The Allocative Cost of War
Why is war so economically costly? Our answer is that modern war lowers output not only by destroying productive factors, but also by making the surviving economy work less efficiently. Using uniquely comprehensive firm-level data collected during Russia’s full-scale invasion of Ukraine in 2022, we document a dramatic collapse in allocative productivity in Ukraine. To […] The post The Allocative…
Why is war so economically costly? The answer lies in the fact that modern warfare not only destroys productive assets but also renders the surviving economy less efficient. A recent study based on extensive firm-level data from Russia's invasion of Ukraine in 2022 reveals a significant drop in allocative productivity in the country.
To better understand the factors contributing to this decline, the researchers examined spatial differences across Ukrainian districts and compared the situation with Russia's aggression in 2014 and the 2008 Global Financial Crisis. The key takeaway for policymakers is the importance of restoring allocative efficiency and establishing institutional frameworks that enable swift reallocation of resources during times of crisis, ultimately safeguarding economic capacity, defense, and national security.
This insight emerges from a recent working paper authored by Yuriy Gorodnichenko, Marvin Amann, and Oleksandr Talavera.
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