PREPARED TESTIMONY OF

DR. GORDON ADAMS
Director, Security Policy Studies Program at
George Washington University

POST-WAR IRAQ: POLICIES AND COSTS

Hearing of the
Senate Foreign Relations Committee

February 11, 2003

Introduction and Summary

I want to thank the Committee for its kind invitation to testify today on this subject of such compelling and immediate importance.

The United States is near a state of war with Iraq. Very little now stands in the way of starting a military campaign. The outcome of this campaign is relatively predictable, though its duration and consequences are not. As we approach war, it is critical to begin discussing and planning for the consequences of that war, including the costs of a potentially long-term US presence in and assistance to Iraq. The administration has argued that discussions of post-war Iraq policies and their costs are speculative and have no beating on the decision to go to war, which is and should be based on security considerations alone.

I am not going to discuss the wisdom of the decision to go to war. However, I believe we should not go to war without a serious discussion of its potential consequences for longer-term American commitments overseas and the costs of those commitments to the American people. The test of our policy in Iraq depends on the post- war outcome, as much as it does on the outcome of combat, itself. Will Iraq, as a result of war and regime change, be truly disarmed and dramatically different in a way that increases stability in the region, reduces the risks of terrorist attack, and provides greater security for the American people.

We could well win the war and lose the peace, irwe do not tend now to post-war Iraq policy. Winning the peace, however, will require a significant, long-term US investment in Iraq, an investment that needs to be discussed in advance. I do not believe we have discussed the implications of this commitment adequately. That is why I commend the committee and its members, Mr. Chairman, for holding a hearing such as this in advance of a final administration decision to go to war.

Let me summarize in brief the points I wish to make, and then elaborate.

- A successful war in Iraq will leave the United States with primary responsibility for humanitarian relied, internal security, the restoration of governance and any steps toward democracy, and economic reconstruction in Iraq.

- We are likely to shoulder even more of this responsibility in the absence of a United Nations resolution supporting the use of force if Saddam Hussein fails to comply fully with Resolution 1441. Our isolation may be further enhanced by a course of diplomacy and policy- making over the past four months that has alienated a substantial number of friends and allies.

- Estimating the costs of this responsibility is a challenge. For the most part there are not hard numbers, nor has the administration offered any details of its intended policies and budgets. Nonetheless, estimates are useful. They bound the problem of cost and provide some sense of the scale of potential need. Moreover, the costs of this policy may have bearing on policy choices we make in other areas of federal policy.

- The United States is likely to provide the bulk of the occupying force after the war. Others may be disinclined to do so, unwelcome in the region, or simply have inadequate personnel, properly trained, to carry out this mission. That occupation could cost $12-48 b. in the first year, alone.

- Humanitarian aid requirements are likely to be significant and immediate, in part because of a legacy of impoverishment under Saddam Hussein, and in part due to damages combat itself may cause to the electrical power, communications, water and transportation infrastructure, oil production and distribution facilities, food and medicine distribution, housing and sanitation systems, and to the population itself as a result of traumatic injury and the creation of refugees. Humanitarian assistance requirements could cost from $1-10 b., with as much as $3.5 b. being needed in the first year, alone.

- Governing Iraq will pose an immediate challenge, especially the need to establish authoritative internal and border security, adequate policing, successful location and elimination of weapons of mass destruction, and a working system of justice.

Over time, the governance challenge will be demanding, especially if we intend to try to create democracy in Iraq, a "nation-building" task par excellence. The governance challenges could cost as much as $12 b. over five years, with substantial funding (perhaps $5 b.) needed up front to pay salaries for civil servants we will want to stay in place.

- Economic reconstruction poses another large challenge. Depending on war damage, there could be substantial infrastructure to repair, including oil field and pipeline damage. Over the past two decades, the Iraqi economy has sunk into virtual non-productivity outside of oil production. An assistance program will be needed to create new productive opportunities. The costs of reconstruction include a wide range of estimates, from $30 b. to more than $100 b. over the next five to ten years.

- Iraqi debt of at least $62 b., claims of $172 b., potential reparations, and contract costs will pose a heavy burden on a post-war Iraqi budget. These claims and commitments will either need to be renegotiated or paid to some degree, to free resources for internal needs.

- Iraqi oil revenues are unlikely to be available to cover all these costs. First, production will have to be restored. Second, the oil industry itself will need to use its income to modernize an aging and degraded production and export infrastructure and to upgrade the country's electricity grid. Exploitation of Iraq's substantial potential and probably reserves will require substantial additional investment and will not be on line for several years, at least. Iraqi oil income is likely to be constrained either by OPEC export quotas or by significant price declines, should Iraq leave OPEC.

