Economic Final 3

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INTRODUCTION

 The Gulf War was an armed conflict between Iraq and a 42-country
coalition led by the United States. The coalition's efforts against Iraq were
carried out in two key phases: Operation Desert Shield, which marked the
military buildup from August 1990 to January 1991; and Operation Desert
Storm, which began with the aerial bombing campaign against Iraq on 17
January 1991 and came to a close with the American-led Liberation of
Kuwait on 28 February 1991.

BACKGROUND
 Throughout the Cold War, Iraq had been an ally of the Soviet Union,
and there was a history of friction between Iraq and the United
States.[45] The US was concerned with Iraq's position on Israeli–
Palestinian politics. The US also disliked Iraqi support for Palestinian
militant groups, which led to Iraq's inclusion on the developing US list
of State Sponsors of Terrorism in December 1979.[46]
 The US remained officially neutral after Iraq's invasion of Iran in 1980,
which became the Iran–Iraq War, although it provided resources,
political support, and some "non-military" aircraft to Iraq.[47] In March
1982, Iran began a successful counteroffensive (Operation Undeniable
Victory), and the US increased its support for Iraq to prevent Iran from
forcing a surrender.
 With Iraq's newfound success in the war, and the Iranian rebuff of a
peace offer in July, arms sales to Iraq reached a record spike in 1982.
When Iraqi President Saddam Hussein expelled Abu Nidal to Syria at
the US's request in November 1983, the Reagan
administration sent Donald Rumsfeld to meet Saddam as a special
envoy and to cultivate ties.

 By the time the ceasefire with Iran was signed in August 1988, Iraq was
heavily debt-ridden and tensions within society were rising. [51] Most of
its debt was owed to Saudi Arabia and Kuwait.[52] Iraq's debts to Kuwait
amounted to $14 billion.[53] Iraq pressured both nations to forgive the
debts, but they refused.[5

 Iraq accused Kuwait of exceeding its OPEC quotas for oil production. In
order for the cartel to maintain its desired price of $18 per barrel,
discipline was required. The United Arab Emirates and Kuwait were
consistently overproducing; the latter at least in part to repair losses
caused by Iranian attacks in the Iran–Iraq War and to pay for the losses
of an economic scandal. The result was a slump in the oil price – as low
as $10 per barrel ($63/m3) – with a resulting loss of $7 billion a year to
Iraq, equal to its 1989 balance of payments deficit.
 In early July 1990, Iraq complained about Kuwait's behavior, such as
not respecting their quota, and openly threatened to take military action.
On the 23rd, the CIA reported that Iraq had moved 30,000 troops to the
Iraq-Kuwait border, and the US naval fleet in the Persian Gulf was
placed on alert.
 On 26 July 1990, only a few days before the Iraqi invasion, OPEC
officials said that Kuwait and the United Arab Emirates had agreed to a
proposal to limit their oil output to 1.5 million barrels (240,000 m3) per
day, "down from the nearly 2 million barrels a day they had each been
pumping," thus potentially settling differences over oil policy between
Kuwait and Iraq.[71]
 On 2 August 1990, Iraq invaded neighboring Kuwait,[27] and had fully
occupied the country within two days.
COURSE OF GULF WAR
 On 2nd August 1990, Iraq annexed its southeastern neighbour Kuwait, a
country which is 25 times smaller in size than itself.
 Iraq was, at that time, ruled by Saddam Hussein.
 Hussein claimed Kuwait as Iraq’s province, but the real reasons for the
invasion were:
 Hussein eyed Kuwait’s huge oil reserves. He thought Iraq could acquire
a significant bargaining power in the world if it owned massive oil
reserves.
 Iraq had accrued huge debts after its war with Iran. The country also
owed Kuwait a significant amount. (Ironically, it was the US that had
armed Iraq with weapons to aid in its war against Iran, which was on bad
terms with the US since its Islamic Revolution in 1979.)
 A third reason was that Hussein wanted to link this annexation with the
Palestinian conflict.
 Upon the annexation, the United Nations Security Council
(UNSC) reprimanded Iraq and warned of military action if it did not retreat by
15 January, 1991.
 As Hussein showed no intention to back off, despite the UN warnings, US-led
coalition forces comprising more than 30 nations, assembled troops in Saudi
Arabia.
 The coalition included the US, the UK, Saudi Arabia, Egypt, France,
Canada, Syria, Morocco, Oman, Pakistan, the UAE, Thailand, Qatar,
Bangladesh, Italy, Netherlands, Australia, Niger, Sweden, Philippines,
Senegal, Argentina, Spain, Belgium, Bahrain, Poland, South Korea,
Norway, Singapore, Czechoslovakia, Denmark, Greece, Hungary and
New Zealand.
 They totalled about 7 lakh troops.
 After the deadline, the coalition forces launched Operation Desert Storm, in
which they destroyed Iraq’s oil refineries, air defences and other major
infrastructure. This was a naval and aerial bombardment offensive.
 This was followed by Operation Desert Shield, a ground offensive, which
started in February.
 In February end, Kuwait was released after Hussein signed a ceasefire
agreement. The war officially ended on 28 February 1991.
ECONOMIC CONSEQUENCES
INTERNATIONALALLY
 The 1990 oil price shock occurred in response to the Iraqi invasion of
Kuwait on August 2, 1990,[1] Saddam Hussein's second invasion of a
fellow OPEC member. Lasting only nine months, the price spike was
less extreme and of shorter duration than the previous oil crises of
1973–1974 and 1979–1980, but the spike still contributed to the
recession of the early 1990s in the United States. [2] The average
monthly price of oil rose from $17 per barrel in July to $36 per barrel in
October.
 The world of oil defied expectations on the second day of the Persian
Gulf War.

