The relevance of economics
Conflict and the subsequent peacekeeping require scarce resources which could be used for alternatives such as education and health. But military costs are only one component of the total costs of conflict. Typically, there are sizeable hidden costs which cannot be ignored. Historically, conflict was the preserve of political scientists, but increasingly, defence economists are applying their economic tools to the analysis of conflict (Sandler and Hartley, 2003).
The economics of conflict
Conflict embraces actions within states such as civil wars, revolutions and terrorism as well as military actions between states in the form of wars and international terrorism. Economists start by analysing wars between states as involving the use of military force to achieve a re-allocation of resources and property rights. Examples include invasions to “steal” another nation’s land, oil, water, minerals or strategic positions (eg Golan Heights, the Syrian territory under Israeli occupation). The study of conflict departs from conventional economic analysis with its focus on increasing the output of civil goods and services (growth) and exchange based on market prices, voluntary transactions and equilibrium states. Conflict replaces voluntary exchange with military force leading to destructive rather than creative power, and chaos and disequilibrium replacing market equilibrium. Wars destroy the participants’ military forces and their civilian human and physical resources (e.g. deaths, injuries, destruction of infrastructure and property).
Conflict also involves strategic behaviour, interactions and interdependencies between adversaries ranging from small groups such as terrorists and guerrillas to nation states. Strategic interaction means that conflict can be analysed using game theory involving games such as “bluff, chicken and tit-for-tat”. In some cases, an escalation of military threats can lead to mistakes with one nation mis-reading another’s intentions, resulting in armed conflict.
Despite the many wars, there is a surprising lack of empirical work on the costs of conflict and even less on the expected benefits. Economists analyse conflict using a cost-benefit framework and an example for the Iraq conflict is shown in Table 1. Ideally, a comprehensive economic evaluation of the Iraq conflict requires data on its military and civilian costs for all the participating nations and an assessment of its likely benefits. Reality is more complex and the approach is subject to at least three limitations. First, data availability. For military costs, data are required on the additional costs of the conflict, including both the one-off costs of the war and the continuing costs of peacekeeping. Second, the counter-factual has to be addressed. What would have happened to civilian economies in the absence of the Iraq conflict, and what would have happened to Iraq with the continued rule by Saddam Hussein subject to international sanctions? Third, a distinction needs to be made between plans and outcomes. Governments decide to go to war on the basis of plans, forecasts and expected outcomes. Economic forecasts, like military intelligence forecasts, can be wrong (as the pre-war intelligence forecasts on WMD have shown). Controversy and debate about the Iraq conflict has often been dominated by hindsight and has tended to ignore the choice criteria for the original decision to go to war.
A framework for assessing the Iraq conflict
Britain’s costs of the Iraq conflict
There are various costs, not all of which are immediately apparent. Military costs are the most obvious, but these embrace the direct one-off costs of the conflict, the continuing costs of peacekeeping and any indirect costs through adverse effects on recruitment and retention of military personnel and increased terrorist threats to Britain both currently and into the future. There are also costs to the British economy through such impacts as higher oil prices, possible recession effects and the need for higher defence spending which has to be financed. Further costs arise in British contribution to the reconstruction of Iraq.
Published data on Britain’s military costs for Iraq leave much to be desired. A 2006 report by the House of Commons Defence Committee on the costs of peacekeeping in Iraq and Afghanistan concluded that “…the House should be properly informed of the expenditure it is being asked to approve and that it should be aware of our concerns about the manner in which MoD [Ministry of defence] presents its estimates to Parliament” (HCP 980, 2006, para 23). The Defence Committee recognised that the costs of operations such as Iraq and Afghanistan are uncertain, “but that is not a reason to deny Parliament any information at all. Telling Parliament that the costs of the deployment to Afghanistan is ‘around a billion’ is just not good enough. This is a very large amount of public money, and the public deserve better information on how it is going to be spent” (HCP 980, 2006, para 18).
Data are available on both the estimated and actual British military costs of the Iraq conflict. Before the start of the war, in late 2002, the Treasury estimated that the costs of the conflict to Britain would be £1 billion, but by March 2003, this estimate had risen to £3 billion. The Ministry of Defence has published data on the actual costs of the conflict and subsequent peacekeeping operations. These data are net additional costs incurred over and above the annual defence budget and they are financed from the Treasury Special Reserve (which has alternative uses; nor does it mean that the Treasury will not attempt to reclaim this expenditure from future defence budgets).
