Iraq's Odious Debts

Will World Bank, IMF botch Iraq?

Mark Gongloff
April 22, 2003

New York: Though the roles of the United States and the United Nations in rebuilding Iraq are still unclear, two other groups, the World Bank and the International Monetary Fund, are almost certain to take part – and some critics worry that might be bad news for the future of Iraq’s economy.

These critics, who come from various points on the political spectrum, cite a long history of failure by the World Bank and IMF in helping poor and rebuilding countries develop.

“Their over-all macro-economic record is horrible. After a 20-year experiment in developing countries throughout the world, there are no success stories; not in Asia, Russia, Brazil, Argentina, the list is endless,” said Marc Weisbrot, co-director of the Center for Economic and Policy Research, a left-leaning think tank in Washington, D.C. “Why would you want them determining economic policy in postwar Iraq?”

While Weisbrot and other progressives think the World Bank and IMF go too far in forcing privatization and open trade, critics on the right take the Bank and IMF to task for forcing high tax rates and establishing an unhealthy reliance on foreign aid, with equally disastrous results.

“Frankly, Iraq would probably be better off not to rely on their aid and advice,” said Ian Vasquez, director of the Project on Global Economic Liberty at the Cato Institute, a libertarian think tank in Washington, D.C.

Though the IMF did not respond to requests for comment, the World Bank pointed to a long list of its successful post-war reconstruction jobs, including, most recently, Afghanistan.

“These places may not be completely out of the woods and are still facing problems, but I can’t point to any country where we could say, ‘We did a bad job,'” said Ian Bannon, manager of the World Bank’s Conflict Prevention and Reconstruction unit. “That’s a pretty long list, going all the way back to Mozambique, Uganda, East Timor and even the West Bank and Gaza.”

Bannon added that Iraq, a country with the world’s second-largest proven reserve of oil and a well-educated, highly skilled work force, will likely take the lead role in setting its economy’s course.

“We get criticized a lot for imposing conditions, but the truth is, we can’t force countries to do anything – our influence is vastly overstated,” Bannon said.

Bank, fund likely to play ‘normal’ role

The reconstruction of Iraq following the U.S.-led war to oust Saddam Hussein from power could cost more than $100 billion, according to some estimates, making it the most expensive rebuilding effort since World War II.

And Iraq owes anywhere from $60 billion to $300 billion in debt and compensation from the first gulf war, according to some estimates. Though the Bush administration hopes to convince Iraq’s creditors to forgive or restructure much of its debt, many of Iraq’s obligations will have to be paid, diverting funds from infrastructure and humanitarian relief.

Some observers hope Iraq’s oil will pay for all this, but experts say it will take months or years to get the oil fully flowing, and at the moment most of Iraq’s oil revenue is spent on food, medicine and other critical humanitarian aid for most of its population.

Though the United States and other governments will chip in some cash for the effort – U.S. taxpayers are footing the bill for the early rebuilding contracts, for example – turning Iraq into a robust economy will require up to $20 billion a year for several years, according to a recent study by the Council on Foreign Relations.

Once an Iraqi government is established, much of this cash seems likely to come in the form of loans from the World Bank and the IMF, international economic and financial institutions formed at a meeting in Bretton Woods, N.H., in 1944 to help stabilize the post-war global economy.

“The World Bank and the IMF stand ready to play their normal role in Iraq’s re-development at the appropriate time,” the groups said in a press statement after its Spring Meetings, held April 12-13 in Washington, D.C.

Restructuring still needed

That “normal role” will certainly include extending loans and grants and could involve guiding the new Iraqi government’s economic policies – the very scenario critics most fear, since decades of such “guidance” have produced no obvious, long-lasting benefit for Argentina, Russia, Bolivia, Haiti and a host other struggling nations.

In 2000, a congressional commission headed by Allen Meltzer, a professor at Carnegie Mellon University and a senior fellow at the American Enterprise Institute, said the IMF and World Bank needed sweeping reforms to improve their effectiveness.

To date, Meltzer told CNN/Money, only some of the recommended reforms have been adopted by the groups, and he’s worried that putting Iraq’s development totally in their hands could be dangerous.

“Leaving it to them would certainly be a big mistake until they’re restructured and much more effective than they currently are,” Meltzer said.

The case for optimism

Still, Meltzer said he was optimistic that Iraq had at least two things going for it that could help it avoid some of the disasters that have befallen other World Bank and IMF clients – namely its vast oil reserves and its highly skilled labor force.

“Assuming you can get some political stability, the rule of law and the protection of property rights . . . the oil and the work force are things that make Iraq different from, say, some sub-Saharan country where the World Bank has been unsuccessful,” Meltzer said.

Supporters of the groups’ involvement in post-war Iraq also say the groups could, at the very least, spread around the heavy lifting – and heavy spending – necessary to turn Iraq into an economic success.

“In a situation where no single actor has more than 20 percent of the answers, it makes a lot of sense to pool efforts and to work multilaterally,” said Oliver Buston of Oxfam International, a global development group headquartered in Oxford, England.

Buston pointed out the many good things the World Bank and IMF do, including pouring money into education and health care around the world. Even the groups’ critics on the right and left note they could at least help with giving Iraq some relief from its debts.

“The bank and the fund do rightly take a lot of criticism, but we have to look at things on a case-by-case basis, and I think this is a case where it’s a completely new situation and nobody has all the answers,” Buston said.

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