As the Bush Administration and Iraqi opposition groups plan the future of a post-Saddam Hussein Iraq without its weapons of mass destruction (WMD), economic issues loom large. Iraq's economy has been grossly mismanaged, and its people largely repressed, for 40 years.

Iraq desperately needs an alternative to the failed policies of its dictator. Sound economics are needed to help the Iraqi people rebuild their lives and their country after two decades of wars and four decades of repression under the current regime. The U.S. government, the oil industry, and international financial institutions should provide technical expertise to the future government of Iraq to divest, privatize, and modernize its national economy.

Saddam's Devastation of Iraq's Economy
Saddam's regime has succeeded in bankrupting the country even though Iraq boasts the world's second largest oil reserves after Saudi Arabia, estimated at 112 billion barrels of oil and potentially even higher. The oil sector provides more than 60 percent of the country's gross domestic product (GDP) and 95 percent of its hard currency earnings. Yet GDP for 2001, at the market exchange rate, is estimated to be only about one-third its level in 1989. Iraq also is hobbled by its $140 billion foreign debt. This devastation was wrought by such policies as the nationalization of the country's chief export commodity, oil; extensive central planning of industry and trade; the 1982-1988 war against Iran; and the invasion of Kuwait, which precipitated the 1991 Gulf War.

According to the U.S. General Accounting Office, oil smuggling and illegal surcharges of 25 cents to 50 cents on a barrel of legal oil are providing the funds to bolster Saddam's regime. Saddam's unaccounted revenues are at least $6.6 billion--money that he has been free to spend to develop WMD and support terrorism in spite of economic sanctions imposed by the United Nations after the Persian Gulf War to force him to give up his WMD. And Saddam still stubbornly refuses to meet the terms for lifting the economic sanctions that the United Nations has imposed on his regime.

The road to economic prosperity in Iraq will not be easy, but the Bush Administration can help the new government achieve fundamental structural reform with massive, orderly, and transparent privatization of various sectors of the economy, including the oil industry.

Building a Post-Saddam Iraq
The new government established by the people of Iraq should represent all the major sub-national groups--the Shiite Arabs, the Sunni Arabs, and the Kurds. The best model is a federal system that includes the various factions. Iraqi opposition leaders will need a commitment, from the United States and international financial institutions, that they will furnish necessary expertise and technical assistance. To gain that commitment, Iraq will need to abandon its statist policies and become fully committed to the principles of a market economy.

Promoting Privatization
Privatization efforts in other countries show that privately held infrastructure, oil, and oil service companies generate greater efficiencies, improved production, and higher revenues than do centrally planned and state-owned industries. The same can be achieved in Iraq, whose oil industry cannot thrive without access to global capital markets. The Administration should work with Iraq's future federal government to develop mechanisms for privatizing these industries, taxing oil sales, and sharing the proceeds equitably with the three major ethnic regions--the Shiite Arabs in the South, the Kurds in the North, and the Sunni Arabs in the central region.

As the end of Saddam's regime will mean the end of the U.N. sanctions, the rationale for the U.N.-administered oil-for-food program will be removed. Absent the threat of an Iraqi program to develop weapons of mass destruction, the Bush Administration should not support leaving the oil-for-food program in place, let alone expanding it. The temporary U.S. administration and the future government of Iraq should also remove Ba'ath cadres loyal to Saddam and his clan in the national oil ministry and the Iraqi National Oil Company.

During the 1990s, Saddam attempted to dismantle the U.N. Security Council sanctions or "encourage" permanent members to veto the use of force against Iraq by allocating lucrative contracts for the development of giant Iraqi oil fields to companies from Russia, France, and China. The power of Saddam's regime to allocate these contracts in view of their corrupt nature is questionable, and the circumstances surrounding the granting of these contracts need to be re-examined.

Needed: Comprehensive Economic Reform
The Bush Administration, its allies, and international organizations should prepare, encourage, and support the future leaders of a post-Saddam Iraqi government to develop a comprehensive economic reform package. Specifically, in addition to the reforms outlined above, a new federal Iraqi government must take steps to create a modern legal environment that recognizes property rights and is conducive to privatization; educate and prepare the people of Iraq for structural economic reform and privatization through a public information campaign; deregulate prices internally, including in the utilities and energy sector; prepare state assets, including industries, utilities, transportation, ports and airports, pipelines, and the energy sector, for privatization; keep the budget balanced and inflation, taxes, and tariffs low; and liberalize and expand trade, and launch an effort for Iraq to join the World Trade Organization.

Conclusion
Economic growth will be an important contribution to the stabilization of Iraq, allowing the United States and other forces stationed there to depart after assuring that Iraq's WMD threat and repressive regime have ended. Structural reform and comprehensive privatization is a winning strategy for the people of Iraq, its future government, the region, and the United States.

Ariel Cohen, Ph.D., is Research Fellow in Russian and Eurasian Studies in the Kathryn and Shelby Cullom Davis Institute for International Studies, and Gerald P. O'Driscoll, Jr., Ph.D., is former Director of the Center for International Trade and Economics, at The Heritage Foundation. This paper is updated from Backgrounder No. 1594, published on September 24, 2002.