Chapter Eight
War, Peace and Economic Growth:
The Phoenix Factor Reexamined
Economic Growth: The New
Perspectives for Theory and Policy
Tai-Yoo Kim (Seoul National University)
and
Almas Heshmati (Sogang University)
Springer 2014
Copyright © 2013 Tai-Yoo Kim and Almas Heshmati
CONTENTS
 8.1 looks at the two contradictory forces that have
ultimately led to war in human history.
 8.2 examines the previous literature on the impact of
war on the postwar economy according to the ‘War
Construction view’ and the ‘War Destruction
view’.
 8.3 presents the importance of technology for the
course of the postwar economy.
 8.4 presents the results of empirical analysis to
determine why some countries experience
postwar growth while others do not.
 8.5 draws out the implications of study results for
research and development policy.
 8.6 Summary
 8.7 References
8-2 Previous Literature on Postwar Economic Growth
‘War Destruction view’
War has a negative effect on postwar economic
growth.
There are two basis for this view:

War distorts the economy negatively and
exogenously (Thorp , 1941; Wright ,1943;
Higgs, 2004).

Destruction of human and material resources
during war has a negative effect on postwar
economic growth (Murdoch and Sandler, 2002;
Kang and Meernik, 2005).
8-2 Previous Literature on Postwar Economic Growth
‘War Construction view’
War has a positive effect on postwar economic growth.
The pioneering work: Organski and Kugler (1977)

They analyzed how much the economic status after the First
and Second World Wars deviated from economic growth
trends before the war periods.

They found that defeated nations underwent greater
economic recession than victorious nations immediately
after war, but achieved faster economic recovery and
eventually resumed their full prewar rates of economic
development more quickly than victorious nations.

They named this postwar resurrection ‘the Phoenix Factor’.
8-2 Previous Literature on Postwar Economic Growth
‘War Construction view’
Later studies attempted to find factors that could
explain why the ‘Phoenix Factor’ occurs.
There are two explanations for ‘Phoenix Factor’:
 ‘Phoenix Factor’ is caused by the destruction of
political structures (Olson, 1982).
→ The destruction of the groups, which control the economic distribution of
resources, enabled the smooth distribution of resources, which became a
driving force behind fast economic growth.

‘Phoenix Factor’ is caused by economic
destruction (Kugler and Arbetman, 1989)
→ The industrial facilities with old technologies were destroyed by war, after the
war, the latest technology was used for the machinery, which increased
production capacity.
8-3 Interests of this Study
Two conflicting results with regard to the effects of War
Some studies find the effect of war on the postwar economy to be
negative (Kang and Meernik, 2005; Thorp, 1941), whereas others
find it to be positive (Kugler and Arbetman, 1989; Olson, 1982;
Organski and Kugler, 1977).
Faced with these results, two responses are possible:

Take the view that there will always be some unpredictable
external circumstance that renders it impossible to determine
in advance whether the effect of war will be positive or
negative,

Or take the view that there is some underlying, as yet
unidentified, factor that can be used to explain why war
sometimes yields positive, and other times negative, effects.
→ We pursue the second line of thinking.
8-3 Interests of this Study
The accumulation of technological strengths
Previous literatures has already suggested that
the accumulation of technological strengths may
be an important factor on post-war growth:

Olson (1982) mentions that the technological strength of
the US is an exception to his argument that political
destruction is the cause of the ‘Phoenix Factor’.

Kugler and Arbetman (1989) note the introduction of
new technology due to the destruction of industrial
facilities.

Abramovitz (1986) explains the prolonged manifestation
of the accumulation of technological strength during
war in the economy by appeal to social capabilities.
8-3 Interests of this Study
The Purpose of Empirical Analysis
To provide evidence that the technological strengths and
industrial production capability accumulated during war
are the efficient cause of the ‘Phoenix Factor’.
We address the following research questions:


Q1 : Does the technological strengths and industrial
production capability that a nation accumulates during war
have a significant impact on post-war economic growth?
Q2 : How does the destruction experienced during war
affect postwar economic Growth?
Empirical models based on growth theory is used to
answer these questions.
8-4 Empirical Analysis
Regression Model
Regression model is based on Barro model.
ln( yi (t ))  ln( yi (0))
  ln( yi (0))   X i   Z i   i
t

The model has been used as the baseline for much of
growth econometrics (Durlauf et al., 2005)

It was also used by Barro and Lee (1994), Koubi (2005),
and Kang and Meernik (2005) to examine the
relationship between war and postwar economic growth.

Left-hand side : The growth rate of per-capita GDP

Right-had side : Variables that influence the economic
growth rate. (Xi and Zi)
8-4 Empirical Analysis
Regression Model
We rewrite the equation to include war variable as
follows:
r (t , t  k )    X (t , t  k )    W   (t , t  k )

r (t , t  k ) : The dependent variable, which represents the
average growth rate over a period of k years after World
War II that begins t years after the end of the war in 1945.

