The War Economy: Who Profits From Conflict in the 21st Century?

The world of 2026 is not witnessing the return of war. It is witnessing its consolidation. According to the Armed Conflict Location and Event Data Project, political violence increased by 25 per cent globally in 2024 compared to the year before, with an estimated 223,000 people killed in conflict-related incidents and one in eight people on earth exposed to active violence. The International Institute for Strategic Studies recorded a 37 per cent rise in conflict fatalities in the twelve months to mid-2024. Global violent-event fatalities rose a further 23 per cent in 2025, approaching 240,000. These are not the numbers of a world edging toward confrontation. They are the numbers of a world already inside it.

The major conflict theatres of 2025 and 2026 are not isolated crises. They are structurally connected nodes in a single global war economy, each generating its own demand signal and each drawing on the same industrial and financial systems. Ukraine enters 2026 in its fourth year of full-scale invasion, with Russian forces making incremental territorial gains in Donetsk at a cost estimated at between 200,000 and 285,000 military casualties on the Russian side alone. The fiscal implications are extraordinary: Russia has committed approximately 7.1 per cent of GDP to military expenditure, and 19 per cent of all government spending. Ukraine, receiving arms transfers that increased nearly a hundredfold between 2015-19 and 2020-24, has allocated 34 per cent of its GDP to defence, the largest military burden of any country in the world according to SIPRI. The entire Ukrainian tax revenue now flows into military expenditure. This is not a nation defending itself. It is a nation that has been economically converted into a war machine.

Gaza has entered its third year of devastating conflict, with 72,123 Palestinians killed according to the Gaza Ministry of Health as of March 2026 and the UN describing the humanitarian situation as catastrophic. Sudan's civil war between the Sudanese Armed Forces and the Rapid Support Forces has killed an estimated 20,000 people in a single year, displaced over 12 million and triggered famine conditions across a country that was already among the world's most fragile. Across the Sahel, the Wagner Group's successor networks have deepened their operational footprint in Mali, Burkina Faso and Niger following the expulsion of French and American forces, while JNIM and Islamic State affiliates have expanded their area of influence toward coastal West Africa. In Myanmar, more than 2,600 active armed groups have been recorded since the 2021 coup, making the country the most fragmented conflict environment in the world. The Council on Foreign Relations' annual risk assessment for 2026 rates Sudan, Ukraine, Gaza and the Iran-Israel axis all as Tier I priorities, with North Korea elevated to that category for the first time.

What connects these theatres economically is not ideology or geography. It is the structure of demand they generate. Each active conflict creates an accelerating pull on the same set of industrial inputs: artillery shells, drone components, missile guidance systems, armoured vehicles, satellite communications, field medical supplies, and the fuel that moves everything. When multiple high-intensity conflicts operate simultaneously, as they are doing in 2026, the cumulative demand pressure on global defence industrial capacity becomes structural rather than episodic. Lead times lengthen. Prices rise. The producers who can scale fastest gain market share and political influence. The states that cannot secure supply find themselves negotiating from a position of strategic dependence. The war economy does not distribute its benefits evenly. It concentrates them in the hands of those with the most advanced and most flexible production capacity, and that asymmetry shapes every diplomatic relationship in the system.

The fundamental distinction between a peace economy and a war economy lies in the definition and direction of abundance. In peacetime, the global system is organised around the logic of consumer choice: the ability to manufacture infinite variations of a civilian product for a dispersed market. It is the logic of the shelf and the competitive margin. In wartime, this logic is not merely suspended. It is violently redirected toward singular and relentless output, with the state as the sole customer and the factory floor as the primary unit of national sovereignty.

The Second World War remains the definitive industrial benchmark for this transition. In 1941, the American industrial base was essentially a civilian machine. By 1944, the Ford Willow Run plant in Michigan had reached a tempo that remains statistically staggering: at its peak, the facility produced a B-24 Liberator heavy bomber every 63 minutes. Across the Atlantic, the Castle Bromwich Aeroplane Factory in Birmingham, operated by Vickers Armstrong, was outputting hundreds of Spitfires per month through a total mobilisation of the British labour force. To move from bespoke assembly to mass production of advanced combat aircraft within a single facility required a total suspension of peacetime efficiency in favour of raw industrial velocity. Scale was not a preference. It was a condition of national survival, and every industrial, fiscal and human resource was subordinated to achieving it.

