Another week later, Russia’s military assault on Ukraine continues, with Russian dictator Vladimir Putin upping the ante as initial plans for a quick uprooting of Ukrainian government and land turn into a tragic joke.
Like all large-scale invasions, it is a humanitarian catastrophe. It is a political disaster for Europe and the world and, above all, a harbinger of possible future reactions between other personality-dominated non-market economies like China and North Korea and their neighbors. Then there are the economic, unintended effects even more widely than expected.
The directions of these effects can all be predicted, or the possibilities at least discussed. Their magnitudes, however, remain up in the air. They largely depend on continuing or even expanding military operations before Putin – and the “siloviki” military and security chiefs below him – throw in the towel and seek a less costly way out. . It will happen, but the scale of the damage, humanitarian, economic and political, could spread dramatically before it happens.
Also understand that economic damage can be categorized in many ways, both spatially and temporally.
What will be the economic costs for Ukraine? In Russia? To the rest of Europe, in particular to countries like Germany which, in good faith, have become very dependent on Russian fuel supplies? In the United States, so far only bothered by rising gas prices? To the global economy as a whole if confidence is shaken in existing investment conditions and existing financial and trade institutions?
Remember that markets are still shaking as we emerge from the worst pandemic in a century and are still in an unproven recovery from the global financial market debacle sparked by the United States in 2007-09.
And what effects will still be evident this year? This harvest season? Before the next national elections? During the next turn of the US and global economic cycles?
As one expands both in space, from the immediate combat zones in Ukraine to the world, and in time from the remainder of 2022 into the next decade, one moves from risk to real uncertainty, situations not only unknown, but unknowable. Or, to use Donald Rumsfeld’s phrase, “known strangers to unknown strangers.”
Start with the concrete. What will Ukraine suffer in terms of human resources, housing stock and business facilities, industrial base and transport network? All of these are ransacked, though fatalities remain below worst fears. These one-time losses of existing productive resources will limit the resources needed to produce new goods and services to meet the needs and wants of the Ukrainian people. In the years to come, more work and physical resources will have to be devoted to replacing the assets destroyed by the Russian attack. Less will be available for household consumption.
Such recovery can be remarkably quick. On September 1, 1945, Japan’s 100 largest cities were burned down. Almost nothing of productive use remained in the USSR south and west of a line from Leningrad to Moscow to the Black Sea. In large parts of Germany, housing, industry and transport lay in ruins. The railways and bridges crossing the northern third of France had disappeared. Large bombed areas in London, Coventry, Manchester, Liverpool and other British cities remained flattened and tens of thousands of people lived in makeshift temporary accommodation.
Yet recovery in many areas has been rapid. The US Marshall Plan for economic aid to Europe has proven to be one of our nation’s most important actions this century. The economic boost to Japan as a breeding ground for massive US military operations in Korea from 1950 to 1953 was significant but often overlooked. Japan and Germany have become and remain solidly democratic industrial powers.
But the essence of the recovery came from enormous sacrifices on the part of the people of these devastated countries. And the human cost was high.
Now Western Europe and North America will help Ukraine, perhaps enormously. And the Ukrainian people are well educated, dedicated and hardworking. Recovery will come.
But it will come faster if the result of this conflict is a real peace with secure borders in Eastern Europe than if Ukraine remains a Hadrian’s Wall between peace and barbarism. Russia must change its policy. The United States and the rest of the “West” can influence but not determine this. Under the other alternative, Russian rule, Ukrainian recovery remains elusive, especially when comparing Soviet efforts to rebuild post-war East Berlin with what happened in the West – the bombed-out ruins remained decades after the war.
But at the macro level, Russia ultimately needs fundamentally different economic and political systems, much like China, North Korea, Cuba and other nations still mired in an essentially feudal past. But fundamental change can only come from within. The point for now is that maximum destruction of Russian trade and finance in the long run will be counterproductive.
Europe, especially Germany, will suffer at the macro level in terms of total production and at the micro level in terms of cold houses and power brownouts, if the Russian gas and oil shutdown is immediate, total and sustained. . About 90% of the gas consumed in Western Europe is imported and about half comes from Russia. Russia also sells oil to these neighbors, and since they have closed their own unprofitable mines in recent decades, they also buy coal. And then there are non-ferrous metals like nickel, aluminum, titanium and other key raw materials that Russia exports.
The United States is a highly self-sufficient and self-centered nation. We usually overlook other people’s problems. Not understanding the real difficulties our closest friends are facing will be a big mistake, but we probably will.
Until events in Europe shake the entire global financial system as the outbreak of World War I did, the price we could pay will be exorbitant. We fear high gas prices, but we won’t face sold-out gas stations. The ban on imports of Russian crude is a political symbol. No power stations will shut down and we won’t have to deal with unnecessary furnaces and stoves because there is no gas in the local pipes or pipes. Food prices will rise, causing ire at checkouts – but joy for farmers and farm equipment manufacturers. Employment and production will continue to grow.
In other words, we should “humanize” ourselves and focus more on helping others who face much greater difficulties than ourselves. The pressure on Russia must increase until it changes course. But it’s also important to re-examine the international economic structures that have been so helpful to kleptocracies, from “Wild West” cryptocurrencies to banks laundering dirty money in Cyprus owned in part by US Secretaries of Commerce to states like South Dakota willing to prostitute themselves. and their banks to those who hide criminal gains. But those are other matters.
St. Paul economist and writer Edward Lotterman can be reached at email@example.com.