No Cheap Wars
Dec. 16, 2002
The best equipped military force in the history of the world should be able to quickly and decisively defeat a war ravaged, poverty stricken country on the other side of the world. This statement would have been at least as true in reference to Vietnam in 1964 as it is today in reference to Iraq. Of course, Iraq is nothing like Vietnam, but that doesn’t mean that things may not turn out differently than planned. It is worth giving some of the unplanned possibilities some thought, before the nation rushes into war.
The first unplanned possibility is that a war – which much of the world views as unjustified – substantially increases the already high levels of hostility directed against the United States. Being liked isn’t everything, but being too unpopular can have real costs.
To take one specific example, Kentucky Fried Chicken franchises are not selling too well in Pakistan these days. That is because two of them were ransacked by mobs after the U.S. attacked Afghanistan last year. The prospects for greasy chicken in South Asia may not be of much concern, but if an attack on Iraq causes the United States to be perceived as a brutal aggressor throughout the developing world – a possibility suggested by recent polls – then U.S. businesses might become concerned. Retail establishments from McDonalds to Wal-Mart may see their expansion opportunities severely curtailed.
And it is not just retail stores that could lose in this scenario. Boeing may find a new obstacle in its world-wide competition with Airbus. Microsoft might see more countries and companies opting for open source software. And the music and movies produced by Disney and AOL-Time Warner may spread more freely via the Internet and bootlegs than through authorized copies that fetch royalties.
It won’t just be U.S. companies that could be hurt if the war takes a bad turn. In one of the negative scenarios that has been widely discussed, a large portion of Middle East oil is removed from world markets for a significant period of time. This could happen if Saddam sabotages Iraqi oil fields before being removed from power. It is also possible that an Iraqi attack or domestic insurrection could cut production in Saudi Arabia or one of the other Gulf states.
This would send oil prices skyrocketing, virtually guaranteeing a second dip to the recession. But, as bad as this would be for the United States, the effects are likely to be even worse in developing nations. They would get hit not only by the higher oil prices, but they would also see a sharp fall in demand for their exports, most of which go to the wealthy nations.
Developing nations would also see a sharp rise in interest rates, as money flees to safe havens in Europe and the United States. This could derail heavily indebted economies such as Brazil and Uruguay. In fact, it could sentence the whole continent of Latin America to a third consecutive decade of stagnation.
But the most dangerous bad possibility is an upturn in terrorism. The September 11th attack has vastly increased concerns about terrorism, prompting tens of billions of dollars of new spending and leading to a creation of a new cabinet department. But, even with this heightened concern, the perceived threat could be far greater. For example, the threat of terrorism in the United States is nowhere near as great as the danger experienced by Israelis.
If a heightened threat of terrorism led the United States to adopt Israeli type pre-cautions the costs would be enormous. To take just one example, the cost of stationing an armed guard at the entrance of every retail outlet in the country (the standard practice in Israel) would be more than $100 billion a year. The full cost of countering a vastly expanded terrorist threat would be devastating to the economy, leading to years of stagnation and rising unemployment, in addition to the cost in lives and insecurity that we would all bear.
Of course, this is all speculation. It is possible that an attack on Iraq will go like clockwork – meeting little resistance and arousing little concern from people elsewhere in the region or the world. But, we should at least give some thought to the possibility that it won’t turn out that way. Needless to say, the people making the decisions will not be the ones who pay the price if they turn out to be wrong.
Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.