 Oil prices crashed Thursday in their biggest one-day fall. Oil companies
froze or lowered wholesale gasoline prices. Lines failed to appear at
service stations. And oil supplies remained ample.

 One day after the United States and it allies launched a massive attack
on Iraq, oil prices in New York plunged an unprecedented $10.56 a
barrel to $21.44--a dime below its price on Aug. 1, the day before Iraq
invaded Kuwait. The free fall confounded predictions that a war would
cause oil prices to soar as high as $60 barrel.

IMPACT ON INDIA AND ITS BOP

 The Government Expenditure was more than the earnings. Hence the
Fiscal Deficit was high. The Gross Fiscal deficit rose from 9 % of GDP
in 1980-81 to 12.7 % of GDP in 1990-91.
 The Internal Debt of the Government rose due to the above reason. It
rose from 35 % of GDP in 1985-86 to 53 % of GDP in 1990-91.
 In addition the country was importing more than exporting. Hence the
Current Account Deficit was high.
 The current account deficit was triggered by the rise in crude oil prices
because of the Gulf War. Due to this, the Forex Reserves of India
depleted massively. Despite substantial borrowings from the
International Monetary Fund (IMF) earlier in the year.
 By June 1991, India had less than $ 1 billion forex reserves, just
sufficient to meet import requirements for a period of 3 weeks.
 India did not have enough Forex reserves to conduct business with the
world.
 India was on the verge of defaulting on its International Debt
Obligations.
 Investors pulled out their money.
 Short term credit dried up, as exporters were apprehensive that they
would not be paid.
 There was a massive rise in inflation rates.
 The cost of the crisis to India is estimated at around $1.6bn. In absolute
terms India is the third most affected country. However, relative to the
size of the whole economy, the impact is only 0.6% of GNP .
 While the overall effect is relatively small, most of the 200,000 workers
in Iraq and Kuwait came from just two states, Kerala and Gujurat.
Remittances from the Gulf are estimated to account for some 15% of
Kerala's economy. In both states the impact is likely to have exceeded
1% of their Gross State Product..
RESPONSES

 A t least forty poor developing countries were severely affected by the


Gulf crisis to an extent akin to a widespread natural disaster (>1% of
GNP).

 Both the IM F and the World Bank responded to the crisis in several
ways and discussed with the most severely affected countries, but
without so far raising additional concessional funds.

 •There was a remarkable response by the countries involved in the Gulf


Crisis Financial Coordination Group. The $14bn promised so far is an
enormous amount . of official development assistance and corresponds
to nearly a quarter of normal total aid flows. This sum was even more
remarkable given that it was additional to large sums pledged to defray
the military costs incurred by the Coalition forces.

 However, the distribution of this $14bn, unlike normal responses to


emergencies, was highly selective and not always directly related to
need. While in aggregate the funds raised by this Group could meet the
estimated $12bn country-specific costs of all the forty or so severely
affected countries, it appears that aid to date was only been channelled
to six of these, covering 60% of the total cost.

 Extending compensation to the poorest group of other severely affected


countries — Yemen, Sri Lanka and fourteen Sub Saharan countries —
would cost only another $2bn, representing a small proportion of either
the Coalition's war costs or Kuwait/Iraq's reconstruction costs

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