The world is waiting with bated breath the onset of what now looks to be an inevitable, though potentially avoidable, war against Iraq, led by the United States.

Despite the charade in the United Nations, which it reluctantly turned to in the hope of providing it a fig leaf, the U.S. has unilaterally imposed the decision on the rest of the world by the sheer force of its preponderant military might, with its military budget equal to the combined budgets of the next 25 militarily most powerful countries in the world.

This armed colossus seems to be bent on rampaging not only a puny, if pompous, dictatorship in the Middle East, but also on wreaking destruction on the world economy, especially the more fragile ones in the Third World and with considerable damage to its own economy and political prestige as the lone superpower.

The economic costs and consequences of this insane misadventure have never been seriously assessed or systematically analysed by those undertaking it. This cavalier neglect is based on the fond, if misplaced, belief that its benefits to them and allegedly to the rest of the world would be so immense that they would completely outweigh their deleterious effects, which in any event are viewed as being minimal and inconsequential. However, costs considerations can be ignored, even by economies as large as the U.S., only as long as they remain low and affordable. If the costs, especially in terms of human lives, which are not easily convertible into dollars, begin to escalate, on both sides of the battle lines, the tolerance levels of the peoples involved, both directly and indirectly can radically change, as in the case of the Viet Nam war. If, in addition, the increased defence expenditure necessitates major tax increases or results in a deep recession,or if the United States’ image in the world is further tarnished because of callous attacks on civilian populations and other collateral damage,it could face an unprecedented backlash, both at home and abroad.

In view of the importance of the costs and its likely impact on the economy, independent analysts and reputed academics have attempted to estimate the costs of the impending war against Iraq to the U.S. economy alone. The most well-known of such estimates is that of Professor William Nordhaus of the Yale University, currently one the world’s leading macroeconomists. His estimates, based on a number of detailed assumptions and arrived at with the help of an elaborate macroeconomic model and summarised in the table below, range from a low estimate of under $100 billion to a high estimate of under $ 2 trillion. The estimates relate to the costs to the U.S. economy alone and are the aggregate for the decade following the expected eruption of the conflict (i.e., 2003-2012).

Table: Estimates of Decadal Cost to the United States of a Potential War in Iraq (in billions of 2002 dollars)

It should be emphasized that these estimates vary in terms of precision and empirical robustness. Apart from the estimates of the direct military costs, which are based on official records, all of the numbers should be regarded as informed conjecture. The costs are limited to the United States and exclude those likely to be incurred by other countries, which will be discussed later in this article.

The estimates of costs do not depend on who will win, for it is a foregone conclusion that, notwithstanding Saddam’s bravado, the United States’ overwhelming military might will prevail and overcome whatever resistance Iraq’s military may be able to muster. Rather, the difference lies in the duration of the war and the nature of resistance, both within and outside Iraq,to be faced by the invading forces. In the case of a short, surgical operation, as in the case of the 1990-91 Gulf War or the more recent war in Kosov, the military costs are likely to be limited. In case, however, the war drags on and assumes the nature of an organised resistance as in Viet Nam the possibility of which is severely discounted by the U.S. and its allies the military costs alone could escalate threefold.

A “protracted conflict” is a situation where things begin to go wrong for the invading army for a variety of unexpected reasons. Such an unfavourable roll of the dice include prolonged conflict and an Iraqi strategy of concentrating forces in urban areas such as Baghdad; adverse impacts on oil markets; escalation of war by Israel; terrorist acts around the world; heavy occupation and peacekeeping costs; burdensome reconstruction costs and nation-building; costly humanitarian assistance; shocks to the overall US economy; and the use of weapons of mass destruction. The prospects of a desperate and fleeing Saddam Hussain fulfilling the prophecy of President Bush can’t be termed unrealistic. The rear-guard actions of the remnants of Taliban and Al-Qaeda more than a year after the launching of the war in Afghanistan provide ample support to this hypothesis. Indeed, if the U.S. allegation that Saddam Hussain has had longstanding links with Al-Qaeda and other terrorist groups, this prospect would certainly have to be reckoned with. While the direct military costs of the war are easy to calculate, the costs associated with keeping the peace, which some regard as a euphemism for occupation and colonisation, are hard to guess.Keeping the peace can, however, turn out to be more expensive than waging the war, at least in the short-run. Apart from peace-keeping, reconstruction and nation-building and humanitarian assistance are the other components of costs that have to be borne after the cessation of hostilities. The major identifiable costs to the United States for the decade following the start of a war, that is, from 2003 to 2012, included by Nordhaus in his study are:

Peacekeeping: The calculation of the cost of peacekeeping is affected by the number of peace keepers required, the duration of their stay and the post-combat environment in Iraq. Based on the past experience in peacekeeping by the U.N., Nordaus calculates an estimated minimum total cost would be $75 billion with a maximum cost of up to $500 billion. The larger figure envisages a duration of more than five years of peace-keeping and a post-combat environment which is consistent with peacekeeping operations in the Balkans and the size and scope of the task in Iraq. Quite possibly this would be an underestimate as the post-combat environment in Iraq is likely to be much tougher than in Balkan and is likely to be closer to that in the West Bank. Reconstruction and nation-building:Recent examples of US attempts at nation-building, including in Haiti, Bosnia, and Afghanistan, indicate that the United States has not discovered any formula for quick and inexpensive success. The length of the nation-building effort is highly uncertain, but it is hard to see how a serious attempt to turn Iraq into a modern democratic society could be accomplished in less than a decade.

