War Economics – A Primer (2025)

Wars are costly, economically and financially, particularly protracted wars that require a significant mobilization of economic resources and last for a long time. A resource- and manpower-intensive war like the war in Ukraine has important economic and financial as well as strategic consequences.

Financing the War Effort

In terms of government finances, increased expenditure on personnel and materiel as well as operations can be sustained through higher taxes, lower non-defense spending, greater debt financing or the drawdown of government’s financial resources. Governments can also finance increased expenditure through direct central bank financing of the budget, which often leads to higher inflation (so-called inflation tax). Russia has thus far financed its war effort by taking on little additional debt (if the official statistics are to be believed), instead relying on the drawdown of financial resources. It is noteworthy, however, that higher inflation has also been instrumental in maintaining a low debt-to-GDP ratio.

To the extent that the war effort relies on foreign resources, the economy needs to be able to acquire imports. Similarly to the domestic, budgetary financing of the war effort, the government (or country) can draw down its existing foreign assets, export goods and services to generate revenue to finance imports or raise foreign debt to do so.

This is where sanctions enter the equation. The freezing of the Central Bank of Russia’s foreign-exchange reserves means that these resources are not available to finance imports. Financial sanctions prevent the Russian government from raising foreign debt. Foreign trade sanctions aim to limit Russia’s ability to generate foreign-currency revenue. Relatedly, export controls are meant to force Russia to deny Russia access to critical imports or at least force it to acquire them elsewhere at higher prices, if available elsewhere. More broadly, trade restriction also imposes what economists call deadweight losses on the economy, leading to overall welfare losses, as the economy is forced to switch to more expensive goods internationally or more expensive sources domestically. Finally, to the extent that its ability to acquire critical technology, whether due to export controls or limited financial resources, it will also weigh on long-term economic outlook in terms of productivity growth.

Economic and Political-Economic Constraints on War Effort

The war effort and sanctions have had and will have a negative impact on the Russian economy in the short and long term. Economically, governments are almost always capable of mobilizing enormous resources to support a war effort. Politically, however, they may be or feel constrained, as the greater the resource mobilization, the greater the relative reduction in household consumption, and the worse the long-term economic outlook.

In the short term, it is possible for increased defense spending to boost economic growth provided the economy is operating at below capacity. It does so by pulling idle resources into economic production, both labor and unused capital. But a very significant increase in defense spending reduces output available for household consumption or decreases domestic savings required to finance domestic investment. Reduced household consumption may weaken domestic support for the war. Reduced investment will weaken the medium- and long-term economic outlook. Importantly, unless an economy is able to pull in additional foreign resources, increased defense expenditure typically has both an economic and political costs, or both. (This is the reverse of the post-Cold War peace dividend when a significant decline in defense expenditure translated into increased savings and investment as well as consumption.)

In addition to the impact of higher defense expenditure on consumption and investment, land wars also remove non-negligible amounts of labour from the economy, particularly in the face of significant battlefield losses. If the potential decline of active labor force is not offset by increasing the labor participation ratio (e.g. women, pensioners), the more limited availability of labor will weigh on the economic outlook. While more limited savings lead to a more limited availability of capital (after depreciation), a more limited labor pool will limit the availability of workers. Both will weigh on long-term economic growth, including the availability to support the war effort by way of a growing economy and available resources.

In short, significant non-defense tends to squeeze investment or consumption, or both. The former weakens the economic ability to prosecute the war. The former and the latter will weigh on private consumption, which may weaken political support for the war. The USSR in part lost the Cold War because it was not able to balance defense-related spending with sustainable long-term economic growth and the political need to sustain sufficient private consumption, thus undermining the government/ regime legitimacy. The Russian leadership is acutely aware of the contribution made by economic and financial difficulties to the fall of USSR.

The Long-Term Economic Consequences of the Ukraine War

If financial data are taken at face value, the Russian government faces manageable near-term economic and financial constraints., are very manageable, economically and financially. Defense spending is estimated a 6-7% of GDP. This may not be sustainable over the medium to long term. But financially speaking, it will not present a problem given lower debt levels. However, high inflation does suggest that domestic demand is running too high. This may require a reduction in domestic consumption to offset increased defense expenditure. This may be politically less palatable for the Russian government in domestic political terms. To the extent that wages do not match inflation, real consumption is already declining, of course, pointing to the trade-offs discussed above.

None of this means that Russian cannot mobilize further resources for the war effort, such as reducing household consumption or increasing the labor participation ratio. But it does indicate that increased defense spending and personnel losses do have a material cost to Russia’s short-, medium- and long-term economic prospects. And this is before factoring in the welfare and productivity losses due to reduced international trade and more limited or more costly access to advanced foreign technology. 

In the decade leading up to 2022, the Russian real GDP growth averaged 1.4%. If sanctions and trade restrictions remain in place and Russian maintain defense expenditure of more than 6% of GDP, the economy is at risk of entering stagnation over the medium term. More optimistically, the IMF is more optimistic, projecting real GDP growth of 1.1% in 2026-30. However, given a shrinking workforce, aging technology, stagnating to declining domestic investment, the Russian economy will fare far worsen over the next decade than over the past decade. This, in turn, does create domestic and strategic constraints for the Russian government, not least because its ability to significantly increase defense expenditure will be constrained politically and, at least in the longer term, economically.