- The macroeconomic impact of a war in Iraq depends on its duration, especially if it has the effect of causing a long-term price spike for oil. The costs to the economy of a major, sustained increase in the price of oil could be significant.

On the other hand, a short-term spike would not have lasting consequences and a decline in the price of oil, long-term could have positive consequences.

- The United States will also incur costs in the current time frame for commitments it makes to allies in the war effort and, downstream, for commitments we are likely to have to make to wider regional programs for democratization or steps toward peace in Israel. Allied commitments might go as high as $15 b., depending on the outcome of current negotiations. The costs of future commitments are unknown, but probably inevitable.

- The costs of not going to war also deserve discussion. Arguably, these could include the costs of maintaining a military presence in the region, of continuing inspections and weapons destruction, of accelerated funding to combat terrorism abroad, and high level of expenditure for homeland security.

- One must question the wisdom of a fiscal policy that is likely to face combat and post-war expenditures of this magnitude, while submitting a budget that anticipates none of them, but would aggregate $1.8 b. of deficit between now and 2013, according to the Congressional Budget Office. Health care policy decisions and tax policy decisions need to reflect this broader fiscal reality.

The Consequences of War

In my view, a successful war to remove Saddam Hussein and disarm Iraq will lead to our inheriting Iraq as a virtual ward, a nation for whose internal well being, security, reconstruction, and economic recovery the United States will assume primary responsibility. I am not an expert on Iraq. However, even a well-informed amateur can detect the following inheritance after a war:

A nation, which has long suffered under repressive governance by an ethnic minority, leaving substantial ethnic divisions in the wake of the removal of that government and the risks of some trouble with its neighbors. It will not be an easy task to reassemble the pieces of governance and the risks of postwar inter-ethnic conflict are real.

- A people who have suffered humanitarian degradation over the past two decades, leaving a substantial legacy of food, health and temporary housing needs. These needs have to be addressed immediately after the war, including the extent to which they have been aggravated by that war.

- An economy devastated by war, inattention and lack of productive investment for two decades and saddled with debts, claims, and reparation demands. This is especially true with regard to oil production, which, despite substantial proven and probably reserves, has declined significantly. The Iraqi economy will require substantial economic assistance to rebuild, recover and grow.

- Some signs of hope: the oil and gas assets, properly exploited and distributed, can bring long-term benefit to the Iraqi people; a populace that is educated and capable; a long historical and cultural tradition of which they are rightly proud; and for all of its problems, a state apparatus that can function on a central basis. - An uneasy relationship to the fact of occupation and to. the occupying power. It is far from clear that the Iraqi populace will welcome the United States as a liberator, even though Saddam Hussein will be gone. The history of outside occupations in the Middle East and Gulf region is not a happy one, as the British and French have experienced. Significant cultural differences and suspicion are likely to separate the populace from the occupying force.l

We have faced such problems before, in Europe after the Second World War, in Korea, in the Balkans and, today, in Afghanistan. Their magnitude in Iraq may be great, however, and their character will certainly be different. Iraq is not Western Europe, making the Marshall Plan a misleading template for designing programs or estimating costs. There is no lengthy history here of democracy, free movement of capital, a strong and organized industrial labor force or a long history of positive relations and ethnic ties with the United States. Nor is Iraq the Balkans where the war, while devastating, left substantial parts of these countries untouched, including many parts that had a strong tradition of industrial development. Nor, on the other hand, is Iraq the same as Afghanistan, which had virtually no central government or bureaucracy, and has precious few economic assets.2

The goal of post-conflict US policy in Iraq should be tailored to the conditions of the country and the region, not imposed from some external template used in other countries or regions. Policy should aim at assisting the emergence of a viable state, capable of governing internally, disarmed of its weapons of mass destruction, and prepared to behave in a peaceful and responsible way toward its neighbors and other countries in the world. As one experienced participant in post- conflict reconstruction efforts put it: Iraq "must be neither a basket case nor a bully" once the conflict has ended and the recovery and reconstruction task has been underway for a time?

I want to make one other important point. The task is a large one and the United States cannot carry it out alone. War, itself, itself, may not require substantial participation by other nations and may even be affordable, though we will not have the benefit of the substantial war subsidies we received in the first Gulf War. Succeeding at establishing the peace will require substantial participation by other countries, international institutions and non-govemmental organizations.

While I do expect we will receive some cooperation in the post-war effort in Iraq, the administration's policy process of the past few months could pose a serious problem in this regard.