In 2026, this structural redirection creates a stark and largely underdiscussed contrast within the Global South. India serves as a compelling case study in the divergence of national capacity. The Union Budget 2026-27 allocates a record 7.85 lakh crore rupees to defence, representing a 15.19 per cent increase over the previous year and accounting for 14.67 per cent of total central government expenditure, the highest share among all ministries. The budget was shaped directly by the aftermath of Operation Sindoor, which validated India's operational doctrine but also cemented the political consensus that security must precede development in the fiscal hierarchy for the foreseeable future.

The structural consequence of this choice lands hardest on those least positioned to absorb it. In the remote districts of Odisha, Bihar and Chhattisgarh, primary health centres operate with chronic staff shortages, crumbling infrastructure and negligible pharmaceutical supplies. Out-of-pocket medical expenses consume a disproportionate share of household income for the rural poor across these regions, a burden that has remained stubbornly resistant to improvement across a decade of headline GDP growth. The war economy builds world-class missile systems and high-precision manufacturing hubs in urban clusters with genuine efficiency. What it does not build, and has never historically built, is the interior. The two are not in accidental tension. They compete for the same rupee, and in 2026, the missile is winning.

The calculation of human labour undergoes an equally total transformation when a nation pivots to a war footing. In a peace economy, youth unemployment is treated as a persistent structural failure requiring patient market correction. Among the 15 to 24 age bracket in India, unemployment has frequently exceeded 20 per cent because the civilian market fails to efficiently match unskilled workers with formal employment. A war economy abolishes this patience. Labour becomes a raw material to be rapidly refined and deployed. Facilities like Castle Bromwich and Willow Run functioned as impromptu technical colleges where thousands of workers with no prior industrial experience were trained to assemble complex aircraft components within weeks. In 2026, the expanding defence industrial base performs the same function. It absorbs under-qualified labour not through the slow filter of market signalling, but through the urgent mandate of the state. The productive capacity that peacetime governance could not unlock, wartime necessity routinely does.

The machinery of war in 2026 has successfully detached itself from the 20th-century obsession with raw tonnage and heavy metal. The military-industrial system has transitioned into a software-defined sector where the GPU cluster and the satellite constellation are as critical to the outcome of conflict as the aircraft factory was in 1940. The kill chain is now measured in milliseconds of data processing rather than in the calibre of a barrel, and the nation that cannot compete on this dimension cannot compensate with any quantity of conventional hardware. This is not evolution. It is a structural rupture in the economics of military power.

The integration of artificial intelligence with military targeting has moved operational decision-making from a manual, human-centric process to a machine-assisted dashboard operating at machine speed. Satellite imagery, drone feeds and signals intelligence are now aggregated in near real time, cross-referenced and ranked by probability of success before a human commander ever reviews the picture. This architecture privatises intelligence at a scale that would have been unimaginable a decade ago, with technology firms rather than defence ministries holding the most consequential keys to national security. The economic implication is stark: a state without access to advanced AI targeting infrastructure is not fighting a more difficult version of the same war. It is fighting a categorically different one, against an adversary operating from a position of permanent and widening information superiority.

No state has pursued this fusion more deliberately or at greater scale than China. Under the Military-Civil Fusion Development Strategy, formalised in law since 2017 and aggressively expanded since 2020, Beijing has systematically eliminated the institutional boundary between civilian technology development and military application. Chinese technology firms are not merely encouraged to support military requirements. They are legally obligated to do so. Huawei's telecommunications infrastructure doubles as signals intelligence architecture. Alibaba's cloud computing capacity is available to the People's Liberation Army on demand. DJI's global dominance in commercial drone manufacturing has produced a manufacturing and supply chain ecosystem that feeds directly into military drone production at a scale no Western country can currently match. China spent an estimated $314 billion on defence in 2024 according to SIPRI, the second largest figure globally, but the effective military-industrial capacity embedded within the civilian economy is substantially larger than any single budget line can capture.

