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Economic Roots of Conflict in New World OrderAuthor(s): Sharat G. LinSource: Economic and Political Weekly, Vol. 28, No. 5 (Jan. 30, 1993), pp. PE2-PE12Published by: Economic and Political WeeklyStable URL: http://www.jstor.org/stable/4399334Accessed: 22-08-2014 20:46 UTC

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8/10/2019 Root of conflict in New world order

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  conomic

R o o t s

o

onflict

i n

e w

W o r ld

r d e r

Sharat

G

Lin

The

global

economic

crisis

has

toppled governments

and

shattered

nations

in

the

east,

given

rise to

a

popular

backlash

for

change

in

the west,

and

provided

a new

geopolitical

context

for

international

conflict

in

the

1990s

and into the 21st century. The war in the Persian-Arabian Guf was a case in point, for it was less the result of

a

failure

of

international

diplomacy

than

a deliberate

strategy

of

the

US

government

to exacerbate

a crisis

as

a

pretext

for

intervention.

At

stake

were

not

merely

the

price

of

oil,

human

rights,

or

military

victory.

Of

far

morefundamental

importance

were,and

still

are,

thesustained

reycling

of petrodollars

into

the

western

ndustrialis-

ed states, support

for faltering

US

economic

and

financial

dominance,

and

reassertion

of

US

military

and

political

hegemony

in

the

wake

of

the

collapse

of

the Soviet

Union

as a

couitervailing

superpower.

This

retrogression

to colonial-style

armed force signals

a new

era

in which

the

only

retpaining

$uperpower

will

seek

to

enforce

by

any

means

necessary

its

economic

centrality

and

political

pre-eminence

hn

he

face of underlying

economic

weakness.

AT the

beginning

of the

decade, we

foresaw a

global

economic and

political

crisis

in both the east and

west.' Three

years

later, relatively peaceful

revolutions

have toppled every statist government in

eastern Europe.

The

formerSoviet

Union

has disintegated

not only as a

superpower

but

as

a nati6n.

The

US

has

stumbled

from

the

longest

boom to the

longest

recession since

the

Gret.

Depression.

Severe

imbalances

in

interest rates and

in-

vestment

flows in western

Europe

threaten

economic union. The boom in

private

fix-

ed

investment has

been

interrupted

in

Japan

for

the first time

since the

second

world war. A one-sided war in

the

Persian-

Arabian

Gulf has

brutally redefined

the

new

world

order. India

has suffered

another oil shock a'nd the worst foreign

exchange

crisis and

devaluation

in

recent

memory. Most

third world

countries,

although

sustaining

economic growth, are

acceding to

aggressive

western pressures

for

privatisation, 'free trade'

by the giant

multinationals, and

stringent

protection

of

intellectual property

rights.

Aggregate

world output declined

by 0.7 per cent

in

1991 for

the first time

since the

second

world

war, marking a

truly global

reces-

sion.2

These

momentous

events

are not

entire-

ly

unrelated. The

collapse in

eastern

Europe and the USSR has abolished the

global

balance of power

and drained

off

capital

investment flows

that

formerly

went to the US

to pay for its

balance of

payments deficit. After a

decade

of

wreck-

less

borrowing

against the future and fall-

ing industrial

competitiveness, the

reces-

sion in

the US

and flight of

capital had

become inevitable. As

candidates for

'change',

Bill

Clinton's

victory and

Ross

Perot's

surprising

strength in the

US

presidential

elections on

November

3,

1992

symbolise

the underlying

economic

malaise

of the

American

people-un-

employment,

taxes,

the

high

cost

of

health

care,

crime,

etc.

But the elections

also

rais-

ed

important

issues

which are less tangi-

ble to

the average

voter,

such

as

uncon-

trollable

federal

and state

budgetary

deficits, government waste, the falling

dollar,

and questions

about

the

US

government's

role

in

helping

to create the

preconditions

for

war

in

the Persian-

Arabian

Gulf.

The origins

of this

conflict

in the context

of the

deeper

economic

con-

siderations

in the US and

in the

global

market

economy

deserve

an

in-depth

examination.

What are

the real

underlying

reasons

for

the Gulf

war?

Was

Iraqi

aggression

itself

really

a reason

for

the US-led inva-

sion?

If

so,

where

was the

US when lbrkey

invaded Cyprus,

Israel occupied

southern

Lebanon, Syriaeffectively took control of

eastern

and

central

Lebanon,

Iraq

attack-

ed

Iran, or

Morocco

annexed

the

western

Sahara?

The

historical

record clearly

shows

that

countering

aggression

was

never

a consistent,

let

alone

guiding,

feature

of US

foreign policy.

In

fact,

US

military force

was sent

in much

more

often

to deal

with

internal

strife than

ex-

ternal

aggressions:

Lebanon

n 1958,

Cuba

in

1961,

Vietnam

in 1960-75, Grenada

in

1983, and

Panama

in 1989.

The

Bush ad-

ministration

had

frequently

hinted

that

.its

ultimate

objective

was

the complete

neutralisationof Iraqi militarypower and

even the elimination

of

Saddam

Hussein

himself.

Few people

in the US,

even

among

George

Bush'ssupporters,

believed

that US

policy

was

motivated

by

these

reasons alone.

Most acknowledged

some

vague notion

that

the

war was being

wag-

ed to defend

'the American

way

of life'

or

'American values' or 'US

national

in-

terests'.

In

fact,

beyond the

notion

that

"aggrestion

cannot

be

allowed to

go un-

punished",

the

US

government

has

never

publicly

given

any

substantivereason

why

economic

sanctions

would

not

work,

and

why war

was the

only solution.

Did

the

US act

out of

any genuine

con-

cern for Iraqi

human

rights

abuses or to

neutralise

its chemical

and

biological

weapons? If so, where was the US when

the Iraqi army allegedly used chemical

weapons on Kurdish

civilians during

autonomy struggles

before the Gulf crisis

began? During

the first

days

of the

US-

led aerial bombing,

all

three Iraqi nuclear

power reactors

and numerous

sites

of

suspected

chemical

and

biological weapons

production were priority targets.

When

US

reconnaissance

aircraftfailed

to

detect

radiation leakages,

the

nuclear

sites were

reportedly retargeted

with

complete

dis-

regard

for the

potential

environmental

consequences.

Though unconfirmed,

this

has not

been denied

by

the

Pentagon.

An-

ticipating the attacks, it is probable that

the

Iraqis

had

deliberately

removed

radio-

active

materials from reactor

sites

precise-

ly

to avoid another Chernobyl

or Three

Mile Island

catastrophe.

Did

Iraq pose

an

extraordinary

threat

to

the

political

and economic

stability

of

west Asia that was not matched by the

military aggressions

of

other nations?

In

the months

preceding

the air offensive

against Iraq, US

military propagandapro-

jected

the

Iraqi

armed

forces as the fourth

largest

in

the

world with approximately

one

million

regulars

and

reservists.It took

advantage of American ignorance of

world affairs by conveniently

ignoring the

significantly larger

armed forces of

India

and

Vietnam,

each

of

which have

well

over

a

million

regular troops plus

vast

reserves

and

paramilitary

units.3

It was

only

when the alleged Iraqi chemical,

biological,

and

prototypenuclear weapons

threats

utterly

failed

to

materialise

during

the

war that

the public could seriously

question

whether

these

threats had been

vastly exaggerated by the Pentagon to

create

a

blinding

fear

of

a

mythical Iraqi

military monster

that

must be stopped at

all

costs. After all,

if

Iraq were really so

PE-2

Economic and Political Weekly

January

30,

1993

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powerful,

why

did

it

trade

captured

ra-

nian territory

or

peace

at the endof an

eight-year-long

talematedwar?

The Pentagonreported

545,000 Iraqi

troopsdeployed

n the Kuwait heatre

of

operations

t the outset

of war.Yetwhen

US-ledground

forces encircled

Kuwait,

only some60,000

IraqiPOWswere

cap-

tured,

perhaps nother60,000could

have

fled back across

the Iraqiborder n two

days' ime,and perhaps 5,000had fallen

as casualties.

Did as many

as 350,000 raqi

troopsmerely

evaporate nto the

desert

air?Did

thePentagon eliberately

nflate

Iraqi troop strength to

exaggerate he

threat?Or had

the withdrawal f

Iraqi

troops

fromKuwait ctuallybegun

well

before

the US-led

ground

offensivewas

launched on February

24, 1991?The

Pentagonadjusted

ts own figures

down-

wardseveral imes

first to below500,000

and

finally

to 250,000,but provided

no

explanation.4

The direct

political

nd

military

easons

for the Gulf wargo backat leastto the

time of

the

Islamic

evolution

n Iran n

1979.The overthrow

f theShah

brought

an

abrupt

nd to

the

special

relationship

between

he US

and the then

paramount

militarypower

nd

most populous

oun-

try

in the Gulf region.Despite

ears hat

the Soviet

Union might

fill

the

power

vacuum,Iranian

uspicionsnever

made

this a

real

possibility.

Nevertheless,

n

his

State-of-the-Union ddress

before

Con-

gressin January1980,president

immy

Carterwarned:

An

attempt by any

outside force

to

gain

controlof thePersianGulf regionwill be

regarded

s an assaulton

the

vital

nterests

of the

United

States

of

America.

And

such

an assault

will be

repelledby any

means

necessary,

ncluding military

force.

The

US

response

was

politically

to

cultivate

avour

with

Iraq

n

the

hope

of

using

it as

a

buffer

to contain

anti-

imperialist

Islamic

fundamentalism

n

Iran.Militarily,

he

strategy

ncluded he

creationof a

'rapid

deployment

orce'

whichcould

meetany mpending

military

threat o the

vulnerable

il-exporting

ulf

sheikhdoms,

while

spanrng

he US

from

permanently

tationing

ts

ground roops

on Arab soil and invoking ocal resent-

ment.

The

abortive

attempt

to rescue

American hostages

in Tehran n 1980

dramatised

he

importance

f

a

credible

military apability

n the

Gulf to defend

those

vital nterests.

With

probable

US

en-

couragement,raq

attacked

ran,setting

off a

prolonged

war

of attrition that

would

postpone

he need

for

a directUS

deployment. t

by

the

late

1980s,

he

US

felt

compelled

o

intervene

irectly

on a

limited-

cale to protect

Gulf oil shipping

threatened y the

Iran-Irqwar.The

USS

4

Stark

ncidentand the shootingdown

of

a Iranian

jetliner

were

grim

reminders

of

the fragility

of limited US military

nvolve-

ment.

Then in 1988, the end of the

Iran-

Iraq warabruptly

ended US hopes

of

con-

taining militant

nationalisms,

whether

fundamentalist

or secular, by pitting

one

against

the other.

This

opened

the

way

for

direct US

intervention,

but

first world

opi-

nion had

to be shaped

to

accept

it.

