International Economic and Social Implications of the War in Ukraine
June 27, 2022
June 27, 2022
Following the economic calamity associated with the COVID-19 pandemic in 2020, the global economy witnessed a sharp recovery in 2021 with world GDP rising by some 6 percent and the volume of world trade rising by slightly over 10 percent, a welcome development after the collapse seen in 2020 when trade contracted by some 8 percent in volume terms. This recovery was expected to continue in 2022. The war in Ukraine has derailed this optimism; the latest forecasts from the World Bank envisage a sharp deceleration of economic growth in 2022, directly as a result of the war, to slightly under 3 percent.
Without doubt one important channel of economic disruption is through global commodity markets. Russia and Ukraine are major exporters of several commodities. Russia is the world’s largest exporter of wheat, natural gas, palladium, nickel, fertilizer and Ukraine is likewise a major exporter of seed oils, wheat and corn. Prices for these commodities have risen sharply in the aftermath of the war, with wheat prices up some 50-60 percent since the beginning of the year. Oil prices had already risen in 2021 by close to 70 percent and are projected to rise further in 2022 by some 55 percent. Europe, in particular, is heavily dependent on Russian energy, with Germany, Finland and Hungary being particularly vulnerable, with natural gas imports from Russia accounting from 60 to 100 percent of total gas imports.
An unprovoked Russian attack on Ukraine is not only causing untold human suffering in the country itself but will have long lasting adverse implications for tens of millions of people all over the world.
These price rises are having fairly direct implications for poverty, food security and inflation. The extreme poverty headcount had already seen a substantial deterioration in 2020-21 because of COVID-19, with more than 100 million people falling below the World Bank’s extreme poverty line ($1.90 per day), reversing for the first time 30 years of uninterrupted progress made since 1990. The share of a typical household’s budget spent on food is about 25 percent in emerging markets and developing countries and it is as high as 40 percent in Sub-Saharan Africa. The likely boost to poverty figures in 2022 could well put SDG 1, on the elimination of extreme poverty by 2030, out of reach. A grim indicator of the social consequences of the war concerns the possible emergence of famine in 2022-23; some 25 million tons of wheat and corn are trapped in Ukraine, equivalent to the entire consumption of these two commodities in the world’s least developed countries, unable to leave the country because of the Russian blockade of the Black Seaport of Odessa.
But the impact on the developing world does not end there. As a result of a pickup in inflation—some of it linked to supply disruptions in the aftermath of the pandemic and some of it reflecting the impact on commodity markets as noted above—there has been a tightening of financial conditions in most countries, and this is putting pressure on highly indebted nations, companies and other economic agents. The move to a higher interest rate environment has also been accompanied by greater volatility in financial markets. The extraordinary loose financial conditions which have characterized financial markets over the past decade and a half are coming to an end and this has led to a sharp rise in uncertainty.
The war in Ukraine has led to the displacement of some 12-13 million people. More than 6 million people have been made refugees as of late May, several orders of magnitude higher than the combined total of the Syrian war of 2014-20 and the Balkan wars of 1991-93. Refugee arrivals will strain local services, particularly for shelter and healthcare, and the dispersion of a large number of refugees could have other social and economic ramifications. Although countries in the vicinity have shown considerable solidarity with Ukrainian refugees, it is not inconceivable that the large numbers involved could end up exacerbating anti-immigrant sentiments in some sectors of society.
COVID-19 resulted in a fairly dramatic rise in the number of undernourished people in the world in 2020, by more than 100 million, to some 770 million people. It is highly likely that this number—perhaps the most eloquent statistic about the shortcomings of our current approach to economic development in the world—will exceed 800 million in 2022. An unprovoked Russian attack on Ukraine is not only causing untold human suffering in the country itself but will have long lasting adverse implications for tens of millions of people all over the world. The mixture of one man’s warped reading of Russian history and an authoritarian regime based on fear have cast a dark shadow over the world’s economic outlook and its collective security.
Beyond the impacts described above there are other risk factors worth noting.
Some may find the question jarring. But it is a historical fact that our recent experience has shown that conflict can sometimes lead to institutional innovations that then create opportunities for future gains in human welfare. The European Union, our most important experiment over the past century in the area of economic and political cooperation, would not have been possible without the chaos and destruction that preceded it during World War II. I see at least two important opportunities accruing already from the war in Ukraine.