The contrast with Western procurement doctrine is not merely philosophical. It is structural and consequential. In the United States and Europe, defence procurement remains largely siloed from civilian innovation cycles, with acquisition timelines measured in years and legacy contractor relationships that resist disruption. Anduril Industries' Arsenal-1 facility in Ohio, spanning five million square feet, represents the most serious American attempt to bridge this gap: a software-defined production system capable of switching between autonomous combat aircraft, underwater vehicles and sensor towers using the same commercial machinery and the same workforce. It is the 2026 successor to the Ford Willow Run model, built on the recognition that the inability to manufacture a thousand units as readily as ten is a strategic liability of the first order. But Arsenal-1 is one facility. China's civil-military fusion is a national doctrine applied across thousands of firms, with regulatory, financial and coercive enforcement mechanisms that no democratic economy has yet replicated or chosen to.

The global arms trade is not a free market. It is a politically managed system in which supplier states use weapons transfers to build alliances, project influence, generate export revenue and test new platforms in live operational conditions. Understanding the war economy requires understanding who controls this pipeline and on what terms. According to SIPRI's March 2025 Arms Transfers report, the top five arms exporters in 2020-24, namely the United States, France, Russia, China and Germany, accounted for 71 per cent of all major arms transfers globally. The United States alone held a 43 per cent share, a figure that exceeds the combined exports of the next eight largest suppliers and represents a 21 per cent increase from the previous five-year period. The US supplies arms to 107 countries across every region of the world. No other state comes close to this reach.

The revenues at stake are significant and growing. The SIPRI Top 100 arms-producing companies recorded combined revenues of $679 billion in 2024, a 5.9 per cent increase on the previous year and a record high. For the first time since 2018, all five of the world's largest arms companies increased their revenues simultaneously. Demand was driven by the wars in Ukraine and Gaza, by European rearmament and by the accelerating defence budget increases across Asia. The three Israeli defence companies in the Top 100 increased their combined revenues by 16 per cent to $16.2 billion, despite the growing international backlash over Gaza operations, a finding that reveals with uncomfortable clarity the degree to which arms revenues and humanitarian concerns operate in entirely separate institutional frameworks. South Korean producers increased revenues by 31 per cent, with Hanwha Group recording a 42 per cent jump, more than half of which came from exports. Japan's five Top 100 companies grew by 40 per cent. A new industrial geography of arms production is forming, and it does not correspond to the old map.

The supply side is fracturing in ways that will define the strategic landscape for a generation. Russia's arms exports collapsed by 64 per cent between 2015-19 and 2020-24, the steepest decline of any major supplier in the database's history, as sanctions disrupted supply chains and the domestic war effort consumed virtually all available production capacity. Russia supplied arms to only 33 countries in the most recent period, compared to a much broader network before 2022. The clients that cannot find replacement suppliers elsewhere, notably several African and South Asian states with Russian-origin platforms requiring spare parts and technical support, face a serious capability gap that no amount of political goodwill can immediately fill. India, historically the world's largest arms importer and deeply dependent on Russian platforms, is accelerating its diversification toward French, American and indigenous suppliers, a structural shift that is reshaping bilateral relationships across multiple dimensions simultaneously.

The grey zone between official arms transfers and informal supply networks is where the war economy becomes most difficult to audit and most consequential to understand. Three non-state armed groups were identified by SIPRI as recipients of major arms in 2020-24, in Lebanon and Palestine, Libya and Yemen. These transfers do not appear in official export registers. They move through intermediary states, shell companies, falsified end-user certificates and, increasingly, through commercial supply chains where dual-use components such as drone parts, navigation systems and communications equipment are re-routed from civilian to military applications. The arms embargo on Iran has not prevented Tehran from developing one of the world's most capable drone arsenals, large portions of which have been transferred to Russia, the Houthis and various Shia militia networks across the Middle East. The embargo on North Korea has not prevented Pyongyang from supplying artillery shells and ballistic missiles to Russia's war effort in Ukraine. The formal architecture of arms control was built for a world of state-to-state transfers conducted through official channels. The 2026 arms trade operates in a world where that architecture is increasingly decorative.