In the end, neither

occasion nor

suffi-

cient

pretext

could

be found for

rapid

deployment of US

ground forces. The

Gulf

crisis

provided

that

rare

window of

opportunity

for US armed forces

to

open-

ly set foot

on Saudi soil-formerly

a very

sensitive

subject among

Arab nationalists,

Islamic

fundamentalists,

and Israelis

alike.

This established

afait accompli

by which

a

long-term

or permanent

US military

presence

in

the Gulf

could be legitimated

among

the

local

authorities

and

populace.

The long sought-after

foothold and bas-

ing in the

Gulf would, at last,

obviate the

need

for a rapid deployment

force. Quite

the contrary, the massive deployment of

ground, air, and

naval forces took

over

five months to

mobilise and assemble

in

the desert sands.

It

absorbed

three- quar-

ters of all active US tactical

combat

air-

craft,

six of 13 active aircraftcarriers,

and

37

per

cent

of the US

army

from bases

around

the

world.5

What interests were

'so

vital as to

motivate such

a

costly

and

determined

responWe?

THE

DELIBERATE

WAR?

The seeds of crisis were sown as early

as

February24,

1990

during

a meeting of

the ArabCo-op Counil in Amman,

Jordan

when

gaddam

Hussein

threaten-

ed

reprisals

if Kuwait-and Saudi Arabia

did

not write off some

$ 30

billion

in

debts

incurred

during the Iran-Iraq

war.

Tnsion

quietly

escalated

until

May 3, when Iraqi

foreign

minister

Tariq

Aziz

vehemently

criticised

unnamed OPEC states for over-

production

and driving down the price of

oil. On

July 3, 1990, Iraq

and Iran open-

ed their

first

direct

official contact since

their

August

1988

cease-fire.

At the Arab

League conference

in Ilnisia on July 16,

Tariq

Aziz openly accused

Kuwait of

'stealing' Iraqioil from the Rumailah oil

field

which straddles their

common

border,

and demanded reimbursement.

'The very next day

in

a public

speech

in

Baghdad,

Saddam Hussein

threatened

military action to

prevent Kuwait and

the

United

Arab

Emirate

from

vx

oucing.

The initial US

response

was a

logical

continuation

of the informal

policy

of

the

Reagan

administration

which

guaranteed

that the

US would defend Kuwait

(then

allied to

Iraq)

if it

was attacked

by

Iran.

On

July

19,

US

secretary

of defence

Dick

Cheneyreiteratedn

a

press

briefing hat

the US was committed

to

militarily

defen-

ding

Kuwait

if

it

was attacked.

Asked if

a general

US

pledge

to come to Kuwait's

aid still

applied,

he

affirmed: "Those

commitments

haven't

changed.6

On

July 21, Iraq

accused

Kuwait of

prepar-

ing the way for foreign

intervention

in

the

Gulf.

By July 23, Iraq

had

reportedly

massed 30,000 troops

on the border

with

Kuwait and

the

US fleet

in the

Gulf

had

been placed on alert. At the OPEC

meeting

in

Geneva on July 27,

joint

pressure

from

Iraq

and Iran

finally

mov-

ed Kuwait and the

UAE to

join

in

an

ac-

cord to

end

four

years

of

low-priced

oil

by limiting production to

22.5

million

bar-

rels per day and setting

a

newtarget

price

of

S

21

per

barrel.

Then,

in

the face

of

escalating

tensions,

the

US government abruptly changed

signals.At

a

press briefing

on

July

24,

US

state department

spokesperson Margaret

Tutwiler said: "We do not have

any

defence treatieswith

Kuwait,

and there are

no special defence or security commit-

ments to Kuwait:'7

The very next day, US

ambassador to

Iraq April Glaspie

was

summoned

by

Saddam

Hussein.

In

a

transcript

of the

meeting given by

the

Iraqi

govermment

o the

American

press,

Hussein

made clear that

if

Iraq

attacked it would

be in

response

to what he

considered

Kuwait's

ongoing economic war against

Iraq.

Instead

of issuing a stern

warning,

Glaspie

responded

with

appeasen, n;

,

3he

said: "I have

a direct

instru

tion

from the

president

to

stek

better relations

with

Iraq:' Finally she offered

the

ambiguous

signal:

"We

have

no

opinion

on

the Arab-

Arab conflicts like your

border

disagree-

ments

with

Kuwait:'8

That same

day

on

July 25, assistant

secretary

of

state

for

near

eastern and

south Asian

affairs,

John

Kelly,reportedly

cancelled

a

planned

Voice

of

America

broadcast that

would have

warned

Iraq

that the

US

was

'strongly

committed'

to

the

defence of

Kuwait and

other Gulf oil

states. The

official US

government posi-

tion at the

time

was

further reaffirmed

during

house

foreign

affairs

subcommittee

hearings

on

July

31.

In

reference

to

Dick

Cheney's

statement on

July

19 of a

US

commitmentto defendKuwait,John Kelly

was asked to

clarify that commitment.

Insisting

that he had

never

even heard

of

Cheney's

statement, Kelly replied:

"We

have no

defence treaty relationship

with

any Gulf

country.

...We have

not histo-

rically taken a

position on border dis-

putes"9 If the

Bush administration ial-

ly

wanted

to

avert war as it

had

claimed,

what was

behind thisdeventh-ur about-

face?

On

July 31, Iraq

and Kuwaitsent dele-

gations

to

Jeddah,

SaudiArabia to

negoti-

ate theiroil and border isputes.The

talkcs

Economic and Political

Weekly

January 30,

1993

PE-3

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broke

down the

very

next

day.

The

next

morning, on August 2, lr.Aq nvaded

Kuwait,

nd the

US, Britain,

and

France

immediately

alled or

withdrawalf

Iraqi

troops

and froze

Iraqi

nd Kuwaiti ssets.

Thus, during

he 15

days

from

July

19to

August 2, 1990,

the

official

US

govern-

mentposition

came

full circle after two

180-degreeurns.

Orchestrated

hrough

the state

department,

but

carefully

avoidingdirectcomment from Bushor

secretary

f

state

James

Baker,

he Bush

administration

poke

with one consistent

voiceduring

he

brief ntervening

eriod.

Unequivocally ssuring

Saddam

Hussein

that the

US would

urn

a blind

eye

f

Iraq

were o

invade

Kuwait, raq

ead

he

green

light from

he US

to proceed.

As

soon

as

Iraq

had

committed

tself

by

the act of

in-

vasion, hc US immediatelyurned

ff the

false

green light. The pretext

for US

military ntervention ad been locked n,

and

the stage was set for Desert Shield.

When t

becane

apparenthat

the fran-

tic rounds of diplomaticmanoeuvring

would pay off in increasingly

uncom-

promising esolutions n the UN

Security

Council, he

po~sibility

rcw

hat a static

defenceof

Saudi;Arabianil

fieldscould

be transformed

ntoanoffensivedrive o

expel

the

Iraqiarmyfrom

Kuwait,

Care-

fully testing

the

internationalmood

at

each

step of escalation, he US gradually

movedon to the

secondphaseof military

deployment from 230,000

troops

in

a

defensive

posture

to

the

build-up for

Desert

Storm.

When

t

appeared

hat the

US-led

coalition

would

hold

ogether fter

the

war

began

and

that the bulkof Saudi

oil installationsould bepreservedntact,

the

US became

ever more

emboldened.

JustwhenSoviet

and Irnian

attempts

o

brokeran

Iraqiwithdrawalrom Kuwait

were

beginning

o bear ruit,and Iraqof-

fered ts ownsettlement

orwithdrawaln

February

5, 1991,

he Bush

administra-

tion

flatly rejected all conciliatory

gestures.Calling

the

Iraqi

offer

a

'cruel

hoax' Bush issued a final

impossible

ultimatum: et out of Kuwait

uncondi-

tionally within seven days or face a

devastating

round nvasion.

The

message

was clear:

Bush would

hearnothingof step-by-stepraqi onces-

sionsorof anypotential

diplomatic olu-

tion. Evena briefcease-firewas

repeatedly

ruledout.

Having

omethisfar,

he wanted

nothing

short of the

decimation

of the

lraqi military

machine

and

a

total US

military victory. Repeatedly,

American

generals poke

of

orchestrating

he

Iraqi

retrat on US terms.

Even

n

the final

days

of full

retreat,

he

Iraqiarmy

was mer-

cilessly pounded

on the

highway

from

Kuwait

city

to

Basra

leaving

behind

a

graveyardf burned

ut

vehicles

s

far

as

the eye could see. This

wilful genocide

plus the massacre of an estimated 100,000

Iraqi civilians--euphemistically dimissed

by the Pentagon as 'collateral damageL-

were the true war crimes of the Gulf

crisis.

They were

certainly

no less than the

atrocities committed by Iraqi troops

against Kurdish and, other dissident

civilians

during the ensuing Iraqicivil war.

Why did the Bush adminiistrationap-

parently manipulate Iraq into a direct war

with the US at the' very source of the

world's most strategic commodity, and

then, repeatedlypre-empt potential diplo-

matic solutions in favourof unconditional

military victory? Why was a military solu-

tion the only solution for George Bush?

A

WAR FORHEART ANISMINDS OF

AMERICANPEOPLE

Before the war began, the US popula-

tion and Congresswerevery nearlyequally

divided for and against a US-led invasion.

Bush and his advisors pinned their bets

that

once US forces were committed to

battle, American public opinion would

quickly solidify behind the troops.

Waging

a hi-tech

propaganda

war

and disinfor-

mation

campaign unprecedented ince the

total censorship of

the

second world war

they proved to be right

with

public sup-

port

for Bush

soaring

to

70-80

per

cent

immediately after

the US

began

the most

intensive bombing campaign in history.

But

that still

left

some 20-30 per cent

decidedly opposed to the war and

the

largest anti-war demonstrations at

the

outset

of

any major military

adventure

Making

the

high support ratings

last

until national elections in November last

would be a much more difficult task. A

protracted conflict would certainly erode

public support

as

the

body bags

came

home. (As a precaution, the press was

banned from

the Delaware airbase

used

to receive the remains of all fallen US

soldiers.)

A cease-fire and

diplomatic

set-

tlement would have been perceived as

in-

conclusive or

indecisive,

and done little

to

sustain

that

level

of

support.

Once

com-

mitted

to

combat, only

a total

victory

could have

provided

the

boost to the

American

psyche

that

had been

wanting

since the US defeat in Vietnam in 1975.

The Vietnam

war

was

something

of an

anomaly

in US

history.

With

the

collapse

of

the

British

empire,

Americans in the

post-colonial

era

had become

accustomed

to

thinking

of their

country

as

the undis-

puted

world

leader.

Excepting

n

Vietnam,

the US

had never

ost

a war

in

its

215-year

history. Hence,

the later

unpopularity

of

the

Vietnam

war was

due not

so

much

to

its

protraction

or

cost

in lives

per se,

cer-

ta.nly

not

to

any

moral

reservations,

but

most fundamentally

because

the

US

was

not winning. Hence, the

American

euphoria over

a

total

military

victory

in

the Gulf was a

mass

psychological

reac-

tion

against

the

'Vietnam

syndrome'.

