Iraq

War with Iraq: Costs, consequences, and alternatives

Source
Posted
Originally published
Committee on International Security Studies
Carl Kaysen
Steven E. Miller
Martin B. Malin
William D. Nordhaus
John D. Steinbruner

Contents

PREFACE

CHAPTER 1

U.S. National Security Policy: In Search of Balance
Carl Kaysen, John D. Steinbruner, and Martin B. Malin

CHAPTER 2

Gambling on War: Force, Order, and the Implications of Attacking Iraq
Steven E.Miller

CHAPTER 3

The Economic Consequences of a War with Iraq
William D. Nordhaus

CONTRIBUTORS

* * *

Preface

This Occasional Paper has its origins in a discussion that took place at a meeting of the Committee on International Security Studies (CISS) of the American Academy of Arts and Sciences on October 11, 2002. Participants included: James Carroll (Boston Globe), Richard Garwin (Council on Foreign Relations), Janice Gross-Stein (University of Toronto), Harry Harding (George Washington University), Carl Kaysen (Massachusetts Institute of Technology), Neal Lane (Rice University), Robert Legvold (Columbia University), Jane Holl Lute (United Nations Foundation), Martin Malin (American Academy of Arts and Sciences), Everett Mendelsohn (Harvard University), Steven Miller (Harvard University), Janne Nolan (Georgetown University), Robert Pastor (American University), Bruce Russett (Yale University), and John Steinbruner (University of Maryland).

At the meeting it was agreed that the ongoing public discussion of U.S. policy toward Iraq would be enriched by a timely, scholarly analysis of the underlying issues. The papers in this collection are an attempt to provide insight into the potential costs and consequences, over the long term, of going to war with Iraq. We thank the Academy's Executive more widely.

"U.S. National Security Policy: In Search of Balance," by Carl Kaysen, John D. Steinbruner, and Martin B. Malin, was informed by the CISS discussion but is the product only of its authors; other members of the Committee may or may not agree with it in whole or in part.

"Gambling on War: Force, Order, and the Implications of Attacking Iraq" was originally written by Steven E. Miller for an International Pugwash Workshop (no. 276) on "Terrorism and Weapons of Mass Destruction" held in Como, Italy, on September 26-28, 2002. Professor Miller revised his paper for this publication.

"The Economic Consequences of a War with Iraq" was written by William D. Nordhaus. A substantially shorter version was published in the December 5, 2002 issue of the New York Review of Books.

As always, the argument and opinions presented in these papers are those of the individual authors, not those of the American Academy of Arts and Sciences or its Committee on International Security Studies.

Carl Kaysen and John Steinbruner
Co-Chairs, Committee on International Security Studies

November 2002

(extract)

CHAPTER 3

The Economic Consequences of a War with Iraq

WILLIAM D. NORDHAUS

Armed with strong resolutions from the U.S. Congress and the UN Security Council, the United States is marching toward war with Iraq. The October 2002 Congressional Resolution authorizing the use of force describes U.S. policy, "to defend the national security of the United States against the continuing threat posed by Iraq and enforce all relevant United Nations Security Council resolutions regarding Iraq." 1In early November 2002, the unanimous Security Council Resolution warned "Iraq that it will face serious consequences as a result of its continued violations of its obligations. . . ." 2 The major benefits of a war are reckoned to be disarming Iraq of its weapons of mass destruction and removing a leadership that is unrelentingly hostile to the United States.

But what of the costs? Even asking such a question may be thought a sign of insufficient resolve at best and appeasement at worst. However, while cost estimates are often ignored when war is debated, most people recognize that the costs in dollars, and especially in blood, are acceptable only as long as they are low. If the casualty estimates mount to the thousands, if oil prices skyrocket, if a war pushes the economy into recession or requires a large tax increase, and if the United States becomes a pariah in the world because of callous attacks on civilian populations, then decisionmakers in the White House and the Congress might not post so expeditiously to battle.

Given the salience of cost, it is surprising that there have been no systematic public analyses of the economics of a military conflict in Iraq. This essay attempts to fill the gap. It is recognized that the estimates here are virtually certain to be wrong, for the fog of war extends far beyond the battlefield to include forecasts of political reactions and economic consequences. However, as Keynes said, it is better to be vaguely right than precisely wrong.

While historians have documented the many miscalculations involved in war, little has been written on faulty economic forecasts, but a couple of examples will suffice. Lincoln's Secretary of the North would be $240 million, which amounted to about 7 percent of annual GDP at that time. The actual cost to the North turned out to be $3,200 million, or about 13 times the original estimated cost. 3 The cost to the South was much greater, for most of its capital stock was destroyed and output per worker was depressed for nearly a century. The most prophetic economic analysis of war and peace of all time, Keynes's Economic Consequences of the Peace, did not foresee the great German inflation that was virtually at hand, nor did it contain any hints of the coming Great Depressions in Britain of the 1920s or of the world of the 1930s.

In recent times, the costs of the Vietnam War were grossly underestimated even as the buildup occurred. The original budget projection in early 1966 underestimated the cost for the subsequent fiscal year by $10 billion, or about 1.5 percent of GDP. In assuming that the war would end by June 1967, the Pentagon underestimated the total cost of the war by around 90 percent. The war in fact dragged on until 1973, and the total direct cost was in the range of $110 billion to $150 billion.4 The indirect costs were more difficult to gauge but comprised inflation and economic instability, civil unrest, and, some have argued, a growing disenchantment with authority and government in the United States.