Reconstruction and nation-building costs will be largely determined by the U.S. ambitions for postwar Iraq. If Iraq is to attain a per capita GDP equal to Egypt or Iran, and if one half of the capital stock requires rebuilding, this would imply reconstruction needs of about $800 per capita, or a total of $20 billion. This estimate is close to post-conflict rebuilding estimates by the World Bank for Lebanon, East Timor, and Bosnia, which required approximately $1,000 per person.

Humanitarian assistance: Under this rubric is included care for the refugees, the wounded and ill in Iraq, and possibly those in neighboring countries. It is estimated by Nordhaus that between one and five million residents of Iraq (out of a total population of around 24 million) would require assistance in the postwar environment. Figures from the Balkans in the 1990s indicate that humanitarian assistance could well cost approximately $500 per person per year. If the time required for assistance was between one and four years, then the total cost of humanitarian assistance would range from $1 billion to $10 billion.

Economic costs: A more significant factor stemming from the war on Iraq will be the impact on the economy, which will arise from two major sources, viz. the change in the price of oil and the overall performance of the US economy. Strategists in the Bush administration seem to be betting on favourable outcomes in oil markets. They seem to argue that a decisive victory in Iraq,with no destruction of oil facilities and followed by political stability in the region, could lead to increases in oil production capacity in Iraq; and this could put downward pressure on oil prices.

The speed at which Iraq can increase its oil production should not be overestimated, however. A reasonable optimistic scenario would involve Iraq increasing its production capacity to around four million barrels per day within five years after a war. Under plausible assumptions about the effects on the supply of oil from other regions, this would lead to a decline of slightly under $1 per barrel over the next decade. Using a baseline forecast of $25 a barrel, this would lead to a decrease in the cost of US oil imports of $30 billion over the next decade and a commensurate reduction in the war expense.

However, in the scenario of a prolonged war in Iraq, implying a decline in world oil production of seven million barrels per day, partially offset by a supply of 2.5 million barrels per day drawn from US strategic oil reserves. Many combinations of events arising from wartime destruction, terrorism, or political reaction of governments, including an OPEC boycott, in the regioncould lead to such an outcome. The impacts of such a decline in production would involve sharp increases in oil prices, high inflation, and major transfers of wealth from oil consumers to oil producers. In the worse case scenario, Brookings Institution economist, George Perry, projects a tripling of oil prices to around $75 per barrel, while Sheikh Yamani has suggested a price of $100 per barrel. In such a case the cost of imported oil imports would rise by $200 billion per year in the US, and the oil-price shock and inflationary impetus would probably set off a recession. To estimate the total costs, Nordhaus assumed that the curb on production lasts for one and a half years.

The overall macroeconomic effect of major wars, such as World War II and the Korean and Vietnam Wars, which absorbed a significant portion of GDP in defence expenditures, has generally been expansionary. By contrast, the first Persian Gulf War saw defense spending increase by only 0.3 percent of GDP, which was unable to the adverse psychological reaction in stock prices and consumer sentiment. The result, unique in wartime in recent American history, was a sharp recession beginning the month after the Iraqi invasion of Kuwait.

The direct military cost of a second Persian Gulf War is likely to be relatively small, which will be unable to obliterate the adverse psychological factors that are already prevailing in the equity markets for over three years, although markets have in part factored in the prospect of a war, or at least of a short war. In the case of a quick victory, the macroeconomic impact will probably be negligible.

If the war goes badly wrong in the initial phases, the macroeconomic outcome could quickly turn sour. The trigger could be provided by combination of heavy casualties, protracted urban warfare, gory pictures on the nightly news, rumors of, or actual use of, chemical or biological weapons, or major terrorist actions at home or abroad. A plausible outcome of such a scenario would be an average, with output losses in the range of 2 to 5 percent of GDP ($200 billion to $500 billion in current dollars).

Although the above estimates are far from precise, they do give a flavor of the range of possible scenarios, some of them pretty scary, which could result from a protracted involvement in a war against Iraq in which every country, including Pakistan, will be dragged into, willingly or unwillingly. Yet, what we have discussed only the problems of the USA alone. Their effect on the rest of the world would be even worse and the problems of poverty alleviation and economic development in most countries will be shelved for a long period of time. We may well experience another lost decade of development as a consequence. The likely effects of the war on Iraq on developing countries, especially in South Asia, will be discussed later.