Economically, a government can almost always extract additional resources to support a war effort, at least in the short term, by reducing private consumption or domestic investment. However, a sharp reduction of private consumption may prove politically difficult. A sharp reduction in investment will curtail the long-term sustainability of high defense expenditure. The latter would also weaken Russia, whose relative economic position is already relatively disadvantageous in terms of the size of its economic base. In terms of GDP, Russian defense expenditure is already more than three times the expenditure in European NATO countries, while the combined economic size of European NATO, let alone al NATO members is far greater than Russia’s. On a nominal GDP basis, Russia’s economy is about 1/15 of America’s or about the size of Canada. On a purchasing power parity basis, Russia is 20% of European NATO members’ GDP. In other words, Russia is already in an economically disadvantageous position and continued high defense expenditure will lead to a further relative weakening of Russia’s economic power. 

The EU Should Change Its Approach to Countering Trump’s Tariffs (2025)

See also: https://ip-quarterly.com/en/eu-should-change-its-approach-countering-trumps-tariffs

The US president’s powers to set trade policy are vast and unlikely to be checked. Therefore, Brussels should try to influence Trump’s cost-benefit calculus rather than targeting other actors.

The United States’ trade policy has taken a dramatic protectionist turn, increasing the risk of a broader transatlantic trade conflict. If current EU-US trade negotiations over the removal of “reciprocal” tariffs fail, the European Union will adopt retaliatory measures targeting US imports. (US President Donald Trump imposed these tariffs on April 2, but then suspended them for 90 days, before threatening the EU with 50 percent tariffs by June 1, again deferred after a telephone call with European Commission President Ursula von der Leyen last weekend.) 

But even if a transatlantic trade conflict can be averted, the EU needs to review its trade defense and deterrence policies. Instead of simply adopting proportionate retaliatory tariffs, Brussels should consider devising a policy that more directly and immediately affect the cost-benefit calculus of the institutionally dominant American trade policymaker: the president.

Wide-Ranging Powers

The Trump administration’s policies have been made possible by the president’s extensive trade authority. Article I, Section 8 of the US Constitution confers the power to collect taxes and duties and to regulate commerce to Congress. However, starting in the 1930s, Congress began to delegate some of its trade-related prerogatives to the executive. 

Several laws give the US president wide-ranging, if not unlimited, powers to impose trade restrictions. Under Section 201 of the 1974 Trade Act, the president can impose trade restrictions if imports are found to cause serious injury. Under Section 301 of the same act, the president can also impose restrictions in case a foreign government is found to be violating an existing trade agreement or discriminates against US companies. And under Section 232 of the 1962 Trade Expansion Act, the president can impose trade restrictions on national security grounds. Finally, and crucially, the International Economic Emergency Act (IEEPA), enacted in 1977, allows the president to impose wide-ranging economic restrictions on another country following a presidential declaration of a national emergency. 

Other, if partially older, trade legislation exists but, unlike Section 201, 301, and 232, trade-restricting measures under these laws have never been imposed. Nonetheless, the acts indicate how extensive the US president’s trade authority is. 

Section 338 of the Tariff Act of 1930, for example, authorizes the president to impose 50 percent tariffs in case US commerce is found to be discriminated against by another country. Section 122 of the 1974 Trade Act allows the president to impose 15 percent tariffs on the imports of another country of up to 150 days in the event of persistent and large balance-of-payments imbalances. Section 891 of the Internal Revenue Code of 1934 allows the president to double domestic taxes on companies and individuals from countries that have been found to be discriminating against US companies in terms of their domestic taxation regimes.

Significant Flexibility

The trade instruments available to the president differ in terms of the extent, target, and the duration that trade-restricting measures can be imposed. IPEEA gives the president maximum flexibility without having to undergo time-consuming investigations or face restrictions in terms of proportionality, duration, or sector-specific restrictions. The president can simply declare a national emergency and take a wide array of measures aimed at restricting cross-border exchange. (Or at least this is how extensively the Trump administration has interpreted the law.) 

By comparison, Sections 201, 232, and 301 tariffs typically require time-consuming prior investigations before trade-restricting measures can be imposed. Moreover, Section 201 only provides for time-bound, product-specific or sectoral safeguards. Measures taken under Section 232 are not time-limited, but they typically affect specific sectors, while measures under Section 301 require separate investigations and determination on an individual country basis. However, where individual instruments do limit policy flexibility, the president can simply activate, though more cumbersome, different instruments to maximize trade-related leverage vis-à-vis other countries.

Both the US Congress and the courts can, in principle, act to restrict or restrain presidential trade authority. Congress has delegated significant trade-related powers to the president but can reclaim the authority it has delegated. It can also restrict the president’s ability to impose trade-related measures under IPEEA by declaring an end to a national emergency through a joint resolution adopted by both the House of Representatives and the Senate. 

However, if the president vetoes the resolution, a two-thirds majority in both chambers is required to overrule the veto. Under current political conditions characterized by a high degree of partisanship and polarization, Congress is highly unlikely to restrict the president’s trade-related authority. Reclaiming delegated trade authority faces similar, high hurdles. Courts, too, might be able to constrain the Trump administration by rejecting its extensive interpretation of its statutory authority in trade matters. But courts have historically shown deference to the executive on questions of international trade, national security, and national emergencies. 

US Trade Policymaking

For all these reasons, it’s safe to predict that Trump’s trade authority will remain extensive and his ability to set policies will remain largely unconstrained. A high degree of policy flexibility allows the president to use tariffs as an all-purpose instrument to opportunistically gain economic leverage in pursuit of varying economic and geopolitical goals. 

A trade policy characterized by what may be called a transactionally-focused, coercive protectionism accounts for the capricious nature of policies. US trade policy is not informed by intellectually coherent strategy guided by a more predictable inter-agency process. All this is made possible by the president’s substantial authority to impose trade restrictions.

