The Economics of the Persian Gulf War

On August 2, 1990, the Iraqi army marched into Kuwait in a two-day invasion that Kuwait could not resist, and as a result, Kuwait was annexed into Iraq as its 19th province. This invasion results in a seven-month occupation of Kuwait by Iraqi forces, which is only broken by the intervention of the US-led coalition in Iraq. This military conflict culminates in a stunning coalition victory over the Ba’athist forces and the deaths of almost 50,000 soldiers and civilians.

On top of this, it created severe political turmoil in the Middle East as well the in the western world. It also led to the destruction of infrastructure, including oil infrastructure in Kuwait in spite of its liberation by the coalition.

Reasons For the Conflict

Iran-Iraq War

The base cause for the conflict comes from the Iran-Iraq war which was a seven-year-long protracted military conflict between 1980 and 1988, which ended inconclusively. It was fought due to the tensions between Iran and Iraq after the Iranian revolution which brought about the fall of Reza Shah Pahlavi, leading to Iran becoming an Islamic nation, which Saddam feared would turn his own populace against him threatening his grip over his country.

The Economics of War

This was viewed as an invasion by Iran, and the battle was fought without a decisive outcome, during which time both countries borrowed heavily to pay for their weapons imports. Iraq had borrowed heavily from the Saudis and Kuwaitis, as well as the Americans, who were keen on preventing Iran from gaining an advantageous position in the war. A stronger Iran and its ability to project power and influence in the Middle East posed a significant threat, particularly to Saudi Arabia, which was concerned not only about the Shia-Sunni divide in the Middle East, but also about the seeds of revolution spreading to their own country.

This meant that at the end of the war Iraq was riddled with a debt of approximately $14 billion which is owed to Kuwait alone. This coupled with bad standards of living and economic performance were leading to tensions and discontent among the populace against Saddam Hussein. It was in this context that Iraq requested Kuwait and Saudi Arabia to forgive the debts as they were all ‘Arab Brothers’, which both the nations promptly refused.

Financial Troubles

After the war, Iraq was going through a rough phase for its economy as well as its political stability. There was anger in the population against the government due to the economic hardships during the post-war time. The Iraqi government was close to bankruptcy and was not able to sustain its own government functions much less the public works and repairs necessary after the destruction of the war. And on top of this OPEC nations like UAE and Kuwait were continuously drilling more oil than the quotas assigned to them due to economic problems faced by these countries. This drove the oil prices down by a significant margin which caused huge losses to the Iraqi economy due to lower exports as compared to other oil-rich nations.

Iraq had also accused Kuwait of slant drilling for oil across the border into their own Rumaila oil fields, an accusation which the Kuwaitis denied. At the same time, Iraq had begun a crackdown on voices of dissent in its country which led to international condemnation including that by the US. Even as its ties with us worsened, it continued to stand by its demands of waiving of debt by the Saudis and the Kuwaitis, reduction in oil drilling by the Kuwaitis as well as the end to the alleged ‘slant drilling’ on part of Kuwait. Due to the local dissent against him, Saddam felt that an external military victory would divert the people’s attention away from the local issues and improve his popularity.

The War

Hostilities began between Iraq and Kuwait on the 2nd of August 1990 and led to an easy victory for the Iraqi army, this invasion was strongly condemned all across the world. Sanctions, as well as naval blockades, were imposed on Iraq by the UN. On Aug 6 the US announced that it would be sending troops to the Middle East, a coalition of 38 nations was created to oppose Iraq and under UN resolution 678, Iraq was given an ultimatum of 15 January 1991 to withdraw from Kuwait. Iraq failed to comply with the resolution and the military operations began.

The campaign, codenamed Operation Desert Storm started with a destructive aerial bombardment campaign lasting a month and a half which severely crippled the Iraqi command structure, military installations, and overall morale. This was followed up by a full-scale ground invasion on the 24th of February which destroyed most of the defending Iraqi troops and fully liberated the city of Kuwait. After most of the Iraqi army was destroyed or was fleeing, the US declared a ceasefire ending all hostilities on the 28th of February four days into the ground invasion.

The Economic Impact

The impact of this war was very significant not only in the Middle East but also to the rest of the world. One of the major concerns with this conflict was the cost of oil, which before the conflict was approximately $34 per barrel, skyrocketed up to approximately $76 per barrel. This caused a severe crisis across the board in all the sectors as most of the world at this time was largely dependent on crude oil for their energy needs. This doubling of the prices was very damaging for many middle eastern and other oil-dependent developing nations.

India especially suffered heavily due to the oil crisis as most of its oil was imported from the Middle East and the sudden rise of the prices coupled with a severe economic crisis in India caused a major depletion in India’s foreign exchange reserves and brought about significant uncertainty and volatility in the already debt-stricken economy.

On top of this, the western nations and the coalition forces had to pay a large sum of money to fund the overall expenses of the war. Apart from the nations which had actively deployed boots on the ground, countries like Germany and Japan paid more the $16 billion towards the war effort. Many coalition nations were hesitant to commit armed forces. Some saw the war as an internal Arab conflict, while others opposed the US expanding its influence in the Middle East. Iraq’s hostility toward other Arab governments’ offers of economic assistance or debt relief, as well as threats to withhold assistance, eventually swayed several governments to send troops or release funds.

Economics of War

The cost of the conflict amounted to $61.1 billion according to the US Congress in April 1992. Other nations contributed over $52 billion, including $36 billion from Kuwait, Saudi Arabia, and other Persian Gulf Arab governments. Saudi Arabia contributed a large part of their contribution in the form of assistance, logistics, etc.

In conclusion, the war was fought on the whims and the fancies of a dictator unable to solve the problems of his country domestically leading to an external conflict. The war affected the economies of all the middle eastern nations irrespective of their involvement in the war.

The worst affected was Kuwait which had been under a brutal occupation by Saddam’s troops and many atrocities were committed on the civilian population. The retreating Iraqi army set fire to the oil fields in Kuwait dealing a severe blow to the Kuwaiti economy in the years to come. But it was a conflict that also proved the American military dominance in the world and its ability to not only project power at a short notice thousands of miles away from its territory, but also bring the world’s fourth-largest military to its knees within a span of six weeks.

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Shashank Sekuri
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