It

ominously reminds

us

of the

humilia-

tion suffered

by Germans at the end of

the first world

war, exacerbated

by

puni-

tive war

reparations,

who

then turned

to

Hitler for

revival

of national

pride.

In a

manner

mildly reminiscent

of

attacks

against Jews

in

Europe,

racially-motivated

hate crimes against persons of Arab and

south

Asian

descent

(for

example, turban-

ed Sikhs

stereotypically perceived

to be

Arabs)

soared

duringthe crisis.

Worse still

was the

official

witch-hunt by the

Federal

Bureauof

Investigatio

for Arab.Amricans

who

might possibly

be

considered 'threats

to

national

security'

merely-for

having

Iraqi or

Palestinian

backgrounds-again

an

ominous

reminder of

the

shameful

in-

ternment of

US

citizens of

Japanese des-

cent

during

the

second

world

war.

The

American

readiness to go to

war

must be viewed in

the context of

US

history-both political and psychological.

Unlike the

Europeans,

Japanese,

or

Arabs

who have

themselves

suffered

the

ravages

of

modern

warfare,

not since

the

American

Civil

War

of

1861-1865

have

Americans

witnessed

actual

combat on

theirown

soil.

Consequently,

comprehending the

human

dimensions

of

death and

destruction

rain-

ed down

on

Iraqi cities and towns

is

not

automatic,

particularly under

heavy

US

military

censorship.

Moreover, failure

of

the

dominant white

American

population

as

a

whole to

empathise with

brown

lraqi

civilian

victims and

the

parents

of

fallen

Iraqi soldiers is

nothing

new.

For the

mainstream

press, there

could

hardly

be a

greater

media

bonanza

than

a

major

lightning war.

For the

viewing

public,

there

could

hardly

be a

greater

adventure on

television-as

long

as it did

not last

too

long to lose interest.

During

the

war

violent

crimes

plummeted,

retur-

ning

to

normal levels almost

immediately

after

the cease-fire

There

arose an

obsessive

fascination for the

technology

of

modern warfare

For

a

great

many

the

war was like

a

monumental

football

game

played

out on the

plains

of a

vast

desert

coliseum-whose

troop

and

weapons

in-

ventories resembled the opposing team

biographies,

whose

generals

were

football

stars,

and

whose

damage

statistics

took

the

place

of

the

scoreboard.

By

far

the

most

popular national

pastime of

live

entertainment,

American football

thrives

on

winning

on

a

psychology

of

'us ver-

sus

them.

In

this

context,

for

many

Americans the

final

decisive

victory in

the

Gulf was

internalised as little more

pro-

found than

the

smashing

victory

of

their

favourite

football

team.

It is

no

wonder

that

the

military

triumph

boosted

Bush's

presidential

pproval

atingso

80-85

per

PE-4

Economic

and

Political

Weekly

January

30,

1993

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cent-the highest

ever

reported

in

US

history. Within a month as the euphoria

began

to wear

off, support

had

already

dropped by

five

percentage points.

With

the onset of sustained recession, Bush's

popularity

fell

precipitously

to

around

32-35 per cent up

to

the election on

November 3, 1992. Clearly, popular sup-

port

for Bush was not based

on

any

firm

commitment, ideological

or

otherwise,

and became subject to wide emotional

swings

in

both

directions.

If

the Bush

administration had

calcu-

lated

in

advance the

public opinion pay

offs

of a

Gulf

victory,

it

could

not have

been

more astute. In the face of

moun-

ting socio-economic

woes

at

home-

recession, homelessness, drugs, crime, lag-

ging

industrial

competitiveness, banking

crisis, debt, deficit,

and an

apparent

in-

ability

to come

to

grips

with

any

of them-

-a

domestic

political

crisis

was

looming

on

the horizon. Though a popularity boost

was not an immediate imperative, Bush

could not have missed the rareopportuni-

ty presented by

Saddam Hussein.

Yet,

at

the outset

of

the crisis

in

July

1990 neither

war nor a popularity coup were by any

means

assured.

In no

case

was

popular

support

the

principal,

or

perhaps

even a

principal,

motivation

for

US

strategy

in

the Gulf.

RECAPTURING

EACE

DIVIDEND

For

nearly

45

years the global balance

of

power

between the two

superpowers

ef-

fectively

deterred

direct

engagements

of

either

superpower

n

anything but limited

wars. In this sense, despite their horren-

dous death

tolls,

even the wars in

Korea,

Vietnam, and Afghanistan were limited.

Each

was Qpposed by the other super-

power,

and

along

with

it

a

significant

body

of

international

opinion.

But

the

1980s

brought

Ronald

Reagan

to

power

in

the

US,

and with

him

a

doubl-

ing

of

the US defence budget to over

$

300

billion

annually

to cover

the

largestpeace-

time

military build-up

in

history. Cruise

missiles, stealth bombers, and SDI (stra-

tegic defence

initiative or

'star wars') were

all included. The

imperative

of

matching

US expenditures to maintain the balance

of

power

diverted

Soviet

investment from

much-needed modernisation of infra-

structure

and consumer

goods produc-

tion,

and

finally

exhausted the

patience

of the Soviet

people.

The

US,

with

well

over

twice

the

GNP

of the

USSR, saddled

itself

with

the worst

budgetary deficit

in

its

history;

but

for

the Soviet Union it

spelt

disaster.

The

consequent

economic

collapse

and

political fragmentation

of

the

Soviet

Union made

it

impossible

to con-

tinue

projecting

itself as a

military super-

power even though its armed might re-

mained ntact.This fact, followedby the

dissolution of

the Warsaw

pact,

closed the

final chapter

onthe cold war. With the

balance

of

power

gone,

the US

became

the

sole superpower.

George Bush's

'new

world order'

had already emerged, not as

a consequence

of US

military victory

in

the Gulf war,

but ratheras a

precondition

for it.

T

he end of the cold war initially gave

rise to great hopes that for

once the

modern world

could turn swords

into

ploughshares

and reap the 'peace divi-

dend'.

With no

shortage of hunger,

home-

lessness, unemployment,

and human

despair,

there

could

be

no

more sane alter-

native-

Unfortunately, he Reagan

military

build-up also doubled the

revenue con-

tribution of arms industries

to the US

economy as

well

as

the fiscal clout

of the

military bureaucracy.

Those industries,

which were fearing

for their very survival

in

the post-cold

war era, as well as the en-

tire military hierarchy-the military-

industrial complex-could

not have been

more overjoyedwhen the Gulf crisis came

along.

Hardlysix weeks after

the

Iraqi

in-

vasion of Kuwait,

the Pentagon proposed

the

largest

arms sale in

history:

$ 21 billion

of

advanced

hardware,

including fighter

planes, helicopters,and missiles, for Saudi

Arabia.

Desert Shield was not merely a

defensive deployment,

but also a

first op-

portunity

to test

new

hi-tech

weapons

systems

in

desert exercises.

Desert

Storm

provided the

first combat experience for

the

F-117A

Stealth

fighter-bomber

and

Tomahawk cruise missile. But most

im-

portantly,

the

Gulf war was a new raison

d'etre, even if only a temporary one, for

the

entire military-industrial complex.

And that meant that much of the 'peace

dividend' could

be

ploughed

back into the

armed forces and the defence industries.

It was

only

with the

federal

debt

touching

$

4,000

billion

(over

two-thirds of

GNP)

in 1992

that the political pressure to cut

defence expenditures

and close scores of

military

bases could no longer be held

back.

That oil

is

virtuallythe life blood

of

the

US

economy

and of the American

psyche

is not difficult to understand.

The US

with

less

than 5 percent of the world's popula-

tion consumes

nearly

40

per

cent

of

its

gasoline

and

approximately

30 per

cent

of

its

crude oil. A

central feature

of

the

American

way

of life

is

the

automobile,

not merely

as

a

means

of

transportation

but

as

the

symbol

of

personal

mobility.

In

fact,

the

personal

automobile

has

become

so much a

way

of

life

that in

some

areas, such as Los

Angeles,

the

number

of automobiles

is

very nearly

equal

to

the

number of

persons.

It is no wonder

that

petroleum is

more

important

to the

way

of life in the US than in other industrialis-

ed

countries.

Europe

and

Japan,

through

co-ordinated

energy

policies,

have

progressively

reduc-

ed their

energy

dependence

on

imported

oil since the OPEC

price

shock

of 1974.

By

contrast,

the US

dependence

on

im-

ported

oil has resumed its rise

during

the

latter

half of the 1980s

owing

to a

drop

in

domestic

oil

exploration

consequent

to

low

world

oil

prices,

environmental

risks

of

off-shore

drilling, depletion

of

reserves,

and the

general

lack

of

a

comprehensive

energy

policy.

US

indigenous

crude oil

production declined from 9.0 million bar-

rels per day

(mb/d)

in

1985

to 7.4

mb/d

in

1990, while

imports

nearly

doubled

from 3.1 to 5.9

mb/d

during

the

same

period.

'?

During the

1980s,

US

policy

called

for

shifting

its oil

import

dependence

away

from

the volatile West Asia towards the

shorter supply lines of the

Americas,

and

diversifying

to sources outside of OPEC

(such

as Canada and

Mexico).

Between

1980 and 1990

the

US

crude oil

imports

from

Mexico,

Venezuela,

and Canada rose

from 0.87 mb/d

to 1.99 mb/d.I

However,

this was not enough to stem the renewed

demand

for

oil from

the upper

Persian-

Arabian

Gulf

after

1985 (Table 1).

Another

difference

between the

US ver-

sus

Europe

and

Japan is end-user

sensiti-

vity to

crude oil

price

fluctuations.

Vulnerable

end-users

include not

only in-

dividual

consumers, but

the entire

trans-

portation

industry, and

in

particular the

commercial

airlines which

claim

that two-

thirds of

their

operating

expenses

are for

aviation

fuel.

For

example,

during the

1980s,

some

40-65 per

cent of the

cost of

gasoline in

the

US went

to pay the

cost

of

crude

oil

including all

extraction

costs,

compared to 30-45

per

cent in Europe

and

Japan

due to

higher

taxation.'2 As

a

TABI

E

1: VA[ll.* OP

US

Oil

NPORTS

FRON

IRAQ.

KLt\^II.

\NV)

SAL

1)1

ARr\I.\

"S/oil)

Iraq

Kuwait

Saudi

Arabia

Per

( of

all

*II

OJil Iniports

1985

468

175

171

4.4

1986

434

254

342l

111

1987

482

489

430-3

12(0

1988

147/

437

5461

18.(

1989

2382

961)

702(5

19.6

Source:

U.SI-brt'i,l

inruce

i,ghhlights 989, L'S

Dcpa1-lmc[

(

orumeilce

\:as'nigun,

1)(

.

