How Would the Economy be Affected by a War?

Warren Buffett, an eternal optimist he may be, recently said that in an interview that the thing that scares him the most is the threat of a nuclear war.

With North Korea’s sixth nuclear missile test and Kim Jung Un’s relentless pursuit of military strength, the threat of a war between North Korea and the rest of the world becomes ever more real.

Worryingly, just last week, intelligence sources have estimated that North Korea’s sixth nuclear test is by far their largest yet. Not only did it create an impact that was the size of a 6.8-magnitude earthquake, experts estimate that the bomb had a size measuring between 50-150 kilotons. Even the lowest estimate is three times as large as the atomic bomb that destroyed Hiroshima in 1945.

With this in mind, I thought it might be a good time to visualise how a nuclear war can affect the world and the economy.

Loss of millions of lives and devastating effects on Seoul

North Korean experts believe that the first actions that North Korea might take if they feel threatened would be an all-out strike on Seoul. Their neighbouring country’s capital city is just a few hundred kilometres from their border and is home to around 10 million people.

The next big city that they might target could be Tokyo. Tokyo is within range of its missiles, and as recently as last week, North Korea test launched a missile that flew over Japanese territory. This led Japanese Prime Minister to urge the United Nations to increase control over North Korea and warned that this is the biggest threat facing his country.

Some experts predict that a war would result in hundreds of thousand of deaths in the first week. Within a month, that number might reach a million. These are highly subjective numbers, but it is hard to disprove this claim. With the proximity of large cities, the determination and military capabilities that North Korea has at their disposal, anything is possible.

What would happen to the economy?

Historically, countries that have been involved in wars have seen a drastic drop in their total economic output or gross domestic product (GDP).

A recent example is Syria’s 60% decline in its GDP since the start of the civil war. Other notable incidents of a drop in GDP include South Korea’s 80% drop during the devastating Korean War and Iraq’s 65% decline in their GDP in 1991.

In a North Korea nuclear war, experts believe that the Korean Peninsula would be the hardest hit, with South Korea’s economy suffering the worst. Given that South Korea contributes to 2% of the global economy, and include some of the biggest international companies the world, there will definitely be a significant knock on effect worldwide.

Capital Economics analysts said:

“In particular, South Korea is the biggest producer of liquid crystal displays in the world (40% of the global total) and the second biggest of semiconductors (17% market share). It is also a key automotive manufacturer and home to the world’s three biggest shipbuilders.”

The US economy will also be severely affected. To get an idea of how much will be spent on the war, we can take the 1952 Korean war as an example. At its peak, the US government was spending around 4.2% of its GDP fighting the war. Frighteningly, analysts believe that a nuclear war of this scale would be much costlier and would push up US federal debt significantly.

The Foolish bottom line

With tensions high, recent threats by North Korea, and Trump’s inclination towards military aggression, the likelihood of war grows. If it materialises, loss of lives and decrease in economic output are inevitable consequences. Hopefully for all of us, however, the conflict can be resolved peacefully, and this tragic scenario will remain what it currently is, a mere theory.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.