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.