While the outcome of a Security Council vote on an new resolution is not yet known, there is substantial evidence that our diplomacy and pressure, statements made by leading officials about other nations, and the clear message that the administration will proceed to war without Security Council support have all left a legacy of ill-will and mistrust among our friends and allies. Combine the manifestly less coalition-oriented nature of the pending military campaign with the apparent bitterness among friends and allies, and one has to wonder about the willingness of these same friends and allies to help us with governance and reconstruction, once the war is over. The United States could find itself carrying a substantial share of the post-war burden, in addition to the costs of the war itself.

The Tasks to be Undertaken

With these statements as backdrop, let me turn to the post-war policies and costs, at least to set a range for the tasks and costs we may face very soon.

There has already been much discussion of the military campaign and the potential costs of that campaign. It is not my task to discuss the war plans or the range of cost estimates involved. Even these are somewhat hard to estimate, given the uncertainties we face with respect to force size, the duration of the war, anticipated casualties and the conditions in which the war will be fought (urban warfare, serious Iraqi resistance, use of chemical or biological weapons).4 The algorithms for estimating military costs are, however, reasonable well known. We have deployed forces, conducted combat and withdrawn forces many times, including one major recent experience in this theatre. Even here, we need to keep in mind that the costs of nearly every war have been misestimated (generally too low), as has the pace and outcome of the conflict itself.

In the end, one important consequence of combat operations for post- war Iraqi occupation tasks and costs will be the extent of the damage that the war leaves behind, in terms of civilian casualties, destroyed cities and residences, damaged infrastructure, and oil field destruction. War is neither pretty nor antiseptic; it is likely to leave the occupiers with a major human and economic reconstruction task.

My focus is on the legacy of war and of two decades of authoritarian rule. Administration spokespersons have spoken hopefully of the goal of establishing a democratic, peaceful, disarmed Iraq, unified and living in peace with its neighbors, almost as a "demonstration project" for the region and a deterrent to those who would wish the U.S. and its allies harm. Hope springs eternal in some American breasts, but the struggles and time it has taken to achieve political stability, democracy, and economic growth in the Balkans over the past ten years should temper our optimism. The same harsh reality is being learned day-by-day in Afghanistan, where security is uncertain, central government a phantom, and economic recovery almost non- existent. Count me among those who do not believe that Americans with the best of intentions and a fair bundle of cash can accomplish anything, especially bringing countries with a long history of living otherwise, swiftly into democracy and free markets. The tasks I describe below are likely to take a very long time and may well fail, given the problems in the surrounding social, economic and political environment. The potential costs the United States might incur in carrying out these tasks are manifestly difficult to estimate. The Congressional Budget Office has foregone making such estimates, "even roughly, because they depend on highly uncertain decisions about future policies." Therefore, it describes such estimates as "quite speculative."5 You have invited me today to tread into that zone of uncertain speculation, which I do with some trepidation. For the most part there are no publicly available hard numbers for these tasks. Nevertheless, even wide ranges of estimates are useful. They bound the problem of cost, provide some sense of the scale of potential need, and may have implications for other areas of federal policy demanding budgetary resources.

In defense of the ranges I will offer, let me only say that the administration is going through the same guess work, as we speak, in the process of preparing a supplemental request to fund the FY 2003 costs of an Iraqi war, occupation and reconstruction. The administration has noticeably better resources for making such estimates than most of us in the private sector. They need to do this work, but it is unfortunate that it is being done without significant public comment or discussion, beyond what might have been said this morning. With that caveat, let me describe the central tasks we will face and provide at least a range of potential estimates for their cost.

Providing an occupying force. Unlike the Balkans, where the Europeans rather quickly provided roughly 80% of the peacekeeping forces, the United States is likely to provide the bulk of the force occupying Iraq. This is for three reasons. First, other countries, both in the region and outside it, that have been unwilling to support the U.S. military effort are likely to shy away from the task of dealing with the consequences of the war. The pool of participating nations may shrink, especially among the substantial European land forces. Second, the history of European colonialism in the region is likely to lead to some reluctance on the part of countries that have participated in Balkans peacekeeping to play an occupier role in Iraq. Third, few other countries today have a military as large as ours or as trained to the occupation mission. Over time, an occupying force must be rotated, meaning the base force at home needs to have a pool of at least twice and probably three times the size of the force deployed forward. The British are severely stretched today by the forces they have already deployed in the region. Were France and Germany to participate, their forces would be stretched as well and unlikely to compete in numbers with the United States.

