A Good War for Economic Growth?

Abstract

ABSTRACTWith the implementation of the UN’s System of National Accounts 2008 (SNA 2008), an unusual impact of wars on economic growth emerged. The SNA 2008 enables nations to include the depreciation of military hardware in their Gross Domestic Product (GDP) calculations. Economic growth can be furthered not only by making extensive military investments in force modernization but donations of weapons and ammunition can also be factored into a nation’s national accounts. This research note presents how the SNA has affected the Czech Republic, a member of both the EU and NATO, which is a small-sized country that since 2022 has donated an extraordinary volume of second-hand hardware to Ukraine, which has contributed to the economic growth of Ukraine.KEYWORDS: System of National Accountsdepreciationmilitary aid AcknowledgmentsThis research was supported by the Czech Science Foundation in the project 22-25205S “Structural obstacles and opportunities for the cooperation and integration of post-communist EU member countries in European defense cooperation”. Authors are indebted to the Czech Ministry of Defence for data on military hardware.Disclosure statementNo potential conflict of interest was reported by the author(s).Notes1 United Nations. The System of National Accounts 1993 (New York: United Nations 1993).2 Using the expenditure approach for the computation of GDP, GDP is the sum of consumption (C), investment (I), government expenditures (G), and net exports (X – M). Also, the effect of defense expenditure paid by the government (G) for imported (M) capital in the same year is neutral. (See P. Poast. The Economics of War ‎(New York: McGraw-Hill/Irwin 2006) pp. 59–60.3 United Nations. The System of National Accounts 2008 (New York: United Nations 2008) p. 321.4 For example, defense expenditures on roads and railways have always been calculated into GDP as public investment. Newly, taxpayers’ money spent on weapons became public investment too.5 Eurostat. Essential SNA: Building the Basics (Brussels: Eurostat 2012).6 V. Kermiet and V. Rybáček. Implementace ESA 2010. Mimořádná revise národních účtů (předběžné výsledky) (Praha: Český statistický úřad 2014). https://www.czso.cz/documents/10180/23193798/csu+tk+nu+prezentace.pdf/eaa13af7-837c-426f-93a2-c23af0294293.7 ‘Who is Doing Most to Help Ukraine Against Russia? America, Poland and Tiny Baltic States Stand Out.’ The Economist. https://www.economist.com/graphic-detail/2022/10/12/who-is-doing-most-to-help-ukraine-against-russia (2022).8 ČTK. ‘Česko daruje Ukrajině desítky tisíc zbraní.’ České noviny. https://www.ceskenoviny.cz/zpravy/cesko-daruje-ukrajine-desitky-tisic-zbrani/2168050 (2022).9 ČTK. ‘ČR poskytla Ukrajině vojenský materiál za 3,5 mld Kč, Chystá další dodávky.’ České noviny. https://www.ceskenoviny.cz/zpravy/cr-poskytla-ukrajine-vojensky-material-za-3-5-mld-kc-chysta-dalsi-dodavky/2212682 (2022).10 ČTK. ‘První vrtulníky darované z USA by mohly přiletět do konce příštího roku.’ České noviny. https://www.ceskenoviny.cz/zpravy/prvni-vrtulniky-darovane-z-usa-by-mohly-priletet-do-konce-pristiho-roku/2245105 (2022).11 ibid. 6.12 J. Sixta, M. Šimková, K. Vltavská, and J. Zeman. ‘Czech GDP between 1970 and 1989 Based on ESA 2010.’ Statistics and Economy Journal 96(1) (2016) pp. 4–12.13 The depreciation on the level of the national economy is represented by the consumption of fixed capital, “ … the value of capital assets available for production purposes at a given point in time”. Its meaning is like depreciation within standard double-entry business accounting. This indicator is crucial. It shows an annual amount of assets, such as buildings, roads, cars, etc., employed in the production process. It is used for the derivation of net balancing indicators (net domestic products, etc.) and it is a part of the cost method of estimation of output for non-market producers, i.e., government. Hence, any depreciation of government assets, including weapons, is calculated into the GDP as growth.14 J. Ženka, B. Pernica, and J. Kofroň. ‘The Geography of Demilitarization: Do Regional Economic Disparities Affect the Spatial Distribution of Military Base Closures?’ Moravian Geographical Reports 29(4) (2021) pp. 252–66.15 M. Chovančík. ‘Defense Industrialization in Small Countries: Policies in Czechia and Slovakia.’ Comparative Strategy 37 (2018) pp. 272–85.16 B. Pernica. ‘The Czech Defence and Security Industry: Taking the Pulse to an Ailing Man.’ Defense & Security Analysis 36(2) (2020) pp. 234–44.17 J. Fučík. ‘Soumrak tankového věku (Výroba tanků v Československu v letech 1953–1990)’. Vojenské Rozhledy 2(3) (1993) pp. 14–24.18 J. Štaigl and P. Turza. ‘Zbrojná výroba na Slovensku v rokoch 1969–1992 1. časť”. Vojenská História 17(2) (2013) pp. 75–112.19 J. Štaigl and P. Turza. ‘Zbrojná výroba na Slovensku v rokoch 1969–1992 2. časť”. Vojenská História 17(3) (2013) pp. 77–109.20 ČTK. ‘Obrana podepsala smlouvy o darování tanků Leopard z Německa.’ České Noviny. https://www.ceskenoviny.cz/zpravy/obrana-podepsala-smlouvy-o-darovani-tanku-leopard-z-nemecka/2269633 (2022).21 ibid. 1022 MFČR. Macroeconomic Forecast of the Czech Republic, August 2022. Prague, Ministry of Finance. https://www.mfcr.cz/assets/en/media/2022-08-25_Macroeconomic-Forecast-August-2022.pdf. (2022) p. 323 Nonetheless, the impact on the GDP may be broader, but it can be accessed only with difficulties at this moment due to a lack of robust statistical inputs. For example, the Forbes CZ (Forbes. Velká srdce českého byznisu. Forbes.cz. 5(4) (2022) pp. 36–37) presented that the TOP 100 wealthy Czech people donated CZK 881 m (EUR 33 m) to Ukraine in the two first months of the war. Besides, some hardware is funded with crowdfunding. For example, people collected CZK 30 m (EUR 1.3 m) in one month and they bought one T-72 M1 and let it be refurbished. This tank was sent to Ukraine as the tank Tomáš, named after the first Czechoslovak president Tomáš Garrigue Masaryk. Since the start of the war, people collected CZK 240 m (EUR 10.1 m) (See Kolařík, T. Čechy darovaný tank Tomáš je zmodernizovaná T-72 na míru ukrajinské armádě. iDnes.cz. https://www.idnes.cz/technet/vojenstvi/tank-tomas-ukrajina-t-72m1-darek-pro-putina.A221020_112534_vojenstvi_alv (2022)). In addition, the Netherlands and the United States paid for a refurbishment of 90 T-72B tanks in the stock of private owners; 26 tanks were expected to be delivered by the end of 2022 (see ČTK. ‘USA a Nizozemsko zaplatí renovaci 90 Českých tanků T-72 pro Ukrajinu.’ České Noviny. https://www.ceskenoviny.cz/zpravy/usa-a-nizozemsko-zaplati-renovaci-90-ceskych-tanku-t-72-pro-ukrajinu/2281231 (2022)) but they were not as presented in Appendix A Finally, the Czech defence industry delivered military equipment for CZK 30 bn (EUR 1.3 bn) (ČTK. ‘Resort obrany poskytl Ukrajině 38 tanků, 55 BVP a 13 kanónových houfnic.’ České Noviny. https://www.ceskenoviny.cz/zpravy/resort-obrany-poskytl-ukrajine-38-tanku-55-bvp-a-13-kanonovych-houfnic/2329777 (2023)).24 S. Broadberry and M. Harrison (eds.). The Economics of World War I (Cambridge: Cambridge University Press 2005).25 M. Harrison. (ed.). The Economics of World War II. Six Great Powers in International Comparison. (Cambridge: Cambridge University Press 1998).26 It must be stated that flow indicators are contributions to economic growth as well as an investment into both new and second-hand weapons. Their possession is treated as services, contributing to a gross domestic program by the provision of public service, i.e., defense. This service is valued by the deprecation of weapons, their maintenance, and wages of soldiers. On the other hand, the national wealth is going to be decreased either by using or destroying assets (before the end of their life-cycles).27 ibid. 828 ČTK. ‘ČR Poskytla Ukrajině vojenský materiál za 3,5 mld Kč, Chystá další dodávky’. České noviny. https://www.ceskenoviny.cz/zpravy/cr-poskytla-ukrajine-vojensky-material-za-3-5-mld-kc-chysta-dalsi-dodavky/2212682 (2022).29 ibid. 1030 ČTK. Resort obrany poskytl Ukrajině 38 tanků, 55 BVP a 13 kanónových houfnic. České noviny. https://www.ceskenoviny.cz/zpravy/resort-obrany-poskytl-ukrajine-38-tanku-55-bvp-a-13-kanonovych-houfnic/2329777 (2023). and PL31 Parlamentní Listy. ‘Miliardy šly do našich tanků. Ty míří na Ukrajinu. Svědectví a strach, co nám zůstane.’ ParlamentníListy.cz. https://www.parlamentnilisty.cz/arena/monitor/Miliardy-sly-do-nasich-tanku-Ty-miri-na-Ukrajinu-Svedectvi-a-strach-co-nam-zustane-718501 (2022).32 CZSO. Statistical Yearbook of the Czech Republic. Prague, Czech Statistical Office (1994–2022).33 CZSO. National Accounts. Archived data valid before 30. 9. 2014. Prague, Czech Statistical Office. https://apl.czso.cz/pll/rocenka/rocenka.indexnu?dejarchiv=2 (2014).34 CZSO. National Accounts. Prague, Czech Statistical Office. https://apl.czso.cz/pll/rocenka/rocenka.indexnu (2022).35 MOD. Přehled výzboje a techniky. Praha, Ministerstvo obrany ČR. https://acr.army.cz/scripts/detail.php?pgid=399 (2023).36 T.-D. Young. ‘What are Governments in Central and Eastern Europe not Buying with their Defence Budgets? The Readiness Clue.’ The RUSI Journal 164(2) (2019) pp. 36–55.Additional informationFundingThis work was supported by the Grantová Agentura České Republiky [22-25205S].Notes on contributorsBohuslav PernicaBohuslav Pernica, lieutenant colonel (ret.), works at the Institute of Administrative and Social Sciences, Faculty of Economics and Administration, University of Pardubice, Pardubice, Czech Republic. He is the co-author of the methodology for the calculation of depreciation of military hardware into GDP according to ESA 2010; his research focuses on issues of the All-Volunteer Force, military spending, the defense industry, Security Sector Reform in the post-communist Czech Republic, and corruption.Jaroslav SixtaJaroslav Sixta works at the Department of Economic Statistics, University of Economics in Prague, Prague, Czech Republic. He is the vice president of the Czech Statistical Office and a senior research fellow at the Department of Economic Statistics. He is the author of the national methodology for the calculation of depreciation of military hardware into GDP according to ESA 2010. He focuses on issues of economic statistics, national accounts, statistical methods, and applied economics in statistics, mainly input-output analysis.