199C

Economic

and

POjitical

W'ecklv

January 30,

1993

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result, the doubling of

crude

oil

prices

before

the

Gulf war translated nto a 3540

per

cent

price

increase

in

the

US

versus

a

typically

smaller

rise

in

Europe

and

Japan.

This

played

a

pivotal

role in

precipitating

economic

recession

in

the

US,

and drove a numberof US

airlines-

including

Continental,

US

Air,

and Pan

Am-ever

closer

to financial

collapse.

Yet high

oil

prices are not the

only

source of concern for the US. The Gulf

oil boom

of

1974-1981

was

followed by

a

collapse

both of oil

prices

and Gulf oil

exports

during

1982-1985.

George Bush,

then

vice

president

under

Ronald

Reagan,

once

complained

to the

Saudis that oil

prices had fallen so low that

they

were

drivingsmaller US oil and oil

exploration

companies

out

of business. Another fac-

tor

was that the

US

economy

was then in

an

expansionary phase

with

inflation

under control and

lower

oil

prices

were

not

needed to

sustain that

expansion. By

contrast,

in 1990

the

US

economy

was

already showing signs of weakness, and

a

recession was on the

horizon.

A

specu-

lative

hike

in

oil

prices would

certainly

ex-

acerbate the recession.

Hence,

what

the

US

corporate

interests seek

is neither low

nor

high

oil

prices, but

rather stable and

predictable

oil prices.

In fact,

the Gulf war did

more than

that.

It

obligated

the

Arab

oil-exporting

sheikhdoms-Kuwait,

Saudi

Arabia,

Qatar,

and the

UAE-to

seek

protection

under the

US

military and geopolitical

umbrella. Since

these

countries comprise

four of the

13

OPEC member

states,

that

effectively buys the US, in terms of

political

influence,

an

ex

officio

seat

in

OPEC.

Venezuela

and

Ecuadorare

already

too

dependent on

the US market.

Excep-

ting Iraq,

Iran, Libya, and

Algeria, fear

of

reprisals

will

likely keep the

remaining

OPEC

members (Nigeria,

Gabon,

and

Indonesia)

more

or

less in line with the

US

policy.

That all but

guarantees

a com-

fortable OPEC

majority

in

support

of

stable and

predictable oil

prices.

A

favourite

joke says that

if

the main

export

of Kuwait

were

broccoli

(George

Bushhates

broccoli)

instead

of

oil, the US

would never

have gone to

war. Some

critics have called it a war for oil. Indeed

what is at stake in

the Persian-Arabian

Gulf is no

less than

54

per

cent

of the

world's proven

oil reserves Table

2). Con-

sider that

during

the

crisis

Iraq

and

Kuwait

ogether had

been

withdrawn

rom

the

US

sphere

of

influence,

Iran had

been

defying

the

US

hegemony

since

the

Islamic

revolution

n

1979,

and

Saudi Ara-

bian oil fields

along

the

eastern coast

could,

if

defended

by

the

Saudis

alone,

be

overrun

by Iraqi

troops

almost

as

easily

as Kuwait. This

hypothetical

threat

to the

oil jugular

of the industrialised

western

world could

havetaken48

per

cent of

the

world's

proven oil

reserves

out

of

the

sphere

of western influence.

However,

that this scenario

would

have

ever

threatened he sustained

supply

of

oil

from the

Gulf

to

the industrialised

west

was neverat issue.

Both

Iraq

and

Iran

have

war-shattered economies whose

only

salvation

is

enhanced

oil revenues.

Iraq

in

particular

has some

$

75-80 billion

in

ex-

ternal debt as a directresult of its warwith

Iran.

Saudi

Arabia

too,

whose GNP

was

cut

in half

by

plummeting

oil

revenues

(from

$

108 billion

in 1981 to

$

20

billion

in

1988),

completed

eight

consecutive

years of

severe

budgetary

deficit

in

1990.

The first five

years

were covered

by

draw-

ing on once

vast

foreign

reserves;

the last

three years were

argely

met

by

borrowing.

Since

the entire third

world

could

not

afford

but

a

tiny

fraction of these

oil

exports, Iraq,

Kuwait, Iran,

and

Saudi

Arabia-regardless

of

government-

would have

no choice but

to continue

sell-

ing the vast bulk of their oil to western

Europe,

Japan,

and

the US.

Moreover,

none

have ever

signalled

the

slightest

thought

of

doing

otherwise.

Why then

did the US

government

act

against Iraq

with such determination

and

force

unprecedented

since the second

world war? Given that

UN

trade

sanctions

against Iraq

were

almost

universally

ac-

cepted by

the world

community,

save

some

petty

trading

across

the

Iranian

border,

why

was

war

the

only

solution?

IS

OIL

THE ONLY REASON?

Before the war Kuwait accounted for

only 1.8 per

cent of US

crude oil

imports.

In

turn,

Kuwait derived

more of its

na-

tional

income from

overseas

financial

investments

than from oil

revenues.

Each

of the

oil-exporting Gulf

states has ac-

cumulated

huge financial

reservesand

in-

vested them

in the UK,

US,

Switzerland,

and

other

capitalist

countries.

However,

unlike

Iraq

and Saudi

Arabia, which

have

also

incurred

enormous external

debts on

the

order of

$

70-80

billion

each, Kuwait

has no

worrisome

external debt

burden.

Official

estimates of

the overseas in-

vestmentsof the

Kuwaiti

governmenthave

been placed at

more than $ 100

billion,

but it

is

widely

believed hat the real

figure

may

be

more than

twice that

amount.

And

this does not include

the vast

private

investments of the

Kuwaiti royal

family.

While

the Iraqi and

Saudi

governments

have

been cautiously

selling foreign

assets

to

pay part of

their

operating deficits,

the

Kuwaiti

government

had been

continuing

to seek new

investment

opportunities-

that

is, until

August

2, 1990. The

Iraqi in-

vasion

interrupted that capital

flow into

the

US and other

industrialised

countries.

Yet the

rise and fall

of

international

capital flows

in

accordance

with

market

pressures are routine events

in the

global

economic system.

So

why

was this

inter-

ruption so

intensely crucial

to

policy plan-

ners

at the White

House?

From the

day Iraq

invaded,

the

Bush

administration

has insisted on the

restora-

tion of the

'legitimate

government'

of

Kuwait,

hat

is,

the

ruling

al-Sabah

family,

as

one

of

the key preconditions

to

resolv-

ing the crisis. Yet,the Kuwaitidemocratic

opposition

was

equally

favourable to

the

US-led coalition

and

certainly

no

less

eager to

resume

oil

exports

at stable

prices

acceptable

to the west.

The reason

for

the

US

insistence

was

not

merely

control over

the

flow of

Kuwaiti

oil,

but-more

impor-

tantly

control over

its

global

investments.

To

understand

the reason,

first, one

must

understand the scope

and nature of

Kuwaiti

investments in

the centres of

western

financial power.

Second, this must

be

viewed in

the context of

the conditions

in

the US

economy and

state financing.

Placing Kuwait in perspective, while it

may have

one of the

world's highest per

capita

incomes, its GNP

amounted to

$

23

billion in

1989-90-small by western

stan-

dards.

If

official

figures

of

foreign

direct

investment in the

US by ultimate

bene-

ficial

owner

are any

indicator, the entire

west

Asia's

S

9.2

billion in 1989 s

dwarfed

by

the

UK's

$

60.6 billionor

Japan's

$

33.3

billion. But within

west

Asia Kuwait's

S

4.9

billion far

exceeds

second-placed

Saudi

Arabia's

$

1.4

billion.

13

Foreign

direct

investment s, of

course, but a small

fraction of

total foreign

investment.

Foreigndirect investment s defined by the

US

department

of

commerce as

applying

only to those

business

enterprises n which

at

least 10

per cent is

owned, directly or

indirectly, by a

foreign entity.

Moreover,

direct

investments include

neither port-

folio

investments-i

e, government securi-

ties,

bonds,

and

smaller

stock holdings-

nor

individually-owned

real estate and

bank

accounts.

KuwA,

rs

GLOBAL

INVESTMENTS

A

major

channel

of

Kuwaiti

state

in-

vestment is

the Kuwait

Petroleum Cor-

poration

(KPC),

the

umbrella

organisa-

tion

created to run

Kuwait's oil industry.

It

controls

various

companies responsible

for

domestic oil

production,

Kuwait Oil

Company (KOC); domestic

refining

and

distribution,

Kuwait

National Petroleum

Company

(KNPC);

marketing

of

by-

products

of

refining,

Petrochemical In-

dustries

Company

(PIC); and

transportof

exportedoil, KuwaitOil

Tanker

Company

(KOTC).

However, beyond

these tradi-

tional

activities,

KPC

owns

and operates

the

KuwaitForeign

Petroleum

Exploration

Company

(KUFPEC)

which performs

oil

PE-6

Econornic

and Political

Weekly

January 30,

1993

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exploration

n 14

countries, mostly

in

Asia

and Africa.

Incorporated

in

the

Cayman

Islands, it

is

now based in London. Kuwait

Petroleum International

(KPI)

is the

overseas

marketing

arm of KPC.

Also

based

in

London,

it

operates

three refi-

neries in

Italy,

Denmark and the Nether-

lands and a vast

distribution

network of

some

6700

Q8

retail

gasoline

stations

in

Italy,

Denmark, Sweden, UK, Belgium

and the Netherlands. Kuwait Petroleum

International Aviation

Company, operat-

ing out of the

UK, supplies jet fuel to 50

airlines at

14

airports around the world.

In 1981

KPC

acquired the California-

based oil

and

gas exploration firm Santa

Fe International, which

operates in Texas,

Oklahoma, and the North Sea. Overall,

KPC was ranked

the 10th argest oil com-

pany

in

the

world.

4

No longer critically

dependent

on the supply of oil from

Kuwait, it

buys crude oil, refines and sells

petroleum

products around the world.

In

recent years, KPC has continued to

expand the scope of its operations. In

1990,

by

acquiring Mobil Oil Italiana

S

p

A

from its American parent, it in-

crea.sed

its retail outlets from 1,600 to

3,800

in

Italy alone and increased ts share

of

the

Italian petroleum products market

to 11

per cent.'5

Even during the occupa-

tion

of

Kuwait, and almost on the eve of

the war in

January 1991, it announced a

joint

venture n Hungaryto operate 17 Q8

gasoline

stations and to invest $ 100

million to

modernise an aging oil refi-

nery.

16

In

the US, KPC holds large

passive financial investments

in such oil

giants as Atlantic Richfield Arco) (3.9 per

cent), Phillips

Petroleum

(2.4

per cent),

and

variousHouston-basedoil

and gas ex-

ploration

firms.

However,'theprincipal

official

channel

for Kuwaiti

tate

nvestment

overseas

s

the

Kuwait

Investment

Authority (KIA),

an

agenty

attached

o

the

ministry

of

finance.

The

KIA oversees

the Kuwait

Investment

Office

(KIO) headquartered

in

London

and the Kuwaiti

General

Reserve,

which

maintains, among

other

assets,

over three-

quarters

of official

Kuwaiti

gold

reserves

in

European

vaults.

