Iraq's Odious Debts

U.S. faces daunting task on building Iraqi economy

Rob Lever
Middle East Online, U.K
June 25, 2003

Washington — The United States faces a daunting task in setting up a free-market economy in Iraq, with few precedents to guide the process, experts and officials say. Success in establishing a strong economy in Iraq may be as important as creating a framework for democracy, and could help transform the region, according to those involved in the process.

But the United States has no easy script to follow. Officials are drawing experience from the rebuilding of Japan and Germany after World War II, but also from the Balkans and former communist bloc nations of Eastern Europe.

“We’re in a lot of ways going into uncharted waters,” said Tony Fratto, a spokesman for the US Treasury, which is working to help restore a central bank and commercial banking operations in Iraq.

“Even going back to World War II, (Japan and Germany) were highly industrialized countries,” Fratto said. “But we have to do it right because we’re only going to get one shot at it.”

The blueprint for the economy of Iraq is still in its embryonic stages, but the US government has asked 10 companies to bid on a plan to reshape the Iraqi economy into a free-market system with a major privatization program.

USAID director Andrew Natsios told a hearing earlier this month that creating a market economy is one of the key goals of the US-led reconstruction effort.

“Under Saddam (Hussein), the Iraqi economy was highly centralized and exceedingly corrupt,” Natsios said.

“All the country’s heavy industries, and much of its light industries are government owned. So, too, is the oil industry, which is the main source of the country’s revenue.”

One of the keys to creating a market-based economy, he said “will be to harness the power of the private sector and give the economy the jump-start it needs to create jobs and raise incomes for millions of Iraqi citizens.”

Iraq also needs a legal framework that encourages the private sector and access to private commercial banks, he added.

Analysts note that a flourishing economy in Iraq could serve as a model for other nations in the region.

“All the eyes of the world are on Iraq,” said Hernando de Soto, president of the Institute for Liberty and Democracy, a Peru-based think tank that has worked with former Soviet republics on moving to a market economy.

“And in effect, if there is not a successful transformation there, that will definitely bolster the arguments of all those people who are already marching on the streets against globalization, against the values of a free society, a market society and the possibility of creating capital.”

David Ellerman, a former World Bank economist, told a recent congressional hearing that the process should not be rushed.

“Don’t try to jump over the chasm in one great leap,” he said. “It’s better to try to build a bridge over the chasm from the old to the new, even though one foot of that bridge always has to be on the old, and which may be distasteful.”

Rather than setting up “long chains of authority,” he suggested the notion of local ownership, including employee-owned companies, to get the market-based economy started.

Basil al-Rahim, founder of the Washington-based Iraq Foundation, has its own guidelines for rebuilding Iraq, called the “Phoenix Plan.”

The plan advocates wiping away a big chunk of Iraq’s debts — as was done after World War II for Germany — and using oil revenues as a means to get the economy moving.

Rahim says the Iraqi economy is not as backward as some believe, noting that the country was on its way to becoming an industrialized country in the 1950s.

“Iraq has very fertile land and has achieved self-sufficiency in food production in the past and can do so again,” he said.

Additionally, Rahim said Iraq has “a large technical, professional labor force made up of engineers, doctors, lawyers, teachers, etc.”

US officials and lawmakers are well aware of the stakes involved.

“The establishment of a peaceful, stable and economically viable Iraq will transform the Middle East if it is successful,” said Senator Robert Bennett, who chaired a congressional hearing on the subject.

“If it is not, we will pay a price that is almost incalculable at this point.” [PDFver here]

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