Opinion: The war in Ukraine’s snowball effect
As most people understand, things are not well throughout the world right now. There seems to be a shortage of workers everywhere, supply-line problems, and inflation. And, of course, there’s the war in Ukraine. But many U.S. citizens may not be aware of the overall effect that war has on us and the rest of the world. When Russia invaded its neighbor three months ago, the gambit was like rolling a snowball down a snow-covered hill. As the snowball tumbles down, it grows bigger.
In our modern global economy, Ukraine is both a producer and a consumer, a seller and a buyer. For example, Ukraine is an important exporter of wheat, corn, and sunflower oil. And its customers include countries in every part of the world. But Ukraine also relies on importing certain commodities, like fertilizer. Its closest source for that import has been Russia, which ranks among the world’s top exporters.
Obviously, Russia is not going to supply a country against which it is currently at war with one of its more basic and important needs. This has one of two consequences: Either the Ukraine cuts back on agricultural production (and therefore drives up the price of commodities) or the country’s farmers must contract with other exporters for the same product, but at a greater price (because of the supply-demand equation, increased cost of transportation, or both).
Like other business owners, farmers in Ukraine must also deal with labor shortages (exacerbated by emigration and more men serving in the armed forces), the rising costs of transportation (because of damage to rail systems and highways), and restricted access to water.
According to the Organization for Economic Cooperation and Development (OECD) Interim Report (2022), “Although Russia and Ukraine are relatively small in output terms, they are large producers and exporters of key food items, minerals, and energy. The war has already resulted in sizable economic and financial shocks, particularly in commodity markets, with the price of oil, gas, and wheat soaring.”
It may seem strange that a war, nearly 6,000 miles away, can have a dramatic effect on economic conditions in the United States. However, although a global economy has many benefits, it also has drawbacks when one sector of the economy is suffering any type of disruption. And war, aside from the humanitarian aspects of destruction and death to the combatants, seems to have negative effects worldwide.
The Russia-Ukraine War, of course, came right behind a global pandemic. However, before the Russian act of aggression, the global economy was recovering. As the figure from the OECD shows, most of the world was bouncing back from COVID in 2021 in terms of gross domestic product (the total value of goods and services produced within a country). However, the percentage of growth fell back in 2022 because of the war, and OECD projections indicate that it will continue to decline for the rest of the year.
Like the snowball rolling downhill, regardless of the outcome of the war, the effects of the economic reversal will continue into the year ahead. As you can see in Figure 1, only Japan and Indonesia escaped the 2022 decline in GDP, but both suffer decline in 2023, and only China and Brazil experience a slight growth.
I think that there is a clear message here. Because nearly everyone in the world is tied into a global market, it behooves us all to keep that marketplace as peaceful and cooperative as possible. When the world enjoys stability, we all prosper.
Figure 1. Prior to the war, a global recovery was underway. Source: Economic Outlook 110 database; Markit; and OECD calculations.
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Jim Glynn is Professor Emeritus of Sociology. He may be contacted at email@example.com.