Britain’s military costs of the Iraq conflict are shown in Table 2. Total costs to 2006 are some £4.2 billion. The costs for 2003-04 include the costs of combat operations from 1st April 2003, the costs of subsequent peacekeeping operations and the costs of recuperating operational capability after combat. On the basis of these figures, the actual cost of the conflict was probably some £1 billion. This total comprised £848 million for equipping and deploying British forces prior to the conflict as well as for combat operations to 31st March 2003 (including £700 million for equipment and deployment phase) plus an estimated cost for further combat to end April 2003 of some £150 million (based on the costs of combat operations for March 2003). An earlier MoD report estimated the actual costs of the conflict at some £1.5 billion (including equipping and deploying British forces plus the costs of stock consumption and damage/losses of equipment: MoD, 2003). Unfortunately, it is not possible to assess the accuracy of this £1.5 billion estimate; nor is it possible to assess whether some war costs are allocated to post-war operations.
UK military costs of Iraq
|Financial Year||Costs, £ millions|
|Aggregate Total, 2002-06||4,167|
Note: Costs in current prices.
Source: MoD (2006)
The costs of the actual war represent less than 25 percent of the total military costs of Britain’s involvement in Iraq: peace-keeping operations account for the majority of the costs over the period 2002 to 2006. Further costs will be incurred so long as British forces remain in Iraq. For example, peace-keeping for another year might cost some £1 billion for current force levels but this estimate will fall if British forces are withdrawn. In principle, these resources have alternative uses. Combat operations at a cost of £1 billion represents resources which could have purchased, say, six new hospitals (capital costs only). Similarly, Britain’s total military costs for Iraq to 2006 are equivalent to the target acquisition costs of its two new aircraft carriers (£3.1 billion) and two new Type 45 destroyers; or the equivalent of some 27 new hospitals (capital costs only); or a one-year reduction in the basic and higher rates of income tax by 1p each. In addition to British military costs, there are costs incurred by the Government in humanitarian assistance and contributions to reconstruction (eg the British Government allocated £56.5 million by end-2003).
Further costs include the deaths and injuries to military personnel and the costs to the civilian economy. Value of life estimates are controversial but Britain’s Department of Transport places a value on a life of some £1.4 million (2005/06 prices: on a willingness to pay basis: see Hartley, 2006). However, any assessment of British military casualties due to the Iraq conflict and post-conflict operations has to address the counter-factual – how many casualties would have arisen in the absence of the Iraq conflict (e.g. deaths from accidents, including exercises and from natural causes)? By the end of May 2006, British military fatalities in Iraq totalled 113, of which 84 were killed in action at a value of life cost of some £117 million (the counter-factual might reduce this estimate). The costs of the conflict for Britain’s civilian economy have been estimated at reduced output growth of some 0.1 percent in each of 2002 and 2003 (Hartley, 2006).
In 2006, Britain acquired another commitment, namely, peacekeeping in Afghanistan. This is estimated to cost some £1.1 billion over the period 2005-06 to 2009-10. Table 3 shows MoD’s estimated costs of the Afghanistan deployment. At this stage, MoD stresses that the “…costs for future years are difficult to forecast in fast moving operational circumstances …” (HCP, 980, 2006, para 15). Previous experience suggests that initial cost estimates for conflict are usually underestimated.
Britain’s Costs of Afghanistan
|Category||Estimate (£ millions)|
|Urgent Operational Requirements||224|
|Cost of deployment||118|
|Start-up costs (Infrastructure)||65|
Costs to the US
Initial costs estimates for US military operations in Iraq were between $60 to $200 billion. The latest estimates are $300 billion to 2007 with forecasts that costs could exceed $700 billion (Bennis and Leaver, 2005; IPS, 2006). For the US, the average monthly cost of the Iraq operation is $5.9 billion, compared with the corresponding monthly cost of the Vietnam war of $5.1 billion (IPS, 2006). By March 2006 there were 2309 US military deaths.
Estimates for the military and civilian economy costs for the US due to the Iraq conflict range from less than $1 trillion to more than $2 trillion to 2010. These estimates include the impacts on military recruitment and retention, equipment replacement, the value of life costs for a military death (estimated at $6.1 to $6.5 million per life), higher oil prices and the “lost” output which was available from alternative spending (Stiglitz, 2006). Nor do these costs include the loss of life and destruction of property in Iraq. Estimates of Iraqi military, police and civilian deaths range from some 38000 to 104274 (to March 2006: IPS, 2006).
A proper costing and economic evaluation of the Iraq conflict remains to be undertaken. Even this limited analysis shows that the costs, especially for the US, are substantial. One US economist has concluded that it appears that the analysis of the benefits of the Iraq war ” … was greatly flawed and that of its costs virtually absent” (Stiglitz, 2006, p3). There are clearly alternative uses of the resources allocated to the Iraq conflict, raising the issue of whether these alternatives would have better contributed to security, economic benefits and democracy. Prior to the war, Saddam Hussein could have been offered a bribe to leave Iraq (say, $20 billion) and the Iraqi people could have been offered substantial cash payments (say, $50 billion) which might have avoided war and its consequences and would have been ‘cheap at the price’ (Hartley, 2006).
Keith Hartley is the Director of the Centre for Defence Economics at the University of York
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