Don’t blame it on the bombs

Many claim that the Iraq war is dominating the business and economic worlds as much as it is our TV screens.

‘Markets tumble as fear of prolonged war takes hold’ has been a typical headline since the war started. More upbeat analysts claim that normal economic service should resume once the hostilities die down; others argue that the war and its aftermath could push an already fragile world economy into recession.

In reality, the war itself is not as economically significant as some of the discussion implies. The world economy is in trouble, but blaming the war misreads the real, enduring problems. As Lex wrote in the Financial Times on 29 March: ‘War distorts the data, but the data have long been disappointing.’ (1)

The main theme in the economic discussion of the war today is uncertainty. As Daniel Ben-Ami anticipated on spiked, the focus has shifted from more specific economic problems to less tangible ones (see The price of war). Even the gloomiest commentators have difficulty attributing an influential economic effect to the budgetary costs of war or to the impact of volatile oil prices. Instead, the more amorphous issue of uncertainty has taken centre stage.

So in the past week financial markets have been falling again, due, apparently, to heightened uncertainty about how long the war will last. This kind of thinking sounds familiar. Before the war started, economic troubles were attributed to uncertainties about the build-up to war: when would it start…who would be involved…would there be a second UN resolution? After the war started, some optimists said that things might improve – and there was a respite from the uncertainty for about three days, before it reasserted itself again. And as the war drags on, we can be sure that ‘post-war’ fears for the economy will take hold.

Business leaders and economists in the West are simply projecting their generalised sense of anxiety on to the war in Iraq. Yesterday they projected that anxiety on to different events, and tomorrow they will move on to something else. If it wasn’t for the war, SARS would be getting the blame instead.

But surely, it could be argued, even something as subjective as uncertainty can have a real economic effect. Just as indecisiveness on the part of the Americans has shaped the conduct of the war, so the same might apply to the economic consequences of the war. This comparison is valid, to an extent, in general business and economic terms. But it is not valid as a reason for exaggerating the economic costs of the war.

Firstly, the compass of the war is limited. Apart from their role in oil production, Iraq and the Middle Eastern region do not contribute much in the way of world economic output. Even those global industries said to be most affected by the war – hotels, airlines, tourism – do not rely on the direct war zone for their revenue. Despite Iraq’s historical treasures, sanctions put a stop to Western visitors. And for every dollar of revenue lost in Iraq and the surrounding region, some company will pick up a multiple of that in reconstruction contracts or in restoring military inventory.

Moreover, these tourism and travel sectors have been in trouble for some time. Post-9/11 fear of flying partially explains these industries’ difficulties, but their bigger problems predate both the 11 September terrorist attacks and America’s warmongering over Iraq.

Secondly, even the indirect economic effects of the war through the prism of uncertainty should not be overstated as a clear-cut relationship. Uncertainty provides more of a backdrop to, rather than an explanation for, the state of economic affairs. There is no simple causal connection between uncertainty and economic weakness.

It may seem obvious that uncertainty underpins the softness of global equity markets today, and that it has done for the past three years – but uncertainty has been a constant economic refrain for at least a decade. Even by the mid-1990s ‘uncertainty is the new certainty’ had become a cliché among management gurus, attributed to the combined effects of supposedly intensified global competition and technological change. Yet despite this context of ‘unprecedented’ uncertainty, the end of the 1990s brought one of the biggest financial bubbles in Western history.

It makes more sense to see the perception of ubiquitous uncertainty as the corollary for the defining feature of business culture today: a risk-averse short-termism. Market economies have always veered towards seeking a short-term result over taking a long-term approach. But today, a loss of historical perspective means there is little to provide guidance about how to act. Economic and business leaders lack even their old authority and decisiveness when facing difficulties. Nowadays, coping with problems seems less about resolving them, than simply trying to put things on hold and perpetuate the present.

This culture can often lead business leaders to jump on the latest bandwagon. So when stock markets looked like a one-way bet and the internet was all the rage, almost every investor bought in to the ‘New Economy’. And when the bubble burst everyone joined the ‘I told you it couldn’t last’ band of cynics. Revealingly, those companies that went most out on a limb to embrace the New Economy were often the ones that were later found guilty of ‘excess’. The lesson? Don’t try to break away, and here’s another round of corporate regulation to keep us all in check.

Today, paralysis seems to have the upper hand in the economic and business worlds. There’s a dearth of share flotations, a drought even in that 1990s corporate refuge of merger and acquisition activity, and capital investment has sunk to new depths. BusinessWeek caught this temper well in its description of ‘CEO funk’: ‘The unrelenting bad news of weak earnings and corporate scandals isn’t putting business leaders in any mood to take risks or spend.’ (2)

The war will end at some point – but the economic culture of restraint will survive it.

Phil Mullan is the author of The Imaginary Time Bomb: Why an Ageing Population Is Not a Social Problem, IB Tauris, 2000 (buy this book from Amazon (UK) or Amazon (USA))

Read on:

spiked-issue: War on Iraq

spiked-issue: Economy

(1) Financial Times, 29 March 2003

(2) BusinessWeek, 27 February 2003