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War
and the World Economies
Resolution of the Iraqi situation will play a
major role in global economics in the months and years ahead. Just as the U.S.
economy — now valued at $10 trillion and more than twice as large as the
number 2, Japan — influences economies worldwide, ramifications of the
U.S.-led war effort will also have global effects.1
In America as in many nations, a speedy resolution in Iraq could increase
confidence among consumers and investors, leading the way to long-term
expansion. On the other hand, a difficult or drawn-out war could hamper an
already-uncertain economic outlook.
Here’s a look at how the world economies have reacted to the conflict in Iraq,
and what you might expect to see in the coming months.
Reaction to War
Already this year, speculation surrounding the war has taken its toll on global
economies. In the weeks before the war, worry that the conflict would lead to
oil shortages sent prices soaring to nearly $40 a barrel.2
These higher prices acted as a tax on economic activity, shaving an estimated
half a percentage point off worldwide economic growth even before the war began.
Weakened consumer confidence and business investment also weighed on growth,
shaving off another quarter point. These combined losses totaled $375 billion in
economic activity, a price larger than the entire Indonesian economy.3
But the outlook for the global economies is not entirely bleak. If the situation
in Iraq resolves quickly, oil prices will likely fall to more realistic levels,
and consumer confidence and spending may improve significantly. Under this
scenario, economists predict that global economic growth will surge 4.5 percent
in the second half of 2003, compared with an expected 2 percent for the first
half.4
European Situation
While the effects of a troublesome Iraqi conflict would be felt worldwide,
bouncing back from a prolonged war could be particularly difficult in Europe,
where high wage costs and labor protection would make it difficult for companies
to adjust quickly to an economic downturn. According to the European Commission,
growth during the fourth quarter of 2002 remained flat, while labor expenses
rose by 3.7 percent.5
In addition, the 12 euro-zone nations have agreed to limit their budget deficits
to 3 percent of gross domestic product, seriously limiting fiscal policymakers.
And although interest rate reductions could help fuel growth if necessary, the
European Central Bank tends to be far more reluctant to reduce rates than the
Federal Reserve.
Emerging Markets
Some emerging markets are more dependent on a quick resolution of the war than
others. Japan has suffered four years of deflation and expects a 0.4 percent
contraction in economic growth this year. A war lasting six weeks or longer
could deplete economic growth in that country by more than three times that
amount.6
Economies in Singapore, Thailand, Vietnam, and the Philippines are growing, but
recent terrorism in the region threatens to hamper business spending and cut
tourism revenue. These nations have also been hit in recent years by huge
amounts of foreign investment flowing out of their borders and into China, where
growth is expected to top 7 percent this year, even with higher oil expenses.7
One country that could actually benefit from a prolonged Iraqi conflict is
Venezuela, whose economy is largely dependent on revenue from oil exports.
Although Venezuela has long been seen by oil companies as a favorable
alternative to the unstable Middle East, the recent political upheaval in
Caracas may end up tarnishing the country’s reputation. If the U.S.-led
coalition forces quickly dominate Iraq, the Middle East could draw big oil
companies away from Venezuela.
The outcome of the war in Iraq will affect the economic
outlook of developed and emerging nations alike. As the situation unfolds, new
information may offer a clearer picture as to what lies ahead.
1–7) The Wall Street Journal, March 20 and 21, 2003
©
2002 Emerald Publications
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