Bullish on Baghdad

Bullish on Baghdad
The Iraqi economy shows signs of strength.

BY ROBERT T. MCLEAN
Tuesday, April 11, 2006 12:01 a.m. EDT

A key to success in Iraq will be the ability of the Iraqi people and coalition members to transform the country's economy from a state of ruin to a model for prosperity in the Middle East. Iraqis with jobs and opportunities are less likely to join or sympathize with terrorist and insurgent efforts, focusing more of their energies on improving their individual situation than on political developments that could be interpreted as a danger to their sect. This outcome parallels one of the Bush administration's original goals of the invasion in establishing a bridgehead for reform in the Middle East, while reducing the potential of a drawn out and costly American presence in Iraq. Thus, while the vast majority of attention has been placed on the political violence plaguing Iraq, the economic development of the country deserves additional scrutiny and provides reason for guarded optimism.

As the Iraq campaign continues to be labeled a disaster by political opponents of the Bush administration at home, by those suspicious of the United States abroad, and increasingly by conservatives who call themselves realists yet have no realistic plan for Iraq, positive indicators about the Iraqi economy are not too hard to find. Though the economy expanded by an unimpressive 2.6% in real terms in 2005, that figure is scheduled to reach over 10% this year, as reported by the International Monetary Fund. Dawn Liberi, director of the U.S. Agency for International Development in Iraq, noted in February that per capita income has increased from $500 at the time of the invasion in 2003 to $1,500 today.

Despite the charge by Anthony Cordesman of the Center for Strategic and International Studies that American efforts to improve the devastated Iraqi economy "have largely been a wasteful, and highly ideological and bureaucratic failure," more than 30,000 new businesses have been registered with USAID in the past seven months alone. While the bureaucracy undoubtedly has been responsible for waste and inefficiency--not something uncommon with these types of establishments--ideological efforts to introduce conservative principles into the Iraqi economy seem as little cause for alarm.

In 2004 a modest 5% national tariff rate was imposed to help fund reconstruction costs. A flat corporate tax rate of 15% was applied by the Coalition Provisional Authority and foreign investment restrictions were extremely limited, with the exclusion of national resources such as the country's oil fields. After years of sanctions and isolation--with the exception of Saddam Hussein's corrupt enterprises--the above noted efforts have been relatively successful in opening up the nation's economy.

As Niall Ferguson persuasively advanced in his work "Colossus: The Price of America's Empire": "It has been convincingly shown that one of the principal reasons for widening international inequality in the 1970s and 1980s was in fact protectionism in less developed countries." Citing a 1995 publication by the Brookings Institution, Mr. Ferguson supports the claim by illustrating that when the per capita GDPs of developing countries were contrasted, it was discovered that "closed" economies grew at an annual rate of only 0.7% while "open" countries expanded by a healthy 4.5%. The Bush administration, therefore, has not merely steered the Iraqi economy in a direction of a liberal market economy based on ideology, but has done so under a historical precedent of success.

Historical precedents are also relevant in examining how to establish long-term stability and productivity. An influential piece by Stanley Kurtz titled "Democratic Imperialism: A Blueprint" that appeared in Policy Review in April 2003 predicted a protracted but ultimately beneficial occupation of Iraq. The paradigm, according to Mr. Kurtz, was to follow the lessons of the British imperial experience in India. Of principle importance to establishing a peaceful, democratic, and prosperous nation is the development of a sound education system.

Although coming well short of suggesting a similar dawdling reform process, Mr. Kurtz professes that "the educational policies set up by liberal British administrators 100 years before independence had laid the foundation for democratic self-rule in India." Whereas the British sought to hold on to their colonial possession throughout much of their rule of India, the United States wants nothing more than to return home. Thus, the success in the construction of schools, the training of more than 36,000 teachers, and the provision of nearly nine million textbooks should prove to be a valuable investment for the political and economic future of Iraq.