With

the vast accu-

mulated

surpluses

of

the

reserve,

he

KIO

has invested prudently in a diversified

portfolio, seeking

not

merely

income

and

growth,

but

long-term

financial

partner-

ships

in

country

after

country.

Although

the KIO

portfolio

is distri-

buted

worldwide, roughly

a fifth of

its

assets

are concentrated

in

London,

esti-

mated

at

S

50 billion.

Indeed,

some of its

largest equity

investments

are in British

firms. Most

notable is its

interest in the

oil

giant

British Petroleum

(BP),

Britain's

largest

corporation

and the

largest

dome-

stic oil

producer

in

the

US

through

its

takeover of Standard

Oil Company. The

Kuwait-BP

connection goes back

to the

discovery of oil in

Kuwait n 1938. BP

and

Gulf Oil

held equal

shares in the

former

Kuwait Oil

Company until the

Kuwaiti

government

began

acquisition

in

1974.

Then in 1987 as part of

prime minister

Margaret

Thatcher'sprogrammeof

dena-

tionalisation, the

British

government

decided to

sell off its

remaining 31.5 per

cent stake

in

BP.

Initially

valued at

$

13.5

billion, it was its

largest share

offering

ever.

However, its

plans were

interrupted

by

the worldwide

stock market

crash in

October 1987,

which left most

of the

shares unwanted in

the hands of

under-

writers. Then the

KIO stepped in

to buy

all

remaining shares to spare the British

government the

embarrassment and

ex-

pense of seeing the

huge

offering

fail.

When the

offering finally closed on

January 6, 1988,

the

KIO

bailout

enabled

the British

government to

salvage

$

9.7

billion

from the

sale.'7

The

large Kuwaiti stake in BP

initially

promptedspeculation that the KIOmight

seek some form

of

management

control,

but the KIO

reaffirmed its

style

of

keep-

ing a low

profile. In the

months

following,

the KIO

continued to

gradually increase

its

stake

in

BP up

to a peak of

21.68 per

cent.

By October

1988, political

pressure

had

built up

fears that the size

of the KIO

holding

was

not

in

the British

national

in-

terest. The

KIO offered to limit

its

voting

in

stockholder matters to 14.9 per

cent of

outstanding

shares-only

a

fraction of its

holding. Despite

this the British

govern-

ment ordered the

KIO to cut its stake

in

BP down to 9.9 per cent. Fearinga short-

term

capital loss

of some

$

600

million,

the KIO

announced

in

a rare

move of

de-

fiance that it

would

fight

the order.

Final-

ly, after

lengthy

negotiations,

BP

agreed

to

buy

back

the

excess

shares from

the

KIO for

$

4.37

billion

which would

give

the

KIO

an

average gain

of 5.2

per

cent.'8 The entire

story

of KIO invest-

ment

in BP

underlines the

profound

financial

and

political

relationships

bet-

ween the Kuwaiti

and British

states,

and

their common interest n

ultimately

resolv-

ing

controversies

in

an amicable manner.

The KIO's

financial

interest

in

the

UK

is certainly not limited to the petroleum

industry.

The

KIO

formerly

owned

14.4

per

cent

of the

Royal

Bank of

Scotland

before

selling

its

holding

in

early

1990. It

holds

10.3

per

cent

of Midland

Bank,

in

which it has

announced that it

would stay

out of

management

matters. It

reportedly

owns

significant

shareholdings

n

many

of

the

top corporations radedon

the

London

Stock

Exchange. During

the Gulf

crisis,

fears arose

that Kuwait

might

sell

off

major

holdings

to

pay

for

post-war

re-

construction and its

$

16 billion

pledge

to

the US military.

Kuwaiti finance

minister

Sheikh Ali

al-Khalifa toured

European

capitals to

reassure them that

Kuwait's

enormous

assets would not

be sold to

cause prices

on world

financial markets

to fall. He

insisted that cash

reserves,

short-term

market

instruments, and even

borrowing,

if necessary,

would be used

to meet its

commitments. Thus,

on

September 24, 1990 when

the KIO con-

firmed its first

sale after the Iraqi

invasion-its 10.1 per cent

stake in the

British hotel operator,

Mount Charlotte

Investments,

valued at $

1 0.8 million

there

was

no

panic.'9

By some

estimates the KIO

has become

the

largest

foreign investor

in Spain.

However,

unlike its passive

investment

strategy

in

the

UK, it has

chosen to focus

its

assets and play

an active

role in

management. After

the KIO

bought a

major interest

in

Union Explosivos

Rio

Tinto

S A, then

Spain's second

largest

company,

it

attempted

a reorganisation

that

sparked local

opposition,

In March

1988, the KIO moved to take control of

Spain's argest

sugar refiner,

offering $ 220

million for

34 per cent of

Ebro S A on

the Madrid

Stock

Exchange. Between

1986

and

1989, the KIO

re-organised an

unprofitable

paper manutacturer,

Toras-

Hostench, into

a

flourishing holding

com-

pany

for its

operations

in

Spain.

The

takeover

was

managed

in

stages through

two Dutch financial

holding

companies,

Koolmes

Holding

BV and

Kokmeew

Holding

BV.

Renamed

Grupo

Torras

SA,

it

now has assets of over

$ 5.5 billion and

interests

in some 170

companies

in the

food, chemical, paper, and financial ser-

vice sectorsm

n

1989,

the

KIOsold its stake

in another

Spanish holding

company

that

owns 10.3

per

cent

of Banco

Central,

in

order to concentrate

its

Spanish

invest-

ments in

industry. The

proceeds

went

towards its

$

1.1

billion bid to

acquire

the

remaining

60

per cent

of Torras hat

it did

not

already

own.20

In

Germany, the

KIO has

purchased

major interests

in

corpdrate giants

like

Hoechst

(24.9 per

cent),

Daimler-Benz

17

per

cent),

and

Metallgesellschaft (15

per

TABI.E

2:

PROVEN

OIL RESERVES

AS

PER

CENT

O

WORL) TOTAL

Kuwait

10.0

Iraq

44

Saudi Arabia

25.0

Iran

8.5

UAE

4.8

Qatar

0.5

Oman

0.4

USA

4.4

Canada

1.1

Western Europe

3.7

USSR

12.8

Source-Fac-ts nd

Figures,

ARAMCO,

Dhahrai,

(annual .

Economic

and

Politicai

Weekly January 30, 1993

p1

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cent). In

France, he

KIO has

major

stakes

in

Banque

Paribas

(5 per

cent),

Banque

Suez, the

Cerus and

Parfinance

financial

houses,

as well

as in real

estate. In

Italy,

the

KIO

holds a

major share

in Fiat.2

In

1988

the

KIO acquired

a 10.3

per cent

stake, valued at $ 162

million,

in

Consoli-

dated-Bathurst

Inc,

one

of

Canada's

largest

paper

manufacturers.

The

Power

Corporation

of

Canada, which

holds

another 40 per cent, welcomed the KIO

as

"a

very good,

financially

sound part-

ner"'22

n

the US,

KIO investments have

included

many of

the top

corporations

traded

on the New

York

Stock

Exchange,

US

government

bonds, and

real

estate.

But,

except

in

smaller

enterprises, it has

avoided

conspicuous

controlling interests.

In

Asia,

the KIO

is

reportedly

among

the

largest

foreign

financial

investors in

Japan. In

Singapore

in

1988, the KIO

launched a

takeover bid

for 51

per cent

of

First

Capital

Corporation.

The bid

was

managed

through a

holding

company

in

Hong Kong, Dao Heng Holdings, in

which the

KIO

is a

principal

shareholder.

In

1990

the

Singapore government

issued

for

sale

80 million

shares

in

the

Singapore

P.etroleum

Company.

The

KIObought

the

entire

offering to

acquire a 10.6

per cent

interest.23In

Hong

Kong, it

became an

investment

partner

in the

colony's ninth

largest bank.

The financial

empire

is

truly

global.

However,

a conspicuous void in

the

pro-western Kuwaiti

investment stra-

tegy

has been the rest of

the

Arab

world,

which accounts

for some

of the

popular

resentment

against

the

al-Sabah

family.

Perhaps more

important than

the

mere

magnitude of Kuwaiti investment in the

west is

its role in

stabilising

major

finan-

cial markets and

the

natureof its

manage-

ment

partnerships

n

many

countries.

KIO

strategy has stressed

not

only

return

on

investment,

but

leveraging

minority

equity

participation

to

secure

alliances

with the

most

politically

powerful

elites in the

world. For

example,

in

the

US,

it

invested

heavily

in

the

*politically

influential

Houston oil

industry

which

staunchly

backed Bush in the 1988

presidential

elec-

tions.

In

Italy,

the

KIO

purchased

6.7

per

cent

of

Ifil,

the

holding

company

of

one

of Italy's most influential families, the

Agnellis.

In

Malaysia

the

KIO

purchased

shares

in

the New

Straits

Times

Press,

owned

by

the investmentarm of

the

domi-

nant

political

party

in

the

ruling

govern-

nment

oalition.24

When

crisis

came,

these

alliances

quickly

lined

up

support

in

every

western

government,

and

also

enabled

Kuwait to

launch a

massive

public

rela-

tions

blitz

through

its

connections

in

the

US,

Europe.

Asia and

elsewhere.

When

the

al-Sabah

family

was

toppled

from

power

by

the

Iraqi

invasion,

it

sent

.shock

waves tOevery

metropolitan

centre

of

wesiernl inlaiicial

and

political

poswer.

On top of

their

common

vital interest

in

the

stable

pricing

and

flow of oil from

the

Gulf, everywestern

ndustrialised

country

was

bound to the Kuwaitisby

an intricate

network of financial

interdependence.

This explains the

unanimity

with

which

the

westernworld acted

against Iraq.

Had

time

been allowed for economic

sanctions

to

take effect

in

forcing Iraq

out

of

Kuwait,

the US and UK

would

have

had

littleextraordinaryeverage n ensuring he

restoration

of the al-Sabah

family

to

power

in Kuwaiti

against

the wishes of

the

Kuwait

democratic

opposition. War,

on

the

other hand,

transformed victors into

heroes and

muted initial

opposition

to

reimposition

of the status

quo

ante. With

the

royal family

back

on its

throne,

the

disposition

of Kuwait's

vast overseas

financial empire

was secured. The

im-

mediate threat

of a

sell-off

of even a

small

fraction of

Kuwaiti

investments

which

could

precipitate

a

panic

on world

finan-

cial markets

was averted. Also

deferred

was the longer-termrisk to the west that

a

new

government

n

Kuwait

might

funda-

mentally alter

its

global

investment

pat-

tern

or demand

a

greater

role in

the

management

of

corporations

in which

it

already

had a

major

financial

interest.

