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The Economics of WW1 and WW2: An Update

Posted August 28th, 2017 at 03:18 PM by Guaporense
Updated March 18th, 2018 at 12:06 PM by Guaporense

It has been over 5 years since I wrote the blog entries on the economics of WW2. Since then I have done some more research on the economy of the world around 1940.

Using a modified Maddison's dataset (taking the 1980 ICP as a basis instead of the 1990 ICP as Maddison used since it's closer to the date that we which to look to, also using Fukao, Ma Yuan (2007) benchmark estimate for pre-war East Asia). This is in order to make it more consistent with the available evidence in terms of direct benchmark comparisons of purchasing power parities: the ratio of German/British per capita income in 1937 was more like 0.85 instead of 0.76 as estimated by Maddison, here I am using Broadberry and Klein (2011) time series estimations that German per capita GDP at 0.83 of the British in 1937.

In the last post I had used GNP figures using official exchange rates but these types of figures are inferior to figures computed using purchasing power parities. Now I had done some more study on purchasing power parity figures and got more confident on their utility: the fact that Maddison's time series projections must be adjusted to be consistent with benchmark estimates for each period. For instance, here is the differential between the adjusted Maddison figures and the benchmark per capita estimates relative to the UK for the 1927-1937 period:

Germany ---- 2.8%
France ------ 3.0%
US ---------- 2.0%
Japan ------- 2.1%
Italy -------- 5.7%
Netherlands - 3.6%
Canada ----- 2.4%

Anyway, these are the results, by late 1941-1942 the Allies and Axis coalitions controlled the following GDPs in billions 1990 dollars in their relatively industrialized territories in 1937:

US -------------- 832.5
UK -------------- 303.9
USSR ------------ 250.8 (not occupied parts)
Canada ---------- 57.4
Australia --------- 39.3
New Zealand ------ 9.7
Allies ----------- 1,493.5

Germany --------- 360.3
Italy -------------- 151.5
Japan ------------- 134.8
Hungary ----------- 26.3
occupied Europe -- 569.0
Axis -------------- 1,279.8

ratio Axis/Allies --- 0.857

So, unlike in the First World War, in the Second World War the two blocks controlled relatively similar magnitude of resources. In WW1 the coalitions by 1917-18 were much more unbalanced:

UK ------------------ 232.2
France -------------- 124.6 (parts not under German occupation)
US ------------------ 517.4
Italy ---------------- 101.2
Canada -------------- 39.5
Australia ------------- 24.9
entente powers ---- 1,045.5

Germany ------------ 283.1
Austria-Hungary ---- 123.7
occupied Europe ---- 55.4
Central powers ----- 462.3

In WW1 the Entente powers had a vast superiority in economic resources over the Central powers.

Although one huge advantage the Allied great powers had in WW2 was that their resources were already inside their borders while for the Axis powers a large fraction of the industrial and economic resources under their control (if not most of it) were in occupied territories and hence couldn't be fully utilized by their governmental bureaucracies.

That was a problem specially in terms of manpower: German casualties were much lower than Soviet casualties but they couldn't replace their losses while the Soviet Union could. The occupied countries paid occupation taxes and their industries could be used as they indeed produced supplies for the armed forces: in 1943 it was estimated that between 60% and 65% of the industrial output of France, Netherlands and Belgium was being used to supply the Wehrmacht. But they couldn't simply conscript the population in occupied countries to fight for them.

By the way, it's commonly believed that German armaments production was defective if compared to the Allies but that's a misunderstanding. German armament output was indeed lower than Soviet output in most categories of weapons but that was because the Soviet Union mobilized more soldiers, which needed to be equipped. Hence, output of equipment was higher because demand for equipment was higher. Also, German output of combat aircraft was higher than Soviet output measured in terms of empty weight (instead of number produced).

But, German output of consumable things such as tank, AA and artillery ammunition (75 mm and over) was much higher than Soviet output.

These are figures of mortar and artillery ammunition output by projectile weight from 1942 to 1944:

German - 3,993,950 metric tons of projectiles
USSR ---- 2,585,000 metric tons of projectiles

There was a vast discrepancy in casualty figures in the Eastern Front from 1942 to 1944: German losses averaged 130,754 soldiers per month over the period while Soviet losses averaged 564,579 soldiers per month. That was the result of this discrepancy in firepower between the German army and the Red Army and of the higher quality of the German armed forces in both equipment, organization and training.

Also, thanks to Fukao, Ma and Yuan (2007), we know that Japan in the late 1930s was substantially poorer than previously estimated. It's living standards were below the poorest West European countries like Spain and Italy. Still, they managed to produce a lot of combat aircraft in WW2 despite that fragility. The reason was that Japan focused on the very light aircraft, that could be produced cheaply and also that consumed little fuel (Japanese aircraft production by weight was about 30% of Germany's).

Italy had a larger economy than Japan overall but did not mobilize for WW2 as intensively as it could (in WW1, Italy's contribution to Entente victory was quite substantial). A fully mobilized Italy could have made quite a difference in WW2.

Military expenditures from 1940 to 1944 in billions of 1990 dollars and in proportion to 1937 GDP:

Germany -- 1,801 -- 499%
US -------- 1,494 --- 180%
UK -------- 811 ----- 267%
USSR ----- 742 ----- 199%
Japan ----- 281 ----- 209%
Italy ------ 125 ------- 82%

Interestingly, Germany appears to have spent more than the US. The reason is that they spent way more in proportion to GDP for 2 reasons:

1 - they had access to occupied territories whose collective GDP was 170% of the size of Germany's.

2 - the war lasted longer for Germany over these 5 years.
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