If industry provides the hardware of the war economy, finance provides the oxygen. Financing conflict requires resources that routinely exceed the immediate tax revenue of any state, and the mechanisms used to bridge that gap leave marks on civilian economies that persist long after the last shot is fired. Governments rely on a combination of sovereign debt issuance, emergency taxation and, most subtly, financial repression: the systematic maintenance of interest rates below the rate of inflation, which erodes the real value of accumulated debt over time while transferring purchasing power from civilian savers to the state apparatus. According to SIPRI, world military expenditure reached $2,718 billion in 2024, the steepest year-on-year rise since at least the end of the Cold War and the tenth consecutive annual increase. With active conflict theatres expanding across the Middle East in 2025 and 2026, the current global figure is estimated to be well in excess of $2.7 trillion.

For India, this creates a fiscal tightrope of considerable tension. The pursuit of seven per cent GDP growth is now tied to a defence budget representing two per cent of GDP, the highest share since 2017-18, and accounting for 14.7 per cent of total central government expenditure. Capital that could have built rural roads, funded preventive healthcare or strengthened state-level governance is instead channelled into procurement cycles with operational lifespans of 20 to 30 years. This is the finance of desperation: not recklessness, but the cold and rational acknowledgement that the cost of strategic vulnerability has been judged to exceed the cost of underfunded development. Whether that judgement is correct is a legitimate debate. That it carries a real and distributional human cost is not.

What official budgets do not capture, however, is the parallel financial architecture that has emerged specifically to circumvent the Western-led sanctions regime. This shadow ledger is not peripheral to the 2026 war economy. It is central to it. Russia, under the most comprehensive financial sanctions imposed on a major economy since the Second World War, has routed energy revenues through the United Arab Emirates, Turkey and India using a combination of third-country banking relationships, commodity barter arrangements and currency swap agreements denominated in roubles, dirhams and rupees. Iran has gone further, conducting a significant proportion of its oil trade through cryptocurrency channels and peer-to-peer settlement networks that operate entirely outside the SWIFT architecture. North Korea has demonstrated that a state with sufficiently motivated technical capacity can extract hundreds of millions of dollars annually from the global financial system through blockchain exploitation, using the proceeds to fund ballistic missile development that no sanctions framework has been able to halt.

The cumulative effect of these parallel systems is to significantly degrade the coercive power of financial sanctions as a tool of statecraft. Sanctions remain effective at imposing costs and slowing the acquisition of specific high-technology inputs. They have not, in any of the three cases above, achieved their stated objective of compelling a change in strategic behaviour. What they have achieved is the acceleration of a de-dollarisation dynamic that was already underway, as sanctioned and sanction-adjacent states invest heavily in building financial infrastructure that does not depend on Western intermediation. The BRICS New Development Bank, the Chinese Cross-Border Interbank Payment System and the growing network of bilateral currency swap agreements between Global South central banks are not responses to a single political moment. They are the institutional expression of a structural conclusion: that the dollar-centred financial system is a geopolitical instrument, not a neutral public good, and that any state whose interests diverge from Washington's is exposed to existential financial risk.

For the Global South, the return of the war economy is a structural pressure of a different kind from what Washington or Beijing experiences. It is not the pressure of choosing how to project power. It is the pressure of choosing how to survive its projection by others. Developing economies are caught in a guns-versus-development trap where security competition dictates national fiscal priorities before development planners are consulted, and where the resources required to participate meaningfully in the new industrial order are precisely those that would otherwise fund the social investments that make industrial participation possible. In the Sahel, security spending has created immense fiscal pressure on governments already managing fragile revenue bases, crowding out expenditure on food security, health systems and education at precisely the moment when demographic pressures demand the opposite. Military expenditure across Africa reached $52.1 billion in 2024 according to SIPRI, a three per cent increase from 2023, driven primarily by security pressures in the Sahel and the Horn. The demographic dividend that development economists cite as Africa's coming engine becomes a liability rather than an asset when the state cannot afford to educate, employ or keep healthy the young people producing it.

