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6 March 2003Printer-friendly versionEmail a friend

The price of war
The Iraq conflict has provoked an attack of bogeyman economics.

by Daniel Ben-Ami

If it's not enough that Saddam Hussein is portrayed as the main threat to world peace, he also stands accused of disrupting the world economy.

Over the past few months, rising oil prices, falling share prices, poor car sales and low levels of consumer confidence have all been blamed on the Iraq conflict. And the combination of these and other factors is said to be putting the world economy at risk of recession.

Yet the Iraq conflict has little, if anything, to do with such problems. Rather, it is a development on which business managers and financiers can project their anxieties. Just as small children project their fear of the dark on to an imaginary bogeyman, the protagonists of the Western economies lay their fears at the door of the Iraqi dictator.

To understand the real impact of the war on the world economy, the three most common elements of the discussion need to be critically examined: the direct costs of the war, the impact on oil prices and the dangers of uncertainty.

Direct costs

The direct economic costs of fighting the war for the Western powers can be difficult to calculate: partly because of government secrecy, and partly because it is hard to separate the war costs from everyday military costs.

The reason for government coyness in relation to military spending is spelt out by Professor Keith Hartley, director of the Centre for Defence Economics at York University, in the journal of one of Britain's leading military think-tanks: 'Understandably governments do not wish to reveal their cost estimates since it signals their assumptions about the scale and magnitude of the resources committed to the conflict.' (1)

The difficulty in separating the everyday running costs of military units from the specific costs of each operation makes available figures difficult to interpret. As William Nordhaus, a Yale economics professor and one of the leading American experts on the subject, explains: 'The 82nd Airborne Division has to be paid whether it is in Iraq or in North Carolina. Only additional costs such as those for transport, combat pay, and the replacement cost of munitions should be counted in the cost of war.' (2)

Saddam Hussein will be an excellent scapegoat for a growing level of government debt
Some published statements do give a rough idea of the cost of the war. For example, the Pentagon has recently stated that the costs of the combat phase of the war and its immediate aftermath could be up to $95billion (60billion). This is close to an earlier estimate of $100billion to $200billion from Lawrence Lindsey, a former economic adviser to President George W Bush, who was ridiculed at the time (3).

However, such enormous-sounding figures have to be set against the giant size of the American economy. Given that the annual output of the American economy is over $10trillion, even $200billion would represent less than two percent of that. To make another comparison: assume that the federal government had to borrow on the financial markets to cover the costs of the war. Given that the American federal debt is currently $6.4trillion, an extra $200 billion, although an additional burden, is unlikely to make much difference (4).

In Britain, the chancellor announced in early March that he is willing to 'spend what it takes' above the 1.75billion he had already pledged to the conflict (5). An alternative estimate of the military costs of the war from Professor Hartley puts it at between 875million and 3billion (at 2001 prices), although he notes it could easily be higher (6). But even assuming the costs were as much as 5billion, that would still be less than 0.5 percent of Britain's GDP of 1trillion. It should also be noted that Britain's total government debt is over 400billion (7).

In one respect, the Iraq conflict will be really useful to the treasuries of both America and Britain. Saddam Hussein will be an excellent scapegoat for a growing level of government debt; and the Iraq conflict will provide a convenient distraction from what is overwhelmingly the most important reason for rising levels of debt - the underlying weakness of the American and British economies.

Oil

The discussion of the economic impact of rising oil prices is particularly confused. It generally starts from the correct assumption that the Middle East accounts for a high proportion of the world's proven oil reserves - but goes on to draw sweeping, unjustified conclusions.

In 2001, the latest year for which figures are publicly available, the Middle East accounted for about 65 percent of the world's proven reserves of crude oil. Iraq alone accounted for 10 percent of global reserves and Saudi Arabia for about 25 percent (8). But the fact of oil in the ground does not lead directly, in the way it is argued, to a massive rise in oil prices that will devastate the world economy.

Typically such arguments are based on a worst-case scenario for the West, in which Iraq's oil fields are set alight, Israel becomes embroiled in the conflict, terrorists disrupt oil supplies in other Middle Eastern countries and Arab states consider an oil boycott (9). But given the disparity between America's hugely powerful military forces in the region and Iraq's poor and demoralised army, a decisive US military victory seems a much more likely scenario.

Arguments about a massive rise in oil prices are based on a worst-case scenario
In the unlikely event that much of the Middle East's oil supplies are disrupted, the impact could be contained. Since the 1973 Arab-Israeli war - which led to a quadrupling of oil prices - the Western powers have taken concerted measures to protect themselves against just such eventualities. For example, America, the European Union, Japan and South Korea all have close to three months of oil in reserve (10). The Wall Street Journal has even estimated that the USA holds enough oil to replace all imports from the Middle East for 300 days (11).

Even last week's surge, in which oil prices nearly reached $40 a barrel - a level last seen in the previous Gulf War - was probably not primarily to do with the Middle East. Developments in Latin America, along with an unusually cold winter in the USA, are mainly to blame. According to Lombard Street Research, an economic consultancy: 'The dominant reason for the surge in oil prices has been a general strike in Venezuela. In November Venezuela produced 3.4million barrels of oil a day (b/d); in December - after the strike had begun - the figure slumped to 0.9million b/d and in January to little more than 0.6million b/d.' (12) In fact the main Middle Eastern producers, including Iraq, appear to be bolstering production (13).