In other words, despite the views put forward by some that U.S. forces can be quickly in and out of Iraq, this is unlikely. The occupying force, moreover, is likely to have quite broad rules of engagement. Over time, the American military has learned that restricting its role in peacekeeping to occasional patrols, separating large hostile forces and negotiating disagreements is just not viable. In Iraq, such restrictions on the ROI are virtually ruled out. Their mission is occupation, with broad responsibility for internal security, inter- ethnic peace, oil field security, leadership protection, special operations against remaining hostiles and terrorists, governance and control of the Iraqi military, distribution of humanitarian assistance, and, above all, scouring Iraq for and destroying weapons of mass destruction. Even this may be too limited a view of their likely mandate.

What is an occupation likely to cost? While these costs do not have direct implications for the jurisdiction of this committee, I cite estimates here because they are of consequence to the American taxpayer and the mission of occupation is intimately knitted into the fabric of post-conflict Iraq policy. Hence, if the U.S. is to bear these costs, they are part of the realistic discussion we must have on the policy. According to the Congressional Budget Office, an occupation force ranging from 75,000 to 200,000 would cost between $1 b. and $4 b. a month to sustain. The annual costs could be $12-$48 b. over the first year, depending on force size.6 The CBO estimates are based on the average cost of maintaining an Army peacekeeping in Bosnia and Kosovo. They need to be considered a low-end estimate, however, since the conditions of occupation, rather than peacekeeping, in Iraq are likely to be significantly more stressful and the tasks more demanding than they were in the Balkans.7

Humanitarian Assistance

The Committee will hear other testimony with respect to the humanitarian assistance needs of post-war Iraq. These are likely to be significant. Two decades of Saddam Hussein's rule have impoverished the country to a level well below its former standard of living, including higher rates of disease and hunger. In particular, unlike the pre-Gulf War I period, a significant proportion of the Iraqi population now relies on the government for food and basic necessities.8

Moreover, the sanctions over the past decade have clearly been painful. For all the distribution of food and medical goods that have resulted from the Oil for Food program, this has not reversed the decline in the Iraqi standard of living. Moreover, some part of the funds generated by oil sales have been diverted to supporting the ruling clique's standard of living.

Finally, the war itself will have potentially devastating consequences across the board. It could result in damage or destruction of much of the electrical power, communications potable water distribution, and transportation infrastructure, a halt to oil production and sales, limits on the distribution of food and medicines, the destruction of housing and sanitation systems, traumatic injury and illness, and the creation of a sizeable refugee populations.9

The administration is already visibly planning for the distribution of emergency supplies, food and temporary housing, as the combat moves along and once the war is over. The costs of humanitarian assistance will be mostly borne in the early stages of the operation, as they were in Europe after the War and in the Balkans. Assuming a cost of $500 per person as in the Balkans, and one to two million Iraqis affected for two to four years, Prof. William Nordhaus estimates that the costs of humanitarian assistance could range from $1 to $10 b.l0 On the other hand, a United Nations task force estimated in December 2002, that the "caseload" for humanitarian assistance could reach 7.5 million Iraqis, largely as a consequence of combat operations in a war. Il The first year costs for such a caseload could be in the range of $3.5 b.

The up front character of humanitarian assistance could mean a large administration budget request for FY2003, perhaps in the range of $3 b. to cover the large anticipated caseload. Over time, however, this is the most likely form of assistance for international partners to provide, including the Red Cross, UNHCR, UNICEF, World Food Program, World Health Organization and the International Organization for Migration, other countries and a host of non-govemmental organizations. It should be noted, however, that the international organizations are looking to the US as a major provider of the funds for these activities.

Costs of Security and Governance

Security, stability and long-term governance in Iraq will be the priority task, once the conflict has ended. Near-term security will come at the very top. The Center for Strategic and International studies has identified several key, immediate tasks for the occupiers, based on experiences in the Balkans and Afghanistan and specific conditions in Iraq: putting a international security force in place for near-term policing needs, recruiting police internationally for deployment to Iraq, locating, securing, and eliminating weapons of mass destruction, establishing a transitional administration, creating a rapidly deployable international team to provide equitable justice, and screening or demobilizing the existing police and security apparatus.

These are only first steps. The United States is likely to be principally responsible, in the near-term, for governing Iraq under an occupation and facilitating a transition to indigenous government. Policy will need to focus quickly on sorting out the capabilities of the central government and on the strengthening Iraqi civil society, neither of which is an easy task. Iraq has a capable civil service, but it will require budgetary and salary support early on, as it has in Afghanistan.

