Date created:10/2/03
Last modified:10/2/03
Maintained by: John Quiggin
John Quiggin

The real cost of regime change

Australian Financial Review

7 November

The world is rapidly approaching a fork in the road, regarding the possibility of war with Iraq. As with real, rather than metaphorical, forks, there are three possible paths ahead. The first is one where war is avoided because the UN passes, and the Iraqi government complies with, a resolution demanding unfettered weapons inspections and the destruction of weapons of mass destruction. The second is one where Iraq defies or obstructs the UN, leading to an operation, with broad international backing, to overthrow Saddam Hussein. The third is one where the US, along with a few allies, launches an invasion of Iraq and, more generally, adopts a strong version of the 'Bush doctrine', in which unilateral pre-emption is the preferred response to perceived threats.

Until a couple of months ago, the third outcome seemed like a foregone conclusion, and it is still a strong possibility. There has been a lot of discussion of the military and geopolitical implications of the Bush doctrine. On the other hand, there has been relatively little discussion of the economic implications.

There have been a variety of estimates of the financial cost of implementing the Bush doctrine, but most have focused on the direct short-term costs of an operation similar to Desert Storm, which was estimated at about $US80 billion and lasted about three months. To be successful, unilateral pre-emption would require both the indefinite maintenance of occupation forces in Iraq and the creation of an expanded rapid deployment force.

The best available estimates suggest that successful implementation of the Bush doctrine would require deployment of 100000 additional combat troops, essentially reversing the contraction of the armed forces that took place after the end of the Cold War. An equal number of armed forces support personnel and perhaps twice as many civilian support personnel would be needed. This suggests a cost of around $50 billion per year. Equipment would be equally costly, suggesting total additional expenditure of $100 billion per year.

This estimate, which seems plausible in the light of the Gulf War experience, is equal to 1 per cent of US GDP or around 25 per cent of current US defence expenditure. This is well within the financial capacity of the US economy, but, for a government which has both a growing budget deficit and a violent aversion to raising taxes, it presents a real financing problem. The old-fashioned idea that military spending would represent a beneficial Keynesian stimulus can be disregarded in these circumstances.

One response will undoubtedly be to require contributions in cash and kind from allies. In the case of the Gulf War, these contributions were so generous that, on some estimates, the US made a profit on the operation. That will not be the case this time around. On present indications, the only active supporters for a US pre-emptive strike on Iraq will be Britain and perhaps Australia.

The big danger is that the US will seek to use Iraqi resources to offset the costs of the invasion, thereby turning a war of liberation into an old-fashioned war of conquest. Lawrence Lindsey, economic advisor to President Bush has argued that a conquered Iraq could be induced to expand oil production and drive down the world price. The resulting savings in import bills would, he suggests, more than offset the cost of the war.

New York Times columnist William Safire has voiced a more extreme scenario circulating within the administration. A 'democratic' Iraqi government would, he asserts, repudiate Iraqi debts to, and contracts with, countries such as France and Russia that had failed to back the US with sufficient vigour and instead contract on favourable terms with the US and its allies.

Leaving aside the dangerous political implications, the economic consequences of these proposed policies would be disastrous. An expansion of Iraqi oil production would take years to organise. In the interim, OPEC would have every incentive to drive the price of oil to $40 a barrel and beyond.

The idea of debt repudiation is even worse. The US is not only the world's financial centre, but the world biggest debtor nation, with gross obligations running into the trillions. The suggestion that a US-controlled government should repudiate debts to score political points casts doubt on the credit of all debtors, not least the US itself. If a US invasion goes ahead, and this suggestion has not been scotched, holders of US government debt would be well advised to get out before the market as a whole wakes up to the economic implications of unilateral pre-emption.

Professor John Quiggin is a Senior Research Fellow of the Australian Research Council, based at the Australian National University and Queensland University of Technology.

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