Relatedly, the administration has been as quick to announce and impose protectionist measures as it has been to retract them, often in the context of increasing economic and financial costs risks stemming from these measures.

The President’s Cost-Benefit Calculus

This fact should inform a rethink of EU trade policy vis-à-vis the United States. Instead of simply opting for proportionate trade retaliation—holding trade proportionate retaliation in reserve to facilitate successful negotiations—the EU should at least consider ways to strengthen the political effectiveness of its trade defense and deterrence policies by more directly taking into account the president’s cost-benefit calculus. 

No doubt, such an approach is risky because it can quickly lead to escalation, as the recent US-China tariff tit-for-tat has shown—and in this case China only retaliated proportionately. It also requires a solid understanding of what the president’s cost-benefit calculus is. But it makes more sense to want to shift the president’s calculus more directly rather than take measures that seek to target other US political actors with little or no influence over the trade policy process. In this context, the EU should also consider pre-emptively activating its newly created anti-coercion instrument to provide it with greater policy flexibility.

Seeking to influence other senior officials at the State Department, the Commerce Department, the Treasury, or the Office of the United States Trade Representative, for example, will only have a limited effect. Senior officials have already made up their mind as to the desirability of policies and are simply waiting for the politically opportune moment to move policy in their preferred direction. Appeals to or policies seeking to mobilize Congress against protectionist trade policies would be similarly ineffective. Things would have to become a lot worse economically for Republican members of Congress to gang up with Democrats to subvert the president’s trade policies. 

Traditional trade retaliation that disproportionately targets the electoral base of the president and his party would not be very effective, either. EU trade retaliation that is supposed to hit Republican-dominated states would not represent much of a threat to Republicans’ electoral base. Retaliation that targets swing states could increase the willingness of electorally vulnerable Republican members of Congress to speak out against the president’s protectionist trade policies. But would be highly unlikely to mobilize sufficient Republicans, as there are too few competitive states and districts to have much of an effect on US trade policy—not least because Republican members of Congress are afraid of antagonizing the president and being subsequently “primaried” in non-competitive electoral districts. 

As long as the president dominates the trade policy process, the EU should consider devising trade defense and deterrent policies that affect the president’s cost-benefit calculus more directly. Judging by the recent twists and turns of trade policy, the president appears responsive to the risk of broader financial market instability, as evidenced by his decision to suspend the reciprocal tariffs following a major bout of treasury market volatility. And even though the president was initially willing to massively escalate measures targeting China, the significant equity market selloff that ensued led to an equally rapid reduction in bilateral tariffs to levels seen as less damaging to the economic outlook. 

Forceful rhetoric notwithstanding, the president’s “revealed preferences” suggest that his trade policy is responsive in the face of increasing economic costs and heightened financial risks. The EU should consider adopting a strategy that credibly and effectively threatens to retaliate and escalate in response to unfriendly, protectionist measures while accepting the risk of broader instability. As the economist and nuclear theorist Thomas Schelling pointed out, such retaliatory threats should leave something to chance, including the risk of a potentially, difficult-to-control escalation, as the risk of such an escalation would not be in the president’s interest.It is obvious that such an approach would be risky because it could prove escalatory. That any such policy needs be evaluated very carefully is clear. But Trump’s trade policy has proven responsive in the face of broader economic costs and financial instability. With extensive trade policy authority vested in the president, the risk of a volatile and unpredictable US trade policy will remain high. Putting in place an effective and credible trade defense and deterrence policy would be highly desirable if European interests are to be safeguarded and transatlantic trade relations stabilized.

Pakistan Cannot Sustain Prolonged Hostilities With India, Financially (2025)

Should the current armed hostilities between India and Pakistan lead to a prolonged conflict, Pakistan will find it significantly more difficult to sustain it from an economic and financial perspective. India’s economy is about ten times larger than Pakistan if GDP is converted at purchasing-power exchange rates, and its structural economic growth rate is about twice as large. This provides India’s with a far larger economic base and economic resources to support a prolonged armed conflict.

> India is one of the fastest-growing emerging economies in the world with real GDP projected to average 6-7% in 2025-6, compared to IMF projections for Pakistan of 3-4%. The economic outlook for Pakistan is also much more fragile given Pakistan’s more fragile financial position.

> India’s economy is about 10 times larger than Pakistan if GDP is converted at purchasing-power exchange rates. India’s gross domestic product is set to reach $17.6 tr in 2025, compared to Pakistan’s $1.7 tr. By comparison, U.S. GDP at PPP exchange rates is projected to reach $40 tr.

Although both Pakistan and India have high levels of government debt, India’s is much better positioned to raise additional revenue or increase debt issuance than Pakistan, given it far greater financial flexibility in the event of a prolonged conflict. India’s much larger size also means that one percentage point increase in fiscal deficits allows India to finance ten times as much expenditure as Pakistan. Moreover, Pakistan has a narrower revenue and tax base, and its fiscal deficit is tangibly larger than India’s. India also benefits from higher structural economic growth, which provides it with greater spending and revenue flexibility. Finally, most India’s government debt is held by residents and is denominated in local currency, which significantly limits financial risks.

> India’s government debt exceeds 80% of GDP, which is very high by emerging market standards. The fiscal deficit is projected at a little less than 5% of GDP. Although Pakistan’s government debt ratio is lower, amounting to only 70% of GDP, the financial risks attaching to it are greater. The deficit is projected at 6-7% of GDP. Pakistan’s tax base is also smaller than India’s. India collects more than 20% of GDP of revenue, out of which more than 18% of GDP consist of taxes. Pakistan collects 15% of GDP, out of which 12-13% of GDP are tax revenues.