Yet,

it

is

western

Europe,

not

the

US,

which had the most to lose in the

demise

of

Kuwait, both in

terms of dependence

on Kuwaiti oil

and

Kuwaiti inves'tments.

No doubt, the

British government was a

leading militant.Why then was the US the

least patient with

sanctions and the fore-

most proponent of

a military solution?

No

doubt the American self-image

as the

leading

superpower prompted the Bush

administration to seize

the

initiative. The

real

answer comes

from the US economy

itself and its

changing position in the con-

text

of

the world

economy.

A

WAR

FOR

US

ECONOMY

In

1945,

with

Europe and

Japan in

ruins and

the British

empire crumbling,

the US

emerged

as

the undisputed leader

and

wealthiest

economy on the planet. It

had the

highest per capita

income,

the

strongest industrial

base,

seeminigly

boundless agricultural abundance, and

was in a position

to underwrite the

reconstruction of Europe with the

$

30

billion

Marshall

Plan.

By 1990, the world's largest

creditor na-

tion

had

become i.ts largest

debtor. Its

federal

governmenithad incurred

a debt

of

over

$

3,t)00

billion-nearly 60

per cent

of

GNP-of

which as much as

$

800

billion

may actually be owed

directly or

indirectly

to

foreigners.

Its

largest

states-California, Pennsylvania,

New

York,

and

others

---and virtuallyevery one

of its

rraior

cities- New York

City,

Philadelphia, an Francisco,Los

Angeles-

werealso

facing

their

worst

deficits

ever.

In

1980,

the

US

still accounted for

over

half

of

the world

equity

market

capitalisa-

tion (total

market value

of

all

stocks)

of

$

2,300

billion. But

as share

prices

zoomed

in

Japan

and

equity

markets

rapidly

ex-

panded

elsewhere

during

the

decade

to

$

10,100

billion, the

US

share declined

to

30 per

cent,

second behind

Japan's

40

per

cent.25

Nervousness on the stock

mnarkets

had triggered wild fluctuations in share

prices.

By 1990 with its

real estate

market

in a

slump, the cost

of

bailing

out its

fail-

ing

savings

and

loans

(banks

that

speciai-

lise in

mortgage

lending)

had

topped $

116

billion,

with

projections

going

as

high

as

$

500

billion.2*

Major

banks-,

such

as the

Bank

of

New

England, were

following

suit

into

bankruptcy.There was talk of

serious

financial

trouble

in

the

giant insurance n-

dustry,

as

several

of its

members

ceased

to

meet their

obligations to

insurees.

Not

one of

the

four

pillars

of

high

finance was

in

what

anyone

could call

good

health.

And all this would be exacerbated by a

recession

riggered

by

higher

oil

prices

and

a

lull in

investor

and

consumer

confidence

consequent

to

uncertainty

in

the Gulf.

Meanwhile, labour

productivity had

fallen

behind

those of

Germany

and

Japan. Both low

and

hi-tech

manufactur-

ing were

fleeing

the

country in

search

of

cheaper

labour

markets.

The

US had

already

fallen

behind in

such

high tech-

nology

fields

as

consumer

electronics,

automobiles,

robotics,

memory

chips,

high-definition

television anid

optical in-

formation

storage. It

maintained its

lead

in

biotechnology,

microprocessors,

civil

aviation,

and, of

course,

advanced

weapons

systems.

In times

past when

free

markets

favoured

the

penetration of

US

investments and

commodities

overseas,

the US

government

vigorously opposed

market

intervention.

Today

with

the US

losing its

competitive

edge, it is

calling for

Japan,

Taiwan,

Korea,

and

other

countries

to

set

minimum

quotas

for

US

imports,

such

as

the

request for a 20

per cent

share

in

Japan's

integrated

circuit

market.

Altogether,

this

means

that

for

the first

time, the

US

must now

borrow

from

foreign

investors

to

pay for

everything

from bailing out its failing banks to

foreign

aid.

It

means

that with

the

balance

of

payments deficit

running at

an

annual

rate of

$

94

billion

in

1990 (down

from

$ 162

billion

in

1987), the

only

way to pay

for

it

is

by

foreign

borrowing,

foreign

in-

vestment, or

currency

transactions by

the

major central

banks. Of

these,-

oreign

in-

vestment is

generally

the least

painful. It

means

that to

sustain

technological com-

petitiveness, investment

in

human

resour-

ces

and

capital

formation

anast

ncrease,

which, in

turn,

depend oi-

foreign

invest-

ment

as a major

sourc

of grow h

I

means that one of the few, e;listic preven-

PE-X8

Fconloi;allnd

Flolit.Jc

i

Ms

Iv

Januiary

30),

1993

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tive

measures

against

further

savings

and

loan

or bank

failures

is

infusions

of

new

capital-again

foreign

capital.

It

means

that

in order to

curb

the

real

estate

slump,

confidence

must

be

restored

to

stimulate

new

investment

and

to

discourage

a

sell-

off

of existing

holdings

by

foreign

owners.

During

the

1980s,

the

US

shifted

dramatically

from

an

next

exporter

of

capitalto a massivenet importer Table3).

The

problem

is that

the

chief

sources

of

foreign

finance

capital

into

the

US

have

been

western

Europe,

Japan

and the

Gulf

oil

states,

and

the financial

flows

from

at

least

two

of them

are

in a

contractionary

phase.

With

the

slowing

of the

US

eco-

nomy,

interest

rates

have

dropped

to

their

lowest

level

in

decades,

short-term

rates

down

to around

3 per

cent

in late

1992.

Meanwhile,

the

reunification

of

Germany

is

effectively

diverting

capital

flows

from

the former

West

Germany

nto

reconstruc-

tion and

modernisation

of

the east.

The

new capital

shortage

has

forced

German

short-term nterestrates up to 10percent,

attracting

net

inflows

from

the

rest

of

western

Europe.

The

opening

up of

other

countries

in eastern

Europe

and

the new

states

of

the

former

Soviet

Union

to

foreign

investment

and

market forces

is

also

diverting

capital

flows

that might

otherwise

have

gone

into

the

US economy.

In the Gulf,

Saudi

Arabia

and Iraq

now

have large

operating

deficits

for which

they

must

either borrow

or

divest.

Even

the

windfall

revenues

he

Saudis

received

for boosting

oil production

and

higher

oil

prices

during

the

Gulf crisis

will

be

entire-

ly consumed by war costs and the $ 16

billion pledged

to

the US

for Desert

Storm.

That

leaves

Japan,

which

has

been

under

stiff

pressure

rom

the US

to cut

its

enormous

trade

surplus.

That

effort

had

successfully

slashed

Japan's

current

ac-

count surplus

from

$

87.0

billion

in

1987

to

an estimated

S

47.2 billion

in

1990.

However,

during

the same

period

the US

capital

account

deficit

(capital

investment

outflow)

has risen

from

$

44.8 billion

to

an estimated

$ 78.0

billion.27

n

1990,

the

deficit

of

$

30.8

billion

would

have

to

be

made up

by

the

central

banks buying

Japanese

yen.

Pressures

o

moderate

this

flow have made significant increases in

Japan's

investment

rate n

the US

unlikely

for

the moment.

If

the Gulf

war

provided

any

relief,

it

was

only

temporary.

The

US

current

account

deficit,

dipping

in

1991,

has

rebounded

in

1992

with the slowing

of

global

demand

for US

products.

Mean-

while,

Japan's

overall

current

account

surplus

has

nearly

tripled

since then.28

The North

American

Free

TradeAgree-

ment

(NAFTA)

is one step

in the

direc-

tion of

reasserting

dominance

through

the

larger

aggregate

economic

unit of

the

US,

Canada,

and Mexico.

It is

also

motivated

by

the

desire

to reduce

the flight

of

capital

from

the

US as

an economic

unit,

by

pro-

viding

free

trade incentives

to

divert

that

capital

flight

into

Mexico

and

Canada

where

it

will

be retained

within

the

larger

economic

unit

established

by

NAFTA.

However,

the

measure

has remained

con-

troversial

because

the accelerated

light

of

American

jobs,

while opening

new

oppor-

tunities

for

American business,

will be

of

little reassurance to American workers.

The

net impact

of

all this

is that

tradi-

tional

sources

of

foreign

investment

are

temporarily

dwindling

or

moderating,

and

the

market

conditions

for capital

flight

are

increasing. Meanwhile,

the

US

is

starving

for

foreign

investment

to

finance

its

cur-

rent

account

deficit,

its

state

fiscal

deficits,

and

in some

measure

its private

sector

economic

growth.

This

vastly

magnifies

the

relative

importance

of

continued

petrodollar

recycling

rom

Kuwait

and

the

rest

of

the Gulf

back

into

the

US

eco-

nomy.

The Iraqi

occupation

of

Kuwait

n-

terrupted the petrodollar recycling from

Kuwait.

The

war

itself

had

two

seemingly

contradictory

effects.

First,

it restored

he

political

status

quo

ante

necessary

to

resume

the

compliant

petrodollar

flow

from

Kuwait.

Second,

it multiplied

the

short-term

and

intermediate-term

capital

requirements

or

reconstruction

of

Kuwait

consequent

to

damage

brought

about

by

the

war.

This

has temporarily

reduced

petrodollar

lows

into

the

US

and

UK.

But

when

traded

off

against

no foreseeable

petrodollar

flow

from

Kuwait

at all,

the

war

clearly

served

he

longer-term

nterests

of

US

and

western

economies.

However,

their

true

significance

lies

not

so

much

in

the

absolute

magnitude

of

the

petrodollar

flow,

which

is

actually

infinitesimal

in

context

of

the

US GNP,

but

rather

n

what

that

flow symbolises.

What

is

at

stake

in

Kuwait

s

not

merely

control

over

oil

resources

or

oil

profits,

but

more importantly

the politico-

econo-

mic

leverage

consequent

to

control

over

the

reinvestment

of those profits.

In

the

absence

of intrinsic

economic

paramount-

cy,

US politico-economic

leverage

in

a

world

market

economy

is

ultimately

bas-

ed

on credibility

and

confidence.

And

for

both

foreign

investment

and

international

borrowing

power,

confidence

in

the

US

dollar

is

crucial.

For example, when Brazil, Mexico,

Argentina,

or

many other

developing

countries

incurred

foreign

debts

so

large

as

to

strain

their

abilities

to

make

timely

payments

on interest

and

principal,

the

international

lending

institutions

(IMF,

World

Bank,

and

multinational

commer-

cial

banks) compelled

them

to

devalue

their

currencies

and drop

investment

bar-

riers

as preconditions

o debt

rescheduling.

The

open

marketprovided

no

alternative

source

of credit

except

at

prohibitive

in-

terest

rates.

Capital

exporting

countries

considered

third world

debtor

nations

to

be high risks,and hence,avoidedinvesting

in anything

but

direct

equity

holdings

by

multinational

corporations.

By

contrast,

the

US, even

as

the

world's

largest

debtor,

can continue

to

borrow

virtually

without

limit because

creditors

have

confidence

in

its ability

to

repay-because

the

US

dollar

is still

the

world's

reference

currency.

