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Economic consequences of Iraq war

Subir Gokarn | March 31, 2003

As things stand, it is quite pointless thinking about the economy's prospects for the coming year (and probably beyond as well) without giving significant weight to the progress of the conflict in Iraq.

This is not just a question of how long the war itself lasts, but also of the nature of the regime that is established.

Looking at the progress of the conflict itself, in hindsight, the coalition seems to have deluded itself into believing that there was enough anti-Saddam Hussein sentiment in the country that it could quickly tap into, to minimise resistance to its progress, as well as spare it the necessity of having to fight in the cities and towns.

It is difficult to know whether this was wishful thinking or based on intelligence or analysis (which can always be wrong).

But, it might have been prudent to fall back on a basic principle of nationhood. That is: however much people may hate the regime and its leadership, the decision and the power to change it must ultimately be theirs.

Suppose one was to make the following proposition: given the influence the United States has over world affairs, the choice of president of that country is too important to the rest of the world to be left to that country's citizens alone.

The entire world should have a say in this. One can only imagine the kind of derision that this would be greeted with across the entire political spectrum in that country.

Invading forces may be viewed as liberators if they are fighting against an occupying force. They are unlikely to be so viewed when fighting against a home-grown regime, whatever its roots and conduct might be.

But, all this simply means a somewhat longer fight than was originally visualised by the coalition, at least in public. The difference in strength is simply too large for the fight to continue for very long.

From the US perspective, the additional resources of $75 billion that the administration has asked Congress to approve for the war, is small change in the total federal budget. This is estimated to pay for several weeks of conflict.

The toll of war, dead soldiers as well as the obvious impact on Iraqi civilians, might well begin to tell on domestic political sentiment in the US, but there is little sign of this as yet, and a few more weeks are not going to make very much difference.

The point is, looking at the duration of the conflict, it still remains very much within the 'short war' scenario that had been laid out before it actually started. This scenario was generally perceived to have no particularly adverse consequences for the global economy.

But, what after that? The successor regime in Iraq will obviously be moulded by the coalition and will have to explicitly keep its interests in mind.

Apart from the security dimensions of these interests, the most direct economic concern is oil prices being stable at reasonable levels.

But, any new regime in Iraq will also have to be viewed in terms of its compatibility with two other sets of interests as well -- that of the Organisation of Petroleum Exporting Countries and that of the region.

From the perspective of OPEC, Iraq is potentially its second largest producing member, after Saudi Arabia. Clearly, OPEC also has an interest in price stability, but just as clearly, it will be interested in receiving the highest price it can, within the band of stability.

The coalition, on the other hand, is interested in oil prices being at the lowest end of the band of stability. Its domination of the Iraqi regime gives it a potential instrument to break OPEC solidarity on this issue.

The question is: how is the coalition's power over the Iraqi regime going to impact on the pricing power and, consequently, the domestic politics of other OPEC members? There is a clear potential for emerging conflict on this front.

From the perspective of the region, a US-dominated regime in Iraq clearly shifts the balance of power in the Israel-Arab conflict.

That may have been in an uneasy equilibrium, despite the relatively high intensity of the confrontation in the West Bank and Gaza.

The question is: does the shift in power in the Arab world that the regime change in Iraq represents, have the potential to widen and escalate the level of confrontation?

Watching television coverage of the conflict, the map of Iraq and its neighbouring countries provides a striking visual backdrop to both these questions. Iraq's longest border is with Iran, also a significant OPEC player, on the east.

Clearly, the coalition had no access to this side as a potential front. It has a small border with Jordan and a somewhat longer one with Syria. The latter was denounced as a member of the 'axis of evil' and has now been accused of providing military assistance to Iraq.

Of the remaining countries, Saudi Arabia has a relatively long border on the south and west, which would clearly have been of strategic importance to the coalition. But, it refused to allow coalition forces to use its territory.

Turkey, which was courted assiduously but also finally declined to oblige, was critical to opening up a northern front.

The end result: invasion and the maintenance of supply lines exclusively from Kuwait, which has less than 10 per cent of Iraq's total land borders.

Is this a reflection of the level of acceptability of a new, coalition-dominated regime in Iraq? If so, one shouldn't hold out too much hope for the prospects of quick acceptance and integration into regional and OPEC considerations.

Of course, pragmatism may lead most, if not all, these countries to the conclusion that they are better off accommodating the influence of the USA than resisting it.

So, despite these potential tensions, the end result may well be consistent with the optimistic scenario that the coalition has been describing: diminution of the threat from the region as well as more favourable oil prices for the rest of the world.

But, this is not an automatic or inevitable outcome. It requires favourable rhetoric and action from both sides.

The essential point is that the economic consequences of Iraq lie less in the unfolding of the direct conflict, however far it deviates from the original plan.

They are far more dependent on the acceptability and integration of the new regime into regional and OPEC considerations.

Since the coalition has given us no inkling yet about the nature of the regime or the people who will man it, we don't have an objective basis for concern. Or, is the very fact that we have no inkling yet, itself enough cause to start worrying?

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Sub: Wake up Rediff..its a ''Doosra''

The article was supposed to be "The desi touch of foreign brands" and not the "Econ..."..when are you guys gonna wake up and take notice..spare ...

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