Wednesday, June 4, 2003
T T RAM MOHAN
The lure of imperialism
TIMES NEWS NETWORK
Whatever the officially stated reasons for the Iraq war, most people are convinced that Iraq's oil riches are the principal motivation for the United States.
They see the US as gaining economically from access to the world's second largest oil reserves. Yale professor of economics, William D Nordhaus, thinks otherwise.
He argues that America risks huge losses on account of the Iraq war. (The economic consequences of a war with Iraq, NBER Working Paper 9361). Nordhaus evaluates costs to the US in two scenarios. In one, the war is short, that is, it lasts 30 to 60 days. In the other, the war stretches out over a year. There are the military costs, costs of post-war occupation and reconstruction, humanitarian assistance, and costs arising from the impact on the US economy.
Nordhaus places the military costs at $50-140 billion or about 0.5-1.5% of GDP (the first for a short war and the second for a longer one). These costs are negligible by historical standards. Major wars in American history cost more than 50% of GDP; the Vietnam war cost 15%.
Post-war occupation would cost $75-500 billion. The costs of reconstruction and nation-building would be $30-105 billion depending on how serious America is about this objective. Humanitarian assistance spread over a two to four year horizon would cost $1-10 billion.
The economic impact of the war would be two-fold. First, the impact of oil prices on the US economy. Secondly, the impact on aggregate spending of psychological factors that affect consumption and investment.
In the worst case, Nordhaus assumes that oil prices triple in 2003 and gradually fall back to the pre-shock level. The loss of real national income would be $778 billion over a decade. In the optimistic scenario, prices dip marginally below the trend, yielding a benefit to the US economy of $40 billion.
Finally, the impact on aggregate spending of psychological factors. In the pessimistic case, a sharp rise in oil prices would be accompanied by a fall in consumer and business spending that would cost the US economy $391 billion in lost output.
In the happy scenario, there would be a gain of $17 billion. Aggregating the different items, Nordhaus estimates the total cost to the US economy at $99 billion - $1.9 trillion.
Contrary to popular supposition, these costs will not be paid for by Iraqi oil. Iraq's oil would fetch around $25 billion in revenues per year. This amount would suffice only to take care of Iraq's own requirements. The US would thus be justified in claiming that the war is not about oil. Moreover, unlike in Gulf War I, the US cannot expect others to share the bill this time round.
So, why is the US risking enormous costs in prosecuting the present war? One explanation could be that the higher estimate is exaggerated because the US will not bother itself with occupation and reconstruction on the scale assumed. But even if this were true and we subtracted the relevant costs, the US would be still be left with costs of over $1 trillion or about 1% of GDP for every year over the next decade.
Nordhaus suggests that the Bush administration might have miscalculated the costs of the war because of excessive optimism, as most rulers have done historically. Or it might be actuated by considerations other than the lives and livelihoods of its citizens. However, there is a third possibility that Nordhaus overlooks: costs of the above order might be perfectly compatible with America's sustained economic prosperity.
America's defence spending exceeded 10% of GNP in the 1950s and 8% of GNP for most of the sixties. The lowest level in the seventies was 4.7%. In the eighties defence expenditure remained above 6%. At around 3% of GNP, America's defence expenditure today is at its lowest since the 1940s. If all the Iraq-related costs - of around 1% every year over the next decade - were categorised as defence expenditure, America's defence spending of around 4% of GNP would still remain below historical levels.
In the post-war period, high levels of defence spending have gone hand in hand with America's status as the world's pre-eminent economic power. Those of an imperialist mindset in the US - and the Bush administration does not lack such people - could plausibly argue that America's willingness to sustain military expenditure at historical levels is not only consistent with but central to its economic well-being. Indeed, if the US could benefit from its military prowess in a multipolar world, the benefits would be even greater in a unipolar one.
The ability to project military might ensures access to raw materials and markets. It helps the US fashion an international system that is beneficial to itself. And it ensures that the system remains stable. These are benefits not readily captured in economic analysis. Amoral the war on Iraq might be, but irrational it is not.
(The author is Associate Professor, Indian Institute of Management, Ahmedabad)
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