At

the

turn of

the

century,

the

British

pound

was

the

world's

reference

curren-

cy,

as most

international

ransactions

were

made

with

reference

to

it. As nationalist

movements began

to

erode

the

British

em-

pire,

the

decline

of the

pound

made

way

for

the US

dollar

to

gradually

become

the

world's referencecurrency.From 1934to

1971, he

dollar's

credibility

was

maintain-

ed by

the

gold

standard-tying

its value

to

gold

at

$

35

per

ounce.

As the

US

balance

of

payments

deteriorated

in

the

late 1960s,

downward

pressure

on the

dollar raised

doubts

about

the

ability

of

T.ABI

3: US

FOREIGN

INVESTMENT

BA ANCE

(S

billion

at

current

cost)

1980

1985

1990

1991

UJS

assets

abroad

936

1253

1884

1960

US

government

assets

235

206

257

238

Private: Direct 396 387 623 655

Stocks

19

41

111

158

Bonds

44

74

132

148

US claims

242

545

762

761

Foreign

assets

in US

544

1114

2179

2322

Foreign

governmenit

assctN

176 M()2

371

397

Private:

Direct

126

231

467

487

Stocks

65

126

231

283

Bonds

1()

82

241

277

Government

Securitics

16

88

131

155

US liabilitics

1 1

384

739

724

Net

imsestment

abroaid

+393

+139 -295

-362

Source:

R B

Scholl,

R

.1

Mataloni,

S D

Beuirgatnia

,

'rhe Internationlai

nvestment Position

oft

the

United

States

it 1991.

Survvev

of Current Business,

V'ol

72,

No

6,

1992.

Economic

and

Political

Weekly

January 30,

1993

PL

9

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the

US to maintain

convertibility

of

the

dollar

into gold at the

official

price.

Final-

ly, amid

increasing

currency

speculation,

the

gold standard

was abolished in

August

1971

and the dollar

was devalued

against

the

Deutsch mark and

other

currencies.

Nevertheless,

the US had

long

since

become the world's banker

in the

sense

that much

foreign trade and investment

had come to

be

transacted

in

dollars even

when American firms were

not

involved.

Centralbanks

aroundthe world

had come

to

stabilisetheir

own currencies n

foreign

exchange

markets

through

transactions n

dollars. Foreign

exchange reserves also

tended to

be

maintained in dollars. With

the

expansion of international

rade,

there

was a

need to increase the

supply of

the

medium

of

exchange and reserve

assets

in

those

countries. This

inherentdemand for

dollars

provideda convenient

way

to meet

the

US

balance of

payments deficit

(then

very

modest by

today's

standards).

Then in

1974,

the

quadrupling

of

the

price of crude oil-also denominated in

dollars-gave

renewed

strategic impor-

tance

to the

dollar as the

world'sreference

currency.

High

oil

prices

spawned

simul-

taneous

economic

stagnation

and

infla-

tion

('stagflation'), high

interestrates, and

a

strong

dollar. Then in

the

early

1980s,

oil

prices tumbled with

increased

supply

(from

Alaska

and the

North Sea) and

reduced demand

(energy

conservation).

Ronald

Reagan's policy of

'spend

now,

pay

later' to sustain

short-term

economic

expansion

and the

military

build-up trig-

gered the

spiral of

debt and

deficit

in

which the US finds itself trapped today.

A

weaker

dollar and

severe

structural

m-

balances

between

the US

economy

and its

chief

trading

partners threatened

the

credibility

of the

dollar as the

world's

reference

currency.Unable to

reaffirm its

primacy

through economic

performance,

the

Gulf

war

was an

opportunity

to

reassert

that credibility

through extra-

economic

means-political initiative and

military force. This

time the

centrality

of

the dollar in

world

markets

derives,

in

essence,

not from

inherent

strength,

but

rather

by

virtue of

the US

being

the

pre-

eminent

global

power.

As

the

global

'gen-

darme' protecting the flows of oil and

capital

serve

to the entire

western in-

dustrialised

world,

it

claims a

special

'right'

to continue

to

have the

dollar Serve

as

the world's

reference

currency.

As the

protector

of

world

economic

stability,

it

receives a

certain

unique

respect

in

the

mass

psychology

of

world

financial

markets.

Defying

sagging

US

interest

rates,

the US

dollar climbed

from

a low

of

DM 1.45 at

the

beginning

of

the Gulf

war to DM

1.70 one

month after the

cease-fire-a rise of 17

per

cent.

Never-

theless,

his cannot

alterthe

longer-term

underlying

weakness of the

dollar which

has since

fallen back to below pre-war

levels.

DIRECT

ECONOMIC

PAYOFFSOF WAR

The Gulf Co-operation

Council (GCC)

countries-Saudi Arabia, Kuwait, UAE,

Qatar,

Bahrain,

and Oman-all of whose

ruling

monarchies

felt

threatened by

the

Iraqi occupation of Kuwaitare now deep-

ly indebted to the US

for coming to their

defence and demolishing

the threat.

But

the US

involvementhas not come

without

strings

attached.

Even before the US-led

invasion

began, the Bush administration

had been

urging Kuwaiti officials

in

exile

to give US

firms a leading role

in

rebuild-

ing the country once the Iraqi occupation

was ended.

In fact, American corporate

executives

had the first

opportunities,

meeting

in Saudi Arabia,

to vie for larger

shares

of future

contracts. The

preli-

minary budget

for

Kuwait's

recovery

was

at least $ 70-80 billion, but the final cost

may

well exceed $

200 billion

over the next

10 years. Among

contracts

for the

first

phase

of

emergency

reconstruction

in

Kuwait,

70

per

cent

by

value

have

already

been awarded

lo US

companies.

The

British are a distant second.

The biggest

contracts-some

$ 20 billion-have gone

to

giant

engineering, construction, and

oil-service

firms that put out the oil fires,

and are

rebuilding shattered

oil refineries

and

restoring

oil production. Another

S

20

billion has been

estimated for

re-

constructing other

infrastructure,

in-

cluding

transportation,

communications,

electricity

and

water

supply,

sanitation,

and health

care.29

Despite

financial

reservessufficient to

meet the

preliminary reconstruction

budget,

Kuwait

has

preferred

to

borrow

against

its

overseas assets and even

against

future

oil

revenues to avoid

depleting

its

hard assets. Borrowing could eventually

go

as high as

$ 50-60 billion. Of

course,

US

banks have

been

among

the first to

take

advantage

of the

opportunity.

Citi-

bank,

Morgan

Guaranty

Trust,

and

Chemical

Bank have

already

emerged

among

the

big beneficiaries.

If

and

when a

government

acceptable

to

the

US

is

installed

in

Baghdad, there

will be

additional

massive

contracts for

the

reconstruction of

Iraq.

Once

again,

a

client

regime

n

Baghdad would be

obliged

to

allocate the

bulk of

the

contracts to US

firms.

However, an

alternative

scenario

might eventually be the overthrow of

Saddam

Hussein

by

some

sort of

coali-

tion of

the

nationalist

opposition

which

would not

look

favourably on US

domi-

nation.

This may

be one

reason for

US

reluctance to openly

support the

various

rebel

groups in

the Iraqi

civil war.

In the

absence

of a

good

candidate to

head a

client

regime, the

US

interest in

Iraq is,

for

now,

a

limited

or

controlled

desta-

bilisation of

the

country.

Nevertheless,any

successor

government n

Baghdad,

regard-

less of

orientation, will

have a

desperate

TABLE

4:

ESTIMATED

US

BALANCESHEETFORGULF WVAR

($

billion)

Expenditures Receipts

Desert Shield

20

Pledges

for war costs

53

Desert Storm

20

Emergency

services to Kuwait 2

Occupation

5 Contracts to rebuild Kuwait

60

Reconstruction

aid 5 Contracts

to rebuild Saudi Arabia

I

Promised

aid,

debt write-offs

20 Additional arms sales

20

Cancelled

aid

-I

Added security

I

Cost

of

higher

oil

prices

15

Net

loss of GNP

during

war 20

Total

105

136

Calculations

based

on

re-estimates of costs identified in: J P Love,

Costs

of

the US

U-ar

with

Iraq, Public Citizen, Washington, DC, February 1991.

Econonitn and

Business

Outlook, February

1991

(Bank

of

America).

TABI-L5:

VETOESOF

UN

SECURI1Y

COU

N(

i

RLSOlU11ONS

Country 1984 1985 1986 1987 1988 1989 1990

1984-90

USA

2

7

8

2

6 5 3 33

UK 0

2

3

2

i

2 1

11

France 0

0

1

0 0

2

1 4

USSR

I

0 0 0 0 0

0

1

China

0 0 0 0 0 0 0 0

Items

voted

17

44 21 15 26 25

40

188

Source:

Report

to

Congress on Voling Pracltices n the United \ations, US l)cpartment of State,

Washington, DC (annual;.

PE-10 Economic and Political Weekly January 30, 1993

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need for external

resources and tech-

nology

for

the

monumental task of na-

tional

reconstruction.

In

the

ensuing

scramble

for

civil

contracts,

US and

western

firms will invariably

take the big-

gest

share

of the

business.

One

of the lessons of

the war

with

Iraq,

as perceived

n

the

west,

is

the needto curb

the

arms

bazaar in

West

Asia, particularly

purchases

by 'unreliable'

countries such

as Iraq and Iran.

Despite this, it is clear

that the overriding

thirst for profits in the

west and political

pressures in the West

Asia are

likely

to

accelerate t,

particularly

in the absence of a

comprehensive peace

in the region. Having

dramatised he mili-

tary

vulnerabilityof

all

the oil-rich states,

the Kuwaiti

experience

will

place new

urgency on membersof the

GCC to step

up arms purchases. Once

again

the

grati-

tude of

rulingmonarchs

to

US

leadership

in the war

is likely o translate nto a

direct

windfall of perhaps $ 20 billion

of addi-

tional arms

purchases

from US

manufac-

turers.Moreover, he dramaticsuccess of

US hi-tech armaments

will

undoubtedly

bring

other

third world

countries flock-

ing to US producers

of

winningweaponry.

While the booming arms market will

pro-

vide opportunities as

well

for

other coun-

tries

which have

advanced

weapons

to

sell-such

as

NATO

nations,

former War-

saw Pact

countries, China,

Brazil, India,

and North

Korea-the US

arms

industry

stands to

gain the most.

As Arab members of

the

anti-Iraqi

coalition,

Egypt

and

Syria

too

will

be

seeking advanced

US

arms

technology.

