The Sunday Times Economic Analysis

The Sunday Times Economic Analysis By the Economist

Worst is over: Global economic rebound a distant hope
Is there an economic explanation to the Bush-Blair bombardment of Iraq?
One popular explanation is that it was motivated by the desire to get hold of Iraqi oil supplies for Texan conglomerates. The other milder economic interpretation is that both these leaders require distracting their people from the economic issues in their countries for which they had no solution.

The oil argument though simple has been contested. It is true Iraq is the second largest source of oil in the Middle East next to Saudi Arabia and is estimated to account for about 30 per cent of world supplies. However, the question that some have posed is: How does lower prices owing to larger oil supplies benefit the US companies as overall prices would fall?

This contention could be contested by two counter arguments. One is that the bottom line is not necessarily the oil price to consumers but the margin between the cost of oil and prices fetched. This could indeed be increased and profits enhanced for US firms .The immediate gains for US oil firms could be huge.

How the spoils are going to be divided between the US and the UK is another matter. Whether the final settlement with the UN, neighbouring Arab states and the Iraqis themselves would permit plunder of the oil by the US is another issue that would be only unravelled over time.

The second counter argument is based on a longer American view on oil. Oil being a non-renewable resource the US would like to retain its own oil reserves for a latter day when international supplies diminish. Unless alternate energy sources are found, this would give the US a distinct future advantage. Further, the US could control the amounts of oil reaching international markets and ensure that their returns from oil are high. If this were to happen the much-expected decline in oil prices would not materialise.

The other explanation lies in the economic circumstances of the two countries. The efforts at economic recovery have met with little success in recent years. The Bush administration is at a loss about what actions should be taken. Bush economics can only think of measures to give tax concessions to the rich. Most eminent US economists have hotly contested this approach as a wrong one. As many as a hundred leading economists, including Nobel Prize laureates, thought it fit to place an advertisement in the New York Times warning Bush of his misguided economic policies.

Unable to cope with the economic issues at home did Bush turn to war to boost his popularity? After all, the presidential election is not that far. November 2004 is just 18 months away.

It is however agreed that the stakes of such a popularity-gaining strategy were indeed high and risky. Most commentators are of the view that it had to fail. Once victory was won, the attention of Americans would turn once again to their economic conditions. And these could get worse owing to the additional huge expenditure for the war and the reconstruction aid that would be necessary.

All this means that there isn't much good news for the Sri Lankan economy. Although trade is not very significant to America, American trade is vital to other countries in the world, including Japan. The old saying that, when America catches a cold other countries suffer from influenza, appears to be even truer today with increased globalization. The economic recovery of the US is important for the rebound of European and Japanese economies. The economic growth of these developed countries is vital for Sri Lanka's industrial exports.

The US is Sri Lanka's single largest market for the country's main export -- garments. The recent agreement for freer trade in garments was expected to boost the country's garment exports. For it to have an impact, consumer demand must recover. It is not governments that buy garments. It is ordinary people. Their incomes must rise if demand for our exports is to be sustained and increased. This may take sometime.

Meanwhile, another disaster for the Sri Lankan economy has been avoided: The prospect of sky rocketing prices. Certainly stable oil prices would be essential for both Sri Lankan manufactured exports and for stability in domestic consumer prices. The end of the war may mean that there would be stable prices. Further, our tea market is likely to revive with normal shipments and increased demand from the Middle East. There have been some concerns regarding aid. The US has assured the government that the Iraqi war would not affect American commitments.

There are many imponderables about the post-Iraq world economic conditions. At least the worst appears to be over, in as far as the Sri Lankan economy is concerned. Yet the impact of the war on global economic conditions remains uncertain. Only a strong bounce back of the world economy could benefit and boost Sri Lanka's economy. That may take sometime.

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