The Economic Costs of a War in Iraq

Andrew Stoeckel and Warwick J. McKibbin

Estimating the costs of a war with Iraq is difficult. The uncertainties are enormous. Federal Reserve Chairman Alan Greenspan was questioned at a congressional hearing on the US$100 billion a year cost of United States troops being in Iraq. He responded that he was ?doubtful if the impact on the economy is more than modest, largely because this is not Vietnam or Korea?. Others disagree. William Nordhaus, for example, believes these estimated economic costs of a war with Iraq are too low based on a history of underestimation of the cost of wars and based on the experience of the 1991 Gulf War.

In making an estimate of the economic costs of a war it is important to distinguish between the cost to government budgets, versus the overall economic cost to the world economy. In this paper we attempt to calculate the global economic costs taking account of a range of factors that impact on the overall costs of war in Iraq.

War with Iraq is likely to be costly to the world economy in the short term. How costly, depends on the length of the war and the compounding effects of many different factors. The main economic costs on which we focus are the flow-on effects from higher budgetary costs, rising oil prices and greater uncertainty. We should stress that we are not undertaking this study in order to argue for or against a war, but to better inform decision makers in order that a more appropriate cost benefit analysis can be undertaken. Merely presenting the cost to the fiscal position as the cost of a war is a significant underestimate of the overall cost of conflict just as changes in fiscal balances are an inappropriate measure of the possible gains from war.