X : The standard major variables that are used in the
literature on economic growth. (These capture the
accumulation of material and human capital,
convergence factors, and the inefficiency of government)

W : The war variables which reflects the effect of war on
economic growth
8-4 Empirical Analysis
Sample Sets
Figure 8 - 1
Final sample of countries used
in the analysis

We conducted an empirical analysis of
the effect of World War II, a war of
industrialized nations, on the postwar
economic growth of these nations.

We defined three analysis sample sets based on the following criteria.

World War II Actors : The countries that participated in the World War II

World War II Winners / Losers : The countries that participated in the war are divided
into Winners and Losers.

World War II Industrial Powerhouses : The countries that generated 10,000 GW/hour or
more and also produced 2,000,000 metric tons or higher of iron ore between 1936 and
1945
8-4 Empirical Analysis
Data and Definition
The 20 countries were used as analysis samples and the
period from 1950 to 1960 was chosen as the target period.
Variable
Dependent
variables
Independent
variables
Definition
Average growth rate
The average growth rate over a particular
Period
Dummy,
1955-60
Dummy variable for 1955~60
Ln(GDP)
The initial per capita GDP
I/Y
Real Investment share of GDP (%)
G/Y
Real Government share of GDP (%)
SST
Industrial
Powerhouses
TDP
BDP
The average years of secondary schooling
in the total population
Dummy variable denoting industrial
powerhouses
The total military dead of all causes per
population
The number of total battle deaths per
population
Data Source
World Table Version 5.6
(PWT 5.6)
World Table Version 5.6
(PWT 5.6)
World Table Version 5.6
(PWT 5.6)
World Table Version 5.6
(PWT 5.6)
Barro and Lee (2010).
Mitchell (1980)
Clodfelter (2002)
Clodfelter (2002)
8-4 Empirical Analysis
Estimation Results
Table 8-1
Variable
Estimation Results
Model 1
Model 2
Coefficient
Std. error
t-statistic
Prob.
Coefficient
Std. error
t-statistic
Prob.
Constant
0.1204
0.0174
6.9150
0.0000
0.1494
0.0216
6.9300
0.0000
Dummy,
1955-60
0.1177
0.0176
6.6760
0.0000
0.1469
0.0218
6.7410
0.0000
Ln(GDP)
-0.0111
0.0027
-4.1240
0.0000
-0.0151
0.0033
-4.5880
0.0000
I/Y
0.0005
0.0003
1.7170
0.0859
0.0007
0.0004
1.7270
0.0841
G/Y
-0.0009
0.0005
-1.8810
0.0599
-0.0010
0.0006
-1.6090
0.1076
SST
-0.0074
0.0021
-3.5790
0.0003
-0.0060
0.0026
-2.3100
0.0209
Industrial
Powerhouses
0.0143
0.0029
4.9990
0.0000
0.0190
0.0036
5.3270
0.0000
TDP
0.0009
0.0001
9.7590
0.0000
0.0009
0.0001
7.3480
0.0000
BDP
R2
(period,
number of obs.)
0.9141
(1950-1955, 20)
0.4782
(1955-1960, 20)
0.8958
(1950-1955, 20)
0.3392
(1955-1960, 20)
8-4 Empirical Analysis
Estimation Results
The estimation results related to the economic
variables match those of the general empirical
analysis of economic growth (Barro and Lee, 1994),
except for the initial level of secondary education.

A country’s initial income Ln(GDP) has a negative effect
on economic growth, which supports conditional income
convergence.

Physical capital (I/Y) had a positive effect on economic
growth

Government spending (G/Y) had a negative effect on
economic growth

Initial level of secondary education (SST) had a negative
effect on economic growth
8-4 Empirical Analysis
Answer to The Research Question
Q1 : Does the technological strengths and
industrial production capability that a nation
accumulates during war have a significant impact
on post-war economic growth?
A1 : The technological strengths and industrial
production capability accumulated during war
does have a positive impact on post-war
economic growth.
 Industrial Powerhouses experienced greater
postwar economic growth rates than other
actors. (* See the positive coefficient of a
dummy for Industrial Powerhouses)
8-4 Empirical Analysis
Answer to The Research Question
Q2 : How does the destruction experienced during
war affect postwar economic growth?
A2 : The destruction of war had a positive effect
on postwar economic growth.

The destruction suffered by actors in World
War II had a positive effect on postwar
economic growth (* See the positive
coefficients of BDP and TDP variables)

The estimation results are relevant to Koubi’s
(2005) findings and consistent with the ‘war
construction view’.
8-5 Discussion and Conclusions
Main Findings
The results show that a major cause of the
Phoenix Factor is the technological strengths and
industrial production capability.

