World economy: Is War Good For Business?
FINANCE MINISTERS from the seven largest economies in the world met recently to debate how to revive the sick world economy. However, there was little agreement on how to revive the patient.
Kevin Parslow
European ministers were worried that the re-emerging ‘twin deficits’ in the US of trade and the budget would eventually cause a run on the dollar. This would reduce its value against other currencies, thereby strengthening others such as the euro, which would make their exports dearer. They were also worried that Bush’s $695 billion tax cut plan would not revive the economy enough because it was aimed largely at the rich who would not spend the windfall.
As well, the effectiveness of interest rate cuts is diminishing all the time. US interest rates are now 1.25% and the economy is still slowing, while Japan’s interest rates are virtually zero and its economy continues to experience recession and deflation. However, the hard-line European Central Bank has reduced its interest rates to help the beleaguered German economy.
The big hope of the finance ministers and others is that somehow the immediate problems facing the world economy are largely due to the uncertainty caused by the war. They wish for a resolution of the conflict without resort to the kind of military action proposed by Bush and Blair.
However, if there has to be war they believe a short, sharp war, where the costs are kept to a minimum and there is a quick victory for imperialism, would be best for the financial markets. Then there could be a rapid return of confidence and the world economy could return to an upward swing.
A war dividend?
But would any of the conditions afflicting the world economy be resolved by a war?
Even before the threat of war loomed, the bosses were cutting capital spending. Business confidence has fallen around the world and some anecdotal evidence suggests that war with Iraq is a reason for companies to hold back spending.
But the underlying problems of the world economy (huge overcapacity, massive indebtedness, etc.) the hangover from the 1990s, will remain.
On the other hand, could war make the situation worse? That’s possible. There are at least two risks: firstly, the costs of war itself and the reconstruction of Iraq will widen the US budget deficit. Unlike 1991, there will be no grateful oil sheikhs to foot the bill; none of them, nor Germany and Japan, can afford to.
The US Congress suggested $90 billion for military expenditure and reconstruction. But Bush’s former economic adviser Lawrence Lindsey offered a more pessimistic estimate of $100 billion – $200 billion, which would be much more devastating for a budget already under pressure from lower growth and massive tax cuts.
Secondly, the price of oil could rise at least for a short period. Already the uncertainty has pushed up prices, which has been exacerbated by the political crisis in Venezuela. “There has never been an oil spike which has not been followed by a recession,” said Professor Andrew Oswald of Warwick University.
Global fund managers
Moreover, global fund managers who place billions of dollars every day are worried that because the US economy relies so heavily on international capital a war could frighten foreign investors.
This would prompt them to sell out of US stocks and drive down the dollar, at a time when the US economy is more dependent on global capital than at any time during the past 50 years, according to David Bowers of Merrill Lynch.
Finally, the US population is now showing signs of exhaustion as the consumer of last resort. US consumer confidence has plunged to levels last seen in the deep recessions of 1990 to 1993, 1979-1982 and 1974-1975.
So war is unlikely to help the troubled finance ministers, in fact, it may give them even more to argue about.
WHILE SOME optimistic economists believe that the price of oil will drop to $20 a barrel after a war, as it did in 1991, others say that it will only fall back to $27 or $28.
This will make fabulous profits for oil companies but it’s estimated that each $5 rise would cut world economic growth by 0.1% or $32 billion. If the oil price remains $8 higher this year it will cost the global economy $51 billion.
