Comparative Analysis of the Wars in Kosovo
and Iraq
In
the last eight years the United
States of America led two wars without UN
resolutions and claimed successful victories. However, a realistic evaluation of
these victories reveals their high costs and unfinished outcomes. Kosovo and Iraq are still
in transition to stable economic and political development. This comparative
analysis of the Wars in Kosovo and Iraq
focuses on the cost of intervention and the impact of the wars on international
trade, foreign direct investments and the economic performance of Kosovo, Iraq
and their neighboring countries. The regional economies were affected by trade
disruption that led mainly to higher costs of exports. To produce under the new
costs of the exports, firms had to reduce their expenditures and fire some of
their workers. Thus, the higher costs, caused by trade disruption, led
indirectly to an increase in unemployment rate and a decrease in GDP growth
rate. The analysis points out also similarities between the situations in Kosovo
and Iraq.
Kosovo War (March
24, 1999 – June 10, 1999)
Until 1989, Kosovo
(approximately 90% Albanians and 10% Serbians) had the status of an autonomous
province within the Socialist Federal Republic of Yugoslavia. In 1989, Serbian President
Slobodan Milosevic removed the autonomy of the region and placed its political
control in the hands of the Serb minority. The Democratic League of Kosovo
(LDK) led by Ibrahim Rugova started a peaceful opposition, building parallel
governing structures. In the late 1990s, the long-standing tensions between the
Kosovar Albanians and Serbs escalated into open hostilities which led to a
civil war. To restore stability in the region, NATO intervened in Kosovo.
The Kosovo War, consisting as it did only of air attacks, was a virtual war.
During the 79-day air campaign NATO dropped twenty thousand tons of bombs which
demolished houses, industrial plants and roads. While NATO and Human Rights
Watch estimated that approximately 500 people were killed, the Yugoslavian
government approximated the civilian casualties in the range from 1,200 to
5,700. The immediate consequences of NATO’s victory in Kosovo were mixed. Despite
the presence of peacekeeping corps, the situation in the postwar Kosovo
resembled anarchy and Kosovar Serbs were fleeing because of Albanian revenge
killings.
Cost of the War to the United States
Steve
Kosiak of the Center for Strategic and Budgetary Assessments estimated the budgetary
cost of the Kosovo War to the US
in the range from $2 to $3 billion. He
also estimated the costs for the non-US NATO allies at about $1 billion. The
Pentagon announced that it had spent $2 billion on the conflict and projected
approximately an additional $2 billion on the KFOR mission per year. However, Digby
Waller, a defense economist, estimated the cost of the air campaign at $12
billion and the cost of a projected Kosovo occupation at $10 billion.
According to BBC, the final cost of the Kosovo War (₤31.67 billion)
consisted of the military cost that NATO incurred (₤2.111 million) and
the amounts dedicated for aid, peacekeeping and reconstruction (₤29.04
million). The final estimation of the total cost of the Kosovo War should
include not only the direct costs to Serbia,
Kosovo, USA
and its NATO allies but also the indirect costs that Yugoslavia’s neighbors incurred
because of the instability in the Balkan region.
Cost of the Kosovo War for the Balkan
countries
The
cost of the Kosovo War for the Balkans countries should be estimated in terms
of its impact on transportation, international trade and foreign direct
investments. The Economist Intelligence Unit estimated that the Kosovo conflict
cut US $7.8 billion from the GDPs of Yugoslavia and its seven neighbors. NATO’s
bombing of Serbia’s
roads and bridges damaged the transportation infrastructure. Prior to the
Kosovo War, the existing Balkan transport infrastructure provided
cost-effective transport of goods and stimulated trade within the region and
with the European Union. The Balkan Wars in Croatia,
Bosnia and Herzegovina and
Kosovo have excluded the former Yugoslav
Republic from being a strategic player in the Balkan market. When
NATO’s bombing of Serbian bridges on the Danube, a Pan-European transport corridor,
made it impassable, there was direct impact on the transitional economies of
Bulgaria and Romania, as well as a spillover effect on the Austrian and
Hungarian economies (two of the biggest users of Danube). The usage of
alternative routes for shipments in and out of Southeastern
Europe led to a significant increase in transportation costs.