In addition, the administration has repeatedly stated the ambition of bringing a democratic Iraq into being. Despite earlier rejection of such a policy, this policy will involve "nation-building" par excellence. This ambitious, perhaps unachievable goal, will require support for a fair, objective and accessible system for the administration of justice, retraining and recruitment of police, strengthening Iraqi civil society (voluntary associations and non- govemmental organizations), and bringing all three major Iraqi ethnic groups fully into the governance process. Our experience with such programs is decidedly mixed. Freedom Support Act and SEED funds included active programs for the support of both government and civil society throughout central Europe and Russia. Oversimplifying, the results of these programs have not been entirely positive (nor entirely negative). It is difficult to impost a culture of democracy on unreceptive soil and sometimes more difficult if the source of funding is seen by some in the society as suspect. Where indigenous societies have a strong history of fair justice and civil activity, such programs can take off rapidly.

After two decades of authoritarian rule and scant history of democracy, it is not clear how fertile the Iraqi soil will be to such an effort. 13 Moreover, if the Iraqis look at the United States as an occupying power, with some fear and doubt, that concern may reflect on organizations created by American funding even if staffed and operated by Iraqis.

It will be worth making an effort of this kind, however, even if it falls short of full democratization. Creating a stronger civil society and a more transparent state bureaucracy and eliminating a repressive security apparatus can only be positive steps forward. If we are true to our words that we will be liberating the Iraqi people, the governance investment will be needed over the long-term to demonstrate even these more limited results. Moreover, germinating and growing a more democratic Iraq appears to be a core part of the "demonstration effect" the administration's policy will have on the region as a whole. There is substantial doubt that such an effect will take place. Many countries and populations are unlikely to welcome a US invasion, strengthening anti-US feeling in the region. Moreover, it is not clear that the terrain is fertile for democracy in many Middle Eastern countries.14

The costs of support for security and governance will be high, especially in the beginning before local tax and oil revenues are on line. Costs of supporting the salaries of the Iraqi civil service could run as high as $50-100 m. a month at the start; the currency will need to be reprinted, technical equipment (computers, etc.) will be needed, police training and equipping will be critical, the justice system will require some cleaning out and retraining, local groups will need support in cash and in kind. It would be reasonable to assume costs of $5b. in the first year, tailing off over a period of five years by about a billion a year to a total five-year cost of $12 b.

There may be some support from other countries and international organizations for such expenditures. Policing may have international support, as it has in the Balkans. The search for and destruction of weapons of mass destruction could be carried out under UN auspices, though the United States shares in the costs for these teams. When it comes to governance, salaries and democratization, it is not clear that other donor countries are prepared to take on this almost "missionary" task or to provide the fiscal support it will require.

Economic and Social Reconstruction

The long-term effort to reverse the devastating effects of two decades of authoritarian rule, sanctions and war on the Iraqi economy will be an enormous challenge. While Iraq is not a regional economic powerhouse, it has the capacity to become one, with substantial oil and gas resources and the capacity to export petroleum products. Over time, with adequate oil exports, the country should be able to raise the standards of living, health and education of the populace.

Iraq is very far from this optimistic goal today. The Iraqi economy has deteriorated over the past two decades, with GDP per capita now substantially lower and the bulk of the population dependent on state handouts. As I will note shortly, the oil industry has declined over the same period of time and, yet, remains almost the only source of export earnings for the Iraqi economy.

An important subset of the reconstruction issue is the matter of Iraq's international sovereign debt, international claims, potential reparations costs and contract claims. At more than $62 b., Iraq sovereign debt is very high, compared to its GDP, one of the highest in the world, iS In addition, according to the CSIS analysis, unsettled claims against Iraq submitted to the UN Compensation Commission total $172 b. and another $27 b. remains to be paid on already settled claims. Beyond that, the Iran-Iraq war has given rise to $100 b. in reparations claims. Finally, Iraqi contracts pending with various foreign countries come to an estimated $57.2 b. One-by- one, these financial "overhangs" will have to be dealt with - through rescheduling or renegotiations - if Iraq is to have sufficient resources to invest in its own reconstruction. The good will of other nations will be essential for the US to lead in resolving the problem.

The task of rebuilding and growing the Iraqi economy will take time and significant resources. Citing a UN report on the costs of restoring Iraqi infrastructure to its prewar level after 1991, William Nordhaus estimates that overall reconstruction costs could be $30 b. in current year dollars. He arrives at roughly the same number using a capital output ratio for oil countries, which he calls the "minimal rebuilding needs in postwar Iraq."16 More ambitiously he suggests that a Marshall Plan for Iraq could cost as much as $75 b., assuming it would take six years. As noted, however, the prospects for success in spending Marshall Plan levels of resources on Iraq are minimal, given the dramatic differences in levels of economic development and political and societal organization between Europe and Iraq. Similarly, a Council on Foreign Relations working group has estimated that economic reconstruction in Iraq could cost between $25 and $100 b.