Of the most disingenuous, or simply ignorant, charges that were leveled prior to, during and following the spring 2003 invasion of Iraq was that the war was conceived to rob the Iraqis of their oil reserves. This imprudent accusation has largely disappeared because few have the audaciousness to carry on this conspiratorial paranoia. However, the administration's reluctance to become thoroughly engaged in the Iraqi oil industry--a result of domestic and foreign critics--has made things unnecessarily difficult for the Washington and Baghdad alike. Put simply, the Bush administration needs to focus more on Iraq's oil.

One of the first actions taken by the United States following the ouster of Saddam Hussein was the nearly immediate transfer of sovereignty of Iraq's oil industry back to the people of Iraq. Even after handing the key to nation's wealth back to Iraqis, the United States has sought little influence in oil policy-making decisions. When asked by the Baghdad based daily Al-Adalah about American and British interference in the Iraqi oil industry, former oil minister Dr. Thamir al-Ghadban responded:

No doubt the U.S., British and other forces are here in Iraq. This is an accomplished fact and known to everybody. But throughout my experience after the fall of the regime until I left the ministry I can affirm that no person or side tried to influence on the approach that we adopted in the oil policy. Where is the influence?
Attacks on oil pipelines have made deliveries north to Turkey virtually unattainable, limiting Iraq's near-term export potential. Additionally, the lack of investment from Saddam Hussein's regime left the technology and infrastructure of the country's oil industry in desperate need of modernization. The goal articulated by the Bureau of International Information Programs of the U.S. State Department is for Iraqis to expand production to more than five million barrels a day from the 2.1 million that is currently extracted from the country's vast reserves. A dedicated commitment through investment and technological assistance from the United States is necessary to help the Iraqi government generate revenue and decrease dependence on American assistance. This is entirely achievable, and as attacks on pipelines decrease, the oil industry will become a boon to an increasingly diverse Iraqi economy.

As with the oil industry, other significant problems needlessly obstruct potential economic growth. As noted by Rashid Ashraf of the Financial Times: "More than half of the families in Iraq still receive a monthly food parcel of basic supplies. This legacy of the oil-for-food programme in the long years of sanctions is expensive, and distorts the market." Socialist prescriptions such as these were necessary under the sanctions regime to keep millions of Iraqis from starving, but are no longer appropriate. As the economy continues to advance, free market principles will rightfully continue to be encouraged by the United States as a means to facilitate those gains.

The new Iraqi dinar, the official currency introduced in July 2003, has become a stable and unifying presence in the economy of Iraq. The banking sector is emerging as a powerful economic staple now that the Baathists no longer corrupt and distort the system. A similar development has occurred with the 2004 introduction of the Iraq Stock Exchange, as it too is free from the corruption that beleaguered the Hussein-era Baghdad Stock Exchange. About 90 stocks are listed, and market capitalization grew from $1.15 billion at the end of 2004 to $2.14 billion at the same time last year. However, fear of foreign domination of the market has kept it closed to international investors. An Iraqi investor noted to Agence France-Presse late last February that the best way to increase the capital flowing into the Iraq Stock Exchange is to "open the market to foreign investors and get money into the market." This will happen over time.

Some foreigners, however, are already bullish on Iraq. In fact, United States and other coalition forces serving in Iraq are betting on an economically successful future for Baghdad. Many American troops are putting their money into purchasing the new national currency in hopes that a secure and prosperous Iraq will emerge. The fact that they are already not paid enough for the work that they do and that they are using their hard-earned paychecks and intimate knowledge of the Iraqi environment to purchase a share of Iraq's future speaks volumes about the potential for a forthcoming significant economic expansion in Iraq. Perhaps the not-too-distant future will teach the impatient that, with time, large returns can come from a substantial investment.

Mr. McLean is a research associate at the Center for Security Policy in Washington. This article appeared on the Web site of The American Spectator.

Ellie