The WWI Economics Of COVID-19

COVID-19 is wreaking havoc on our lives, health, and the economy. Given the global scale of action to combat the virus, it’s no far stretch to equate the current economic conditions to those brought about by a global war. Here, we discuss The Economics of World War I (2009), edited by Profs. Broadberry and Harrison from the University of Warwick, to find the ways the Great War is similar to the current pandemic and the economic lessons we can learn from it.

Similarities

• WWI’s first phase was considered “business as usual.” People assumed fighting would take place like the wars of the preceding centuries, with a clear distinction between front-line soldiers non-combatant civilians. It didn’t, and another shock was the war’s global scale: it was a regional conflict following Archduke Franz Ferdinand’s assassination that soon swamped the whole world.

COVID-19 spread similarly: (1) countries were not anticipating it to impact the civilian population much; (2) they failed to realise differences from the previous epidemics such as SARS or MERS; (3) and it has been a complete surprise how extensively the virus has halted the global economy.

• From late 1916, countries realized they were approaching total war. Consequently, nations mobilized all their resources to provide wartime supplies: ammunition, military equipment, and rations.

Now, we have similarly scaled mobilisation of medical resources against COVID-19. In the US, President Trump recently invoked the Korean War-era Defense Production Act to order General Motors to use its industrial capacity to manufacture ventilators. And in the UK, the government implored retired medics to return to NHS.

• During WWI we saw fiscal outlay increase globally (Table 1).

Table 1

Source: “The Economics of World War I (2009)“

On 29 March 2020, the American government announced $2 trillion legislation (10% of GDP) to combat the virus. Other economies did the same (for the country-wide response, click here).

5 Main Lessons

Economics Does Matter

Richer countries (most of which were in the Allied Forces) were able to mobilise production, public finance, soldiers, and weapons disproportionate to the size of their economies. They were also able to bail out other allies in times of need. Poorer countries could devote less output to fighting because much of it was needed to meet the subsistence requirements of the population. This economic prowess meant that Allied forces not only deployed more soldiers and produced more weapons, their weapons were largely superior (Figure 1 and Table 2).

If COVID-19 is analogous to a war, richer economies are positioned better than poorer countries in their ability to produce and deploy more weaponry. In the case of COVID-19, these weapons would be testing kits, ventilators, and protective gear.

Figure 1

Source: “The Economics of World War I (2009)“

Table 2

Source: “The Economics of World War I (2009)“

Self-Sufficiency is Overrated

During WWI, Austria-Hungary, Turkey, Germany, and Russia all ran short of food long before they ran out of armaments. Initially, the assumption was that these economies were at an advantage because most of their people could feed themselves (due to peasant agriculture). On the other hand, Britain had a high dependence on food imports and was expected to starve. When war broke out, British farmers were offered higher prices by the government. Additionally, they also had large reserves of unused land. This high marginal productivity of farm labour meant that large increases in farm output were possible with just a few additional resources.

By contrast, in Germany, wartime mobilisation took resources away from farming – primarily laborers and horses. Once in the army, these men and horses still needed to be fed, which required food supplies to be redirected from rural households to government purchasers who paid lower prices. War dried out the supply of manufactured goods to the rural side, as the industrial sector was now primarily concentrated on supplying the armed forces with munitions. Peasant farmers thus fell back into subsistence activities as they had no incentive to produce since they could not exchange the extra output for other goods and services and prices obtained from the government were low. Consequently, the economy began to disintegrate. Whatever the government could get their hands on, they supplied to the army. The market supply of food dried up, causing food prices to soar, and this led to the urban famine which ultimately evolved into revolts and withdrawal from the war.

Lasting Economic Pain

During the war, the German and Austrian economies fell about 20-25% below their pre-war real output. By 1918, the GDP of the Ottoman Empire had declined approximately 40%. While the UK did grow, it was debt-fuelled growth, with the majority of output stemming from wartime production and so untranslatable into a better standard of living for the population (Chart 1).

Furthermore, comparing the economic performance of countries that remained neutral during WWI with combatants (Table 3), we see the slowdown in growth persisted decades ahead. Huge government-run fiscal outlays (Table 1) also meant an exponential increment in tax rates: e.g. the US, whose top tax rate rose from 7% in 1915 to 77% in 1918.

So after we have seen the worse of COVID-19, we may not see a smoother “V” shaped recovery. It may even be that recovery to previous trend values of growth will take decades due to hidden structural changes (e.g. people being wary of using airplanes and avoiding tourism). This, in turn, may dent the consumption and export of many economies. Additionally, governments rapidly increasing their fiscal spending to ward off the virus may eventually have to finance the fiscal deficit by increasing the tax rates later.

Chart 1

Source: “The Economics of World War I (2009)“

Table 3

Source: “The Economics of World War I (2009)“

De-globalisation

Before WWI, from 1815 to 1914, societies saw unprecedented global integration: significant worldwide trade, global capital flows, and international migration. The invention of the telephone and steamships expanded travel and communication on a global scale.

After the war, countries imposed restrictions on trade, capital flow, and immigration to insulate economies. Historians commonly cite protectionism due to a disrupted supply chain during WWI, and nativism as people became wary of foreigners. These policies also set the stage for the Great Depression later on, since the drop in international trade halted one of the major engines of global growth.

With the US (and others) having upcoming elections this year, we should watch whether rhetoric on de-globalization escalates as a second-order effect of this pandemic.

Post-WWI, There Were Economic Winners and Losers

When the war began, the US economy was in recession. But a 44-month economic boom proceeded from 1914 to 1918 as Europeans began purchasing US goods for the war. When the war began, the US was a net debtor in international capital markets, but following the war, it began investing large amounts internationally, particularly into Latin America. It started to overtake the role traditionally played by Britain and other European countries. In contrast, the German government printed money to pay for the war and their sovereign debt went from 5 billion to 100 billion marks. After the war, Germany had to print more money to meet the 132 billion marks of the Treaty of Versailles’ reparations, later causing hyperinflation (Chart 2).

To end on a sanguine note, it may well be the case after the pandemic is over that we see some winners emerging. They’ll probably be either those economies who combated the pandemic well, or perhaps economies with unique features: low global supply integration, a small share of tourism exports, high oil imports (oil prices have fallen significantly), low FDI, and large foreign reserves.

Chart 2

Source: Based on the values in Table IV (page 441) of
“The Economics of Inflation by Costantino Bresciani-Turroni (1937)”

Mehdi is a research analyst at Macro Hive. He’s currently pursuing an MSc in Finance & Investment at Nottingham University Business School and he is a CFA level 3 candidate. Mehdi has previously pursued roles as an Equity Research Analyst, Junior Economist & in Proprietary Trading.

Abdul Akram is a Research Analyst at Macro Hive. He’s currently pursuing a MSc in Finance and Accounting at Imperial College Business School. Abdul is also currently working as an Economics Research Assistant at Lancaster University Management School, Economics Department (GOLCER), since 2017.