Profiteering by private military contractors and other economic consequences of conflict- Case study the Iraq War.

Before the first Iraq war Paul Wolfowitz then Under-Secretary of Defence for Policy astonishingly declared that action in Iraq was necessary to access the vital raw materials primarily Persian gulf oil. This neoconservative school of thought played a vital role in both the Bush administrations and offers an alternative explanation for the invasion for the invasion of Iraq than the pretence of the search for Weapons Of Mass Destruction. Iraq has one of the largest proven oil reserves at 119billion barrels; second only to the vast reserves of Saudi Arabia which suggests that the actual motive for the invasion of Iraq was Western imperialism. The Iraqi Oil supply was severely threatened by a souring of relations with the Hussein regime which could create a highly volatile in a market for which demand is inelastic and is a necessity for the functioning of the economy. Considering the profiteering motives for the invasion of Iraq it seems only logical that firms would soon follow in the profiteering trend; the aftermath of the Iraq war has led to an unprecedented use of private security contractors who represent a government failure. The fact that coalition forces are unable to provide sufficiently provide for the troops without commercial firms and are unable to station enough troops to occupy Iraq is an has led to this failure. There is also the issue of the phenomenal costs which are incurred through the use of private security firms which further validate the assertion that they are an example of a government failure. Between 2003 and 2008 the Congressional Budget Office estimated US agencies awarded around $85billion in contracts to private defence contractors in Iraq1 other valuations are much higher for instance , according to the Centre for Public Integrity 3000 contracts valued at more than 300 billion dollars2. In 2005 there were 20,000 contractors3 operating in Iraq at a much higher cost than the cost per standard troops. While the charges with security firms charge is highly variable and difficult to ascertain it has been estimated that in the early days of the U.S. occupation of Iraq, for instance, a security contractor could reportedly earn between US $500 and $750 per day4. Therefore the charges of the private security firms must be much higher and must amount to astronomical costs for the coalition forces. One recent congressional analysis, however, found that in the case of personnel provided by one company (i.e., Blackwater Worldwide), the total cost of private security personnel was significantly higher than the direct costs that would-be incurred by the (U.S.) military because of mark-ups and other costs charged the U.S. government5. Economist Joseph Stiglitz in 2008 said that what weve already spent (on the Iraq war) is in the order of magnitude of $600 billion. Therefore the estimated $85 billion in security contracts must comprise a significant amount of the total price of the war in Iraq.

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Volker Franke-security by contractor outsourcing in peace and stability operations War Profiteering in Iraq -Proffesor Bruce Lusignan 3 P.W Singer-outsourcing war 4 Volker Franke-Outsourcing security
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CRS report for congress 2008

The vast quantities of money spent also represent vast cash withdrawals from the coalitions circular flow of income; for example the Money spent to hire a Nepalese contractor working in Iraq does not stimulate the economy in the same way as say the construction of a school would do in Britain or America especially since 40% of money which funds the Iraq war has been borrowed from abroad6. The money which has been spent on funding the war (with the exception of salaries of troops and armaments bought from their own country) represent a huge cash withdrawal from the coalitions circular flow of income . The withdrawals from the circular flow can have highly adverse of the respective economies of the coalition for instance it can cause a contraction in aggregate demand (as represented by the shift from AD1 to AD2) and so result in a general slowdown in the economy. It may also result in a decrease in the value of a currency as an increase in withdrawals is equivalent to increasing the supply of a currency. The increased supply will result in a shift from S1 to S2 and so result in a depreciation in the currencys value (represented by the shift from $1 to $2) which can have many negative effects such as a loss of confidence and an increase in inflation.

