The downside is daunting
Dr B R Prasad
Chief Economist, Bombay Stock Exchange
Wars are inflationary. History says so. Prices rose a whopping 117 percent during the American Civil War (1861-65), 126 percent during the World War I (1917-18) and 108 percent during the World War II (1941-45). Korean War (1950-53) led to a price jump of 12 per cent in the US in the first year alone, with the incidence being much higher in European countries and the Vietnam War (1964-73) lead to massive rise in inflation in the United States that subsequently led to recession and market meltdown.
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The worry with the present war is whether this party of an impressive low inflation record in the recent period will come to an abrupt end with the duel between George Bush and Saddam Hussain.
Cost wise, it is not alarming. In a recent paper for American Academy of Arts & Sciences, William Nordhaus, a leading Yale economics professor, puts the estimate for a short and successful war (30 days of war and 2.5 months of US presence) at $50 billion which might go up to $140 billion if it escalates further.
Even the estimate by Larry Lindsay, a former economic advisor to the president is in the range of $100-200 billion, which is less than 1.5 percent of the current US gross domestic product.
The cost of the 1991 Gulf War was about $48 billion, a major chunk of which was borne by the allies.
The economic premise of the current war is if Iraq is won over quickly and swiftly, oil prices will come down and stock markets will rally both of which could stimulate growth of world economy with monetary policy being accommodative with softer interest rates. Evidence of earlier wars shoring up stocks is abundant.
The S&P 500 posted a cumulative gain of 58 per cent during WWII, 27 per cent during Korean War, 7 per cent during Vietnam conflict and similar rise during Gulf war.
The first day of the current war witnessed oil price decline and jump in the equity markets and by Thursday, Dow Jones showed seventh straight gain, but the big question is how long it will continue.
The downside on the other hand is very daunting. A protracted battle could escalate oil prices, stoke inflation and dampen the growth prospects, which is already anemic.
An International Monetary Fund estimate indicates that a $10 a barrel rise in the price of oil sustained over a year (which is what happened last year, though it was peacetime) will reduce global gross domestic product by 0.6 per cent. The impact varies from 0.8 percent of GDP in America and the Euroland to much more in major importing countries such as Korea, India and Thailand.
Citing a study that covered war data of 66 countries, a recent paper from Research Institute of the Finnish Economy makes an interesting observation.
Real GDP growth declines noticeably during domestic wars, although rises somewhat during the foreign wars, and inflation is higher during domestic wars than foreign wars. Since the war now being waged by the US is a foreign one, it might be possible that US could benefit from it, from which the rest of the world could hope to derive some relief and recovery.
Food, forex kitty up resilience
Ajit Ranade
Chief Economist, ABN Amro Bank
Inflation stayed below 4 per cent ever since the 9/11 attacks, touching a low of 1.1 per cent in February 2002. In fact, during this period the non-core component was contributing negatively to overall inflation, which meant that the manufacturing side was in a deflationary phase.
However, since May last year, inflation has been steadily inching up. This upward trend reflected both a demand side pickup, pricing power returning to manufacturing sector, as well as impact of a deregulated fuel price regime. That the drought didn