Romania estimated that it lost as much as $50 million per month while the
Danube remained closed. According to Bulgaria’s trade minister, the
economy lost $70.7 million in trade, $30.8 million in transport, $22.7 million
in industry, $9.1 million in agriculture, and $8.1 million in other sectors.
The Bulgarian Finance Ministry evaluated the total amount of the losses in 1999
at US $800million. The effect of Kosovo War on trade was a decrease in GDP
growth rates and an increase in unemployment rates in Bulgaria and Romania. The
Kosovo War had also a significant effect on the Croatian economy: a reduction in
tourism receipts, exports and foreign direct investments. The Croatian
Reconstruction and Development Bank Officials estimated the damages of NATO’s
air war to be more than $522 million in 1999. The
Macedonian economy suffered from trade disruption, influx of refugees and prospects
for political and economic instability. In the early days of Macedonian independence, Yugoslavia remained
a major partner in direct and transit trade; trade links with Yugoslavia
accounted for 70 percent of Macedonian exports.
The
Kosovo War affected not only regional trade but also foreign direct investments
(FDI). The perception of political instability decreased FDI inflows and caused
a slow down in the economic performance of the Balkan countries. For the period
1999-2000, the FDI inflows decreased in Bosnia-Herzegovina (from $158m to
$150m), in Croatia (from
$1700m to $1100m) and in Serbia
and Montenegro
(from $225m to $50m). FDI inflows remained constant in Romania ($1000m). Although the FDI
inflows increased in Albania
(from $46m to $150m) and Macedonia
(from $30m to $170), the increase could be explained by the additional amounts
of foreign aid received for the refugee wave.
FDI
inflows are directly related to investors’ expectations regarding future
returns. Domestic instability or conflict with neighboring countries reduces
the profitability in countries in transition because domestic sales and exports
are reduced, production is disrupted, and infrastructure is damaged. Examining
the significance of political risk for investment decisions, economic studies
conclude that political instability affects the value of the host country’s
currency and, therefore, reduces the value of the assets invested in the host
country and the prospects for future profits.
Since
the Kosovo War disrupted the normal economic links among the countries of Southeastern Europe, it could easily have triggered
macroeconomic instability and a reversal in the ongoing structural reforms. All
countries in the region, except Greece,
suffered from fragile market institutions. Although Southeastern Europe (SEE)
grew more slowly than Central Europe, most of
the countries in SEE managed to maintain macroeconomic stability and continued
the structural reforms thanks to the generous contributions of the
international community (almost 20 billion euros).
The Economies of Kosovo and Serbia
The
UN mission in postwar Kosovo had unique aspects. Since Kosovo is a Serbian
province, not an independent state, the UN was involved for the first time in
building financial institutions from the ground up to start Kosovo’s transition
to a market economy. The postwar Kosovo economy was characterized by high
unemployment rate, pending reconstruction of roads, houses and industrial
plants and low level of FDI. The majority of Kosovo exports prior to 1999 were mainly to other parts of Yugoslavia. The war and the
establishment of a UN protectorate in Kosovo severed the economic links between
Serbia
and Kosovo. After the loss of the Serbian market, Kosovo’s export potential was
limited. Moreover, as a landlocked region, Kosovo depends on its neighbors for
maintaining its trade links. Instability in Albania
and Macedonia or border
clashes with Serbia
make Kosovo’s economic independence fragile. In March 2001, the internal
conflict in Macedonia
temporarily blocked Kosovo’s main trading artery. Prices increased for several key goods because
the supply of imported goods was limited. Kosovo’s economy is highly dependent
on imports because the production for the internal needs is also inadequate.
The development of the manufacturing sector is restricted by the obsolete
production methods, insufficient investments and limited demand for its
products.