Egypt has alreadyreceivedfrom the Bush

administration

promises

of

big increases

in future

military aid. Syria,

however, as

a

front-line tate

in the

confrontation

with

Israel,

will

continue to face

staunch

op-

position

from Israel

and

the

powerful

Zionist

lobby

in

the US to its

acquisition

of

sophisticated US arms. This

is one

reason why the US is

for the

first

time ac-

tivelyseeking some kind

of

peaceful set-

tlement

of the

Palestinian

issue. With its

enhanced political

leverageon

both

Syria

and Israel

consequentto

the

Gulf

war,

the

US

is

presentedwith another rarewindow

of opportunity to emerge as the peace

broker n

WestAsia. With

improved US-

Syrian relations

and,

paradoxically, by

partially reducing

tensions,

this could

open

the

way

for another round of

arms

purchases by Syria.

While

the US may be

losing

its

compe-

titive

edge vis-a-vis

Japan

and

Europe

in

producing

and

selling

a

wide

range

of

manufactured

goods,

the Gulf

war has

demonstrated that

it

can still excel in sell-

ing protection.

Pledges

to

the US for war

costs

from

Saudi

Arabia

(S

16

billion),

Kuwait

(S

16 billion),

other GCC

states,

and non-combatant allies

total $

53.5

billion.

This

amounts to

a

significant

deduction

from

the

huge

US

balance

of

payments

deficit.

Moreover,

now

that

the

war

has

proven

to

be

short,

costs

to

the

US

are

closer

to

$

45

billion

instead of

the

$

60

billion

projected

earlier

by

the

White

House.

However,

George

Bush,

in

attemp-

ting to

avoid

being

seen as

a

war

profiteer,

has

stuck

to

the

higher

figure.

In

fact,

the

US

government

has

probably

earned a

tidy profit of over $ 10

billion

from

the

war

itself,

although it

will

have a

net

ex-

pense

owing

to

aid

and

debt

write-offs

promised

to

Egypt,

Israel,

and

other

supporters.

Ultimately

by the

time all

the

contracts

for

reconstruction

of

war

damage

and

marginal

increases

in

overseas

arms

sales

resulting

rom

the

demonstrated

uperiori-

ty

of

US

firepower

are

counted, the

US

economy

as

a

whole will

show

a

signifi-

cant

surplus from

the

war.

Even

if

poten-

tial

contracts

for

future

reconstruction

of

Iraq are

excluded,

conservatively

the

US

economy could well experience a net gain

of

over $

30

billion

as a

direct

result of

the war

(Table

4).

But

these

direct finan-

cial

benefits

are of

minor

imporotance

compared

with the

far

more

profound im-

pact

of

the

reaffirmation

of

US

politico-

financial

hegemony.

BUYING

OrES

AT

UN

Seeking

a

veil

of

legitimacy

from

the

United

Nations, US

secretary

of

state

James

Baker

and

other

officials

spent

months in

intensive

shuttle

diplomacy

to

secure

support for

a

step-by-step process

of condemnation, economic sanctions,

embargo

on

food and

humanitarian

sup-

plies,

authorisation

for

use

of

force

to

eject

Iraqi

roops

from

Kuwait,

and

finally

a

draconian

settlement of

war

reparations

and

demilitarisationof

Iraq.

The

apparent

consensus in

the

UN

Security

Council

was

not

so

much

a

result of

any coincidence

of

national

interests

as of

intense

US

political

and

financial

pressure.

Although

precise

details

have not

yet been

made

public,

it

is

clear

that Soviet

and

Chinese

co-operation

in

the

UN

Security

Council

were

rewarded

with

promises of

loan

guaranteesand preferential nvestment ies

at

a

time

when

both

economies

were

suf-

fering

severe

dislocations;

the

cost of

non-

cooperation

would

have

been

cancellation

of

some

existing

loans and

political

ostra-

cism for

'human

rights'

abuses.

Colombia,

which

supported

the

US,

was

rewarded n

precisely

this

manner with new

loans

and

aid,

while

Yemen,

which

opposed

the

US,

had

its

US-controlled

loans

and

grants

summarily

cancelled.

These

events

sent

unequivocal

signals

to

other third

world

countries

when

the

US

went

search'ing

for

partners

in

the

Desert

Shield

military

coalition.

Egypt

received

cancellation of

$

7

billion

in

military

debts

to the

US

plus

rights to

military

hardware left

behind.

Bangla-

desh,

Niger and

Senegal,

always

desperate

for

economic

assistance,

received

com-

mitments

for

new aid.

Morocco

and

Pakistan,

already

closely

allied

to

Saudi

Arabia, were

similarly

persuaded.

Pakistan

was

reportedly

also

given funds

for

mercenaries

ent

to Asir province n Saudi

Arabia to

fight

in

the

border

dispute

with

Yemen.

Syria,

despite its

occupation

of

the

greater

part

of

Lebanon,

was

given a

green

light to

consolidate

its

control

by

driving

the

Christian

militias

out

of

Beirut.

It was

also

promised $

1-2

billion in

annual

economic

and

militaryaid.

Turkey

eceived

a 40

per

cent

increase

in

its

textile

import

quota

to

the

US.

Even

non-combatant

countries, such

as

India

which

reluctant-

ly

allowed

the

US

to

refuel its

military

air-

craft

at

Indian

air

fields,

received

condi-

tional

loans from

the

IMF.

For

its

finan-

cial

contribution

of

$

9

billion,

Japan

was

rewardedwith a relaxationof US pressure

on

the

terms of

bilateral

trade.

Bush

declared

that

for

the first

time

since

the

Korean

War

the UN

was "fulfill-

ing its

promise

as

the

international

parlia-

ment

of

peace"

in

adopting

an

unbroken

string

of

security

council

resolutions

against

Iraq

up

to the

authorisation

for

use

of

force.

This was a

veiled

reference

to

the

convergence

of the

US

and

USSR

in

world

affairs

and

the

former

inability

of

the UN

Security

Council

to

act-

allegedly

due to

Soviet

obstruction of

US-

supported

resolutions.

However,quite

the

contrary, in the seven years 1984-90, the

US

exercised its

veto

power

over

30 times

more

often

than

the

USSR

(Table

5),

while

the

Soviets

sided

with

the

Americans

on

129

out

of

134

affirmative

votes.

The

resolutions

most

frequently

vetoed

by

the

US

pertained

to

US

policy

incen-

tral

America,

Israeli

policy in

the

occupied

territories, and

South

Africa.

It

is

clear

that

the US

attitude

towards

nternational

bodies has

been

completely

opportunistic.

When

world

support

could

be

mustered

for

US-sponsored

resolutions,

it

loudly

condemned

Iraqi

intransigence.Yet

when

the International Court of Justice in The

Hague

on

June

27,

1986

declared

the

US

mining

of

Nicaraguan

harbours

and its

sponsorship

of

the

Contra

war

in

viola-

tion

of

international

law, the

US

itself

chose

open

defiance.

The

economic

crisis

in

the

west

in

general, and in

the

US

in

particular,

have

moved

the

US

state

to

reassert

ts

centrali-

ty

in

global

finance

and

capital

through

extra-economic

means.

This

means

both

co-operation

and

contention

with

other

industrialised

nations.

Mounting

financial

imbalances

will fuel

renewed

economic

and

political

rivalries

among

the

indus-

Economic

and

Political

Weekly

January

30, 1993

PE-II

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trialised powers. But most

importantly,

now with the

disintegration of Soviet

power, deterrence and

the

global

power

balance are

gone. The limits on

conven-

tional war

have been lifted.

The

new

world

order

signals

the

decline of

east-west con-

flict

and the renewed

primacy of north-

south conflict.

Nt)tes

I S G Lin, 'The 1990s: Decade of Global

Economic and Political

Crisis,

Economic

and Political

Weekly,

January 27, 1990,

pp PE47-PE52.

2 WorldEconomic

Survev

1992, United Na-

tions, New York, 1992, p 11.

3 The Military Balance 1990-1991, Interna-

tional Institute for Strategic Studies,

London, 1990.

4

Time, February 25, 1991, p 18, Newsweek,

March 18, 1991, p 38.

5 Time, March 4, 1991, pp 38-39.

6 The WashingtonPost, July 20, 1990, p

A12.

7

The WashingtonPost, July 25, 1990, p

A17.

8 The Bush administration has neverdisputed

the accuracy of the Glaspie-Hussein

trans-

cript.

In

fact,

leaks from the

state

depart-

ment have confirmed

that

Glaspie

was

faithfully following

the strict instructions

of a cable signed by James

Baker.

Yet,

dur-

ing post-warcontroversyon the subject,

the

White House attempted to turn her

into a

sort of

scapegoat

to

protect

Baker

and

Bush-much in the manner

that

John

Poindexter

and

Oliver North

wert

dumped

in

order to insulate president

Ronald

Reagan

from

the

Contra-gate

scandal.

9

The official

US

signals during

this

period

consisted

of

both non-specific support

(aimed at reassuring Kuwait and Saudi

Arabia) and non-commitment (presumably

aimed to confuse Iraq). John Kelly restated

the US

position

to "do all

we can to

sup-

port our friends when they are threatened

and

preserve stability".

But

he

always

balanced that with the assertion that the

US

has no defence treaties

in the area. See The

Washington Pos(, August 1, 1990, p

A14.

10 Petroleum Supply Annual

1990,

Vol 1,

US

Department of Energy, Washington, DC,

1990, p xv.

11

Ibid,

p

xviii.

12 OPEC Facts and Figures, OPEC,

Vienna

(annual).

13 Foreign Direct Investment

in the United

States

1987

Benchmark

Survey,

Final

Results, US Department of Commerce,

Washington, DC, 1990, p M-8.

14 Petroleum

Intelligence Weekly,

December

11,

1989.

15

Wall

Street Journal, March 21, 1990, p

B2.

16

Washington Post, January 9, 1991, p

F3.

17

Christian Science Monitor, January 15,

1988, p 11; September 20, 1990, p

8.

18 WallStreet

Journal,

October

5, 1988, p A29,

October

6, 1988,

P

A15; January 4, 1989,

p

A3.

19 WallStreet

Journal,

October

4, 1988, p A25;

June

12, 1989, p

Al

l; September 25, 1990,

p

A18.

20,

Christian

Science

Monitor, January 15,

1988, p 11;

WallStreet

Journal,

March

22,

1988,

p

30;

April

10,

1989, p

AIO;

I)emernber

28,

1989,

p

A4.

21

Le

Monde,

August 3,

1990, p

4.

22

Wall

Street

Journal,

June 7,

1988, p

28.

23

Wall

Street

Journal,

October

12,

1988,

p

A15;

October

5,

1990, p

BIIA.

24

San

Francisco

Chronicle,

January

2,

1991,

pp

CI-C2.

25

Morgan

Stanley

Capital

International

Per.spective,

1990.

26

E&onomic

and

Business

Outlook

(Bank

of

A,nerica,

San

Francisco),

August

6,

1990.

27

World

Economic

Outlook,

IMF,

Washington,

DC,

October

1990.

28

OECD

Economic

Outlook,

OECD,

Paris,

June

1992,

p

viii.

29

Business

Week,

March

11,

1991,

p

34,

Timne

March

11,

1991,

p

42.

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PE-12

Economic

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Political

Weekly

January

30,

1993