> Pakistan’s public sector is also far more dependent on external financing than India’s with Islamabad’s external amortization accounting for 50% of the country’s external financial needs in 2025 or 2% of GDP. By comparison, India’s government foreign-currency financing needs amount to a mere 0.3% of GDP. India also has more ready access to international private capital markets.

The picture is similar in terms of the two economies’ external financial position. Pakistan’s greater dependence on official financing also makes it more sensitive to foreign financial pressure, including pressure from its external creditors. This may lead Islamabad to face increased diplomatic pressure from its lenders, who are not to keen to provide financial support which, instead of going toward macro-stabilization, is spent on a costly armed conflict. In case of a prolonged conflict, Pakistan’s economic and financial outlook would like deteriorate to a point where Pakistan’s IMF program moves off-track. This would to a sharp decline in multilateral and likely in official bilateral lending, which Pakistan is highly dependent on. India faces far fewer external financial pressure points on account of its far more manageable external financing needs and its ability to tap private sector financing, if necessary. 

> India’s international financial position is quite manageable, Pakistan’s is very fragile. This is not surprising given that Pakistan is under IMF supervision considering significant balance-of-payments needs. Pakistan’s external financial position is highly dependent on multilateral and official bilateral financing as well as continued compliance with the IMF program. It was only the new government’s willingness to sign up to a new IMF program following last year’s election that helped Pakistan avoid a broader financial crisis. However, Pakistan foreign-exchange reserves are much lower than India’s in terms of import cover (and external financing requirements). Pakistani FX reserves cover only two months’ worth of imports, compared to India eight months.

> India’s external debt is less than 20% of GDP, compared to 30% of GDP. As such, the difference is not that significant. About 40% of Pakistan’s balance-of-payments financing needs are covered by official borrowing, which shows how dependent Pakistan is on the continued goodwill of official lenders. The Pakistani government, as opposed to India’s, has no access to international capital markets due to heightened sovereign credit risk. Pakistan’s credit rating is in the CCC range, compared to India’s, which is in the BBB range. India’s investment-trade compared to Pakistan sub-investment grade rating would allow it to access international capital markets if necessary. Pakistan does not have that option. India’s external financing flexibility is far greater than Pakistan’s.

Why U.S. Trade Policies Will Prove Very Disruptive, Particularly to Financially Distressed Developing Economies (2025)

America’s protectionist trade policy will prove economically and politically very disruptive to financially distressed developing economies, less so emerging economies, even if Washington decides not to follow through with its reciprocal tariff policy or lowers announced trade restrictions over time. US trade policy has created significant economic and financial uncertainty, which will increase economic and financial risks as well as weaken political stability risks, particularly in financially distressed, commodity export dependent developing economies. Developing economies that have significant bilateral trade surpluses with the United States face increased risks due to the higher reciprocal tariffs they will face once the temporary suspension expires in early July. Here is why:

First, higher across-the-board tariffs in the guise of 10% and additional reciprocal tariffs based on size of bilateral goods trade surplus will hurt the exports of emerging and developing economies. The greater their dependence on the U.S. market, the more they will suffer by way of reduced exports and lower foreign-currency revenues. Lower export revenues will lead to a growth-reducing import compressions, falling foreign-currency reserves or politically painful currency depreciation, or all of them combined. Many already financially distressed developing economies facing financing problems are at particular risk of financial instability.

Second, higher US tariffs, directly and indirectly, will also impact US and global economic growth due to higher U.S. import prices, lower exports by tariffed countries and a general decline in consumer and investor sentiment due to heightened uncertainty. Lower global economic growth is also likely to weigh on commodity prices. While lower energy prices may benefit selected emerging economies, such as Turkey or Egypt, developing economies generally depend on commodity exports, and deterioration of terms of trade will further depress export and foreign-currency revenues, particularly in commodity-dependent sub-Saharan Africa.

Third, to the extent that US tariffs lead to higher US inflation, they are likely to keep U.S. interest rates higher for longer, even in the context of slowing U.S. economic growth. Moreover, increased global investor risk aversion will make it more difficult, particularly for financially challenged countries to issue debt in international capital markets, while concessional borrowing also remains relatively, given higher risk-free U.S. interest rates.

Fourth, if increased global economic and financial uncertainty leads to a stronger dollar, this will further increase financial distress due to the higher financing costs in local currency terms. Contrary to the historical pattern, this time the dollar has in fact weakened in the wake of increased economic and financial uncertainty, at least it has done so in trade-weighted terms. Individual developing economies, however, are faced with currency depreciation and hence dollar appreciation.

Fifth, US protectionism will lead to trade diversion, meaning that countries that cannot export to the United States will seek to redirect exports to other markets. To the extent that emerging economies, for example, compete with Chinese manufacturers, domestic producers and the economy will be faced with increased competition from Chinese and other countries’ imports. This may be less of an issue for developing economies whose domestic industries typically compete less directly with Chinese or EU exports. But emerging markets may see increased imports and this may lead to increased trade restrictions targeting trade diversion, this raising the risk of further trade conflict.

All this means that as global growth weakens, interest rates stay higher than they would otherwise have done, export revenues decline and capital inflows fall, emerging and especially developing economies will face significant economic and financial headwinds. Many developing economies and some emerging economies are already in financial distress or at heightened risk of financial distress. The outlook for developing economies is further exacerbated by the reduction in US foreign aid. The adverse economic and financial development will force them to implement even more forceful, but politically controversial macroeconomic adjustment and reform, including a reduction of government spending, including subsidies, and an increase in taxes. If balance of payments pressure force countries to devalue their currencies, inflation and the cost of living will increase. All this has the potential to increase domestic pollical tensions and increases the risk of social protests in developing economies.

