Wednesday, August 22, 2012

Oil's toxic partner: ZIO-Guns and crooked policies...

Oil's toxic partner: ZIO-Guns and crooked policies...
By Hossein Askari

Needless to say, military expenditure takes financial, economic and human resources away from productive uses, are used in armed conflicts and wars and these, in turn, exact an even heavier toll on human and economic development.

Oil is intimately connected to military expenditure and armed conflicts and wars in a number of ways.There is evidence that oil revenues and military expenditure are somewhat correlated, providing a seemingly painless means of financing the most sophisticated weaponry available; the acquisition of sophisticated military hardware, in turn, encourages armed conflict and causes significant human and physical loss; and armed conflict, in part because of arms depletion, encourages further military expenditures.

Conflicts have developed over oil and gas ownership. Foreigners have meddled and have a military presence in the region largely because of its oil and gas resources.

Military expenditures became significant in the Persian Gulf after the first dramatic rise in oil prices in 1973-1974 and have remained large by any standard. Military expenditures took a further jump with the Iran-Iraq War, especially in Iraq, Saudi Arabia, and the United Arab Emirates. Over the past 30 or so years, the Persian Gulf could be classified on a number of dimensions as the most militarized region in the world.

Although the broader Middle East and North Africa region accounted for only 4.7% of the word’s population, it was responsible for 7.1% of global military expenditures in 2007; and over the period 1988-2005 the region’s average annual military expenditure as percentage of its GDP stood at 6.1% while the global figure averaged at 3.0%. In 2007, Iran and Saudi Arabia were among the top 15 military spenders in the world.

Average annual per capita military expenditures (in constant 2005 US dollars) over the period 1988-2005 were highest in Kuwait ($2,729), followed by the UAE ($1,300), Saudi Arabia ($934), Bahrain ($527) and Iran ($66).

As percentage of gross domestic product, Kuwait again averaged the highest (9.8%), followed by Saudi Arabia (7.4%), the UAE (4.5%), Bahrain (3.1%) and Iran (2.9%).

Moreover, during the period of 1988-2005, annual Persian Gulf arms imports per capita averaged $36 per year, ranging from an annual average of $9 per capita for Iran to $222 for the UAE. For the UAE this indicator would increase by four- to fivefold (to about $1,000 per capita) if only the nationals of the UAE are included, as 80% of the UAE's population are immigrant workers.

While some claim a positive economic effect from military expenditure, on balance, the negative effects on economic performance are overwhelming. These negative effects include:
i. lower investment in the civilian sector,
ii. lower expenditures on health and education,
iii. higher civilian unemployment,
iv. allocative inefficiencies,
v. lower civilian research and development,
vi. higher budget deficit,
vii. higher public debt,
viii. higher inflation rate,
ix. lower growth rate,
x. more corruption,
xi. increased chance of armed conflict, and thus
xii. higher rate of destruction of human life and physical capital.

Military expenditures in the form of military imports, a high component of military expenditures in the Persian Gulf, have additional negative effects through the balance of payments.

What have been the fallouts of the three recent wars in the Persian Gulf?

The estimated cost of the Iran-Iraq War was $637 billion to Iran, $376 billion to Iraq, and $326 to other Persian Gulf countries and the rest of the world, all in constant 1988 US dollars. The global cost of the Iran-Iraq War, based on our conservative assumptions and methodology (while omitting a number of significant costs due to the lack of data), is almost $1.4 trillion in 1988 dollars.

The total cost of the war to Iran was equivalent to almost 19 years of Iran's oil export revenues. For Iraq, its burden represented 13 years of its pre-war oil revenues. Iran's cumulative GDP between 1980 and 1988 was $739 billion in constant 1988 US dollars. Thus, the total damage to Iran's economy during the war was equal to about 77% of Iran's cumulative economic output during the war years.

Iraq's aggregate output between 1980 and 1988 was $363 billion in constant 1988 dollars and its total war-related cost was equal to about 136% of its cumulative economic output during the same period.

These are staggering costs.

In contrast to the Iran-Iraq War, the First Gulf War did not have a profound long-term impact on oil prices. However, inevitable exclusion of the environmental costs of the war from our calculation makes our cost estimation an underestimate of the burden on Persian Gulf countries. The cost of this war to Iraq was $269 billion, $533 billion to the allies and $34 billion for the rest of the world.

