The Impact of the First World War on the International Economy - Literature review Example

International Economy: Impact of World War I Name: Tutor: Course: Date: Introduction The essay is aimed at evaluating the impact of the World War I on the international economy. The results of the war on successive economic performance brought about a large human and physical capital scale of destruction with national balance sheets implications. Over the period 1913-1929, European per capita income growth dropped compared to the growth rate between 1918 and 1929. To economies experiencing the worst devastation, it was the highest. Though a rebound existed, it was difficult to undo the international institutional framework damage and the negative effects of the capital destruction caused by the war (Maddison, 1995). The flow ratio of weapons and the capital-intensity of warfare was proliferated in the combat service years. The time of World War I had lesser technological innovations despite similarities in terms of capital movements and trade. The international economy of the last century is qualitatively different from the globalized world economy today. World economy in the pre-war and during World War I In the era of liberalism between 1846 to 1914 economic processes were supported by governments of various political persuasions, noted the baneful consequences of aggressive policies practiced against enterprise and foreign capital. In establishing an international economic order, it witnessed national merits in cooperating with other countries in a moderately free flow of commerce among nations. Ashworth (1987) argues that the volume of global trade rose at four to five per cent annually indicating that the restraint worked in comparison to about one percent a year in the past mercantilism century (1713-1815). Real per capita incomes was lower than the faster trade growth. At the start of the nineteenth century to 1913, the ratios of imports and exports were nearly a third while national incomes increased from two to three percent. The capital destruction effects on economic growth were colossal. It is clear that the economies, comparing 1918 with 1929, that experienced the fastest growth in the 1920s, suffered the worst destruction during the war. The neoclassical growth model prediction showed a marginal product of capital reduction. Knox et al. (2008) on the contrary, compares 1913 with 1929, and shows that the war drastically reduced the growth rate of European per capita income as a whole, and especially for combatant countries, as opposed to neutral countries. Until after World War II, Europe remained on this slow growth path. Between 1950 and 1973, European countries started to experience higher growth rate in retrospect to the European economic trend before 1914 projected in future time (Cosgrove-Mather, 2009). World War I and International Economic Integration The qualitative leaps and Great War quantum towards the integration of countries and regions into the global economy happened. Foreman-Peck (1995) suggest that, across the world, people's working lives and incomes have come to be affected by imports and exports, migration of labour across frontiers, foreign investment, and currency fluctuations. This happened within the imperfectly comprehended operations of an embryo international monetary system. Before the war, industrialization has integrated local, national, and regional economies into a global economy that is interdependent. In practice, how is the world economy affected by war? Small wars involve few belligerents and many neutrals. If the aggressors are big countries, there is a probability of a large global effect (Obstfeld & Alan, 2003). The impacts of major historical wars have been catastrophic on world trade since belligerent countries relate to a great share of global trade with neutrals and themselves. Britain applied economic authority during the nineteenth century over much of the world. Its leadership was linked with the openness of international trade, the market globalization, and capital movements. Scammell (1983) suggest that the general political and economic stability gave rise to multinational corporations that spread over Europe. British hegemony and the favoring conditions were brought to an abrupt end by the World War I. In the 1920s and early 1930s, there was a decline in capital mobility, increased protectionism, and the formation of regional blocs. This ate away at the basics of the world economy, increasing economic instability and contributing to the depression. By and large America carries the blame for the tragic chain of events since it emerged as the strongest economic power at the end of World War I worldwide. The US declined to assume a leadership role earlier played by Britain. This lead to “irresponsibility” exemplified in the people’s minds by the notorious 1930 Smoot-Hawley Tariff, which by about 40 percent, raised the average tax on United States’ imports (Daggett, 2010). The US closed its markets to overseas goods at the start of the depression helping to take the global economy into its worst dive. The situation was exacerbated by the reluctance of the new super power to organize its currency and monetary policies with other countries. Most countries and the US itself had negative consequences from the posture that was more isolationists on the part of the global economic hegemony (Barbieri & Levy, 2008). Trade and other means of economic liberalization have given way to more liberal world trading system and reductions in trade protection. The Great Depression and the two World Wars interrupted trade liberalization resuming after World War II. The General Agreement on Trade and Tariffs (GATT) of 1946 evolved into the World Trade Organization (WTO). Consequently, it characterized essentail reductions in barriers and tariffs to trade in services and goods. Other liberalization aspects led to the production factors increases and movement of capital. O’Brien and Williams (2010) note that some historians and economists suggest that globalization be more than a return to the global economy of early twentieth century and the late nineteenth century. It can be learned that borders were open with migrations of people and substantial international capital flows. The major European countries as part of the colonial system relied critically on international trade as viewed by some British scholars, in retrospect by the British to that period of imperial dominance of the world economy. Countries with bilateral trade ties have a minimal probability of war connected with the loss of trade gains due to the opportunity cost. The probability of conflict is higher for adjoining countries, since closer geographic proximity and contiguity necessitate confrontations on issues like land borders (Clark, 2007). The conflict likelihood is also higher for countries involved in alliances. More ambiguous