‘Wars as headwinds and economic opportunities’

Wars are world-shaking events to participants: glory to winners and destruction to losers.

To non-participants, they provide challenges that complicate their economic problems. They also bring new opportunities. Those opportunities ought to be seized. Failing so could mean losses.

Wars. The Israel war with Hamas, which has put the Middle East on war alert, could lead the global economy into greater uncertainties. The new conflagration in the Middle East happens at a time when the war in Ukraine had already stoked the world’s grain and energy prices.

Meaningfully, the inflationary problems of recent experience in many countries, including us in the Philippines, have been partly stoked by the recent wars.

The Israeli war against Hamas could only contribute to the heightening of concerns about global energy supplies. When such events happen, the prices of major commodities in world trade are also affected.

Throughout her history as an independent state since its founding in 1948, Israel has been under constant existential siege from its Arab neighbors, including rebellion from its Palestinian residents.

The behavior of Arab nations, which are in sympathy with the fate of Palestinians, can be predicted: they support the Palestinians, who are Arabs. Such nations control a key economic commodity – the supply of oil and gas – that is essential to global growth.

For instance, during the Gulf War of 1967 and the Yom Kippur War of 1973, the Arab energy countries conspired to withhold oil and gas supplies, thus causing the multiple rise of energy prices to levels that were unknown before.

Those years altered global development. Countries with abundant energy resources became much richer and those that had to import energy to feed their own needs became very challenged economically. Those that found means of adjustments managed well, but many other oil-importers became impoverished.

Israel’s war with Hamas could potentially have further global impact if it leads to the tightening of energy prices again. If, in the efforts of the Israelis to obliterate Hamas with its military might, untold sufferings and misery are brought to innocent Arab civilians, Arab countries in control of oil and gas supplies could easily disrupt world supplies. Such is the grave danger of the current Israeli Hamas war.

As much as the Ukraine war has already led to the problem of grain and energy prices becoming more volatile and imposing a penalty of imported inflation into our Philippine development experience, the addition of the Israeli Hamas war therefore complicates the challenges that we face.

Examples of shooting wars in our region. Since Philippine political independence in 1946, three major wars have visited our immediate region in East Asia: (1) the Chinese communist victory in that country’s civil war [1949]; (2) the Korean War (1950-1953); and the (3) the Vietnam War [1950s-1975].

The Chinese Civil war was a long running struggle between the communist rebels led by Mao Zedung and the nationalist-controlled government led by Chiang Kai-shek. In 1949 after decades of struggle, the communists consolidated power in the mainland, and the nationalists retreated to Taiwan. The Korean War and the Vietnam War were American wars that tried to hold off the spread of communism in East Asia.

The outcomes of these hot wars defined the political boundaries of the Cold War between the United States on one side and the Soviet Union. It was a titanic cold struggle between the democracies and communism. These regional wars helped avoid a direct larger total war between these two nuclear powers. In 1991, the Soviet Union collapsed as a single state, and its components were inherited principally by Russia

Opportunities and challenges for third countries. The outcome of the civil war in China was very significant as a political matter because China in those days was still a very poor country. Once it achieved unification as a nation, China became an important factor in the two hot wars that followed.

China became a direct participant in the Korean War when it intervened in the war when North Korea was all but defeated. In the case of the Vietnam War, China eventually had become an interested indirect supplier of war materiel that helped the Vietnamese in their guerilla war against the Americans.

The two hot wars brought about – on the economic front – the rise of global demand for commodities that enabled many countries in East Asia to accelerate their economic growth during the period.

This was especially the case of Japan. Impoverished and defeated after World War II, the Korean war helped in speeding up its economic recovery by building up its export-based economy.

The so-called four economic tigers – South Korea, Taiwan, Hong Kong and Singapore – whose economies were helped by outward outlook with the assistance of their depreciated currencies and opening to foreign capital investments were quick to take advantage of economic opportunities that immediately arose. They filled up the rise of demand for commodities most needed – manufactured low cost items like boots and textiles, and garments and simple implements.

These countries began manufacturing low cost consumer goods that filled the wants of advanced countries. They captured these markets by keeping their exchange rate reasonably market-based. They utilized their low-cost labor extensively in their choice of goods to manufacture. They attracted foreign capital. All these stimulated the productivity of their economies to become major exporters.

It is interesting to note that during this period, the benefits to the Philippines were not as decisive. We benefited in part from the rise of commodity prices for our exports, which were mainly agricultural. But Philippine economic policy was in the wrong direction. The dominant policy was high protection of domestic industries being promoted by import and exchange controls and later, high tariffs. The peso was highly over-valued and Philippine-made goods were not competitive.

In those days of early Philippine efforts to set up industries, we were carried away dominantly by a highly protectionist approach to development. Unlike our neighbors that had found a niche for efficient economic growth that was designed to produce for world markets, our policies were essentially made to produce goods for ourselves – the mantra of growing through (high-cost) import substitution.

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