Ernest Mandel

Economic Consequences of the War

(February 1991)

From International Viewpoint, Issue 200, 18 February 1991, pp. 9–10.
Transcribed by Joe Auciello.
Marked up by Einde O’Callaghan for the Marxists’ Internet Archive.

Whilst uncertainty about the duration and ultimate result of the Gulf conflict makes any exact prognosis impossible, it is clear that the war will have severe effects on a world capitalist economy already beginning to suffer the effects of recession.

The direct costs: Wars are expensive and wars conducted at a distance are even more expensive. The cost for the USA of the military presence in Saudi Arabia can be estimated at between $2 and $3 billion per month. This is the net cost, after deduction of the $30 billion contribution from the Allies.

With the outbreak of the war, these costs will rise considerably. The duration of the war, and how many troops remain in the Middle East after the fighting, are variables that will influence the direct costs. The minimum cost of the US operations in the Gulf for 1991 can be estimated at $50 to $60 billion, but could go as high as $100 billion.

The direct consequences: There is not the slightest possibility that this sum can be covered by a rise in taxes or tax income due to economic growth. The budget deficit will grow. Thus, there will be further borrowing by the state, inflating further the public debt. This will increase the tension on capital markets, push interest rates up and accelerate inflation. All these factors will coincide with the economic recession and make it worse.

The American arms industry was already working at full stretch before the start of the Gulf crisis. Thus there will be no extra stimulus to economic activity as a result of the war. On the civilian sectors of the economy, the effects will be wholly negative. Consumer income will fall. High interest rates will hit the construction sector. It will be more expensive for enterprises to invest. Thus, the war will slow down economic activity and employment. For the first time in two centuries, the dominant capitalist economy will see recession and war at the same time.

The oil price: The war creates uncertainty about oil supplies in the short and medium term. These difficulties will appear even if Saddam Hussein does not temporarily put important centres of production out of action. The result will be extreme speculative oscillations on the oil markets.

On January, 1991, during the Baker-Aziz discussions, the oil price fell from $26 a barrel at nine in the morning to $23 by six-thirty that evening. Two hours later it had gone back up to $30.

A price of $30 means a loss of 1% in real income in all the non-oil producing countries. A price of $40 would cause a 1.5% drop in purchasing power, and so on. The Pentagon predicts that the average price of oil in 1991 will be $44; optimists foresee an average of $425. It is impossible to make exact predictions. But it is certain that a rise in the price of oil would result in a weakening of economic activity throughout the world.

Cumulative effects: A rise in US interest rates cannot be neutralized by a neo-Keynesian “cheap money” policy. Such a policy could only lead to the bankruptcy of the state. Thus, Washington is going to keep interest rates up in order that Japanese investors continue to buy US treasury bonds.

High interest rates in the USA will put pressure on the other rich countries, whose rates will also rise. This will be true in particular for countries with a high public debt, such as Germany, or a significant budget deficit, such as Japan. Thus, recessionary tendencies will be strengthened in the rest of the world. The American domestic market is the most important sector of the world market. A recession in the US means less exports by the rest of the world to the US, and a drop in production, employment, and domestic demand.

Apart from the Anglo-Saxon countries, the recession is underway in Scandinavia, and also perhaps in Italy and France. A deeper analysis is needed to grasp the significance of this recession, its duration, and at what point it may be turned around by opposing tendencies.

Among the factors to take into account in such an analysis are the duration of the war, long-term variations in energy prices (and not only the oil price), the extent of the destruction in the Middle East, the ecological consequences, political reactions in the Third World and so on.

Geographically and socially differentiated consequences: Hardest hit by the war will be the poorer countries and countries with few natural resources. Differences in living standards will increase, on a world scale, within each region of the world, and within each country.

The “economically weak” will suffer more than the “economically strong.” Non-oil producing Third World countries will be worst affected. The absolute impoverishment of these countries will grow. The war will also hit the Eastern European countries hard. Their energy bills will rise, and thus their production costs, making it harder for them to export.

In the semi-industrialized countries of East Asia, the war will entail a sharp reduction in exports to the USA, higher production costs, thus a decline in competitiveness, a slowdown in economic growth and even a recession.

The oil-producing countries outside the Middle East (for example, Venezuela, Mexico, Indonesia and Nigeria) will profit from the rise in the oil price and step up production. At the same time, they will lose out through declining exports of other products to the imperialist countries and the increase in the price of their imports from these countries.

The Western countries and Japan will feel a deterioration in the economic climate, although the precise dimensions of the problem cannot be given.

Only the Soviet Union is in a position to derive all-round economic benefits from the war – provided that it is able to maintain and increase oil output, which is by no means guaranteed.

Last updated on 26.12.2011