The Telegraph
Since 1st March, 1999
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The United States of America’s war on Iraq reminds one of a Charlie Chaplin movie. In one famous sequence, Charlie, the tramp, stealthily moves around the neighbourhood throwing stones and breaking window-panes. Shortly afterwards, he reappears as a glass repairer and does brisk business. Similarly, the US military first destroys Iraqi infrastructure and then George W. Bush pledges to rebuild Iraq. The only difference is that Charlie, unlike Bush and Tony Blair, did not espouse any noble intentions.

By now, most independent analysts believe that the single, most important economic motive behind the war is to gain control over Iraq’s oil reserves, the second largest in the world after Saudi Arabia. The secondary motive could be winning a war (ostensibly against global terrorism, in the aftermath of 9/11), with the minimal loss of American lives. This would also brighten Bush’s prospects of re-election, despite a sagging American economy.

The Saudi rulers, in any case, are dependent on the US for their survival and generally play the oil game by keeping the US in good humour. Even in the present war with Iraq, the Saudis have promised to increase oil supplies to the world to prevent any sharp rise in oil price.

Saddam Hussein, however, chose to keep the US and British oil companies out of the Iraqi oil business. His regime entered into agreements with other countries, including Russia, France, China and India, to exploit and transport Iraqi oil. A report, prepared for the council on foreign relations in the US before the war, is quite revealing. It clearly suggested that the US needed to replace Hussein for its long-term energy security. This report nowhere mentioned the need to bring democracy in Iraq.

Dwight Eisenhower, the first and only war-hero to become US president, had warned against the rising power of the “military-industrial” complex in the US. In the present context, both destroying Iraq and then rebuilding it make good business sense for many US companies. A recent article in the New York Times showed how US companies with good connections in the “corridors of power” were going to be major beneficiaries of the current military operation and the subsequent reconstruction work in Iraq. Halliburton, the firm with which the US vice-president, Dick Cheney, was formerly associated, is already in the news for trying to corner a major chunk of such deals.

Quoting experts, the article estimates that about $ 25 billion to $ 100 billion will eventually be spent on rebuilding Iraq. Bids will be solicited from American companies first. French firms will understandably be kept out, given the threat of a French veto in the United Nations security council against the US invasion.

Even British firms have so far been excluded — which will make Blair’s life difficult. Britain will surely try to extract its pound of flesh from the US for its participation in this unpopular war.

Also, the major part of the money to be spent on reconstruction in Iraq is not US money — it will come from selling Iraqi oil. First, US defence industries benefit directly from the war expenditure. One Tomahawk cruise missile costs $ 600,000 and already 500 such missiles have been fired and many more will be. Then US oil companies will gain from access to the oil business in Iraq. Finally, US construction firms will benefit from the money which rightfully belongs to the Iraqi people. Basically Americans, and not the Iraqis (at best there could be a puppet Iraqi government after the war), will decide who gets the contracts. Thus, Iraqi infrastructure is first being destroyed and then Iraqi resources are being spend on its reconstruction.

Apart from the gains to some favoured American (and perhaps British) companies, who else will gain or lose as a result of the war' It is fairly clear now that the war may last for months, not days or weeks as originally projected. Experts believe that there could be an at least $ 5 increase in the price of a barrel of crude oil, if the war continues for some time. A cost-push hike may result in stagflation (a combination of inflation and recession).

Consumers of oil, especially energy-intensive industries, will lose out. Continental Europe and Japan will suffer more than the US and Britain, both of which have large oil reserves of their own. Direct supply disruptions, as sea routes get blocked, and the general uncertainty surrounding the impact of war may also prolong the prevailing recession. Stock prices, which went up hoping for a quick end to the war-related uncertainties, are likely to crash as the war gets prolonged.

Airline companies will be hit hard as a fear psychosis grips travellers, specially to Asia and west Asia. Even travel within the US and Europe would be affected for fear of terrorist attacks. In addition to falling traffic, the rise in fuel and insurance costs (specially for flights to and from west Asia) will cut into their profit margins. If air fares are hiked, the volume of traffic will fall further.

The shipping industry already faces a tough time as ships ferrying cargo to and from Europe and beyond have to avoid the Suez Canal (to minimize the war risk premia), and take a detour via the Cape of Good Hope. This means an additional sailing cost of about 10 days and a corresponding rise in the freight cost of shipments.

However, after the war, oil prices may drop even below pre-war levels as Iraq is allowed to sell a larger quantum of oil in the world market. The post-war reconstruction phase in Iraq will see a scramble for contracts among the major Western powers. The US and British governments will presumably argue that since they bore most of the cost of war, they should get the lion’s share of the spoils.

What will be the impact of the war on the Indian economy' After all, the earlier Kuwait War had been the last straw which pushed India into near-bankruptcy in 1991. But this time, India has foreign exchange reserves that can cover more than 16 months of imports (in 1991 there was barely enough for 15 days’ imports). This means India has a cushion to absorb a possible oil price shock.

Moreover, India (like many other countries) has a strategic oil buffer stock in place. Nonetheless, oil still accounts for 25 per cent of India’s import bill and imports help us meet 75 per cent of our oil needs. A $1 increase in price per barrel hikes India’s import bill by $ 0.5 billion. India’s exports, specially to west Asia, would also be adversely affected, putting a further strain on its trade balance. India’s airlines and shipping companies are already facing difficulties.

A lot will depend on whether the war spreads to other Arab countries. This seems unlikely now. Thus, there may not be any large-scale or long-term displacement of Indian workers in west Asia, with the consequent loss of foreign exchange remittances. In the short run, the remittances are likely to increase as many expatriates would prefer to convert their savings from Arab currencies (or even dollars) to Indian rupees before those currencies (including the dollar) depreciate as a result of the war.

Moreover, the current situation on the remittances front is somewhat different from earlier. In the last Kuwait war, our foreign exchange remittances were largely from west Asian countries. Today, with Indian software professionals spread all over the globe, the impact of disruptions in west Asia on total remittances will be much less.

Some analysts are predicting a favourable long-term scenario for India. Suppose, Iraq becomes a modern state, and with the objective of promoting economic growth with its huge oil resources, invites investment and technology from other countries. In such a scenario, India, with its long historical ties with the region, may find significant new economic opportunities for trade and investment.

But will Iraq ever be allowed to be such an independent country by the victorious powers' That is the big question.

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