There
is a strange
complacency about the impact a U.S.-led aggression on Iraq will have on
the world economy and, at home, the effect on the Indian economy. Short
or long, a war will damage the economy. This will happen at a
particularly inappropriate time since the world economy continues to
show sluggish growth. The effect on India will not be insignificant,
notwithstanding the large foreign exchange reserves that the Reserve
Bank now has.
It is sometimes argued that a war boosts demand and is
therefore 'good' for the economy. The distasteful decision of USAID
earlier this week to award contracts worth $900 million to U.S. firms
for the reconstruction of a war-ravaged Iraq -- before the first shot
has been fired -- would appear to be one indication that the conflict
would at least benefit the U.S. economy. However, the gains to the civil
construction firms and the armament industry are not the only things
that count. In addition to the terrible human and social costs that a
war imposes on a society, it unsettles the economy in numerous ways. It
increases uncertainty, which affects business investment decisions. It
causes personal insecurity, which affects consumer behaviour. It
consumes vast financial resources, thereby putting strains on a
Government's commitments to the economy. It causes dislocation, which
again pulls down the economy. And, in the victim country, it causes
considerable economic loss by destroying the infrastructure. The injury
to Iraq, already suffering from a decade of U.N.-led sanctions, rarely
figures in the calculations. But even the U.S. will not escape the ill
effects of a war that it threatens to unleash on Iraq and on the global
economy as well.
An early warning is contained in a report leaked from the International
Monetary Fund, which now projects global economic growth in 2003 at just
3 per cent, down from the 3.7 per cent the institution had predicted
last September. Horst Kohler, IMF chief, has recently spoken of the
"great uncertainty" a war will create around the global economy. While
Mr. Kohler puts all his hopes on a 'short' war containing the global
effects, there is no escaping the expensive bill the U.S. will present
to the world economy. The 1991 Gulf War ended quickly. Global oil
prices, after touching even $50 a barrel, subsided gradually to their
pre-war levels. The world economy was, however, left dealing with the
after-effects of the Gulf War for at least a couple of years. Global
economic growth, according to World Bank data, halved between 1990 and
1991, falling from 2.8 per cent to 1.4 per cent. It remained under 2 per
cent over the next two years and it was not until 1994 that the global
economy climbed out of the trough. In high-income countries annual GDP
growth plummeted from 3 per cent in 1990 to 1.3 per cent in 1991, again
recovering to over 3 per cent only in 1994. Low-income countries too
went through the same experience.
And under George Bush senior, the U.S., victor in the Gulf War, went
into a recession and showed a negative GDP growth of half a per cent in
1991. This must be a warning for George Bush junior, for his father went
on to lose his presidency in the elections in 1992, where the economy
was the major issue. In the early 1990s, the U.S. economy recovered much
more quickly than the rest of the world and the Gulf War was not the
only cause of the downslide. But the war certainly aggravated the
economic situation and even a 'short' war in 2003 could do much the same
thing.
The numbers being mentioned as the direct financial costs of a new war
for the U.S. alone are huge. There can be no certainty about the costs
of a war that is yet to break out. But there is enough information
available to suggest that it will not be a small or easily manageable
amount. The cost of the 1991 war has been put at $78 billion at today's
prices. The initial internal estimates placed the cost of a war in 2003
at just $35-40 billion or half the cost of the 1991 conflict. But that
has now been shown to be a gross underestimate. A number of panels of
independent experts and former senior U.S. Government officials have
generated estimates which are two to three times higher. The first cost
is of a 'long' versus 'short' war. A conflict brought to an end quickly
may cost under $40 billion, but a war that goes on for more than a
fortnight may cost anywhere between $80 billion and $100 billion. The
second cost, which was ignored in the early estimates, is of a future
U.S.-led "peace-keeping force" in Iraq. This has been placed at as much
as $15-20 billion a year for three to five years.
And the third cost is of post-war reconstruction of Iraq, which has been
put at $40-50 billion. Of course, as Afghanistan is learning to its
bitter cost, the promise of reconstruction is not always met. When these
numbers are added up, the 2003 edition of a Gulf War will cost at the
very least between $100 billion and $200 billion. These are just the
financial costs that the U.S. (and its partner in crime in Iraq, the
U.K.) will have to incur. No one knows or has cared to add up the
financial costs, leave alone the human costs, that Iraq will have to
suffer. A financial burden of $100-200 billion is a huge amount and it
is not surprising the Bush presidency has been less than forthcoming
about the numbers. Proposals for major tax cuts threaten to send U.S.
finances topsy-turvy and the last thing the presidency wants is to
inform the U.S. public how much worse the situation will become after a
war. To put these numbers in perspective, the U.S. defence budget for
this year, excluding the cost of a West Asian conflict, has been placed
at $380 billion.
The effect that the war will have on India is easier to assess. Of
course, the economy will not be tipped over the edge as it was in 1991.
Then, the temporary rise in global oil prices, the fall in remittances
from West Asia and the flight of NRI bank deposits were too much to bear
for an economy saddled with a huge external debt and already weakened by
political instability brought on by three Governments in less than 18
months, social conflict caused by the anti-Mandal agitation and communal
violence provoked by L.K. Advani's Rath Yatra.
This time there is adequate cushion to absorb the balance of payments
impact of a likely rise in global oil prices. But that is not the only
factor that matters. First, while there may be enough foreign exchange
to pay for oil imports, if global petroleum prices stay high they will
have an impact on inflation at home. Of course, the Government, which is
already taking decisions focussed on the next Lok Sabha elections, may
instruct the oil companies not to raise retail prices. The costs of such
short-termism will badly hurt the economy later. Second, if the U.S.
economy takes a dip, the world economy too will be affected and with
that India's export growth rate will slow down. The only question is by
how much and for how long. In one respect the Indian economy is more
vulnerable today to the effects of a Gulf War than in 1991.
The economy is now linked much more to the world than in 1991; that by
definition makes it more susceptible to the fallout of wars and global
recessions. Trade will be affected, foreign direct investment will be
affected and the direction of foreign portfolio investment may change.
Since the Indian economy at this point is not in a particularly vibrant
phase, the complacent attitude that the $70 billion of reserves has
generated in the Government and the RBI is not warranted.
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