It remains to be seen whether to what extent and on whom tariffs will be imposed once suspension of reciprocal tariffs expires in early July. Countries running trade deficits with the United States will be better positioned than its competitors faced with higher reciprocal tariffs. To what extent they will be able to take advantage of this situation, however, depends not just on relative tariff levels but also in their export structure. A commodity-exporting country that faces lower reciprocal tariffs may find it difficult to take advantage of the decline of a manufacturing export from countries facing high U.S. tariffs. Moreover, Washington has imposed and will impose further sectoral tariffs, such as on steel and aluminum, autos, copper, lumber, critical minerals, pharmaceuticals, semiconductors and so on. As these sectors are generally exempt from reciprocal tariffs, countries that export these goods will not be able to take advantage of differential tariffs. 

Finally, the trade war during the first Trump administration led to the emergence of so-called connector economies that attracted trade and investment by (Chinese) companies seeking to circumvent U.S. trade restrictions on China. This time, only very few, if any countries will be able to take advantage of U.S. tariffs, as tariffs are much more broad-based and there is greater uncertainty as how long they will remain in place, which will make companies less willing to set up production facilities in connector economies. Washington is also more likely to take measures targeting connector economies.

Regardless, few, if any countries will be better off, as global macro impact will outweigh relative competitiveness gains. US trade policy is broadly negative for emerging and especially developing economies. Financial distressed countries, mostly in sub-Saharan Africa, but also IMF countries, such as Pakistan, Sri Lanka, Bangladesh, Egypt, will be forced to implement more forceful policy adjustments. This will prove politically contentions, particularly if accompanied by lower global growth, reduced capital flows and lower export revenues, and currency depreciation. 

Macroeconomic Stability Despite Structural Political Instability - The Case of Peru (2025)

Peru’s perennial political volatility has not prevented it from pursuing sound macroeconomic policies and maintaining financial stability, even though it has undoubtedly prevented it from realizing its full potential. Following a decade or so of very rapid economic growth from 2002-13 in the context of the global, China-induced commodity boom, Peru’s more recent economic performance has been middling in the context of unstable domestic politics and considerable regulatory and bureaucratic obstacles holding back private investment. Despite this unfavorable domestic context, successive governments have managed to mainta macroeconomic stability and to make substantial progress in terms of economic development and poverty reduction, allowing Peru to become an upper-middle income country comparable to, if slightly poorer than Brazil, Colombia and Mexico.

> In the ten years leading up to 2013, real GDP growth averaged 6.5%. Following the end of the China commodity boom and in the context of increased domestic political instability, real GDP growth more than halved, slowing to 2.5-3.0% today. In recent years, investment as a share of GDP has fallen to below 20%, which is consistent with medium-term economic growth 2-3%.

> Peru has been characterized by macroeconomic stability and a disciplined policy framework. Despite low levels of government revenue and a high commodity dependence, it managed to weather various global shocks without experiencing broader financial instability. An independent central bank, a sound financial sector and disciplined fiscal policies have translated into low inflation, avoidance of banking sector crises and low government debt. At just over 30% of GDP, government debt is very low (even though half of it is denominated in foreign currency). Peru also benefits from a solid external financial position. Its foreign-exchange reserves are very large, covering more than 11 months of imports. Its current account is close balance and fully financed by net foreign direct investment inflows.

> Peru’s commodity dependence is high. According to the WTO, fuel and mining account for more than 50% of total exports, while agricultural products account for an additional 20%. China is Peru’ largest export market, followed by the United States, accounting for 32% and 13%, respectively.

> In the context of rapid-to-fair economic growth over the past 25 years, Peru reduced its poverty rate from slightly less than 60% to less than 30% today. Extreme poverty, defined as living on less than $2.15 a day, declined from 17% to less than 6% during the same period. 

The short-term economic outlook is middling and global trade tensions represent a significant, if manageable risk, but a more stable political environment and more streamlined investment-related policies would help boost the medium-term economic outlook considerably. The short-term economic growth outlook is fair, but not exceptional with the IMF projecting economic growth of 2-3% over the next few years. Reliant on commodity exports, Peru, like many other Latin American economies, is highly sensitive to a decline in global commodity prices in the event of a greater-than-expected U.S. economic slowdown and even more so in the context of a broader global economic slowdown due to trade conflict. Structurally, however, Peru has significant potential to accelerate medium-term economic growth in view of increasing global demand for raw materials tied to green transition as well as countries seeking to gain access to important, critical raw materials in the context of geopolitical competition and international economic fragmentation. Greater political stability and a more forward-looking policy aimed at fast-tracking mining projects would help Peru unlock greater commodity and related infrastructure investment. Recent deregulation should go some way towards boosting the investment outlook. As during the aughties, higher investment would then lead to faster economic growth and higher government revenues, which would allow the government to pursue growth-enhancing investment policies in the context of macroeconomic discipline. Based on Peru’s recent historical experience, a combination of increased investment and increased government spending could help lift real GDP growth to 3-4%.

> The IMF forecasts real GDP growth of 2.6%this year, in line with the Fund’s medium-term projection of 2.3%. The IMF projects the investment ratio to remain below 20% of GDP over the medium term. This compares unfavorably to the almost decade and a half leading to COVID-19 when the ratio exceeded 20% of GDP and real GDP growth was closer to 4%.

> According to the IMF, $62 billion worth of mining investment projects have been stalled for several years now due to bureaucratic complexity and social conflicts. According to E&Y, Peru’s mineral reserves investment pipeline is worth $ 55 bn and foreign investor interest remains high, particularly related to copper, gold, and other essential minerals. This is equivalent to 20% of GDP.

