, it is extremely disappointing. At least the resources used in this should be regarded the same way that the resources used in the “digging and refilling holes” activity.
Craig
Feb 7 2024 at 12:03am
“We have an unjustified, primitive, religious believe in the god of war.”
Who are you to question a million years of evolution?
I do share your sentiments, but I think 8% (google) of Asia is descended from Genghis Khan. And even if not specifically true of course he was surely prolific.
Jose Pablo
Feb 7 2024 at 1:42pm
Fair enough, Craig. It was, certainly, a normative position on the meaning of “being human”.
I very much doubt, though, that Genghis Khan would have the same reproductive success nowadays in downtown Manhattan. He, very likely, would be better off (in this regard) being the guitar player of a pop-music band.
And yes, I would call this change “evolution”.
Craig
Feb 7 2024 at 4:04pm
There are aspects of modern society that punish violent traits and will make those traits less likely to be passed on.
Jim Glass
Feb 22 2024 at 4:53pm
Nobody’s reading this comment thread any more, I’m sure. But for the record…
The IMF just increased its GDP projection for Russia in the coming year while saying the increase will hurt the economy — because the increase is coming in the form of wartime production and wartime production harms productivity and consumption. “It’s like the Soviet Union”.
https://youtu.be/G5KQh4ClCp0?t=259
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