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Last Updated:  Friday, 21 March, 2003, 08:03 GMT
A battle for economic survival

Analysis
By Emma Clark
BBC News Online business reporter

An ancient Chinese military strategist once argued that war exhausts the wealth of the people.

"Contributing to maintain an army at a distance causes the people to be impoverished," wrote Sun Tzu in 400BC.

A Tomkat takes off
The cost of war could escalate
As the British and US armies head into battle in the Gulf, people at home are more concerned about the morality of war, than the impact on their wealth.

"It has enormous political importance to people," says Martin Weale, director of National Institute of Economic and Social Research. "But it's not of terribly great economic importance."

In spite of this, President George W Bush and Prime Minister Tony Blair are taking considerable risks at a time when the global economy is far from robust.

The US economy, the engine of global growth, remains sluggish, even after 12 cuts to the country's interest rates.

"Given the weakness of the world economy at present, this may be a particularly bad time to go to war," says Graeme Leach, chief economist at the Institute of Directors.

Keeping it sweet

No doubt both leaders will be pinning their hopes on a short, sharp war and a rapid recovery.

It is not uncommon for brief and successful campaigns to boost consumer confidence, as well as the manufacturing sector with an increase in military spending.

Graph to show the economic cost of US wars

The 1982 Falklands War, for example, was followed by a period of growth in the UK. But, as Mr Weale argues, the circumstances of each war are different.

"There are also the more sustained wars like Vietnam [in the 1960s], and if you move up the scale, they can be economically devastating like the second World War."

Purely in economic terms, three key factors determine how damaging conflict can be:

  • the length of the war
  • the intensity of the war
  • and the state of the economy at the start of the war.

In the Middle East, another crucial determinant is the impact on the oil price.

Frayed nerves

The recent build-up to war has calmed the oil price, as traders bet on a rapid campaign with minimal disruption to oil production.

However, the risk of further spikes in the price during the conflict could mean the difference between recovery and recession.

A bridge on fire in Baghdad
Reconstruction could be expensive
"A sustained oil price at $40-50 would chip away at economic growth," says Mr Leach.

During the past few days, light crude has been trading between $27 and $32 a barrel.

Speaking this week to the Middle East Association in London, Sir Philip Watts, chairman of Shell, said: "Uncertain times mean volatile oil prices."

Rises in the price are debilitating because they force consumers to spend more on fuel and less on other goods, while companies have to manage a higher cost base.

But the true impact on UK growth "cannot be sensibly answered until the war is over", adds NIESR's Mr Weale.

Totting up the bill

The direct expense of funding a war in Iraq is more tangible. Mr Leach estimates that a short campaign would cost about 1% of the US' gross domestic product (GDP), or $150bn (96bn).

For the UK, the bill would be much smaller at 2bn ($3.1bn), or one-quarter point of GDP.

This is marginally more than the $80bn spent on the first Gulf War in 1991, although that figure was netted down to $4bn following contributions from various Arab states.

Any humanitarian aid and peace-keeping efforts in Iraq, after a war had been concluded, could cost a further $150bn, spread out over a number of years.

However, costing the reconstruction of Iraq is largely guesswork, says Mr Leach, and could escalate to $500-700bn if there was internal strife.

In Bosnia, for example, the peace-keeping operation cost one-quarter of a million dollars per soldier.

Various nightmare scenarios, such as a wide-scale terrorist attack in response to the war, or the torching of Iraqi and Kuwaiti oil wells, could compound the economic damage.

Shell's Sir Philip concluded his speech to a room stock-full of Arab ambassadors and business people: "We face dark and difficult times."

Losing the peace?

But for all the doom and gloom, Mr Weale argues that funding modern warfare is becoming a way of life.

Tony Blair and George W Bush
Blair and Bush are taking risks
"We spend peace time paying off the last war and saving up for the next one - wars happen roughly every 10 years," he says.

This does not detract from the gambles that Messrs Bush and Blair are making, should either of their economies lurch into recession.

It is common parlance that George Bush senior won the first Gulf War, but lost the peace when he stood for re-election, even though the US economy was on the verge of recovery.




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