No ‘Best-Case’ Scenario: What Are The Alternatives?
March 31, 2003
International Perspective, by Marshall Auerback
Now that the phoney war is over and the shooting has commenced in earnest, some of the pre-war fog has lifted, even as new uncertainties are being created on the ground. Prior to the commencement of actual hostilities in Iraq, little attention was focussed on the law of unintended consequences invariably arising from the day to day conduct of the war itself. Much of the debate focussed on what kind of a regime would follow and how the country’s considerable resources, particularly oil, would be deployed. Implicit was the belief that once formidable American firepower was focussed on the job at hand, Saddam’s Ba’athist regime would crumble quickly. Hence, it was felt that there was little point in hypothesising about the day to day ups and downs of the war, even if one expressed concern about the attendant costs.
But the coalition troops now have a fight on their hands. It is becoming increasingly clear that the cries to “get on with it” – said in hope that much of the building uncertainty would be quickly lifted with the onset of war – has created a host of new unpredictable problems not yet discounted.
What we can say about the war thus far is as follows: a best-case scenario (on which the market’s initial hopes were placed) can now be safely dismissed as unrealistic. The range of post-war scenarios now looks set to take on a less congenial hue, from “least bad outcome” to disaster. It is important to consider a new spectrum of potential outcomes, the concomitant implications for the markets, and place these in the context of a war occurring amidst a world economy still characterised by mounting external imbalances in the US, and ongoing sluggish growth in Japan and the eurozone.
First the good news: thus far, no use of chemical weapons, the oil wells remain largely intact, the casualty count has remained relatively low despite the massive use of firepower, and the battle has thus far been largely contained within the borders of Iraq.
Now for the bad news: a war lasting days (the initial basis for the recent surge in global equities), rather than weeks or months is looking far less likely. In contrast to the first Gulf war, the US has clearly not opted for an incremental approach, but a higher risk dash to Baghdad, which only makes sense in the event of a prompt, decisive victory. Time is not on the side of the coalition forces in terms of winning the important battle for public opinion, which was tenuous even before the start of hostilities. There has been no damage to the oil fields, but the oil market remains very tight as evidenced by the recent move into backwardation. The commander of the UK forces in the Persian Gulf, Brian Burridge, acknowledges that the Rumaila oil field is in “terrible condition” and suggests that it may take at least 3 months before Iraq can start exporting again. Crude prices are therefore likely to trend higher. Despite news of the Basra uprising, there is no real evidence that the Iraqis (or, indeed, much of the Arab world) view the US/UK forces as liberators.
Another obvious point of conflict are the squabbles already emerging over post-Saddam Iraq. Not just who is going to control the country - the US or the United Nations - but who is going to pick up the tab and who is going to get the contracts for rebuilding the country. Such disputes, if not quickly resolved, leave open the disturbing prospect of the victors being viewed as an illegitimate occupying power which may remain subject to persistent insurgency and guerrilla warfare. Iraq itself could fracture, notably in the north, where the Turks are now beginning to intervene in Kurdistan, against the express wishes of their American “allies”; the possibility of the conflict extending beyond Iraq’s borders needs to be considered by the markets.
The oil fields of Kirkuk are but one clear flashpoint which opens up the possibility of a widening war. As the Economist magazine noted in this week’s edition,
“The Americans have managed to persuade the Kurds to promise to refrain from making a lunge towards the oilfields at Kirkuk (just outside their enclave), and to agree to place their 60,000 peshmergas, or guerrillas, under American command. But the Turks still fear that the Kurds will seek to break away from Baghdad once Mr Hussein falls, and they believe that, by wading in, they can prevent this happening. They also claim that their presence will keep Iraqi Kurdish refugees (and Turkish Kurdish separatists) from flooding into Turkey.”
Kirkuk retains significant importance for the Kurds, as they have long viewed this major oil producing area as a potential cash cow enabling them to finance a de facto (if not de jure) Kurdistan in Northern Iraq. The Turks and Iranians clearly covet the oil fields for precisely the opposite reason: to keep the resource for themselves and suppress any incipient moves for independence amongst the Kurds, whilst retaining stability within their own respective national borders. Given the ostensible commitments already expressed by the Americans for a unified Iraq post Saddam, it is unlikely that any of these parties will gain ready access to these fields, adding to more potential disgruntlement. This remains an ongoing source of tension. It is a microcosm of how conditions can degenerate from “least bad outcome” to potential disaster.
The push towards the capital has been severely hampered by repeated attacks on armoured columns and supply convoys trying to bolster the American front line 50 miles south of Baghdad. These ambushes have fuelled criticism (amongst real generals, not just those of the armchair variety) that the Pentagon went to war with too few troops. Serious disruption to these supply lines has compromised coalition advantages of mobility and firepower, to say nothing of putting paid to the notion of a quick conclusion in Baghdad. As long-time defence strategist (now Director of the Center for Cultural Conservatism at the Free Congress Foundation) William S. Lind suggests, it might be Saddam’s intention to suck in the coalition troops, and then cut them off:
“This type of defence was first developed by the German army during World War I (early critics called it the ‘let them walk right in defence’), and it was the standard German defence during World War II. The key element, the counterattack by armoured forces, will probably be impossible for the Iraqis because of air power. But there are other ways to cut a supply line. This outcome is disastrous in both the short and long terms. Short-term, we lose an army. Long-term, the Islamic world gets what it might see as its biggest victory since the Turks took Constantinople in 1453. It would be an enormous shot in the arm for every Islamic jihadi, and would lead to a collapse of America's position throughout the Islamic world, and perhaps elsewhere as well.”