Six
years after the war, a large percentage of Kosovo’s population lives in poverty
as unemployment and corruption continue to plague the country. With an
unresolved political status, economic development remains one of the greatest
challenges faced by the new Kosovar government. Over half of the population of
Kosovo lives below the national poverty line – $1.65 per day (World Bank).
International aid received after the war has not led to significant job
creation opportunities. According to the United Nations Development Program
(UNDP), official unemployment figures fluctuate between 49-57 percent. More
than 70 percent of the youth aged 16-24 years are unemployed. For a country with an average age of 25, these
figures are particularly troubling.
The
Kosovo Albanians consider the unresolved political status a major barrier for
FDI inflows. They hope investments will pour in, when Kosovo becomes free and
independent. Recently, microfinance initiatives are considered to be a very
good start for creating employment opportunities and building social capital.
Although twenty institutions work in the field of microfinance in Kosovo, there
is a strong need for programs that would concentrate more on facilitating
integration among the ethnic groups. There is no available data about minority
involvement in the postwar microfinance initiatives in Kosovo. However, it
should be noted that a stable macroeconomic environment is a prerequisite for
entrepreneurs to take risks and invest.
The postwar Serbian economy had
similar characteristics as the Kosovo one: high unemployment rate, low FDI and
pending reconstruction of its infrastructure. To restore growth and reintegrate
Serbia
into the world economy, Serbian government removed price and trade controls and
started a privatization process.
The Relationship between Balkan Politics
and Economics
The
economic potential of the Balkan region depends on the political situation. The
unresolved status of Kosovo affects regional stability. In 2001, Macedonia
experienced the consequences of the Kosovo War for its ethnic stability. The
internal Macedonian–Albanian Crisis in 2001 affected Macedonian economic
performance and might have had indirect effects on Bulgaria and Greece. The
international community would be well advised to restrain the rise of
nationalistic spirits among Kosovo Albanians because attempts to revitalize the
myth of Great Albania might destabilize the future of Macedonia as independent state
(Macedonians 70%, Albanians 30%). It might also awaken Hungarian pretensions to
parts of Serbia and Romania where the population is predominantly Hungarian
(about 20%). Potential future destabilization of the region would be too costly
for the economic development of the Balkans. Therefore, it is important to
foster regional cooperation. In July 1999 the Balkan Countries adopted the
Stability Pact for South Eastern Europe. It
was designed to prevent another armed conflict in the region after Kosovo and
to bring the region closer to integration into the European structures. The
combination of regional initiatives with involvement of the European Union will
play an important role for economic and political stability in the Balkans.
Iraq 2003 - 2006
Officially,
the Iraq War, known also as Operation Iraqi Freedom, lasted only twenty-five
days, from March 20 to April 15, 2003. US President George W. Bush stated that the reasons for the invasion were Iraq’s
disarmament of weapons of mass destruction, the end of Saddam Hussein’s support
for terrorists and the liberation of the Iraqi people from Hussein’s
dictatorship. Instead of
weakening the terrorists, the war ended up strengthening them.
Despite the ongoing insurgent violence in Iraq in 2005, elections were
conducted for a transitional government, a permanent constitution and a
permanent government. Religious and ethnic separation, exploited by the
terrorists, has reemerged as a major obstacle for Iraq’s stability.
Cost of the War to the US
In
comparison with the Kosovo War, the Iraqi War turned out to be more expansive
because of the war strategies used in Iraq and the difficulties that the
peacekeeping operation encountered. While Kosovo War was a “virtual” war, the tactics
of the Iraqi War included a combination of air attacks and ground operations.
Unlike Kosovo, in Iraq the United States
covered most of the expenses for the non-US force deployments. Utilizing the
troop projection reported by the Congressional Budget Office, Linda Bilmes and
Joseph Stiglitz estimated the total cost of the war to the United States
to be $2.267 billion. Bilmes and Stiglitz included government’s spending for
the war ($725 billion), health care and disability benefits for veterans ($127
billion) and hidden increases in defense spending ($160 billion). The
calculations of the final cost of the Iraqi War should include the estimation
of Bilmes and Stiglitz, the additional costs incurred by the 2007 surge
(deployment of extra 30,000 US
troops) and the aid that the United States
will continue to give to Iraq
for its development.