The global cost, based on our conservative assumptions and calculation, is at least $783 billion in constant 1991 dollars, far above the initial estimations and highly significant, by any standard, for a 210-day military conflict.

Iraq would have needed almost 18 years of its pre-war oil revenues to pay for the total damage inflicted on its economy. On the other side of the conflict, Kuwait suffered at least $130 billion in budgetary and macroeconomic losses during the invasion and occupation by Iraq. Kuwait also needed 13 years of its pre-war oil revenues to cover the budgetary and macroeconomic damage to its economy.

When president George W Bush made his famous "Mission Accomplished" speech on May 1, 2003, aboard a US aircraft carrier, he probably never imagined that US combat and support operations expenses alone in Iraq would exceed $1 trillion by 2015.

In our calculations, we did not include some key budgetary and macroeconomic costs of the war such as costs to Iraq associated with the loss of life, injuries, and displaced people, environmental costs to Iraq and its neighbors, and various types of budgetary and macroeconomic costs to other allies.

In spite of omissions that lead to an underestimate, our final figures are still staggering. The total cost inflicted on the direct belligerents, neighbors, and the rest of the world is estimated at $2,509 billion, $140 billion, and $531 billion, respectively. These bring the global cost of the Iraq War, after adjustments to avoid double counting, to almost $3.2 trillion in 2011 dollars.

The Iraq War inflicted severe budgetary pain on the United States, perhaps for the first time since the Vietnam War that a conflict has brought such hurt. More than half of the total estimate for the global cost of the war was and will be incurred by the United States - a figure exceeding $1.7 trillion. Moreover, the human cost for the United States has been unmatched since the Vietnam War.

The deficit spending, coupled with the spending on the wars in Iraq and Afghanistan, has raised the ratio of debt to GDP by about 10%. At the same time, the human cost of the war for Iraq from fatalities, injuries, and displaced population has already exceeded hundreds of billions of dollars according to very rough and conservative estimates.

Apart from the total losses to the direct belligerents, the most profound effect of the three wars on the region may be in the composition of government expenditures towards higher military expenditures.

In all of the countries - except in Iran, where the quality of data, especially for military spending, is highly disputable - the share of military expenditure in total government expenditures is either higher than or equal to the share of public education and health care combined during the 1990s and 2000s.

Also, military expenditures are the only expenditure category where all Persian Gulf countries "outclass" other developing countries, OECD countries, and the global average. Add to these facts and figures:
  • The recent $60 billion arms sales contract announced between Saudi Arabia and the United States;
  • The UAE's $7.1 billion contract to purchase 80 of the most advanced F-16 fighters in the last decade;
  • The recent $35-$40 billion contract with the United States to purchase and upgrade the UAE's anti-missile defense systems;
  • Oman's $12 billion and
  • Kuwait's $7 billion contracts with the United States to buy new warplanes;
  • Washington's reported agreement to sell bunker-busting bombs to the UAE and even
  • New arms and upgrading of F-16s for Bahrain (a country caught in internal turmoil).

    These are breathtaking set of numbers.

    These are staggering costs that all Middle Easterners must be made aware of, costs that are a testament to the folly of their leaders and the duplicity of the powerful nations.The question that must be answered is simple. Would these wars have occurred if leaders and countries knew the global price of their aggressive actions and believed that they would have to pay for them in full - that is, full reparations for victim countries and leaders and their cronies forfeiting their ill-gotten wealth, being subject to arrest and trial by the International Criminal Court?

    In short, the region needs a long period of peace to develop institutions and implement policies to achieve political reform and sustained economic prosperity.

    NEXT: Islamic management of oil reserves and revenues

    Previous articles in this series are:
    Part 1: Riddle of the sands
    Part 2: The sweet and sour of oil
    Part 3: The driver of oil prices
    Part 4: OPEC in the driving seat
    Part 5: The OPEC bogeyman
    Part 6: OPEC and the sanctions highway
    Part 7: Oil-price shocks lie in wait
    Part 8: Whose oil is it anyway?
    Part 9: The dark side of oil

    Part 10: Institutions matter
    Part 11: Oil-rich rulers blind to the future

    Part 12: 'Arab Spring' without a bloom
    Part 13: Reform - or be kicked out

    Hossein Askari is Professor of Business and International Affairs at the George Washington University.
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