> According to the Peruvian National Society of Mining, Petroleum, and Energy (SNMPE), between 2026 and 2028, new mining projects representing an investment commitment of USD 6.9 billion are expected to break ground, reinforcing Peru’s standing as a key mining hub. The bulk of the investment will be allocated to cooper (> 70%), gold (> 10%) and iron ore (9%).

> The mining sector accounts for 9% of GDP. Copper is the most important export product, followed by gold, zinc, iron and lead. Peru is also one of the leading producers of zinc, copper, silver, tin, lead and mercury. Peru sits on 10% of global copper, 4% of gold, 22% of silver, 9% of zinc and 5% of lead reserves, according to the US Geological Survey.

The Financial Crisis, the Smooth-Hawley Tariffs and the Great Depression (2025)

U.S. reciprocal tariffs risk causing a major loss of global economic confidence and an economic downturn. However, the experience of the 1930s, if heeded by policymakers outside the United States, will help the world economy avoid a prolonged slump akin to the Great Depression. The United States' "reciprocal tariffs" announced on April 2 (and paused for 90 days on April 9) represent the most far-reaching set of protectionist trade measures the United States, or any other major country, has imposed since the infamous Smoot-Hawley tariffs in 1930. Today, the Smoot-Hawley tariffs are widely seen as having exacerbated and prolonged what came to be called the Great Depression. But they were not its cause. 

Instead, a major financial crisis and the domestic economic policies of countries around the world were the main root causes of the Great Depression. In the 1930s, following the economic downturn caused by the 1929 Wall Street crash and subsequent international financial crisis, many governments focused on reducing their public deficits at a time when demand, both domestic and external, was weak. They also implemented orthodox monetary policies, often tied to gold, and allowed banks to go bankrupt, which further limited liquidity and destroyed wealth in the form of bank deposits. Together, these policies exacerbated the global economic slump and delayed a recovery, which started as soon as states absorbed the impact of protectionism and focused on domestic demand stimulus. 

If today's policymakers heed the lessons of the 1930s, the economic fallout of U.S. protectionism will be significantly more manageable, if nonetheless economically and financially painful. Modernpolicymakers understand that a major negative demand shock stemming from higher tariffs makes it imperative to support domestic demand and to intervene in case of financial distress to avert greater structural damage to the economy. Though some are more constrained than others, many countries canease macroeconomic policies by cutting interest rates to support domestic asset prices, domestic credit and economic growth. A welcome side effect of such a policy would be a devaluation of their exchange rates, which would help offset parts of the U.S. tariffs, provided that countries have, as most of the world's major economies do, flexible exchange rate regimes and provided the United States does not raise tariffs even further in response. Tariffed countries will also have greater scope to cut interest rates than the United States, as the effect of tariffs abroad may be deflationary, while tariffs will beinflationary in the United States. 

The countries hit hardest by U.S. protectionism have several domestic economic policy options to address slowing economic growth. First, a much weaker growth outlook could cause deflationary pressure, warranting currency depreciation to make exports more competitive and support economic growth.Second, instead of trying to balance the budget in a vain effort to reestablish credibility, as happened in the 1930s, governments can let automatic fiscal stabilizers like progressive tax systems and transfer payments play their role in buffering the slowdown of domestic demand. Third, countries with greater fiscal space can launch policies that counteract the effects of the recessionary fiscal cycle, such as tax cuts or increased government spending, to maintain economic growth and absorb excess production due to lower exports domestically. 

As it happens, Europe is loosening its fiscal stringsto facilitate higher defense spending. For instance,Europe's largest economy, Germany, just reformed its debt brake and is embarking on a major investment and defense expenditure spree. This will help soften the blow of U.S. tariffs and offset part of the country's slowed economic growth resulting from lower exports. China, hardest hit by U.S. tariffs, will also have increased incentives to support domestic demand through higher fiscal spending to offset lower exports, in addition to allowing for a gradual, managed currency adjustment.

Countries' trade policies will also have a significant impact on the effects of U.S. protectionism. Standard economic theory posits that tariffs and, in particular, tit-for-tat trade wars reduce economic welfare for all parties involved. This theory proved true in the 1930s, when countries opted for beggar-thy-neighbor policies, whereby they tried to "steal" demand from one another by diverting their exports to countries, whether through protectionist trade restrictions or competitive currency devaluation. This time around, policymakers know that refraining from broad trade conflict and keeping markets open (despite political challenges) will help affected countries alleviate the most severe economic impacts of U.S. tariffs and avoid a depression-type economic downturn. 

Although there are no guarantees about what direction policymakers will take in reaction to U.S. protectionism, many have repeatedly demonstrated a desire for cooperative trade policy. For instance, in the wake of the 2008 global financial crisis, concerns about increasing trade protectionism led to the creation of the Group of 20 nations to avoid mutually damaging economic policies. More recently, China paused retaliation against the European Union over protectionist EU measures targeting China, and many countries and blocs are attempting to establish free trade agreements, including the United Arab Emirates and the European Union, India and New Zealand, and China and Bangladesh. These examples illustrate that policymakers are taking to heart lessons learned in the Great Depression. However, even if cooperation fails and beggar-thy-neigbor policies prevail, most countries' ability to support domestic demand to replace declines in exports should help make the current crisis much more manageable than in the 1930s.

