Big Impact of Iraq War on the Economy

The Iraq War is estimated to cost between 500 billion to 1,500 billion dollars, if it is a short war which ends within six weeks. Add in post-war peace keeping, humanitarian aids and rebuilding expanses, and the additional cost would be 1,000 billion to 6,000 billion dollars over ten years period.

“More important is the macro economic expanses that will affect the national economy. Even if the war is a short one, for a coming decade it will take away from 1,000 billion to as much as 1.9 trillion dollars from the nation`s GDP,” forecasts William Nodehouse, professor of Yale University.

Many economists have optimistic views. They say that if the U.S. ends the war within a short period of time, it will eliminate uncertainties and will help the world economy. However the magazine ‘Economist’ refutes, “There will be uncertainties after the war, such as possibilities of terrorism.” They also point out, “The previous Gulf War may have help to boost the economy but the current situation is different from that of the 1990s.”

The current oil price is around 36 dollars per barrel. The optimists refer to the previous Gulf War as example. They forecast that the oil price may rise as high as 40 dollars but when the war ends, it will stabilize to around 20 dollars range.

However unlike in 1991, the current oil production in the Venezuela has suffered due to labor strikes. It’s uncertain whether other oil exporting countries may raise their production. There is also a possibility of oil field destruction by Iraq`s Saddam Hussein. Also the current U.S. oil reserve is at its lowest level since 1975.

If the economy is shriveled by war, the Central Bank has to lower the interest rates to sustain the economy. However the current U.S. interest rate is 1.25%. They can`t afford to lower anymore. Also sustaining the economy by government expenditure is not an easy option. The Japan suffers from a huge public debt and has no reserve to speak of. European countries` finance policies are tied down by European Union`s ‘Stability Treaty’.

During the previous Gulf War, the S&P 500 stock rates have increase over 20%. However the market at the time was under evaluated. Also the current market is sustained by optimistic views. So if an unexpected situation is to occur, it will affect the market tremendously. The current diplomatic friction between U.S. and Europe is expected to affect the international trade negatively. Already there are trade disputes in the steel and foodstuff industries. There are even boycott activities of opposing countries` products.

Seung-Jin Kim sarafina@donga.com