The United States cannot shoulder costs of this magnitude. Ideally, other organizations such as the United Nations Development Program, the World Bank and the Asian Development Bank can play an important role, as well as the European Union. US international leadership in this effort will require intensive and careful cultivation of other nations and international organizations, or the US could well be left with the lion's share of reconstruction assistance.

Oil Revenues as a Solution

The availability of Iraqi oil revenues has suggested to some that Iraq, itself, may generate the resources to fund the reconstruction task, relieving the US, other nations and international organizations of the responsibility. This expectation is likely to be illusory, however. Oil revenues generate something around $10 b. a year for the Iraqi economy, down from previous highs. Production has fallen from a peak of roughly 3.5 million barrels per day (bpd) to roughly 2.8 million bpd. Moreover, one immediate consequence of combat will be the shutdown, and possibly severe damage to this capacity. Depending on the level of damage, it could take several years to restore the oil fields to their current level of production. Industry analysts and experts believe that much of the revenue from the oil fields will be needed simply to repair, rebuild, and upgrade the oil industry 17 infrastructure to pre-1990 levels, and the effort could take from 1.5 to 3 years.

It is clear that there is significant long-term promise in the Iraqi oil fields. Only 17% of the 74 proven fields of reserves have been exploited and probable reserves would make the Iraqi oilfields the second largest reserve in the world after Saudi Arabia. It will take substantial investment over some year, however, to exploit those reserves. The Council on Foreign Relations working group estimates that this investment, alone, will require $30-40 billion in investment, setting aside the roughly $25 b. needed to upgrade current export capacity and restore the Iraqi electricity grid to its pre-1990 level of capacity.

The oil revenues that exist today are likely to be used in the oil fields, with some left over for claims settlements and humanitarian assistance. Longer-term, some have argued, resources will grow with major increases in production, perhaps to the 6 million bpd level. Even this estimate must be treated with caution. Iraq was a founding member of OPEC and is likely to remain in OPEC. Production quotas will limit Iraq's ability to grow its production at the rate some expect. Were Iraq to leave OPEC and enter the open market, moreover, its oil exports would be likely to depress international oil prices. While this may be good news for oil importing countries, it would depress revenues realized from increased production.

The Economic Costs of a War

The question of oil takes me to another potential cost of an invasion of Iraq - the impact of war on oil prices and the impact of oil prices on the US and global economies. There is no question that even the prospect of war in Iraq has had an impact on oil prices, which are already nearing $40 per barrel. A war itself, most economists seem to agree, will spike oil prices even higher. Part of this spike would reflect simple market fear; part could result from significant damage to the Iraqi oil fields as a result of combat. The cost to the economy of that spike will depend on how long prices stay high.

Economist William Nordhaus uses a Brookings Institution study on oil market shocks to estimate that if oil prices should rise to $75 per barrel over a year, there could be as much as a $778 b. cost to the U.S. economy over the next decade as productivity slowed down and the economy reentered a recession. On the other hand, if the war were short, Iraqi production were not significantly curtailed, and oil prices fell back to pre-buildup levels, the impact on the economy could provide a small positive lift of $40 b. to the GDP over the next decade.18

More broadly, the economy could respond to war fears by sliding into a recession anyway, independent of oil prices.

There are many causes of a recession, however, which has been with us for some time. Nordhaus argues that the economy may have already discounted the impact of a war, along with other negative economic news over the past year.19 If the war is quick and the oil price rise brief, economic performance could actually improve later in the year. On the other hand, if the war is extended, oil fields are burned and the regional reaction is negative to violent, the economy could return to negative growth.

In either case, the impact of changes in defense spending itself are likely to have only a marginal impact. Defense as a share of US GDP has declined from 5-7% levels of two decades ago to roughly 3.4% of GDP today. The marginal change as a result of an additional $100 b. in defense spending is a very small fraction of GDP, with minor consequences for the economy.

Wider Budgetary Costs and Issues Support for Allies

One budgetary cost that has not been disclosed or even fully estimated is the cost of additional foreign economic and military assistance to countries that would support the US war effort. Newspaper reports have rather fully discussed a potential $6-10 b. package of economic and military assistance for Turkey, should the Turks agree to provide staging areas for US force invading Northern Iraq. There have also been discussions of assistance to other cooperating states, including Jordan and Israel, which could range from $2-5 b. beyond current budgets.

