Economic impacts of modern-day conflicts through the lens of the Israel-Palestine and Russia-Ukraine conflict.
In a world where countries are becoming ever more interconnected and dependent on each other, the smallest of fissures can have drastic repercussions. When China sneezed, the entire world caught a cold that led to a complete global shutdown, drastically altering the lives of millions. Similarly, the consequences of conflicts have grown both in magnitude and spread. Even localised conflicts lead to widespread consequences that have the potential to affect people on the other side of the world. Let’s take a look at the Russia-Ukraine and Israel-Palestine conflicts to gain an understanding of this.
The Russia-Ukraine conflict has had significant global impacts due to Russia and Ukraine's economic positions. Russia and Ukraine contribute 25-30% of global wheat exports and a significant share of oilseeds, leading to high food inflation rates. The supply chain disruptions and outright blockades have resulted in Sunflower and other edible oils being over 47% more expensive for "euro-area" consumers in January 2023 as compared to January 2022. Russia's blockade of the Black Sea has disrupted global food markets by introducing a scarcity of supply. Additionally, Russia is the world's largest exporter of natural gas and the third largest oil producer, leading to oil prices going over $125 per barrel since the conflict began. The European Union is particularly vulnerable, as 30-40% of its gas supply comes from Russia. If no access to Russian gas is available, its GDP could fall by around 2%. The rising prices also impact economies outside Europe due to spillover effects. In such a situation, firms adjust pricing to reduce their share of the burden and workers are incentivised to adjust their wages to recoup wage losses. This feedback system not only reduces real income but can also eventually worsen inflation. Countries with direct trade, tourism, and financial exposure to Russia and Ukraine will experience additional pressures. Economies reliant on oil imports will experience greater fiscal and trade deficits and inflation. Other exporters of oil and natural gas have also benefited from higher prices. By importing Russian crude oil, refining it domestically, and exporting a part of it, India not only kept local fuel prices in check but also benefited from the increased business and increased foreign currency reserves.
One might think that the comparatively localised scale of the Israel Palestine conflict might lessen its effects, unlike the Russia-Ukraine conflict. Reality, on the other hand, is quite different. A third of global oil supply originates from the Middle East. Any instability in the region can cause speculative price hikes due to potential supply disruptions, which then affects global inflation rates. Major oil importers like India, China and the US could face higher inflation, affecting production and energy costs which affects businesses and consumers alike. Disruptions to gas prices are also likely with upward pressure on European gas prices has already been observed. The involvement of other nations, especially Iran, could worsen the situation, potentially affecting the safe passage of vessels through the Strait of Hormuz, a critical global supply route. In the scenario that Iran is brought into direct conflict with Israel, Bloomberg Economics estimates oil prices could soar to $150 a barrel and global growth drop to 1.7% — a recession that takes about $1 trillion off world output. Regional instability could also severely impact domestic stability and tourism in neighbouring countries, which could be disastrous for countries like Jordan, which has high external debt, and Lebanon, whose GDP has declined by over 50% since 2018. Additionally, In FY23, Israel's total imports from India stood at $8.4 billion. The instability in the region could hamper India’s revenue from exporting to Israel.
Thus, conflicts no matter how big or small can have large impacts on the global economy. The difference in scale of the consequences arises out of these main factors - the strength of the relevant economies, their trade relations, and their socio-economic pull in diplomatic settings. The economic consequences of the modern day conflict are far reaching and they manifest in similar ways - rising costs of living, increased inflation, supply chain disruptions, knock on effects, political and economic instability etc. all of which impact countries, businesses and the common person no matter how closely, or distantly related they are to the conflict.
Picture Credits: Centre for Economic and Policy Research
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