The war, which began exactly a year ago, has had an intriguing impact on the US, Euro Zone, Russia and the rest of the world. According to the IMF’s January update of its World Economic Outlook, Russia is expected to grow 2.1 per cent in 2024, against 1 per cent in the case of US and 1.6 per cent with respect to the Euro Area (27 countries). China and India are expected to grow at 4.5 per cent and 6.8 per cent, respectively.
In fact, there are signs of the Russian economy performing better. Sanctions have had a limited impact. The economic support is coming from India and China — two of the largest and fast growing economies in the world. Taking demand for oil as a proxy for growth, suggests that these two countries which are now buying oil from Russia will continue to bolster the Russian economy. Another NATO member country, Turkey, is helping out to circumvent Western sanctions. Russia continues to import important manufacturing inputs such as semiconductors through Turkey. Russian imports from Turkey have doubled in 2022 compared to a year earlier.
Meanwhile, in the Euro region, growth and inflation are in a bad way. In the US, inflation is showing no sign of retreat. This is in spite of repeated rate hikes by the Federal Reserve. Moreover, as data from opensecrets.org suggest, defence manufacturers are known for lobbying and funding political parties, most part of which is inflationary with relatively little contribution in propping up the real sector. Rate hike and inflation in the US and Europe have led to a fall in the real wage rates.
Two other factors are going against Europe. First is climate change. Extreme heatwave, drought and flooding in parts of Europe last year have seen lower crop harvests and higher prices. As per report of the UK Environmental agency, harvests of onion, sugar beet, apple and hops are expected to fall by 10- 50 per cent. Second is the lack of demographic dividend, where bulk of the population is ageing fast. An elderly population usually depends upon social security and pension benefits, while revenues are under stress.
The long term view
In fact, it is in the best interest of the US to stop the war. The EU and the US are likely to gain. For instance, post World War II, economies, in particular Japan and the EU, benefited most from post-war reconstruction.
Something in line with the Marshall Plan, where the Congress spent $13.6 billion for the post World War II recovery, to provide capital and materials to rebuild the economies devastated by the war. Multiplier effect of capital spending kicked in resulting in a faster growth rates in Europe, US, and Japan. The same thing can happen in Ukraine.
However, there can be no denying the fact that the war should stop. There should be no corruption at the time of reconstruction.
The writer is Professor, Mahindra University