The hidden economic cost of war: How conflict undermines productivity
War destroys infrastructure and human capital, but its economic consequences go much further. At a lecture hosted by the Stockholm Institute of Transition Economics (SITE) at the Stockholm School of Economics on September 24, economist Yuriy Gorodnichenko explored how conflict disrupts the allocation of resources, affecting productivity and long-term economic performance.
When war disrupts how economies function
The economic damage caused by war is not limited to what is physically destroyed. Conflict also disrupts how workers, capital, and other resources are distributed across businesses, reducing an economy's ability to use its remaining resources efficiently.
During his lecture, “The allocative cost of war: A view to a kill...ing of productivity,” Gorodnichenko presented research conducted with Marvin Amann and Oleksandr Talavera. Using firm-level data from Ukraine, the researchers estimated that resource misallocation contributed to an approximately 20% loss in productivity following Russia's full-scale invasion in 2022.
The findings suggest that roughly half of the decline in economic output can be attributed to losses in productivity caused by inefficient resource allocation, rather than the destruction of capital and labor alone.
The research also revealed differences across sectors and regions. Agriculture proved more resilient than other sectors, while southeastern Ukraine experienced particularly severe disruptions. The findings also pointed to signs of economic adaptation as firms and workers adjusted to wartime conditions.
Rebuilding means reconnecting resources
The lecture highlighted the importance of economic resilience and policies that help businesses and workers adapt during conflict. Maintaining financial stability and enabling resources to move between firms and regions can help limit the longer-term economic damage.
“To rebuild after war, it is not enough to replace what was lost; we must reconnect what remains,” Gorodnichenko emphasized in his presentation.
The lecture was chaired by Torbjörn Becker, Director of the Stockholm Institute of Transition Economics (SITE).
Access the full presentation to learn more.
