Living under the economic clouds of military adventure

Returning to work this autumn presents a dilemma for many businessmen. The possible war between the United States and Iraq looms on the horizon, threatening to jeopardize the best laid plans just like September 11 last year.

Perhaps it is expecting too much of economists to think that they might have something useful to contribute to this problem. But by taking a detached perspective, free from inevitable regional and national bias, their views can be insightful at this time.

From the point of view of cash flow, the Middle East has little to worry about. Oil prices continue to be strong, and as the National Commercial Bank pointed out this week, the Saudi budget deficit is a thing of the past, and debt repayments are on the cards for 2002.

For it is ironic that the United States will pay a heavy price in terms of increased energy costs for any intervention in the Middle East, and is already paying a high price just for openly considering a military adventure. Who, after all, is the main customer for Iraqi oil? The United States, of course, which continues to fund Saddam Hussain's regime.

Economists can perhaps point to absurdities in a way that politicians find uncomfortable. But what do they consider the impact of a Third Gulf War would be on the regional economy?

Here we get into the military scenarios game, and this is what businessmen hate, because this means uncertainty. Nobody knows if Saddam Hussain's response to a US military attempt to topple him from power would be effective or sustained, or whether he would lash out at one of his neighbors.

If world oil supplies were seriously disrupted by Iraqi action in the region, then the economic impact of US military action would be immediate. But a soaring oil price would more than offset reduced production, and the cash flow to the region would still probably be better than it otherwise would be.

Scenario two postulates a swift change of regime in the mould of the US victory over the Taliban in Afghanistan. Then Iraq would receive a huge amount of aid from the rest of the world, again lifting the cash flow into the Middle East and boosting business opportunities.

Some commentators say that Iraq would also swiftly raise oil production under another regime. But in reality this would take some time, and by then the global economy might need more oil anyway. And an Iraq with more cash to spend would be good news for everyone.

Another scenario suggests a general breakdown in law and order in Iraq and a lengthy involvement by US and foreign forces. That would leave Iraq more or less in its current economic position, i.e. largely isolated, and that would not impact on the rest of the region too much.

Thus, while the likely US military intervention in Iraq this autumn might result in a short hiatus in orders, due to the worry factor, it is hard to see how any scenario will seriously damage the economic welfare of the Middle East, and it could have a very good effect. Only a nightmare scenario would be damaging to the region, and nightmares usually turn out to be fantasies.