Wider Regional Programs

This item falls in a far more speculative category of spending. If a program is instituted to change Iraqi politics, there is every possibility that such efforts will be expanded beyond current budget forecasts to other countries in the Middle East region. If the region accommodates an invasion and occupation willingly or, for that matter, if it does not, there may be a broad expansion of US public diplomacy programs in the region to support the policy the US is pursuing or persuade others of its benefits. Such efforts will also require additional resources, beyond those currently budgeted, but no clear estimate can be made at this point.

Another regional program might be significantly greater US involvement in the outcome of the Second Intifada and Israel/Palestine relations. Regional specialists suggest, with reason, that the governments and populace in the region see the Israel/Palestine conflict as directly tied to broader regional issues. The credibility of US efforts to disarm Iraq and change the regime will clearly be linked to how willing the administration is to engage this related issue. The administration has recognized this connection, albeit only briefly, but should the US engage, there is almost certain to be an outcome which includes additional US spending, either for economic or military assistance or, as some have suggested, to support a US military presence as part of a peacekeeping force in that part of the region.

The Costs of Not Invading Iraq

These potential costs deserve discussion, though they have received little analysis to this point. If the United States were to stand down in the current confrontation, the administration would need to estimate and budget for the costs of maintaining force in the theatre, without combat, which might be similar to the costs of an occupying force. The costs of on-going inspections would need to be estimated, including a US contribution. The administration might well argue that the costs of allowing Saddam Hussein to proceed with his weapons programs and policies in the region also need to be estimated, including the long-term consequences for stability, terrorism and even oil prices of allowing him to acquire weapons of mass destruction. They might also point to the potential costs of withdrawing U.S. forces from a region grown increasingly hostile to the U.S. military presence and the costs of a continued high level of investment in antiterrorism operations and homeland security measures, given continued support for and growth of terrorism emerging from this part of the world. I cannot estimate these costs, nor can the administration, but some of them may be the result of a different policy.

The Budgetary Impact of Post-War Iraq Policy I would be remiss as a budget analyst if I did not comment on the question of whether the federal budget can support the budgetary costs I have outlined above. As many of these costs are expressed in ranges, I will not add them together to provide one single rollup figure. But these are costs over and above current estimates of spending, hence they will most certainly add to the federal deficits projected into the future.

The Congressional Budget Office has just released its analysis of the President's budget. Perhaps most important is the increase in the deficits projected for FY 2003 and FY 2004, which would rise to $287 b. and $338 b. in those years. According to CBO projections, budget deficits would remain negative throughout the next ten budget years, with a shift in cumulative deficits over that time from an OMB- projected cumulative surplus of $891 b. to cumulative deficits of $1.8 trillion dollars over the ten years.2 The out-year numbers in these forecasts are frequently, and rightly, suspect. The near-term numbers show deficits reminiscent of the 1980s and early 1990s. The proposed budget does not include any of the costs I have discussed in this testimony, which would further increase the projected deficits. Nor does it include any CBO re-estimate of the budgetary consequences of Medicare reform, or the potential costs of a prescription drug benefit program or extension of Alternative Minimum Tax changes past FY 2006.

In sum, deficits are likely to be high and go higher. This broader budgetary impact is not necessarily an obstacle to the administration's policy. It does deserve discussion, however, as the administration's policy is being considered. With some sustained economic recovery, higher deficits could well lead to higher interest rates and a squeeze on capital availability. If any of these consequences are likely, it may make sense for the tax policies proposed by the administration to be put on hold.

Conclusion

I again commend the committee for this hearing. It is vital to understand the long-term consequences and the fiscal implications of those long-term policies for the U.S. taxpayer. For this Committee, the Congress and the country, what follows a war will be even more important than the war itself. Ensuring a disarmed and peaceful Iraq and a peaceful region is an important, if ambitious policy goal. Without serious planning and fiscal commitments, however, we could win this particular battle and be worse off in the long run.

Our most important need in a post-war Iraq world is a broad community of support for the effort that needs to be made. The United States cannot achieve its aims alone. What concerns me most is that the diplomatic strategy leading up to the war may have seriously alienated nations we will need for the post-war effort. The consequence could be that we face these major long-term tasks with less international support than they require.

Footnotes:

1. Regional analyst Anthony Cordesman has noted how different this scenario may be from Europe, given this history of colonial occupation, cultural clashes, and the damage caused by the war itself, among other things. Cordesman, "Planning for a Self-Inflicted Would: US Policy to Reshape a Post-Saddam Iraq," rough draft, revision three, Washington, DC: Center for Strategic and International Studies, December 31, 2002, p.2.

