Returns to scale in a wartime economy?

Big power rivalry continues to gather force, with strategic tensions between the US and China increasingly evident.  At an address to China’s legislature this week, President Xi stated that ‘Western countries, led by the US, are implementing all-round containment, encirclement and suppression against us’.  A 7% increase in military spending was announced, along with other initiatives to strengthen China’s economy. 

And the US continues to strengthen sanctions on China and to invest in aggressive industrial policy. US policy across multiple areas is being shaped by strategic geopolitical competition. 

Geopolitical rivalry will play out through hard power as well as across economic and technological domains.  Many advanced economies will implement increasingly mercantilist policies, with aggressive industrial and innovation policy.  Globalisation will be shaped by this strategic competition between big powers: a more fragmented, political globalisation is emerging.

These wartime conditions will cause economic disruption, with a potential reordering of the income rankings.  The environment in which many countries prospered over the past 30 years or so is changing, with many new challenges as well as some windows of opportunity.

One rule of thumb might be to expect the inversion of economic performance; economies that have done well in the previous regime will now under-perform, and vice versa.  Small advanced economies performed well in an environment of intense globalisation, for example, as they leveraged global opportunities.  However, they are commonly argued to find the emerging environment particularly challenging. 

So will big powers prosper in an era likely to be shaped by big power competition?  Does the future belong to large states? 

This note is available at: https://davidskilling.substack.com/p/returns-to-scale-in-a-wartime-economy