Published on Monday, September 16, 2002 in the Guardian/UK
<http://www.guardian.co.uk/>
Oiling the Wheels of War:
Iraq Campaign May Spark Global Recession
Editorial
History is not always a reliable guide to the future. But the fact that
every global recession in the past 30 years has been preceded first by a
crisis in the Middle East and then a spike in the oil price does little
to reassure those fretting over the economic consequences of a war on
Iraq. It may explain why the International Monetary Fund, a body not
given to exaggeration, warned last week that ousting Saddam Hussein
would not be "a very healthy development", and one that could lead to
the panic selling of shares. The fund's image of "fear feeding on fear"
on the world's stock exchanges emphasizes that the devastation would not
be confined to the Middle East. Although there may be political capital
in equating the Iraqi leader to Hitler there is none in comparing world
war two's reinvigoration of the US economy to any putative boost that
America might enjoy if it bombed Baghdad. The assessment this time is
clearly tilting towards the view that a strike against Saddam would be
more of a burden than a boon.
The reason is oil, on which America runs. Contrary to hawkish opinion, a
battle-scarred Iraq - even a post-Saddam one sympathetic to the US -
will not instantly produce millions of barrels of oil, despite the
country's extensive reserves. So oil is unlikely to head down quickly
apart from shedding the "war premium" currently built into its price.
But if the Iraqis lashed out at Saudi Arabian and Kuwaiti installations
crude, according to former Saudi minister Sheikh Yamani, could end up
costing $100 a barrel. This would not help Opec, whose members meet this
week, as high prices hurt oil-consuming, and hence oil-producing,
nations. Experts reckon that a $10 rise in the price of oil cuts more
than 0.2% off growth in America and Europe.
Any draining away of growth will come at a time when the strength of the
biggest economies is ebbing. American consumers are still spending on
cheap Jeeps and property, but the stock market is slipping ominously
downwards. George Bush's America is attracting less foreign direct
investment, and is likely to produce fewer patents than under Bill
Clinton. The result is that the country is moving from economic miracle
- 3% growth a year for a decade - to mirage in one presidency. If the US
economy is spluttering, other economic superpowers are sinking. Europe
is struggling to export goods, and consumers appear reluctant to spend.
Japan, the land of falling prices and wages, appears incapable of
reviving its own fortunes, let alone the world's.
Previous experience may not be enough to avert disaster, as no recession
is the same as the last. Crises in the past have been marked by high
inflation and low growth, but today the shadow of deflation is being
cast. Too many airline seats, too much steel and too much unused airtime
on telephones all point to a collapse in prices in these goods. Rising
oil prices at first spark inflation, but end up being deflationary by
reducing purchasing power. These two conditions could usher in a very
different downturn - one which policymakers have not dealt with in
Britain since the 1920s and in the US since the 1930s. The White House
ought to be worrying about how to reflate the economy when its parlous
state will have supplanted the war on terror in opinion polls. War will
do more harm than good to the US economy, and it is foolish to suggest
otherwise. The 1973 Arab-Israeli conflict, the Iranian revolution and
the first Gulf war all punctured global growth. The last of these saw
George Bush's father win a war and lose an election. If the president
takes the battle to Iraq, he risks history repeating itself.
C Guardian Newspapers Limited 2002
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