The cost of war and the peace dividend (page 1 of 3)

Middle East governments have pulled no punches in condemning US plans to attack Iraq. Across the region, heads of state have taken every opportunity to publicly attack President George Bush for even considering a move on Baghdad.

On the surface, their pleas seem well founded. No country wants a war on its doorstep - military conflicts have a nasty habit of spilling over. However, closer scrutiny suggests that some Middle East countries, particularly in the Gulf, have plenty to gain if it goes ahead.

In the short term, oil prices will shoot up, leading to windfall revenues for the likes of Saudi Arabia, Kuwait and the UAE. In the medium term, the economic rebuilding of Iraq will throw up lucrative commercial opportunities for its neighbors. And in the long term, a stable regime in Iraq will bring greater stability to the entire Gulf region, invigorating foreign investment.

"I don't think war in Iraq would do much damage to the regional economy," says Gill James, Standard Chartered bank's Middle East economist. "We have looked at this and while there would be some short-term shocks, I don't foresee major problems."

Of course, debates on the post-war prospects for the regional economy assume that conflict is a foregone conclusion. By and large, they also assume that it will be short and decisive - an assumption that is wide open to question. However, the international consensus points towards a US assault in the first half of this year, with the fighting over by summer.

"We are saying that it is highly likely," says Neil Partrick, Middle East economist and defense specialist with the Economist Intelligence Unit (EIU) based in London. "We put the probability of war at 70 percent." The EIU forecasts an attack within the first four months of 2003, and for it to be a short-lived campaign. "It is likely that it will be more a matter of weeks and months - three months at a maximum - although putting hard times on it is difficult."

Given this baseline scenario, what will be the economic implications for the Middle East when war breaks out and, perhaps more importantly, in years to follow? On the whole, largely favorable. Clearly, a war in Iraq will carry some costs for its neighbors. But these are likely to be outweighed by significant benefits in the short, medium and long term.
The short-term implications are dominated by oil markets.

"Clearly, there will be some oil price volatility," says Standard Chartered's James. The most likely outcome is that Iraqi exports will dry up for at least two months in the event of an attack. When this happens, Saudi Arabia, Kuwait and the UAE will step in to make up the shortfall. (Their combined spare capacity is estimated at around 5 million barrels per day (b/pd) at present, so they will easily cover Iraq's current production, which fluctuates around 2.3 million b/pd).At the same time, prices will spike, at least in the short term, leading to revenue windfalls for the region's major oil producers.

On the flip side, tourism will be the main short-term casualty. Vacationers are notoriously fickle creatures, and the Middle East's beaches are likely to empty as soon as the first shots are fired. Egypt and Dubai will be hit hardest. Tourism forms the backbone of their economies, and the wider business communities will feel the pinch as tourism revenues dry up.

Egypt will suffer the most from the drop in revenues as its economy is already in a fragile state.