Substack

Sunday, July 15, 2007

Economic Costs of Foreign Policy

James Surowiecki has an excellent article in the New Yorker magazine, Troubled Waters over Oil, highlighting how America's bluster inflicts huge costs on the American economy.

The recent sabre-rattling against Iran is only the latest example of US Middle East Policy initiatives contributing towards increasing the uncertainty in the international oil markets. History is replete with countless examples of such misguided and ill-timed US-Israeli collaborative adventurism in the Middle East, which have been critical in shoring up oil prices. This has resulted in periodic oil supply shocks, thereby considerably enhancing the bargaining power of the OPEC. An economist would call it US Foreign Policy generated oil risk premium. This premium has resulted in the transfer of billions of dollars of purchasing power from the American and Western consumers to the Arab governments. This transfer of resources has played a vital role in propping up dictatorial and autoritiarian rulers in many oil exporting nations, in West Asia and Africa. It is also not incorrect to claim that the uncertainty caused by American Foreign Policy and the attendant oil risk premiums have pushed back the forces of democracy in West Asia.

Neo-cons at Heritage Foundation, American Enterprise Institute or Cato Institute, advocating American foreign policy options to put the squeeze on Hugo Chavez, only need to pause and do a bit of introspection. President Chavez is presently visiting all the "friends of America", merrily doling out the massive oil bonanza that George W and his neo-con cronies have delivered to Venezuela. With oil prices rising seven or eight fold over the past decade, Hugo Chavez can afford to dole out social welfare largesse to his population, pour in massive resources into infrastructure investment in his country and simply buy off America's "rogue nations" to mobilize a coalition against his arch enemy. He can even summon the temerity to offer economic support for Blacks living in the ghettos of Harlem and Bronx. The policy option is to squeeze oil prices and not squeeze Chavez! So long as Chavez has his money, US has limited leverages to control him.

In fact American Middle East Policy appears tailor made to suit the strategic and economic interests of the oil exporters. Even Saddam Hussain or Mahmoud Ahmedinejad could have scripted a better foreign policy for their arch adversary. It would be illuminating if somebody could analyse and quantify the net effective transfer of resources from US and other oil importers to the oil exporting nations due to the higher prices caused by the instability and uncertainty created by the aggressive thrust and clearly perceived bias inherent in American diplomacy in the region. Another case for recruiting more economists at Foggy Bottom!

2 comments:

Quintessential Critic (Sudhir Narayana) said...

This is a very illuminating post. The price of the US's statements have to be borne by the rest of the world. HOwever, one must also not ignore that indirectly even the American firms that are involved in the oil operations in the Middle-East are benefiting because of the US sabre-rattling!

Urbanomics said...

There is a major lapse in my post in adding Cato Institute to the list of ideological supporters of the neo-cons. This is an unintentional lapse, since Cato Institute has been very strong critics of the neo-cons and the Iraq adventurism. The widely held impression of Cato is one of being the ideological support base of the Republican Party and the Conservative movement (though you will resist this). The convergence of opinions between Cato Institute and the Conservatives on many economic issues ranging from role of Government, subsidies, social policies, role of the market etc has only reinforced the impression.
The lapse is purely unintentional.