Cost of the War to Iraq
Estimating
the cost for Iraq, we should
include the number of civilian casualties that could have contributed to Iraq’s
development as a labor force, the cost for reconstructions, the difference
between real and expected GDP values, the increase of unemployment rate and the
lower amount of FDI.
Three
years after the end of the major combat operations, civilian casualties
increased by at least 15,000 killed and 100, 000 injured. As
of April 26, 2006, the Brooking Institution estimated that a civilian death
rate ranges from 14,030 to 24,557.
Insecurity,
corruption, lack of sufficient foreign direct investments (under 1 percent of the
GDP), dilapidated infrastructure, and uncertainty obstruct Iraq’s economic development.
Inflation is above 50 percent. Unemployment rates are in the range from 20 to
60 percent, despite the NGO attempts to foster local employment through various
projects. By increasing the number of
attacks on Iraq’s
economic infrastructure and particularly the oil industry, the insurgents
worsen the economic situation. The ongoing attacks have made repair and
maintenance of existing installations very difficult. Development of new ones
is not under consideration, though this would be greatly beneficial for
increasing oil export revenues. Iraq
could have exported approximately three times the current level, around 3
million barrels per day (bpd). Instead of increasing its exports, Iraq,
with the fourth largest oil reserves in the world, has been forced to import
significant portions of liquefied petroleum gas, gasoline, kerosene and diesel.
In 2006 the Iraqi Oil Ministry estimated that the current average import cost
of fuels was roughly $500 million each month. Although
short-term economic prospects for Iraq seem bleak, the long-term
prospects are optimistic. Accelerating reconstruction by creating jobs and
improving public services would drain support for the insurgents and increase
confidence in the government. If the violence is reduced and the government
performance is improved, Iraq’s ample oil reserves, water resources and fertile
lands can provide the means for significant growth.
Cost of the War to Neighboring Countries
of Iraq
Iraq’s
neighbors face a number of challenges because of Iraq’s insecurity. Jordan’s leaders worry that Iraq is becoming a haven for terrorist groups, a
fear confirmed by the November 2005 suicide bombings in Amman
executed by Al-Qaeda members in Iraq.
The economic impact of the Iraqi crisis on Jordan has been mixed. Since the
1980s Iraq has provided Jordan
with its total annual needs of crude oil and oil derivatives at a low price.
The difference between the world market price and the price Jordan paid was a sum that far surpassed any
other source of aid Jordan
received. The Iraq War caused Jordan to lose not only its main source of
foreign aid, but also the Iraqi market that accounted for one-quarter of all
Jordanian exports. When the situation in Iraq
improves, Jordan
will reap trade benefits. Syria would also benefit from a stable and united
Iraq, because a breakup of Iraq would have a spillover effect on Syria’s
multiethnic and religious society. Saudi Arabia
has an interest in Iraq’s
return as a supplier to the oil market; otherwise, Saudi Arabia will have to make huge
investments to increase its own output in order to satisfy increased demand for
oil and gas. The
prospect of a weak Iraqi government that struggles with ongoing civil strife or
the country’s breaking apart into autonomous regions would be threatening to Iran’s and Turkey’s security and economic
interests.
Data
from World Integrated Trade Solution show that the war’s effect on trade
differs among Iraq’s
neighbors. For the
period 2003-2006 Jordan and Turkey have constantly increased their trade
deficits, while Saudi Arabia
has increased its trade surplus. There is no available data for Iran, Kuwait
and Syria.
While FDI in Iran decreased,
FDI in Iraq
and all other neighboring countries increased. Since the stabilization of the
region is a priority for the developed countries, FDI has increased despite the
insecurity.