2. The Center for Strategic and International Studies points out that Iraq "is far from a failed state." It has a functioning government and bureaucracy and little tradition of religious fundamentalism, despite pronounced ethnic divisions. Center for Strategic and International Studies, A Wiser Peace: An Action Strategy for a Post-Conflict Iraq," Frederick D. Barton and Bathsheba N. Crocker, Project Directors, Washington, DC: CSIS, January 2003, p. 10.

3. Scott R. Feil, "Iraq: looking Beyond Saddam's Rule: Setting the Conditions for Stability: the Military role," paper for the INSS/NPS Workshop, 21-22 November 2002. 4 CBO, in its recent review of the President's budget, has increased its estimated costs of deployment, combat and redeployment from its initial estimates made in September 2002. Deployment costs are now estimated at $14 b., combat at $10 b. for the first month at $10 b. and each subsequent month at $8 b, with redeployment costs at $9 b. A two-month war, including deployment and redeployment costs would cost a total of $41 b., using these estimates. A separate analysis, using earlier CBO data, suggested that a force of 250,000 involved in a two- month war could cost $35 b. Steve Kosiak, "Potential Cost of a War with Iraq and Its Post-War Occupation," Center for Strategic and Budgetary Assessments, February 25, 2003. The administration is rumored to be considering a supplemental request of over $60 b., which may include even higher estimated costs for comparable combat.

5. Congressional Budget Office, "An Analysis of the President's Budgetary Proposals for Fiscal Year 2004," p. 4.

6. CBO, "Estimated Cost of a Potential Conflict with Iraq," Letter from Dan L. Crippen to the House and Senate Budget Committees, September 30, 2003, p.7. These estimates were not changed in the more recent CBO update(note later). CBO notes that these forces would have to be rotated as well, which would be unsustainable for the U.S. Army at the level of 200,000 troops in the occupation.

7. William Nordhans estimates substantially higher costs, ranging from $75 b. for a five-year occupying force of 75,000 to $500 b. for a ten year occupying force of 200,000 over ten years. It seems unlikely, however, that the US would retain a force that size over a period that long; forces are more likely to decline along a slope toward zero, probably over a shorter period of time. In any case, the 200,000 figure is unsustainable over that period. See Gordon Adams and Steve Kosiak, "the Price We Pay," New York Times, February 15, 2003, p. A31 and Kosiak, above, February 25, 2003.

8. According to a UN task force, this proportion could reach as high as 60% of the population. See "Likely Humanitarian Scenarios," United Nations task force report, December 10, 2002, p.3. Available at http://www.casi.org.uk/info/undocs/war021210.pdf

9. Same, p.2.

10. William D. Nordhaus, "The Economic Consequences of a War With Iraq," in Carl Kaysen, Steven E. Miller, Martin B. Malin, William D. Nordhans and John D. Steinbruner, War With Iraq: Costs Consequences, and Alternatives, "American Academy of Arts and Sciences, Committee on International Security Studies, Cambridge, MA, 2002, p.67.

11. "Likely Humanitarian Scenarios," above, p. 4.

12. CSIS, above.

13. A Carnegie Endowment analysis suggests that the effort to create democracy in Iraq is a decidedly long-term task, and far from easy. To quote the document: "the idea of a quick and easy democratic transformation in Iraq is a fantasy," requiring the United States "to engage in nation-building on a scale that would dwarf any other such effort since the reconstruction of German and Japan after World War II." See Marina Ottoway, Thomas Carothers, Amy Hawthorne and Daniel Brnmberg, "Democratic Mirage in the Middle East," Policy Brief no. 20, Washington, DC: Carnegie Endowment for International Peace, October 2002, p.2.

14. The Carnegie analysis notes that "the Middle East today lacks the domestic conditions that set the stage for democratic change elsewhere." Above, p.3.

15. CSIS, above, p.23.

16. Nordhouse, above, p.66.

17. This is the estimate of the joint Council on Foreign Relations/Baker Institute working group. See Guiding Principles for U.S. Post-Conflict Policy in Iraq, Report of an Independent Working Group cosponsored by the Council on Foreign Relations and the James A. Baker III Institute for Public Policy of Rice University, Edward P. Djerejian and Frank G. Wisner, Co-Chairs, New York: Council on Foreign Relations, 2003, pp. 19-20. Cordesman, above, and the CSIS report both agree with the conclusion that oil revenues are at best inadequate, given the variety of needs to which they might be put.

18. Nordhaus, pp.70-71.

19. Nordhaus, p.75.

20. CBO, An Analysis of the President's Budgetary Proposals for Fiscal Year 2004: An Interim Report, Washington, DC: CBO, March 2003, Table 1, p. 17.