is the anticipated result of major power status while major-power states potentially engages in military conflict due to wide-ranging interests possibly bringing them into conflict with many states. Their military capabilities worked to dampen actual conflict. Economic Cost of World War I The losing countries experienced high losses to their GDP and bore a heavy burden such as Austria (7.5%), Germany (8.5%) and France (8.0%). Other Allies’ costs were relatively lower; Italy (3.8%), Britain (4.4%). Bulgaria, Serbia, and Rumania witnessed huge human costs on a GDP foundation. On the contrary, United States was slightly affected while India’s massive economy did not register a change. In all the belligerent countries, the world total flow cost of GDP was 3.4% being a cost burden to belligerent countries. These countries comprised about 73% of global GDP, where direct human costs is the ratio of the entire global GDP comprising to about 2.5% of world GD (Estevadeordal et al. 2003). Most young people were war combatants removed from their whole adult working life. During the WWI, the belligerent countries accounted for three-quarters of world GDP, nearly half of the world population, and about 80% of world trade. According Schaefer (2003) both neutrals and belligerents suffered huge economic impacts when the estimation method is used. As expected, trade among belligerents incurred great losses, leading to a 2.28% GDP permanent flow loss. Further income loss of 0.46% was due to a decline in trade involving neutral countries yielding a total GDP flow loss of 2.74%. The trade collapse with belligerents affected the neutrals, though it formed a large share of own trade, hence the huge GDP flow cost of 2.09% (Knox et al. 2008). United States and Britain were both highly developed and rich. The theatre of warfare spanned a great distance from the continents and the briefer involvement of the US in the war inevitably weakened some of the mobilizing impulses felt. Anderton and Charles (2001) learn that poorer countries had less national accounts and good government over-representing the data reported by richer countries. It reduced confidence in the poorer countries data. It also involved military mobilization where persons were transferred into the armed forces (Agnew & Corbridge, 2005). Level of economic development defined the relative accomplishment of the diverse economies in mobilizing their resources when the influences of proximity and combat duration are kept constant. World War I, Agriculture and Industrial production In World War I, poor countries ran out of guns and short of food. This is associated with a negative influence on mobilization by peasant agriculture. British and American farmers when war broke out boosted production because responded normally to incentives and were offered higher prices. Expansion was easier given that British agriculture used to contract a larger part of their economy (Irwin & Terviö, 2002). There were plentiful reserves of little exploited or unused land and the high farm labour productivity meant that substantial farm output increases could be attained with relatively little addition by means of resources. In contrast, the poorer countries saw horses and young men taken for the army therefore taking resources away from agriculture. Food supplies were diverted from rural households to government purchasers since these horses and young men still required feeding in the military (Mackerras, 2000). In the countryside, the motivation for farmers to sell food was greatly lowered But at the same time. The majority subsistence farmers grew food for own consumption and partly for sale. They preferred business purposely to purchase the industrial made goods such as metal and textiles commodities needed for their families. The countryside supply of manufactures was dried up by war. The poorer countries were soon wholly concentrated in small industrial sectors that supplied the army with equipment and weapons, rations and uniforms. Anderton and Charles (2001) acknowledge that the countryside had no capacity supply left after facing steep supplies decline. As a result, subsistence activities became the only option for peasant farmers. In the towns, as the market supply of food dried up, food prices soared. Though there was still plenty of food, the economy began to disintegrate. It was in the wrong place. The farmers preferred own consumption than selling at throw away prices. The government knew hungry soldiers will not fight and at all costs had to feed an army for the simple reason. In a double squeeze, the urban workers were again trapped between peasantry and the army (Broadberry & Harrsion, 2005). There was enough to eat since adequate food stocks existed for everyone to feel happy. Public opinion laid blame on incompetent officials or unpatriotic speculators as awareness of the unequal distribution of food advanced. Cameron and Neal (2003) note that the truth remains for poor countries had few real choices. Where government actions worsened situations, it was more apparent than real that the scope for policy was to improve the circumstance. For instance, the Russian, German and Austrian governments distributed food in rations to the urban dwellers. For budgetary motive, they attempted to purchase food from the farms at low buying prices (Polachek, 2000). The government of richer countries like France, US and Britain increased pay for food producers delivering more. Poorer countries witnessed the government intention to pay less with predictable results. Conclusion The purpose of this essay was to evaluate the impact of World War I on the international economy. The discussion obtains that the wartime led to increase in real GDP, production mobilization, was associated with the fiscal mobilization that is the wartime transfer of resources into government hands in richer nations especially the US. The growth levels of the economy took the multiplier dimension since it mattered for a country’s ability to supply the means of military power. For rich countries, they were able to mobilize soldiers, production, and finance public owing to broad economic capacities (Agnew & Corbridge, 2005). However, to poor countries, localized shortages were not attributed to the decline in aggregate availability but to the spread in famines arising from loss of entitlement by the urban society. References Agnew, J. A., & Corbridge, S. (2005). Mastering Space: Hegemony, Territory and International Political Economy, New York: Routledge, 1995. Anderton, A., & Charles, J. (2001). The Impact of War on Trade: An Interrupted Time Series Study. Journal of Peace and Research, 38 (4): 445-457. Ashworth, W. (1987). A short history of the international economy since 1850 (4th edn). Harlow: Longman Barbieri, K. & Levy, J. (2008). Sleeping with the Enemy: The Impact of War on Trade. 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