The one structural card the Global South holds with genuine force is geology. Rare earth elements, lithium, cobalt, nickel and manganese are no longer merely inputs for the green energy transition. They are the foundational materials of the 2026 war economy: without them there are no precision-guided munitions, no advanced communications, no electric vehicles for military logistics and no semiconductor fabrication at scale. The Democratic Republic of Congo holds an estimated 70 per cent of the world's cobalt reserves. Chile and Bolivia sit atop the lithium triangle. Indonesia controls critical nickel deposits. Brazil, South Africa and several Central Asian states hold rare earth endowments that no amount of Western recycling or deep-sea mining ambition can yet substitute. The leverage is real and it is structural.

The question is whether the Global South can convert geological endowment into industrial agency before the window closes. The historical record is not encouraging: commodity booms have repeatedly enriched elites and foreign contractors while leaving domestic populations with the environmental costs and the fiscal volatility. But 2026 is not 1986. The geopolitical environment has changed the terms of negotiation in ways that favour resource-holding states more than at any point in the post-colonial era. Indonesia's decision to ban raw nickel exports and force downstream processing within its borders, backed by the credible threat of supply disruption to both Western and Chinese battery manufacturers, is the model. It extracted investment, technology transfer and local employment that a simple export model would never have delivered. Chile's move toward partial state control of its lithium sector reflects the same logic. The verdict on whether the Global South can leverage this moment is not yet written. But it is being written now, in mining codes, trade agreements and industrial policy decisions that most international financial commentary still treats as secondary.

India sits at the sharpest intersection of these pressures. The Union Budget 2026-27 earmarks 1.39 lakh crore rupees, approximately 75 per cent of the capital acquisition budget, for procurement from domestic defence industries under the Aatmanirbhar Bharat framework. This is a structurally rational response to supply chain vulnerabilities exposed by the Russia-Ukraine war and validated by India's own recent operational experience. But the choice is a genuine trade-off, not a free lunch. Every rupee committed to a naval carrier programme or a next-generation fighter acquisition is a rupee unavailable for rural road connectivity, primary healthcare infrastructure or the quality of state-level governance that determines whether headline growth translates into household welfare. India is betting that strategic depth today will create the conditions for inclusive prosperity tomorrow. That may prove correct. But the citizens of Odisha and Bihar are bearing the cost of the bet now, and they were not consulted on the odds.

The ledger determines the sword. In 2026, the war economy is no longer a peripheral concern or a temporary crisis to be managed at the margins of fiscal planning. It is the central organising principle of the global industrial order, reshaping budget priorities, supply chains, technology development cycles and the life chances of ordinary citizens across both hemispheres in ways that will compound for a generation. Whether the mechanism is financial repression in a G7 capital, shadow banking in a sanctioned state, civil-military fusion in Beijing, distributed drone production in Kyiv or mineral politics in Kinshasa, the underlying dynamic is the same: the requirements of the security state are crowding out the investments that build the civilian foundation on which security ultimately rests.

For the citizen in rural India, the cost of this shift is measured in the doctors who are not there, the medicines that are too expensive and the roads that were never built. For the soldier in the field, it is measured in the reliability of a sensor link and the latency of an algorithm. For the policymaker in a Global South capital, it is measured in the brutal simplicity of a budget line that keeps growing while others stagnate, in a context where both the cost of not spending and the cost of spending are real and visible and borne by different constituencies. For the Global South more broadly, it is measured in whether the current geological leverage can be converted into permanent industrial capacity before the next commodity cycle turns.

None of these questions resolve themselves. They require choices, which require trade-offs, which require honesty about what is being selected and what is being abandoned. That is what this edition of The Meridian attempts to provide: not comfort, but clarity. Not verdict, but evidence sufficient to form one. The return of the war economy is the most consequential structural shift of our time. Understanding it requires looking past the smoke of the battlefield to the bones of the ledger, past the headlines of military spending to the quiet mechanisms of financial repression, shadow finance, civil-military integration and resource politics that actually determine outcomes.

Politics may ignite the conflict in wood-panelled rooms. Soldiers may fight it with courage in the mud and the high-altitude passes. But it is sustained, won and lost through the relentless and unsentimental machinery of the economy. Everything else is noise.