The irony is that if Middle East oil supplies are disrupted, it will be the fault of America and Britain. The Iraqi economy is almost totally dependent on oil production. And as long as it is in the ground, rather than being exported in exchange for hard currency, it is of little use to the Iraqi leader.

Uncertainty

The most intangible argument about the economic consequences of the Iraq conflict is that it causes uncertainty. At a push, experts will agree that the economic cost of the conflict is likely to be relatively low and that a severe disruption to oil supplies is unlikely. But their refrain will typically be that markets dislike uncertainty so any type of conflict is damaging. This was certainly a common argument in the financial markets, when shares were plummeting in January 2003.

Such amorphous arguments can be as difficult to disprove as they are to prove. Factors such as business or consumer confidence - which are said to be damaged by uncertainty - are inherently subjective concepts. Just because someone attributes their mood or even their actions to the Iraq conflict it does not mean that their claim should be accepted.

Insofar as there is some truth to these arguments, it is not that Saddam Hussein is generating uncertainty which is then damaging global economic prospects. It is that Saddam has become the current target on which Western business leaders and financiers can project their anxieties. If he did not exist, they would find some other focus for their fears.

Over the past few years, a pattern has emerged where one disaster after another has been viewed as a serious blow to the global economy. In the event the economy, although weak, has not descended into catastrophe in the way many have predicted.

One disaster after another has been viewed as a serious blow to the global economy
The pattern was certainly clear during the Asian financial crisis of 1997-8. Financial turmoil in the financial markets of five relatively marginal nations was frequently seen as a threat to the world's largest economies. Politicians from then US president Bill Clinton and UK prime minister Tony Blair downwards warned that disaster could be imminent (14). But despite the gloom-laded predictions, the world economy continued to grow.

A similar trend was clear after the 11 September terrorist attacks in 2001. It should have quickly been clear that, despite the human tragedy, the economic impact was likely to be minimal (15). But the doomsters predicted disaster - in particular, a sharp fall in personal consumption as shoppers, presumably traumatised by the ordeal, stopped spending. Politicians even called for consumers to exercise their patriotic duty to shop.

As it turned out, shoppers proved far more resilient than the prophets of doom predicted, willing to go on a spending binge to take advantage of cheap credit that lower interest rates made available (16). Ironically, but probably not a surprise in such a fearful climate, the discussion then switched to the dangers of consumers spending too much.

Then there was the collapse of Enron, an energy trading company, and other corporate scandals. There was a pervasive fear that corporate America was somehow in danger of collapse. The discussion of Enron, one company, was replaced by a debate on 'Enronites', or the plague of corruption and excessive debt that had supposedly consumed American firms.

It is this angst-ridden climate that explains the current obsession with the impact of the Iraq conflict on the global economy. Western business leaders are simply projecting their numerous anxieties on to Saddam Hussein. Once he is gone, they will no doubt find something else to blame.

Daniel Ben-Ami is the author of Cowardly Capitalism: The Myth of the Global Financial Casino, John Wiley and Sons, 2001 (buy this book from Amazon (UK) or Amazon (USA)). He is also a contributor to Cultural Difference, Media Memories: Anglo-American Images of Japan, Continuum International Publishing Group, 1997 (buy this book from Amazon (UK) or Amazon (USA)).

Read on:

spiked-issue: Economy

(1) The costs of war (.pdf 187 KB), Keith Hartley, Royal United Services Institute for Defence Studies Journal, October 2002

(2) Iraq: The economic consequences of war, William D Nordhaus, New York Review of Books, 5 December 2002

(3)See US increases estimated cost of war in Iraq, Mike Allen, Washington Post, 26 February 2003

(4) For the current level of US federal debt see The debt to the penny, Bureau of the Public Debt, US Department of the Treasury

(5) Brown to boost Iraq war chest, Reuters, 4 March 2003; Spreading links between business and the community, Gordon Brown, speech at 'Future wealth of nations' conference, 4 March 2003

(6) The costs of war (.pdf 187 KB), Keith Hartley, Royal United Services Institute for Defence Studies Journal, October 2002

(7) See UK debt and deficit, National Statistics, 28 February 2003

(8) Figures are from the Annual Statistical Bulletin 2001 (.pdf 1.18 MB), Organisation of the Petroleum Exporting Countries

(9)For a typical example of a discussion paper sketching such a scenario, see After an Attack on Iraq: The Economic Consequences (.pdf 128 KB), Robert Ebel, Herman Franssen, Larry Goldstein and Adam Sieminski, Centre for Strategic and International Studies, 12 November 2002

(10)See Saddam's other weapon of mass destruction: the potential economic fallout from a war in Iraq, Vincent Cable, Global Dimensions

(11) 'Oil and uncertainty', Wall Street Journal Europe, 3 March 2003

(12) Lombard Street Research Monthly Economic Review, February 2003 linkable text

(13) International Energy Agency Oil Market Report, 12 February 2003. See the Highlights (.pdf 29.4 KB)

(14) For more details, see Cowardly Capitalism: The Myth of the Global Financial Casino, Daniel Ben-Ami, John Wiley and Sons, 2001. Buy this book from Amazon (UK) or Amazon (USA). For a review of this book, see A bold critique, by Phil Mullan

(15)See The terrified economy?, by Daniel Ben-Ami; The fear economy, Paul Krugman, New York Times, 30 September 2001

(16) See the GDP and related data section on of the Bureau of Economic Analysis website

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