While nations around the world debate the relative merits of war with Iraq versus giving UN inspectors more time to search for weapons of mass destruction, a U.K.-based think tank says -- as far as the economy is concerned -- a short war is preferable to a long and uncertain peace. While not advocating war per se, the Institute of Directors in a report this week says a short and successful war would boost the global economy by removing uncertainty over Iraq. The author of the report cautions, however, that the costs of a prolonged conflict could be high indeed.
Prague, 28 January 2003 (RFE/RL) -- A new report released this week says a short and successful war in Iraq would benefit the global economy. The report, by the U.K.-based Institute of Directors think tank, while not advocating war, says nevertheless a quick and reasonably bloodless conflict would end uncertainty over the situation in Iraq and could have a positive effect on economic growth, by lowering oil prices. The institute is nonpolitical and groups around 50,000 business leaders.
Graeme Leach is the author of the report. He says uncertainty over what will happen in Iraq is keeping oil prices artificially high and damaging consumer and business confidence. "One word sums up the report, and that is 'uncertainty.' That was the reason we wrote the report, to highlight the fact that because there are so many possible military and political scenarios for this year, as a result an already very fragile world economy faces a wider range of economic possibilities as well," he said.
The view that the Iraq question is now a strong drag on the global economy is more or less universal. Stefan Schneider, an economist at Deutsche Bank in Frankfurt, told RFE/RL late last year that Iraq was an "albatross" around the world's neck. "The major factor here is what's going to happen with Iraq. I think that's something that's really currently a big albatross around the world economy's neck. Before we get resolution there one way or the other, [any] kind of recovery will be rather subdued," he said.
Leach's report examined several different Iraq scenarios, including one in which UN weapons inspectors are given six more months to continue their search for weapons of mass destruction. The report also looked at what would happen in a relatively short war in which U.S.-led forces prevail in a matter of weeks or months, and in a longer and more difficult conflict.
"We think that if there is a short war, which is concluded quickly, then the oil price will fall back again, the stock market in the U.S. could well rally, the [U.S.] president is more likely to get his [economic-stimulus] package through [Congress], [and] economic confidence will pick up generally across the board," Leach explained.
He said, on the other hand, his research indicates the U.S. and global economies could suffer if UN inspections are allowed to continue and war is deferred. "But, if you have a standoff, where there's no conflict -- let's say the UN weapons inspectors keep going for another six months, hypothetically -- then, that economic growth is weaker. Why is it weaker? That's because uncertainty continues and the oil price will probably stay higher than it otherwise would have done," Leach said.
Leach predicts growth of around 3 percent this year in the United States under the "quick war" scenario, but just 2 percent if UN weapons inspections continue.
The costs of a long and less-successful war, however, could be catastrophic. Leach said if the U.S. meets stronger-than-expected resistance in Iraq, or if the region's oil infrastructure is damaged, oil prices could rise to as high as $80 a barrel from around $30 today. While Leach said the chances of this happening are small, he says an oil price rise to just $60 a barrel would throw the U.S. into recession.
"If the oil price hits $60 a barrel, then we forecast actually the U.S. economy to contract in 2003. But the oil price has got to go a good deal higher yet before that downside scenario clicks in," he said.
To be sure, predicting the effect of war on the economy is tricky. World War II is credited by many as providing the economic boost to lift the U.S. out of the Great Depression. The Vietnam War initially stimulated the American economy, and by extension the global economy, but the large debt incurred to finance the war later became a burden on expansion. And, of course, any economic assessment of war cannot account for the incalculable cost of human suffering.
The first Gulf War in 1990-91 is a good indicator of how badly such predictions can go wrong. It was relatively short and inexpensive -- as wars go -- yet the U.S. quickly fell into recession after the war was over. The recession was so severe that President George Bush was voted out of office the following year.
Leach acknowledges the first Gulf War did not boost the economy, but says circumstances are different this time around. He says in 1990, the U.S. economy was more susceptible to rising oil prices and more fearful of inflation. "The spike in the oil price does naturally lend itself to recession. [I] think it -- certainly in 1990-91 -- pushed the U.S. economy past the tipping point. The U.S. economy was coming off a late-1980s boom -- so was the U.K. economy at the time, under similar circumstances. [The rise in oil prices] was the straw that broke the camel's back," he said.
Leach's relatively rosy scenario is not without its significant dissenters. One is Yale economist William Nordhaus. In a recent article published in the U.S.-based "New York Review Of Books" (5 December 2002), Nordhaus decried what he said was a lack of public debate over the likely total cost of the war, which he said could be far higher than anyone is reckoning.
Nordhaus was not available for comment, but in his article he argues that any calculation of the cost of war must add in the cost of rebuilding infrastructure, as well as peacekeeping and nation-building activities. He says the total cost of a difficult war, followed by a long and difficult peace, while not likely, could reach as high as $1.6 trillion and act as a brake on the economy for years to come.
Leach concedes the point that no one can really know what the war will bring, but takes issue with Nordhaus's figures, particularly with estimates for peacekeeping and nation building. He said, "I do not think the U.S. is going to be in the business of putting in 50,000-60,000 men for long-term peacekeeping activities in Iraq."