Financial Daily from THE HINDU group of publications
Friday, Apr 04, 2003
Industry & Economy - Economy
Will the war serve US interests?
STEAMROLLERING the UN Security Council and massive protests at home, the US-led coalition launched a war on Iraq and by all accounts is closing in on Baghdad.
The US' justification is that Iraq under Mr Saddam Hussein is actively engaged in developing weapons of mass destruction (WMD), is in collusion with the al Qaeda and is an "evil dictator". The US, as the only superpower, has the moral obligation to lead the battle against international terrorism and dictatorship in the long-term interests of global security, peace and people's democratic rights. The US administration feels it has enough evidence against Saddam's rogue intentions and capabilities. If the rest of the world is not convinced, the US is willing to go alone and not wait for another 9/11 to happen.
Very few people will take the US insistence on democracy seriously. After all, it has supported many despotic regimes, military dictatorships and monarchies across the world so long as they served its interests. In its long war with Iran, Saddam was supported by the US, as at that time Iran was considered a bigger threat to US interests. The equations changed as the Iraq-Iran war came to an end and Saddam set his sights on the rich oilfields of Kuwait and eventually ventured to invade the country. The US (under Mr George Bush, Sr.), as the leader of an UN-backed allied force, swiftly ended the aggression. However, Saddam, the "evil dictator", survived.
Even if Mr Saddam Hussein has chemical and biological weapons, he will find it very difficult to use them as he has denied their existence all along. And any such use would justify the US (and even UN) military action. Moreover, available evidence suggests that the dictatorial regime of North Korea already possesses nuclear weapons of far greater destructive power. Though the US is making some noises, it is in no mood to wage a war against North Korea. Regarding the spread of jehad and international terrorism, the two biggest facilitators (after the fall of the Taliban regime in Afghanistan) are Pakistan (as supplier of weapons, training and technology) and Saudi Arabia (as supplier of funds). But the US (at least publicly) prefers to look the other way as these regimes currently serve American interests. The recent videotapes of Osama bin Laden reveal that he himself considers Mr Saddam Hussein a "socialist infidel". In fact, from the social angle, the Iraqi leader heads one of the more moderate, progressive regimes in the Arab world.
So, many independent analysts believe that the single-most plausible motive behind the American and British zeal to start the war is to protect the interests of their oil companies. Mr Saddam Hussein has prevented them entry into Iraq, the second largest repository of known oil reserves in the world. He has entered into agreements with other countries, including Russia, France, China and India, to exploit and transport Iraqi oil. This motive gets further support, as the personal business interests of both Mr Bush and the Vice-President, Mr Dick Cheney, have been in the oil sector. They would be happy to see Mr Saddam Hussein replaced by another dictator of their choice, who would allow American and British companies to gain control over Iraqi oil. A report for the Council on Foreign Relations in US clearly suggests that Washington needs to replace Mr Saddam Hussein for its long-term energy security. The report nowhere mentions the need for democracy in Iraq. In fact, a popularly elected regime is no guarantee for such control by American or British interests.
Of course, other considerations may have also played their roles. The chances of re-election of Mr Bush in next year's Presidential election may get a boost if the US wins the war with minimal loss of American lives. The opposition from France, Russia and China to the US/UK intervention may also have something to do with their economic interests being served better by the current Iraqi regime. Already, Americans are complaining about the use of Russian-made jamming devices by Iraq to misguide the course of US missiles.
Now that the war has started and is unlikely to be a short one, what could be the possible economic consequences? Experts believe that oil prices could increase by at least $5 a barrel if the war continues for some more time. A cost-push hike to stagflation (combination of inflation and recession) may result. The consumers of oil, especially energy-intensive industries, will stand to lose. Continental Europe and Japan will suffer more than the US and the UK, both of which have large oil reserves of their own.
The direct supply disruptions, as sea routes get blocked, and the general uncertainty surrounding the impact of a war may also prolong the prevailing recession.
Stock prices, which went up hoping a quick end to the war, are likely to crash as the war gets prolonged. Airline companies would be hit hard as fear psychosis grips travellers, especially to West Asia and other Asian countries. Even travel in the US and Europe would be affected for fear of terrorist attacks. In addition to falling traffic, the rise in fuel and insurance costs (especially for flights to, and from, Gulf countries) would eat into airlines' profit margins. If airfares are hiked, the volume of traffic would fall further. However, after the war, oil prices may drop even below the pre-war level, as Iraq would be allowed to sell a larger quantum of oil in the world market. The phase of post-war reconstruction of Iraq will see a scramble for project contracts among major Western powers. Halliburton, a firm once headed by Mr Dick Cheney, is already in the news for trying to corner a major chunk of such business deals.
How is India going to be affected? The last Gulf War was the last straw which led to the near-bankrupt economic situation in 1991. However, this time round, India's foreign exchange reserves can cover more than 16 months' imports (unlike 15 days in 1991). So, India has the cushion to absorb possible oil price shocks. Moreover, India (like many other countries) has a strategic oil buffer stock. Nonetheless, one must not forget that a $1 increase in the price of barrel of oil would push up India's import bill by $0.5 billion. India's exports, especially to the Gulf region, would also be affected, straining the trade balance further.
It seems unlikely, however, that the war would spread to other Arab nations. Hence, it may not cause any large-scale or long-term displacement of Indian workers from the Gulf, with the consequent loss of foreign exchange remittances from them. In the short run, the remittances are likely to increase as many expatriates would prefer to convert their savings from West Asian currencies (or even the dollar) to Indian rupees before those currencies (including the dollar) depreciate as a result of war-related problems.
Finally, is the war-related expenditure going to help the US and the world economy come out of the current recession? Economists like Nobel laureate Joseph Stiglitz do not think so.
First, the US enjoyed the longest period of economic boom in the 1990s, during which period there was no war. So, war is not necessary for economic growth. Second, the total cost of war with Iraq would be less than 0.2 per cent of the US GDP and, hence, would provide little stimulus to the overall economy. And, third, the war spending would largely be offset by expenditure cuts elsewhere, especially on education, health, research and environment.
All these would imply no significant demand boost but a crowding out of more socially desirable expenditure and a worsening of the standard of living of common people. Of course, all wars have these undesirable consequences, in addition to loss of innocent lives. Unfortunately, unlike the Second World War, this war does not seem to have any noble ends in sight which even remotely justify these costs.
(The author is professor of economics, IIM Calcutta.)
Stories in this Section
The Hindu Group: Home | About Us | Copyright | Archives | Contacts | Subscription
Group Sites: The Hindu | Business Line | The Sportstar | Frontline | The Hindu eBooks | Home |
Copyright © 2003, The
Hindu Business Line. Republication or redissemination of the contents of
this screen are expressly prohibited without the written consent of
The Hindu Business Line