The example of the Nepalese contractor is rather poignant especially when considering much of the human cost of the Iraq war has been overlooked as security contractors has intentionally recruited much of their workforce from deprived countries particularly in South America in order to avoid paying the human cost (which can range from death gratuity to bad publicity) of death and injury of employees in Iraq. The images of the four mutilated Blackwater employees on a bridge outside of Fallujah in 2004 sent shockwaves through the Western world and giving the Blackwater Company a level of publicity which it did not desire. Other notable events include the families of Blackwater employees who were killed in Fallujah attempted to sue the company for neglect. However it is a sad truth that through exploitation much of the negative attributes of death and injury can be avoided and so it seems likely that the true human cost of the Iraq war is much more than the deaths which have been publicised. This is part of the benefits to governments in hiring Private Security Firms in areas such as Iraq; in doing so they are able to avoid some of the effects of when things go wrong. There is no requirement for death gratuity and disability compensation for instance which proves highly costly to military budgets. Other benefits include a lesser political
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Joseph Stiglitz 3 trillion dollar war lecture

fallout from wrongdoing from contractors. Blackwater in particular has been accused of serious crimes most notably in Nisour Square in Bagdad 2007. Blackwater has been accused of killing 17 civilians by firing randomly into the crowd which it virulently denies despite eyewitness testimonies. These kind of incidents represent create massive externalities in terms of the human cost of the conflict but also cause huge damage in terms of the loss in faith to the coalition which is so vital to it achieving stability in Iraq. The negative externalities are not paid for either by the coalition and the welfare loss to the people of Iraq is represented by the shaded area and because of this it can be inferred that private military contractors are also an example of a market failure as the social costs of their presence is greater than the price they charge for their services.

There have been other prominent accusations of abuse and attacks by private security firms which create vast welfare losses to the Iraqi people; for instance the interrogators at Abu Ghraib. U.S army investigators who investigated the abuse of detainees at the notorious Abu Ghraib prison found that approximately 35% of contract interrogators lacked formal military training. In other cases, investigations of contractors serving in Iraq revealed the hiring of a former British Army soldier who had been jailed for working with Irish terrorists and a former South African soldier who had admitted to firebombing the houses of more than 60 political activists during the apartheid era3. It has also been argued that private security firms create negative externalities through the attractive offers which are made to ex or serving servicemen and women; for instance the large salaries which are available to those who work in the private security industry have discouraged many from reenlisting in the armed forces. The private military industry suffers from a severe lack of regulation which means that incidents such as the deaths at Fallujah and Nisour square are remarkably hard to prove and also far more likely considering the lack of regulation concerning who is allowed to become a mercenary. Halliburtons record in Iraq is yet another prominent example of a market failure in Iraq arising from a private military contractor. When Halliburtons Kellogg, Brown and Root subsidiary was given a massive contract to rebuild Iraq alongside providing logistics for the U.S army it did not come as a surprise, especially since former Vice President Dick Cheney was a former Halliburton CEO. After the collapse of the Hussein regime in 2003 Halliburton was given a no bid contract for logistical support and by 2004 Halliburton had landed $18 billion in contracts2. The fact that the contract was awarded on a no bid basis displays a market failure because Halliburton was given monopoly power and so there was not any level of fair competition. Halliburton has also been accused of a

number of abuses in Iraq, ranging from overcharging for gasoline to billing for services not rendered; the disputed charges now total $1.8 billion3, which validates the assertion that Halliburtons operations in Iraq are an example of a monopoly market failure as higher prices are being charged than under a competitive market. Overall the large prevalence of private military contractors although potentially useful from a governmental perspective as they lighten the burden of traditional military structures they do tend to cost more both in terms of monetary cost and welfare loss than they create. Incidents such as the shooting at Nisour square indicate that the contractors are not highly regulated enough to be operating within such a volatile area and unlike in traditional military organisation, private military firms and contractors do not take into account externalities that may arise from say the death of an employee. Therefore I believe that the contractors represent a vast market failure and the usage of them by governments represents a government failure. If this is to be corrected then there should be much more stringent government intervention in the private military sector such as greater accountability for firms involved in escalation of force incidents and much stronger regulation about who is allowed to operate and be hired by the contractors.