War with Iraq seems inevitable, with or without the support of the UN.
The economic costs of such a war could be huge, both in direct American
outlays for war and its aftermath, and in the indirect spillovers on the
world economy. This war would take place against a background of weak
economic conditions globally, and would exacerbate those weaknesses,
perhaps throwing the world economy into recession. The economic outcome
of war could well depend on the diplomatic context. If America acts
alone, the likely costs of war to the world economy will be higher than
if it has the backing of the UN.

The costs of war must be balanced against the costs of alternative
actions. A high cost of war is certainly not a case for inaction,
especially in the face of a serious risk that Iraq could obtain, and
eventually use, weapons of mass destruction. Yet pursuing war where
diplomatic means - weapons inspections, threats of retaliation in the
face of Iraqi aggression, readiness of the UN to act if dangers from
Iraq become imminent - might suffice could result in huge and avoidable
economic (as well as other) costs.

The traditional textbook view of war is that war stimulates an economy,
at least in the short term. But that simple view of wartime economics is
too narrow to describe the possible effects of an Iraqi war. We must
also recognize that a war with Iraq, even a limited war, could
profoundly disrupt the international flow of goods, services, and
investments upon which our global economy now rests.

These disruptive effects would not only dampen production, but
would undermine investor and consumer confidence and thereby limit
both private investment and consumer spending. The direct
macroeconomic stimulus that could arise from military spending may
be overwhelmed by the uncertainties and disruptions that would
accompany military conflict.

Such uncertainties are already visible. Oil prices have risen several
dollars a barrel since late summer. Since June, US and world stock
markets have declined by around 20% in dollar terms. Each rise in the
probability of war has tended to push the markets down further.

The modern world economy is built upon a complex network of global
economic connections, and those connections are directly threatened by
war. War would pose obvious and direct risks to shipping, notably
shipping of oil from the Middle East.

The increased costs could further depress the drop of cross-border
capital flows that has been underway for two years, since the end of the
US stock market boom. The decline in cross-border flows intensified
after the September 11 attacks last year. Foreign direct investment in
many developing regions has dried up, and emerging markets that depend
on such capital flows, particularly in South America, have seen their
economies thrown into a renewed financial crisis.

Even if the US economy might experience some short-term demand boost
from increased military spending, the rest of the world would not. Most
countries would feel only negative effects - disruptions of trade,
higher oil prices, withdrawals of international capital, cutbacks on
investment plans - without any offsetting direct stimulus.

America's macroeconomic situation is also worrisome. The Bush
Administration's fiscal policies, combined with the bursting of the US
financial bubble of the late 1990s, have pushed America onto an unstable
fiscal trajectory. In contrast to budget surpluses "as far as the eye
could see," the US now has large budget deficits that will linger for
many years to come. War with Iraq would likely cause those budget
deficits to soar.

Rising budget deficits will poison US domestic politics and lead to
budgetary gridlock. That in turn, could lead to a loss of consumer
confidence. Since consumer spending has been the remaining bulwark of
the US economy since the collapse of the financial bubble, war with Iraq
could puncture the last point of stability in the US economy.

Of course, US policymakers have a hidden "ace in the hole." They believe
that the war will be quick, virtually effortless, and self-financing, as
the US. effectively gains control of Iraqi oil supplies, which will not
only drive down world oil prices but also finance Iraq's postwar
reconstruction. An alluring prospect, but perhaps improbable. War might
not be quick at all. Postwar Iraq could be unstable even if the war is
brief. An alternative scenario is huge uncertainty and turmoil
throughout the Middle East, with major disruptions in oil flows, for
political if not military reasons.

The geopolitical costs of a unilateral US war will be even higher. A
quick and successful war, strongly and explicitly backed by the UN,
offers the greatest chance of avoiding a huge negative economic fallout.
A war that pits America against the world could call into doubt the
progress of globalization, particularly international trade
negotiations. Moreover, if the US acts alone, no doubt the post-conflict
costs that America will bear alone will be higher as well. Open and deep
political divisions between America and other major countries will
incite a loss of investor confidence, undermining global economic
stability.

Jeffrey D. Sachs is Professor of economics and Director of the Earth
Institute at Columbia University.
Project Syndicate

October 3, 2002