Those countries that accumulate technological
strengths and industrial production capability
experience strong postwar economic growth,

Those that do not accumulate technology do not
experience postwar economic growth.
8-5 Discussion and Conclusions
Technological strengths and industrial production capability
What we call the accumulation of technological
strengths and industrial production capability
comprises the overall accumulation of industrial and
technological capacities at the state level, including

the innovation of science and technology through
R&D;

the diffusion of technology and improvement of
management efficiency through the maximization of
industrial production;

the research, technology, and industrial manpower
cultivated in the course of the accumulation.
8-5 Discussion and Conclusions
Agricultural Society
The characteristics of the agricultural economy in a pure
agricultural society ensure that production decelerates
and growth slows (Kim et al., 2010).
The output decreases successively compared to input,
and the farm has no incentives for surplus production
beyond the levels required for survival.
Even if a central planner forces increased production,
marginal productivity tends toward zero, and the desires
of the state or the ruler for greater wealth and power can
only be satiated by wresting more farmland and
manpower from others, and this in turn can only be
achieved by war.
8-5 Discussion and Conclusions
Commercial Economy of an Agricultural Society
In the commercial economy of an agricultural society,
the creation of goods can accelerate in the short term
through expansive reinvestment.
But demand will eventually become stagnant because
agricultural products have little elasticity with respect
to the demand for them.
Wars will continue, now intended to deprive trade
routes and commercial supremacy from competing
nations.
War in an agricultural society is a negative sum game,
because the whole mankind is made worse off by it.
8-5 Discussion and Conclusions
Industrial society
The characteristics of an industrial society are that short-term
production decreases successively, while the creation of goods and
economic growth accelerates (Kim et al., 2010).
Industrialized society requires increasing production and occupying
larger markets because the geometric increase of output compared
to input acts as the incentive for entrepreneurs and capitalists to
pursue more production.
Increasing production requires ever greater access to raw materials
and sources of energy, but resources are limited
When a country’s desire for resources exceeds its own capacity to
supply them, they will need to be acquired from other areas → The
result is war.
Other countries searching for markets will go to war to secure the
markets.
8-5 Discussion and Conclusions
Knowledge-based Society
The knowledge-based society will be led by intellectual
productive elements, such as information and technology, rather
than material productive elements, such as resources and energy.
If so, humankind can maintain its expansive reproduction by
concentrating efforts on international cooperation in domestic
R&D instead of fighting to steal limited material resources from
abroad.
Market demand will also expand multi dimensionally along antiaging and life-extending technologies, culture, art, hobbies, and
entertainment.
When market demand becomes diversified and grows multidimensionally, it will be possible to promote complementary
cooperation without exclusive competition or conflict.
8-5 Discussion and Conclusions
The implications of results for R&D policy.
The results of this study show that the accumulation of
technological strengths and industrial production capability
caused rapid post-war economic growth in industrial societies.
It also suggests the possibility that humankind can continue
with economic growth and prosperity in peace, without war, if
there are international orders and treaties.
These orders and treaties would ensure companies and
countries concentrate on R&D and the production of products
and services in their specialized fields by mobilizing all
capacities they have in a knowledge-based society, in which
there will be less need for conflict over productive elements
and market dominance.
8.6 Summary
•
The effect that war has on the economy has long been investigated,
but the results of these investigations do not provide conclusive
answers. (The ‘War destruction view’ vs. ‘War construction view’)
•
This study was designed to look for the possibility of minimizing social
costs, and pursuing warless peace and prosperity in the future by
investigating the causes and effects of the ‘War Construction view’
more thoroughly.
•
We propose a new and promising explanation of what happens to the
economy following war: the course of the postwar economy is a
consequence of the industrial technology accumulated and the
cultivation of engineers during the war.
•
We investigate this explanation for nations involved in World War II
during the period 1950–60 by utilizing econometric models.
•
We find that the technological strength and industrial production
capability that a nation accumulated during the war is an important
factor for economic growth.
8.7 Reference
•
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Journal of Economic History 46, 385-406.
•
Barro, R. J., and J.-W. Lee, 1994. Sources of economic growth, CarnegieRochester Conference Series on Public Policy 40, 1-46.
•
Barro, R. J., and J. W. Lee, 2010. A new data set of educational attainment
in the world, 1950-2010(BER Working Paper No. 15902.).
•
Clodfelter, M., 2002. Warfare and armed conflicts : a statistical reference to
casualty and other figures, 1500-2000, 2nd ed edition.(Jefferson, NC:
McFarland).
•
Durlauf, S. N., P. A. Johnson, J. R. W. Temple, A. Philippe, and N. D. Steven,
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•
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•
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•
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8.7 Reference
•
Kim, T.-Y., A. Heshmati, and J. Park, 2009. The Faster Accelerating Knowledgebased Society, TEMEP Discussion Paper No. 2009:13.
•
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•
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•
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•
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