The Monetary Costs of a New Gulf War: The Global Economy Will Be Rocked by Soaring Fuel Prices, Severe Recession and Market Turmoil If the United States Iraqi Policy Backfires. (Gulf War)

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The pending Iraqi conflict and the wider war against terrorism have cast a shadow of uncertainty over the US and by extension the global economy in the post 11 September environment. The Yom Kippur War (1973/74), the Iranian revolution (1979/80), the 1990-91 Gulf War, each conflict carries its own set of bad memories of economic depression and soaring inflation caused by runaway fuel prices.

Today, both developed-and-developing nations alike remain hostage to renewed downturns in global trade and foreign direct investment. The World Bank cautioned: "Fragile consumer confidence, under-performing stock markets and concerns about a war with Iraq could all knock global recovery off course in 2003 and there is a significant risk that the world could slip back into recession."

The Bank of England in its quarterly Inflation Report said: "Uncertainty surrounding Iraq hangs heavily over the short-term outlook for the world economy". Meanwhile, Alan Greenspan, Chairman of the Federal Reserve Board, warned: "The cocktail of uncertainties has created formidable barriers to new investment".

The potential costs of striking at Saddam Hussein's regime will depend largely on the scale and duration of military hostilities, as well as the overall capacity of the Iraqi army to withstand a US-led onslaught on a nation crippled by decades of poor governance and stringent United Nations sanctions. In recent months, various estimates of the costs of a new Gulf campaign have been reported in the British and American press. A report by the US Congressional Budget Office, noted: "Prosecuting a war would cost between $6bn and $9bn a month ... after hostilities ended, the costs of returning US forces to their home bases would range between $5bn and $7bn."

Initial deployment cost is widely assessed at $9bn to $13bn. Mitchell Daniels, the White House's Budget director, quotes a figure of $50bn-$60bn, well below the $100bn-$200bn previously arrived at by Larry Lindsey, the President's former chief economic adviser. The International Institute for Strategic Studies believes the costs of a second Gulf War at $38.5bn will fall significantly below the $65bn spent during Operation Desert Storm in 1991, when 500,000 US troops were deployed. However, in the 1991 hostilities, which lasted 43 days, wealthy allies, namely Saudi Arabia, Kuwait, the UAE, Japan and even Germany, covered almost 90% of the US's bill, which totalled $80bn in real terms. This time, with a marked lack of wider international support America may have to bear the lion's share of the financial costs of any conflict.

Asked if the flagging US economy could absorb the $60bn war costs, President Bush argued that although expensive, a pre-emptive attack would be cheaper than waiting for the Iraqi leader to make his move: "An attack from Saddam Hussein, or a surrogate of Saddam Hussein would cripple our economy," the President said.

The Washington-based Centre for Strategic and International Studies has presented an interesting analysis of the broader macroeconomic impact of war on the US economy. It suggests three possible scenarios: benign outcome (40%-60% probability); intermediate outcome (30%-40% probability) and worst case outcome (5%-10% probability).

The benign-case scenario envisages a swift campaign lasting four to six weeks and costing around $55bn. This case envisages core OPEC producers, led by Saudi Arabia, agreeing to increase oil production, thereby offsetting the loss of Iraq's 2m b/d exports. This scenario envisages no collateral damage to regional energy infrastructure such as oilfields, pipelines and export terminals.

Such a short, effective strike leading to `regime change' in Baghdad could stimulate business confidence and enable the US economy to recover this year. Crude prices might rise to as high as $36 a barrel but would drop sharply once the success of the US-led coalition was assured.

The `intermediate-case' assumes war lasting for three months with some collateral damage to oil facilities. …