Associate Professor of Ankara Yıldırım Beyazıt University and Head of the Economic Circle International Economic Policy Research Center. Dr. Recep Yorulmaz wrote about the impact of defense investments on the global economy for AA Analysis. *** The world economy has reached a new threshold. This time, the crisis rises not from within the financial system but directly from the center of geopolitics. Great power competition is getting tougher, blocs are becoming clearer, and states are trying to grow by arming themselves with a similar reflex.
These moves by states seem like a growth story at first. When defense expenditures increase, production revives, employment rises, and there is a rapid expansion in the successive sectors of the defense industry, but the surface and depth of this movement do not reflect the same thing. The International Monetary Fund’s (IMF) 2026 World Economic Outlook clearly reveals the background of this expansion. Defense spending may support economic activity in the short term, but the same process increases inflation, widens budget deficits, increases public debt and weakens external balances.
Moreover, this expansion often goes hand in hand with areas such as health, education and infrastructure being pushed into the background. It would be misleading to see this picture as a result of economic choices only. The period we are in is not an ordinary fluctuation but a moment of dissolution of the global order. For many years, the world economy was organized around a specific center, but today this structure is eroding and rising powers are beginning to challenge the rules of the system.
The nature of periods of hegemony transition is clear. When the balance of power changes, the system does not balance itself; Uncertainty increases, competition becomes tougher and the possibility of conflict increases. Today’s developments are not outside this framework. Geopolitical tensions are no longer the exception but the main character of the new era. War economy and its effects Therefore, the increase in defense expenditures is not temporary but structural and permanent.
States are preparing not only for today’s risks but also for an uncertain distribution of power. The question of who benefits from the resulting growth becomes critical at this point. The revival caused by defense spending is generally concentrated in a narrow area. The defense industry, high-tech manufacturing and strategic sectors directly benefit from this expansion. Large corporations and military technology networks are the most visible winners of this process.
On the other hand, this growth does not spread equally to broad social segments because defense expenditures are not a type of investment that spreads productivity and often pushes private investments into the background (crowd-out effect). The large resources transferred to the defense industry divert research and development (R&D) activities from areas that will increase civilian welfare and channel them into disruptive technologies.
Qualified workforce that could be used in fields such as civilian medicine or green energy is confined to the defense complex on the grounds of strategic priorities, and this situation reduces the real growth potential of economies in the long run. Another aspect of this table that is often overlooked is income distribution. The growth that comes with defense spending does not produce prosperity that spreads throughout society, on the contrary, it tends to deepen income inequalities.
These expenditures are concentrated in sectors that are highly capital intensive and create limited employment. While large defense companies and their associated financial structures increase their earnings, large segments of people face rising inflation and shrinking social spending. While real wages remain under pressure, the change in priority of public resources makes lower and middle income groups more vulnerable.
Thus, the war economy erodes not only macro balances but also social balance. While developing economies are forced to allocate their limited resources to imported weapons instead of social development, capital transfer continues to flow in reverse, that is, towards the already powerful military-industrial centres. This dynamic reinforces international polarization as a permanent economic gap, but when viewed conjuncturally, both the pressure brought by the global hegemonic transition process and regionally increasing uncertainty and dangers make these expenditures essential in countries like Turkey.
The inflation issue also has to be rethought in this context. The situation we face today cannot be explained only by the increase in demand. Simultaneous global armament is redirecting production capacity, increasing pressure on energy and critical inputs, and reshaping supply chains with security concerns. These developments push costs up and create more permanent price pressure. The emerging picture points to a new inflation dynamic that pushes the limits of monetary policy.
Geopolitical tensions, fiscal expansion and supply constraints are combining to put persistent pressure on prices. For this reason, it is becoming increasingly difficult for central banks to achieve price stability alone. In light of all these developments, the real question is changing. The issue is not whether defense spending supports growth. The question is whether this growth is sustainable. History shows that economic expansions that occur during periods of hegemony transition do not translate into permanent prosperity.
These processes are periods in which debt increases, inflation sets in, and conflicts intensify. Today, the world is going through exactly such a period. Growth is increasingly based on military spending. This may create a revival in the short term, but it risks weakening economic and social foundations in the long term. The world seems to continue to grow, but this growth is increasingly shadowed by war. The real question is now clearer: Is the world really growing or is it just preparing for a bigger storm?
Source: AA
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