It is too early to say what precise economic effect U.S. protectionism will have on the global economy, let alone on individual economies, given the continued uncertainty about the Trump administration's trade policy, but the world is much more likely to avoid a prolonged economic slump now than it was in the 1930s. The United States remains a major source of international demand, but it is not the world's sole export destination, and governments understand what macroeconomic responses can help avert a worst-case scenario. So while economies around the world will feel the pinch of recent U.S. protectionist policies -- and some countries will undoubtedly dip into recession, perhaps including the United States -- a rerun of the Great Depression with its all-out protectionism, wrong-headed macroeconomic policies, and dramatic and prolonged financial sector crisis is unlikely, provided the rest of the world heeds the lessons of the past.

Demographics, Economic Growth and Political Stability in Sub-Saharan Africa (2025)

Sub-Saharan Africa is the world’s most demographically most dynamic region, which is an important structural factor underpinning the region’s significant, if mostly unrealized economic potential as well as its susceptibility to political instability. Demographically, Sub-Saharan Africa is the most dynamic region in the world, followed by parts of the Middle East and Central Asia. Sub-Saharan Africa continues to experience rapid population growth in the context of high fertility rates and declining mortality. While most advanced countries are stagnating demographically, sub-Saharan Africa is experiencing rapid population growth. Although dependency ratios (or the number of people below the age of 15 and above 59, compared to people of working age) remain high, rapid population growth has broadly supported higher economic growth than in advanced countries, where the population of working age is stagnating and even shrinking. 

> The median age of advanced economies is somewhere between 40 and 50. The median age of most sub-Saharan Africa countries is 25 but more typically below 20.

> According to the United Nations, the fertility rate in West and Central Africa is 4.8 and Eastern and Southern Africa 4.1. Niger has by far the highest fertility of 6.6 and Cape Verde the lowest rate with 1.9. In Asia-Pacific and Latin America, it is 1.9 and 1.8, respectively.

> By comparison, the least developed countries have a fertility rate of 3.8, less developed countries 2.4 and developed countries 1.5.

> Of the top 40 countries with the highest fertility rate in the world, 36 are located in sub-Saharn Africa. (The other four are three Pacific Island countries and Afghanistan.)

The demographic trends in sub-Saharan Africa, where the population of working (labor force) will expand significantly, stands in sharp contrast with those in advanced and emering economies. The working-age population has already peaked in countries such as China and Japan. In many Western European countries, the working-age population is stagnating, broadly speaking, and only net immigration helps prevent decline. In Eastern Europe and East Asia, working-age population are shrinking and will continue to shrink. In sub-Saharan Africa, working-age population will expand rapidly over the next few decades if current demograhic projections are correct. Historically, demographic projections have tended to underestimate the rapid decline in fertility, particularly in lower and upper middle income countries. It is therefore quite possible that fertility will also decline more rapidly in sub-Saharan than currently anticipate, particularly in countries experiencing rapid economic development (lessens economic needs to have a large number of children), improving education levels (makes women postpone childbirth and have fewer children) and where the population has broad-based access to the internet (information about “alternative” lifestyles). Should fertility decline faster, translating into improving dependency ratios, the economic outlook would improve further. To the extent that demographic factors support or represent a drag on economic growth, the region is well positioned. 

> In Africa, the population is expected to grow by 1.7% per year between 2025 and 2050. In Asia, Europe and the Americas, population change will be minimal, ranging from -0.3% per year in Europe to 0.2% in Asia, including India. Africa's population will make up 23% of the world's population by 2050, up from 16% in 2023.

> Sub-Saharan Africa's dependency ratio is very high, but has begun to decline very slowly. Dependency ratios have long bottomed out in most demographically advanced economies, and they will do so in most emerging economies 2030-40. By comparison, sub-Saharan African dependency ratio are projected to bottom out in 2070-80, again if current projections are correct. 

 

Demographic growth and a rapidly expanding population of working age bodes well for the region’s economic growth potential, but for this potential to be fully realized countries need to maintain political stability and pursue sound economic policies conducive to the exploitation of the so-called democratic dividend. Sub-Saharan Africanica has significant potential in terms of a young and growing workforce. It will also benefit from declining dependency ratio because this, all other things equal, allows countries to save more due to the relatively lower share of economically inactive dependents. Unlike in East and South-East, sub-Saharan Africa will find it more difficul to pursue an export-oriented, manufacturing-foscused development strategy, supported by foreign investment, due to constraints in terms of infrastructur as well as political and economic stability. Moreover, emerging technologies, such as robotics and 3D printing, may also reduce the demand for low-cost labor. But none of this mean that an economic development strategy aimed at imporvind infrastructure, raising education levels and leveraging an economy’s compara, as countries like Ethiopia, Rwanda and Tanzania have demostrated.

> Four African countries are among the 15 fastest-growing economies in the world, namely Ethiopia, the Maldives, Rwanda and Tanzania, with all four countries registering real GDP growth of more than 6% per year. Almost half of the top 20 countries were located in sub-Saharan Africa.

> While Saharan Africa represents a large share among the world’s fastest growing economies, it also ranked prominently among the ten worst-performing economies over the past decade. Sudan, the Central African Republic, the Republic of Congo, Equatoria Guinea registered negative real economic growth, which in the contet of demograhpic grwoth means signifcantly shrinking per capita income. These countries’ poor performance was mostly due to political instability and civil strife, or a sharp collapse of the natural resource sector.

· Of the 50 countries in sub-Saharan Africa, 44 have a per capita income of less than $10,000 on a purchasing-power parity basis, The Seychelles ($30,000) and Mauritius ($22,000) are the richest (sub-Saharan) African countries. By comparison, all North African countries have per capita incomes exceeding $10,000.