Similarities between Iraq and Kosovo
National
reconciliation is essential to reduce further violence and maintain stability
in both Kosovo and Iraq,
as post-conflict regions with unresolved ethnic tensions. Iraq and Kosovo
have undertaken a transition from centralized command economies to liberal
market economies. As in Kosovo, the remittances of overseas citizens (representing
almost 20% of Iraq’s population) could be of great benefit. To use their
people’s entrepreneurial energy, Iraqi and Kosovo banking systems should be
able to grant small loans. Since this requirement is unlikely to be fulfilled by
the current banking systems, microfinance initiatives could contribute to the
development of small enterprises. In November 2006, the outreach of the
microfinance initiatives in Iraq
included 16,673 loans valued at US $18, 276,661. Economic
development based on solid macro and micro factors can lead to stability in the
Middle East and in the Balkans, including
prevention of terrorism and organized crime. Moreover, the potential for
democratic governance in a Muslim context could make Kosovo with its
predominant Muslim population an important template for Iraq’s democratic
development.
Despite
the war costs that Iraq, Kosovo and their neighbors have to pay, the transitions
in Iraq and Kosovo could be fostered more effectively by regional and
international cooperation. Southeastern Europe
(SEE) has benefited from the restoration of peace and temporary stability. Through
trade liberalization Southeastern European countries have made efforts for
economic integration within the region. Furthermore, in May 1999, the European
Union (EU) provided SEE exporters with duty free access to EU markets. For
2000-2006 the EU allocated more than 220 million euro for the implementation of
regional programs that fostered cross border cooperation, developed
infrastructure across the region and stimulated economic growth. To promote
interregional stability and prosperity, the Balkan countries participated in several
initiatives: South East European Cooperation Process (SEECP), Stability Pact
SEE (SPSEE) and South East Europe Cooperation Initiatives (SECI). While the EU
is a strong advocate of regional cooperation, the Arab League has not achieved
any significant degree of regional integration. The Economic and Social Council
of the Arab League was created to promote economic integration of the Arab
States in the Middle East and North Africa,
but the accomplishments thus far have been minor because the member states have
not coordinated their development strategies.
Recent
economic studies argue that strong economic ties are crucial for averting bloodshed.
It is believed that closer regional links can help erase the scars of Kosovo
and the other Balkan Wars of the 1990s. Enhancing trade with Iraq and the other Arab nations can contribute
to the improvement of the living standards in the Middle
East and the success of the war against terrorism. Therefore,
supporting economic development through regional and international initiatives
opens ways for permanent stability and prosperity.
The
wars in Kosovo and in Iraq have significant effects on the economic performance
of Kosovo, Iraq and their neighboring countries. War-related trade disruption,
political instability and destruction of infrastructure have led to a decrease in
the GDP growth rate, fluctuations in the exports/imports and decrease in FDI
inflows. Both interventions of the United States without UN
resolutions have ended with high costs and unfinished outcomes. The estimation
of the total costs of these wars should include not only the direct costs to Kosovo, Serbia,
Iraq, the United States and its allies, but also the
indirect costs that Kosovo and Iraq’s
neighbors have incurred resulting from instability in the region. To accelerate
their transitional processes to stable economic and political development,
Kosovo and Iraq
have implemented microfinance initiatives. Although Kosovo seems more secure
(absence of violent clashes recently) than Iraq, its unresolved political
status impedes the termination of its transitional process to economic,
political and ethnic stability. Kosovo and Iraq
would benefit if the initiatives for regional cooperation were further
stimulated since regional integration in Southeastern
Europe has indicated its positive effect on the macro and micro
factors.
Polia Petkova is an undergraduate Economics
major at Reed College in Portland, Oregon. This paper was written as part of an
internship for EPS during the summer of 2007.
Previously, Ms. Petkova served an internship with People to People
International in Plovdiv, Bulgaria during the summers of 2005
and 2006. Originally from Bulgaria, she
is active in many civic and cultural organizations. She is a board member of Reed Art Events, a
member of the Reed Model United Nations, co-founder and vice-president of the
German Club at the American University in Bulgaria and has volunteered at the
Better Community Club and the National Forum for Alternative Practice
Initiatives at the American University in Bulgaria, among others.