THE MIDEAST CRISIS: ASSESSING THE DAMAGE : World Economy Hinges on End of Crisis

What’s at stake in the Middle East is not the price of oil but the security of the world trading system. U.S. troops are in Saudi Arabia not on behalf of economic betterment for a small group of nations, but for the spread of prosperity to all the peoples of the earth.

People worry about energy prices and whether the U.S. economy will fall into recession. But they’re missing the larger point--that long-term health or depression for the world economy depends on success or failure in the Middle East.

If the U.S.-led global effort to turn back the aggression of Iraq’s Saddam Hussein succeeds, there could well be a new burst of growth and prosperity in the world. But if it fails--that is, if Hussein weakens the world’s resolve by maintaining his hold on Kuwait and Middle East oil power, not to mention foreign hostages--then the consequences would be devastating.

Not because of oil, but because of confidence. Oil is a tool of commerce, but confidence is its foundation.

If unified action succeeds in upholding the law that one state cannot merely invade another, then commerce can continue as it has since World War II, fluidly and gathering momentum.

A total of $3 trillion worth of goods and services moves among the nations of the world at present, a 25-fold growth in trade since 1945. That growth has brought historic prosperity to industrial nations and improved living standards in developing countries.

And that prosperity has been backed by confidence in a lawful world--a confidence undergirded in the West by the U.S. military and such mutual security organizations as the North Atlantic Treaty Organization.

The protection has been so effective, it’s taken for granted.

But consider what would happen if it couldn’t be taken for granted. If Hussein faces down the United States and shows the world’s nations to be weak and irresolute, then confidence will diminish. The exchange of goods and services will proceed more haltingly and at high risk, as it has historically when caravans were harried by bandits and sailing ships attacked by pirates. People forget that twice in this century the routine commerce of merchant shipping has been the target of submarine warfare.

Lloyds of London, the world’s insurer, doesn’t forget. Since the Middle East crisis broke out, it has suggested--but not yet imposed--a 5% war tax on shipping. In a lawless world, you would see additional charges or higher interest rates to cover risk. A 5% to 10% extra charge would be a heavy burden in a world where the most successful economies grow only 4% to 5% a year, and the U.S. economy grows at less than 2%.

All right, if it’s so important, what’s the outlook? As of Tuesday, the advantages looked to be increasing on the side of law: The very unity of the world’s nations, the cooperation of the superpowers, the resolve of the United States to commit troops and the reported involvement of Egypt’s army to defend Saudi Arabia were all hopeful.

And Saddam Hussein’s weaknesses should not be understated, says Joseph Tovey of Tovey & Co., an energy investment banker with a knowledge of the Middle East. “Saddam Hussein will be able to command the support of his army and keep whatever allies he has as long as he seems to be winning,” he says. If the United States and other nations can call his bluff by their willingness to use force, they will defeat him.

The aftermath could be very hopeful. Confidence would be not merely restored but confirmed; the global economy would have been saved not only by the U.S. military but by the concerted actions of the world’s nations. A better investment climate could scarcely be imagined.

To be sure, oil may cost more than it did before the crisis, maybe $22 a barrel, says John Rutledge, chairman of Claremont Economics Institute. But the price would be freely paid, not extorted.

And the United States would not automatically escape its economic problems. The economy had been weakening, and the federal deficit ballooning, before the Middle East crisis. And nothing has happened to change that.

Chances are the U.S. economy will suffer a recession in the next six months. But if determination succeeds in the Middle East, the recession could be brief, lasting less than a year, after which growth could resume, explains economist Albert M. Wojnilower, of First Boston Corp.

But if the crisis in the Middle East lingers, with resulting loss of confidence in global business and investment, then the whole world could have a downturn akin to the Depression of the 1930s. The issue, says Wojnilower, who grew up in 1930s Austria before Adolf Hitler moved in, is between civilization and barbarism. “The barbarian always wants to take your civilization, so you must be prepared to defend it.”

It is because they understand that the stakes are that high that President Bush is sending U.S. troops to Saudi Arabia and the nations of the world are so uncommonly united in their resolve that Saddam Hussein will not prevail.