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John Quiggin

Iraq exit will also be costly

John Quiggin Australian Financial Review

26 October 2006

The costs of the Iraq war have been huge, but some have received more attention, and been estimated more precisely, than others. The number of US troops who have died in Iraq (2784 as of 24 October) is precisely documented. By contrast, there is very little evidence on how many Iraqis have died.

Analysis of media reports gives documented evidence for nearly 50 000 civilian deaths since the war began, but with journalists unable to reach large parts of Iraq, this is obviously a minimum estimate. A recent survey, based on methods used in other war zones, has yielded an estimate of between … and … excess deaths. This estimate has been hotly disputed, but no-one has been able to produce a soundly-based alternative number.

There is a similar disparity in the analysis of the economic effects of the war. The cost to to the United States has been much debated, with estimates of the ultimate bill ranging between 1 trillion and 2 trillion. However, the direct costs to the budget so far can be measured reasonably precisely at around $500 billion, and the range of estimates largely reflects uncertainty about the future.

By contrast, even basic data on the Iraqi economy is hard to obtain, and often of dubious quality. Even information on something as directly measurable as electricity supply has become a political football. The now-defunct ‘Good News from Iraq’ website reported at least a dozen announcements during 2004 and 2005 that supplies had surpassed the prewar level and that new additions to the grid were imminent. Similar claims continued into 2006, with President Bush saying that

According to the State Department’s latest weekly, power supply over the last few weeks has been close to the pre-war level (sometimes above, sometimes below). Availability in Baghdad averages six hours per day.

If data on electricity supply is problematic, analysis of the impact of the war on economic activity as a whole is even more so. The first attempt has recently been made by Colin Rowat, a specialist on the Iraqi economy at the University of Birmingham in Britain. He estimates that the war has reduced Iraq’s national income by 40 per cent, or between $25 billion and $30 billion per year.

The big cost arises from the failure to bring oil output back to prewar levels. Thus Iraq has effectively missed out on the boom enjoyed by other oil exporting countries, which could have been expected to increase GDP by around 50 per cent.

Of course, the war itself contributed to the runup in oil prices, so this number may be an overestimate. And while most of the benefit of higher prices would have flowed to the Iraqi people through the Oil-for-Food program, Saddam Hussein would undoubtedly have continued to cream off a significant proportion, with the aid of international collaborators like Australia’s AWB.

But the change in gross income is only part of the story. While available income has diminished, the cost of doing almost anything has been increased by war, corruption and mismanagement. According to a report from the Special Inspector General for Iraq Reconstruction, overhead costs chewed up as much as half of the $18 billion of US aid before anything was done on the ground.

The current position of the US Administration is that having spent $18 billion, it has no more to give. Yet, there is a clear moral obligation arising from having chosen to start this war. More relevantly, perhaps, financial reparations for the damage done by the war might improve the chances of an exit strategy.

One of the biggest problems with proposals for more regional autonomy is that the Sunni regions have little or no oil. Thus, there is likely to be bitter fighting over access to oil-rich areas like Kirkuk. If the US committed itself to a continuing stream of aid of say, $20 billion a year for the next decade, it might find the Sunnis and others keener to support local authorities who could receive and distribute that aid. Given the inevitability of corruption and graft, it’s not a perfect option, but at this point there are no good options, only more or less bad ones.

Finally, what about Australia? We were among the first countries to join the ‘Coalition of the Willing’ and have been among the most steadfast backers of ‘staying the course’. If a change of direction requires a financial contribution, we will no doubt be called upon to pay our share of the bill.

John Quiggin is an Australian Research Council Federation Fellow in Economics and Political Science at the University of Queensland.

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