War's fallout on economy

Any war that involves the United States, the world's largest economy, and the Middle East, the world's largest oil supplier, like the one now raging in Iraq, will certainly do severe damage to the global economy.

The launch of the attack on Thursday did at least end some of the uncertainty and anxiety that had been a feature of most businesses and consumers since July when President George W. Bush began beating the drums of war, but new uncertainties are arising to make business risks virtually impossible to calculate.

Military action always involves uncertainties because the outcome of war depends on many unknown factors, including what might go wrong in the campaign against Saddam Hussein.

Don't be misled by the oil price fall on the first day of the attack on Thursday. Even though 26 leading industrialized countries were reported to have imported enough oil reserves to last up to three months, this war will certainly cause the international oil market to fluctuate wildly.

Oil prices would skyrocket if the conflict drags on for months due to fears of disruptions in supplies from major producers in the Middle East and all derivative products such as petrochemicals, plastics and synthetic fibers would accordingly become much more expensive.

In fact, the war is dragging governments in most countries now into another battle, a fight to prevent the wild volatility in the financial and commodity markets and to maintain a modicum of business and consumer confidence.

Even if this war is short and decisive, the wounds, scars it would leave behind could impose a devastating backlash on the structure of relations between countries in both camps -- those opposing and the ones supporting the attack in Iraq.

Indonesia's economy, which has yet to recover from its multidimensional crisis, is more vulnerable than many other countries to the fallout of the war.

First, because Indonesia is the country with the largest number of Muslim people in the world and is widely known to have pockets of radical elements that could be incited by the war into attacking Westerners or Western interests.

Second, Indonesia's economy is still fragile. Even though the country is still a net oil exporter, it must still import daily 250,000 barrels of crude oil from the Middle East due to the specific characteristics of some of its crude streams and more than 150,000 barrels of refined oil because of the limited capacity of its refining industry.

Moreover, the uncertainties could be even more damaging now as the economy needs more steam from external demand -- exports, tourism -- and investment to offset the slackening domestic consumer demand, thus far the biggest locomotive of economic growth.

Exports that account for around one-third of the country's gross domestic product will surely be hurt by the higher transportation costs caused by the costlier energy and higher security risks and consequently higher insurance premiums. And the tourism industry that has yet to recover from the deadly bomb attack in Bali last October will remain in the doldrums at least until the war ends.

Exports, inbound tourists, domestic consumer confidence and domestic investment may plunge if the government does not make new, concerted efforts to contain problems which could lead to serious damage.

The damage could be contained and minimized if the government, in cooperation with other political and religious leaders, could control the domestic reaction to the war, preventing anti-war demonstrations from escalating into acts of violence, let alone anti-Western backlash.

It is a comfort to learn that the government and Bank Indonesia (central bank) have prepared contingency programs to ensure that the markets will run smoothly and that expressions of protests and opposition to the war will maintain a semblance of order and peace.

Even though the macroeconomic situation and political stability has been strengthening over the past year, the overall condition is still fragile. Allowing excessive speculation in the foreign exchange market or even small acts of violence or attacks on foreign interests could severely damage the budding market confidence in the economy.

Failure to anticipate a shortfall in supplies of basic commodities due to temporary disruption in supplies could cause scenes of long lines at stores and consequently set off panic buying.

This in turn could trigger self-validating panic and start a vicious cycle of economic and financial collapse because in such a situation the market most often does not distinguish an isolated incident from the fundamentals of the economy which actually have been much stronger now than four years ago.