ESTIMATING THE COSTS OF WAR

The Economic Background in Iraq

It is widely recognized that the United States is an economic and military superpower. The military status of Iraq has been carefully reviewed,5 and I will concentrate on the current economic situation, beginning with Iraq's major economic asset, oil. Oil experts believe that Iraq has immense oil resources. Iraq has about 10 percent of the world's proven oil Energy Information Agency stated:

Iraq contains 112 billion barrels of proven oil reserves, the second largest in the world (behind Saudi Arabia) along with roughly 220 billion barrels of probable and possible resources. Iraq's true resource potential may be far greater than this, however, as the country is relatively unexplored due to years of war and sanctions. Deep oil-bearing formations located mainly in the vast Western Desert region, for instance, could yield large additional oil resources, but have not been explored.6

Iraq's oil resources could satisfy current U.S. oil imports for almost a century.

Iraq's oil production in 2000 and 2001 averaged around 2.5 million barrels per day (bpd). About 1 million bpd of this came from the northern Kirkuk field located largely in Kurdish Iraq, and the balance was produced largely in the southern, Shiite-majority Rumaila region.

What is the current state of Iraq's economy? The regime of Saddam Hussein has been as disastrous for the Iraqi economy as for other aspects of Iraqi society. Iraq's statistical system, like much of its economy, is in a sad state. None of the major international organizations has provided reliable data on Iraq's economy for the last decade, but a rough estimate of economic conditions can be obtained on the basis of informal estimates.

In recent decades, Iraq has been heavily dependent upon oil production. During those periods when oil production was not constrained by war or sanctions, it peaked at around 3 million bpd, or about 1 billion barrels per year. This constituted about half of Iraq's GDP during the late 1970s. GDP per capita peaked in 1979 at around $9,000 in 2002 prices.

The year 1979 also marked Saddam Hussein's rise to power. Since that time, Iraq has experienced one of the most catastrophic economic declines in modern history. It appears that per capita income was in the range of $1,000-1,200 in 2001. These figures suggest that in the 23 years since Saddam came to power, living standards in Iraq's economy have declined by around 90 percent.

The first phase of the economic decline came during the Iran-Iraq war (1980- 1988), and second during the first Persian Gulf war and under the subsequent UN sanctions. The Iran-Iraq war dealt a devastating blow to the Iraqi economy. The war destroyed a large part of Iraq's capital stock, reduced oil production and exports, and depleted much of its foreign assets and foreign exchange reserves. Kamran Mofid estimated that the total cost to Iraq was $450 billion (in current dollars), which amounts to about eight years of Iraq's GDP at that time.7

The first Persian Gulf war and the ensuing sanctions dealt two more blows to Iraq's economy. The war destroyed about $230 billion of infrastructure.8 The UN sanctions in place since 1991 have been the most severe ever imposed. Under sanctions, oil production during the 1991-2002 period averaged 1.4 million bpd. Assuming that Iraq could have produced 3 million bpd during this period, the revenue shortfall since the first Persian Gulf war was about $150 billion. Although reliable statistics on the Iraqi GDP are unavailable, it probably averaged $25 billion in the 1990s. This suggests that the sanctions reduced Iraq's oil revenues by approximately six years of GDP, and the total cost to the Iraqi economy was probably even larger than that. Overall, the wars and sanctions during the Saddam regime probably cost Iraq in the order of two decades of GDP in lost output, capital, and financial resources. There are no parallels in modern history to economic devastation on that scale.

Economic statistics are too abstract to capture the grim reality on the ground. A recent report captures the impact of economic decline on day-to-day life. While the accuracy of statistics demonstrating the impact of United Nations sanctions on Iraq cannot be fully determined, there is no question that their impact has been severe. Infant mortality has doubled from the pre-sanctions era, with the Food and Agriculture Organization (FAO) reporting a fivefold increase in mortality among children under age five. Kwashiorkor and marasmus - symptoms of severe protein deficiency and usually seen only in famines - are increasingly common. . . . According to the World Health Organization (WHO), "The vast majority of the country's population has been on a semi-starvation diet for years. "An FAO Mission to Iraq in the summer of 1997 found that 25 percent of young men and 16 percent of young women show signs of chronic energy deficiency, reflecting the reduced availability of food over the past seven years . . . . Before sanctions, 93 percent of urban and 70 percent of rural residents had access to potable water. Currently more than half of rural residents do not have access to clean water.9

Footnotes.

1. H.J.Res.114 (October 2002).
2. Resolution 1441 at Security Council meeting 4644, 8 November 2002.
3. See Table 2 below.
4. The economic story is thoughtfully laid out in Arthur Okun, The Political Economy of Prosperity (Washington, D.C.: Brookings, 1970), chap. 3.
5. See particularly Anthony H. Cordesman, Iraq's (Washington, D.C.: Center for Strategic and International Studies, September 2002).
6. <http://www.eia.doe.gov/emeu/cabs/iraq.html>.
7. Kamran Mofid, The Economic Consequences of the Gulf War (London: Routledge, 1990).
8. Abbas Alnasrawi, The Economy of Iraq (Westport, CT.: Greenwood Press, 1994).
9. Sheila Carapico, "The Impact of Sanctions in Iraq,"Middle East Report No. 206 Vol. 28 No. 1 (Spring 1998), slightly edited for brevity, available at <http://www.cam.ac.uk/societies/casi/info/ themes.html#hum>.

(end of extract)

Please direct inquiries to:

American Academy of Arts and Sciences
136 Irving Street
Cambridge, MA 02138-1996
Telephone: (617) 576-5000
Fax: (617) 576-5050
E-mail: aaas@amacad.org
Visit our Website at www.amacad.org

Full Report (external link) (in pdf* format - xxx)

=A92002 by the American Academy of Arts and Sciences
All rights reserved