Weapons of Mass Destruction (WMD)

DATE=11/14/02

TYPE=BACKGROUND REPORT

TITLE=IRAQ / WAR / ECONOMY

NUMBER=5-52581

BYLINE=MEREDITH BUEL

DATELINE=WASHINGTON

INTERNET=YES

VOICED AT:

INTRO: As United Nations inspectors prepare to begin searching for weapons of mass destruction in Iraq, analysts in the United States are discussing the costs of a war if Saddam Hussein fails to comply with a tough U-N resolution requiring Baghdad to disarm. Some economists say such a war would send shock waves through the global economy and cause oil prices to skyrocket. But opinions differ, as V-O-A Correspondent Meredith Buel reports from Washington.

TEXT: Using economic models, analysts are trying to develop predictions about the impact a war with Iraq would have on economies and consumers worldwide.

Some analysts agree that such a war, especially one that lasts for several months, could cause a sharp decline in global markets, a decrease in consumer spending, and a surge of inflation tied to what they see is an inevitable rise in petroleum prices.

Joel Prakken is an economist who advises the White House and members of the U-S Congress on economic trends.

Mr. Prakken says the most immediate impact of a war with Iraq would be a strong spike in the price of oil which could hurt consumers around the world.

/// PRAKKEN ACT ///

Then you have higher oil prices and the associated inflationary surge that comes with higher oil prices that is going to work to reduce real incomes of consumers in the United States and real wealth of consumers in the United States. This will have an adverse consequence obviously on consumer spending in the United States and globally.

/// END ACT ///

Other economists say oil prices are already reflecting a war premium and that the additional run-up may not be as severe as some believe.

There are also economists who predict that after a war is over, and Iraqi oil production eventually exceeds today's levels, oil prices could drop sharply.

Whichever scenario they find most plausible, investors, businesses and government decision-makers are already taking a possible war into consideration when making economic decisions. Lawrence Goldstein, the President of the Petroleum Industry Research Foundation, points as an example to the recent cut in short-term interest rates by the U-S Federal Reserve Board.

/// GOLDSTEIN ACT ///

Today we are not in war but I believe markets are reflecting a war scenario in terms of equity prices, consumer confidence, the reluctance of the business community to invest in that uncertain climate. The Federal Reserve move last week probably reflects a war psychology as well. The one thing you know for sure in the early stages of a war is the uncertainty. Markets never deal well with uncertainty.

/// END ACT ///

Some analysts predict a second Persian Gulf War would likely be brief, and the potential economic consequences would not be too serious.

Others, however, are not so optimistic.

Stefan Schneider, the Chief International Economist for Deutsche Bank, says Europeans are concerned that war would destabilize the Middle East causing worldwide economic ramifications.

/// SCHNEIDER ACT ///

The Europeans believe if the United States is playing hardball they will win in Iraq. But where the Europeans are much more concerned about is the kind of delicate stability in the whole region and it is not just Jordan. What if Saudi Arabia, if the government there, topples? Then we can start from scratch with our economic scenarios. The worst case scenario is not that the war might take a few weeks longer, but that the whole region is going to be destabilized.

/// END ACT ///

Anthony Cordesman, a national security analyst and former high ranking official in the U-S Defense Department, says western nations should not only worry about their own economies.

He says rebuilding Iraq's economy after a possible war will be critical in molding post-war relations with the Arab world, against the backdrop of the continuing Palestinian uprising against Israeli occupation in the West Bank and Gaza Strip.

/// CORDESMAN ACT ///

/// BEGIN OPT /// If we don't have a very convincing peace, and it is not one which clearly serves the interests of the Iraqi people, then that will interact with all of the tensions and resentments of the second intifada and we will have to live with the consequences every time the United States tries to do anything in the region, whether it is business or political activity. /// END OPT /// If we have a highly successful effort in humanitarian terms and rebuilding the Iraqi economy and if out of it comes an Iraqi political solution to Iraq, then I think Arab peoples and Arab regimes are going to forgive us a lot of what happens before and during the war.

/// END ACT ///

The last Gulf War was follwed by a recession and then a period of robust economic growth. That war was short and the more pessimistic economic analysts today worry about a prolonged conflict that could plunge the world into a much more serious recession. But those who predict any military conflict with Iraq is likely to be short, see an initial shock followed by a strong recovery within a year after such a war is over. (Signed)

NEB/MB/FC