Finding Prosperity on the Far Side of War

Short war. Long war. Gauging the length of the conflict in Iraq is becoming as important to investors, business managers, and economic policymakers as it is to military strategists. Witness the gyrations of the stock market. But the real impact of the war on the economy may well come at its conclusion, in the manner and cost of the reconstruction of Iraq and in the foreign policy that follows. A long, heavy-handed U.S. military occupation of Iraq dominated by American companies and a go-it-alone foreign policy could further inflame anti-Americanism abroad and reshape the U.S. and global economy in unforeseen -- and unwanted -- ways. A quick, occupation that shifts control swiftly to Iraqi leadership and involves a multilateral group of nations and institutions could begin to restore America's image abroad and return the economy to the path of '90s prosperity.

For a decade after the Cold War, U.S. corporations prospered in a pro-American world of ever-opening markets, high-tech innovation, industry deregulation, and risk-taking investors. The U.S. was the model for the world. But war and its aftermath could lead to an increasingly hostile, anti-American world that hampers globalization, slows innovation, curbs productivity, and limits the kind of gains in employment and earnings that were so pronounced in the U.S. in the '90s. Not a pretty scenario -- and not one set in stone.

Short term, the war will likely slow the recovery but prevent a double-dip recession at the same time. Companies that are still working their way out of the excesses of the boom are less likely to chance investing in new capital equipment until war's end. Government spending, however, will pick up some of the slack in the economy. With $80 billion being spent on the war and the occupation in 2003, the federal budget deficit may hit $400 billion. The Congressional Budget Office estimates that the deficit for 2004 will be $338 billion. That's a lot of money. Until business investment kicks in, economic growth will remain below its potential of 3% to 31/2% a year, but the flood of government spending should keep the economy from falling into recession.


Long term, the economic outlook could be dimmer. In the 1990s, the U.S. built a high-productivity, low-inflation economy that generated unprecedented wealth, jobs, and earnings. It was based on the willingness of individual and business investors to take risks. People took chances in the stock market, which expanded the amount of capital available. Entrepreneurs and companies used that capital to innovate and produce new products and services. Globalization promoted the free flow of the best talent available and drove down prices as companies manufactured wherever it was cheapest. They sold their goods and services to consumers worldwide. It was an economic model that depended on a peaceful world, secure enough to support financial and entrepreneurial risk-taking and open enough to take advantage of a global marketplace.

The terrorism of September 11, the war in Iraq, an occupation of unknown duration, and a foreign policy opposed by much of the world now threaten to change the geo-economic underpinnings of U.S. prosperity. The virtuous economic cycle of the '90s could go into reverse, as security supercedes openness and borders constrict. In this scenario, uncertainty increases, risk-taking declines. Companies bulk up on inventories, and supply-chain efficiencies erode. Defense spending rises, and companies with government contacts prosper, while startups suffer. Innovation stalls and productivity drops.

Beneath the noise of the war in Iraq, there are already signs of a less dynamic global economy. There is talk of boycotts on both sides of the Atlantic. The World Trade Organization's Doha round of trade liberalization is stalled. European, Canadian, and Asian companies are angry at being excluded from bidding for the first contracts to rebuild Iraq (only U.S. companies with strong Washington ties were included). Individual investors have fled the stock market. Student visas to U.S. colleges are increasingly hard to get, and many foreign scientists and academics are refusing to go to conferences in the U.S., in protest against the war. At one point, the U.S. could tap into the best and brightest of the entire globe. Less so today. And tomorrow?


If the U.S. and the global economies are to avoid a downward spiral, the world must soon agree on a new post-Cold War foreign policy. The Bush Administration is absolutely correct to say that terrorists and the states that provide them with weapons of mass destruction are new developments that require a new foreign policy. Yet Washington needs to make a more convincing case abroad for a policy of preemption -- and develop an international consensus on when to apply it. It should recognize that a unilateral foreign policy that generates anti-Americanism abroad can hurt U.S. prosperity at home. As a first step, Washington should reach out, in the reconstruction of Iraq, to mend its multilateral ties.

But America's critics, in turn, must recognize that terrorism changes everything, and join with the U.S. in developing a muscular multilateralism to combat it. France, which routinely preempts by sending troops into Africa, must end its blatant anti-Americanism. France has a narrow, mercantile foreign policy solely focused on protecting French economic interests in the Middle East, Africa, and Asia. It has undermined NATO by withdrawing from its command structure and the U.N. by walking away from Resolution 1441. It's time for France to stop professing to be multilateral and actually behave multilaterally. Finally, NATO and the U.N. must reform themselves to deal with the 21st century's major threat to security: terrorism and its state sponsors.

Serious geopolitical changes are needed to ensure a return to growth. War and its aftermath will undoubtedly shape the future economy. The only question is how.

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