Perhaps ongoing sandstorms in the desert will provide time to reinforce overstretched supply lines (although they are also doing tremendous damage to the equipment of the coalition forces). Perhaps we are on the threshold of the climactic point in the battle and that all will be clarified once the impending clash with the Republican Guard commences.
But this brings us closer to the uncertain fate of Baghdad itself, which is deemed to be the pivot on which the war’s success ultimately turns. Assume that Baghdad is seized, and that Saddam is replaced with an American-approved pro-consul. Two questions arise here: to what extent would such an administration achieve international legitimacy, given the lack of UN involvement? There are already signs of significant divergences of view here, notably between the US and UK themselves. Prime Minister Blair has been much more persistent in calling for a legitimising UN presence, while making it very clear to the rest of the world that this is not an imperial adventure. The signals coming from the Bush administration have been considerably more ambiguous.
This is not an academic question. The very nature of the future administration in Baghdad may very well determine the extent of its ability to function effectively in the country as a whole. An underlying assumption about the coalition military strategy is that control of Baghdad means control of the entire nation. This has not been the case, however, in Afghanistan. That country’s leader, Hamid Karzai, is surrounded by 200 American bodyguards because his own people cannot be trusted; his remit does not extend much out from Kabul. To be sure, a US-backed military administration would start with the advantage of a cohesive well-equipped army, but even such obvious starting advantages provide little succour if one is fighting a perpetual insurgency in the countryside, (coupled with the possibility of suicide bombers), as the Israeli experience in the West Bank vividly illustrates.
The third possibility is what the “Wolfowitzian” wing of the Bush administration most desires: Baghdad is seized, Iraq fully liberated and turned it into a modern, peaceful democracy that serves as a template for the rest of the Arab world. The problem here is that virtually any election approximating a legitimate choice amongst Arab electorates has hitherto failed to deliver leaders particularly amenable to Western interests. Note the recent Parliamentary elections in Pakistan, where extremist Islamic parties viscerally hostile to the American war in Afghanistan, gained a combined majority in the legislature. Or consider the case of elections held some 12 years ago in Algeria, during which the Islamic Brotherhood was elected in a landslide only to have the results nullified by the military (with the complicity of the French government). Or simply consider the adverse coverage this war is generating in the Middle Eastern press and media, notably Al-Jazeera, which is playing a prominent role in shaping perceptions in the Arab world. The region does not have an abundance of Western liberal democrats.
All of these problems come at a time when the US is mired in debt and heavily reliant on foreign capital. The evidence of renewed US recession is accumulating as well. Consider the litany of news over the past month:
--Private payrolls declining steadily and sharply
--Initial claims consistent with further decline through March
-- At 62.5, consumer confidence has plunged to a level never before seen without a recession
-- Durable goods orders continue to slump, the unfilled orders decline is accelerating, nominal shipments of capital goods are still sagging
-- Nominal retail sales at chain stores remain stagnant year-over-year
--Homeowners continue to borrow against their homes at historically unprecedented rates
Contrast America’s tenuous position today with the start of the post-W.W.II era. Then, the US was the world’s largest creditor, a huge repository of savings, possessing (albeit temporarily) a nuclear monopoly. The dollar was king and about to become the apex of the post-war monetary order. The US was (to coin a French phrase) a true “hyperpower”. Yet the Truman administration proceeded to construct the basis of the multilateralist world order we have today, and made the US the guarantor of international law. A huge Marshall plan was introduced, but it was largely administered by the European recipients themselves. This period of extraordinary magnanimity and foresight might well have constituted high water mark of American diplomacy.
Today, just over a week into the war and the first bills are coming due, after President Bush’s $75 billion petition to Congress last week. But this money does not cover the cost of reconstruction, merely the provisions for the ongoing war itself (which might have to be increased were it to go much beyond 4 to 6 weeks). The implication is that the rest of the world – or Iraq through its oil revenues – must pay the overall costs of reconstruction. The US assumes that UN humanitarian aid will be immediately forthcoming (presumably under the continued oil-for-food programme), even though many in the administration aim to have a civilian administration under the direct control of the US military, which would largely bypass the UN. Needless to say, this option is not one guaranteed to command a high degree of international support. Once Saddam is overthrown, the Bush Administration will spare no effort to make its liberation of Iraq work; if no UN funds are forthcoming, Iraq’s reconstruction might very well represent another huge burden on an already faltering US economy.
The reality is that the markets are now belatedly reacting not so much to wartime disasters as a failure in the expectations game. And it is true that a failure of expectations is not tantamount to a failure in war. On the other hand, the breakdown of the longstanding institutional arrangements that have governed the post-W.W.II order is not something that the markets ought to view with any great joy. US credibility in the court of international opinion stands at its lowest ebb in generations. This hardly bodes well for those seeking to perpetuate the continuation of the dollar reserve system in its current form. A backdrop of continued global instability is not what the markets bargained for when this conflict got under way. What appears to loom on the horizon is a “back to the future” kind of 19th century world of power politics. To be sure, investor and public confidence will be subject to continued volatile swings in line with the ups and downs of the war, and we do not discount the possibility of another sharp rally. But over the medium term it now appears likely that this military adventurism will constitute a serious negative for the foreseeable future. We leave the final words to Bill Lind: “If the adventurers were replaced by sober men, could we find a way out? Perhaps. It just might work if we took Baghdad, overthrew Saddam, and then immediately turned Iraq over to the Arab League or the U.N. to run, while making it very clear to the rest of the world that America's quest for world hegemony is over, finished and done. A good way to put it might be ‘a republic, not an empire.’”
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