Demographic change is slow and is only indirectly linked to phenomena such as econonomic growth or domestic and international political instability. Economically, a favorably demographic momentum enhanced a country’s economic potential. But there are many other factors that affect economic outcomes, such as sensible economic policy, increasing education, political instability and so on. Similarly, rapid population growth need to lead to political instability. Factors such as the degree of government control, socio-economic or socio-ethnic cleavages and so on affect the degree of politcal stability. Nonetheless, rapid population growth and particularly a rapid increase in the youn adult population will create both econmic and political challenges. The economy needs to provide jobs for a rapidly expanding labor force. Large amounts of infrastructure investments are needed to so. Sub-Saharan countries that manage to implement far-sighted policies will do well in the coming years. Countries already inflicted by signifciant domestic and civil strife will find it difficul to exploit the favorable demographics characterizing the region. 

> Average population growth rate in African countries ranges from 2-3% per year. A growth rate of 3% leads a doubling of the population every 25 years.

> According to current trends and projections, Nigeria (360m), Ethiopia (225m), the Democratic Republic of Congo (200m) and Tanzania (130m) will all have populations exceeding. Populations in these four countries alone will nearl double between today and 2050 .

Turkish Central Bank Intervenes to Stabilize the Lira (2025)

Turkey’s policy of stabilizing the exchange rate amid widespread protests may not prove sustainable and could force Ankara to allow for significant exchange rate depreciation, which would prove unpopular as it would lead to higher inflation or higher interest rates. The arrest of opposition CHP presidential candidate and mayor of Istanbul, Ekrem Imamgolu, has led to street protests in many of Turkey’s major cities, which has increased economic and financial uncertainty. This, in turn, has led to a surge in capital outflows. Instead of letting the exchange rate adjust, the central bank has decided to stabilize the currency by selling foreign-exchange reserves. The amount of foreign-exchange sales has been significant over the past week. Such large FX sales are also a high-risk strategy, as continued capital flows, including from domestic investors, would sooner or later overwhelm the ability of the central bank to maintain exchange rate stability and force the currency into a precipitous devaluation.The Turkish lira has been relatively stable since the beginning of the political crisis due to extensive central bank foreign-exchange sales. According to media reports, by March 25 the Turkish central bank spent a significant $28 billion of its gross foreign-exchange reserves since the arrest of Imamoglu on March 19. This compares to total official reserve assets of$171 billion and foreign-currency liabilities of $ 100 billion, as of March 14. According to additional media reports, following a conference with FM Simsek with several thousand investors, net FX reserves increased slightly.

> The Turkish lira is about 4% weaker against the dollar, compared to before the start of the protests. This week the lira has remained virtually unchanged against the dollar. Turkish equities are down more than 10%. Five-year credit default swaps, which allow investors to hedge against sovereign default risk, increased sharply from 250 basis points the day before the arrest (March 18) to 325 basis points on March 23, before falling to below 300 basis points. At this level, sovereign default risk is relatively low.

Large-scale FX interventions have helped maintain relative Turkish lira stability, but if political uncertainty continues or increases and capital outflows continue or accelerate, the authorities will be forced to scale back intervention and allow for a more significant exchange rate adjustment that could increase inflation. The Turkish authorities seem intent on stabilizing the Turkish lira to prevent a broader loss of domestic economic confidence. However, having already spent more than 15% of its official reserve assets and much higher share of its net reserves, this policy will not be sustainable if capital outflows continue at close to their recent levels. If this happens, the Turkish lira will depreciate sharply, forcing the central bank to reverse course and raise interest rates, which would prove politically damaging to the government, as it would lead to high inflation or higher interest rates (or both). This would also bring about slower economic growth or higher inflation (or both), which may help explain why the authorities have been willing to expend valuable FX reserves. The risk of a broader financial, let alone sovereign debt crisis will remain manageable as long as the authorities allow for a greater currency adjustment as foreign-exchange reserves over time and as net FX reserves are higher today than two years ago.

> Turkish FX reserves had increased tangibly since 2023 when the re-election of President Erdogan led to a policy of economic adjustment and reform. In May 2023, foreign-exchange reserves stood at $59 billion, compared with $97 billion the week before Imamoglu’s arrest. In 2001, a major devaluation of the Turkish lira led to a major financial crisis and helped sweep the AKP to power the following year.

Regardless of whether the authorities’ strategy pays off, short- and medium-term political and economic risks have increased due to the greater uncertainty about the degree to which President Erdogan will respect institutional guardrails and a lessened incentive to pursue economically costly adjustment policies at the expense of lower economic growth. President Erdogan will have less of an incentive to pursue stability-oriented macroeconomic policies in view of a broader clampdown on competitive opposition candidates. This is so because a disciplined policy in 2025 and 2026 would have allowed the government to stimulate the economy in 2027 in view of the 2028 presidential election without unduly increasing financial risks. The risk of a more expansionary, less stability-oriented macroeconomic policy was always going to increase in the run-up to the 2028 presidential elections, as a more expansionary policy would help increase economic growth and help garner greater electoral support. But now that the arrest of Imamoglu risks making the 2028 presidential elections less competitive, the need to implement economically costly adjustment policies will have lessened, as it is not necessary to establish a macroeconomic buffer to be able to stimulate the economy in the run-up to the 2028 elections. More broadly, concerns about political stability and weakening institutional and political guardrails will make investors wary about increasing their investments in Turkey over the medium term. 

> Foreign investors warily returned to Turkey following the 2023 presidential elections and the appointment of market-friendly Finance Minister Mehmet Simsek. With short-term political imperatives taking precedence over medium-term economic stability, foreign investors have reduced their investments in Turkey over the past week. According to the finance minister, recent capital outflows were driven by foreigners rather than residents.