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WebMemo #236 on Iraq

March 25, 2003

Achieving Economic Reform and Growth in Iraq

By and

The future of Iraq depends not only on the ouster of the repressive regime of Saddam Hussein but also on the ability of the new Iraqi leaders to develop policies that will spur real economic growth and reverse the damage to the economy caused by 40 years of gross mismanagement.

The Bush Administration should help Iraqi opposition leaders to develop an economic reform package for their country. A double strategy of ensuring security and enabling economic growth will need international support.

For the Iraqi people, structural economic reform and comprehensive privatization of government assets is necessary to stimulate recovery and provide stability. The winning strategy of structural reform and privatization would also benefit the industrial world, the United States and its allies, countries of the Middle East, and the developing world.

Iraq's return to global markets would allow for a more abundant and stable energy supply, a higher cash flow for the Iraqi people, and numerous business opportunities for the region and the world. Iraq's restructuring and privatization of its oil and gas sector could become a model for oil industry privatizations in other OPEC states as well, weakening the cartel's influence over global energy markets.

What the New Iraqi Government Should Do

Specifically, the new post-Saddam Iraqi government should:

  • Develop a modern legal system that recognizes property rights and is conducive to privatization;
  • Create a public information campaign that prepares the people for structural reform and privatization;
  • Hire expatriates and Western-educated Arabic speakers with financial, legal, and business expertise for key economic positions;
  • Deregulate prices, including prices in the utility and energy sectors;
  • Prepare state assets in the utility, transportation, pipeline, energy, and other sectors for privatization;
  • Keep the budget balanced and inflation, taxes and tariffs low;
  • Liberalize and expand trade and initiate an effort to join the World Trade Organization.

How the United States Can Help
The Bush Administration should provide leadership and guidance.

U.S. political commitment will be needed to motivate international organizations to provide appropriate expertise and technical assistance. Inter alia, these organizations could include international financial institutions, such as the International Monetary Fund and the World Bank, and would likely encompass such diverse non-governmental organizations such as the National Endowment for Democracy, the Center for International Private Enterprise, the American Bar Association, and the AFL-CIO. Such groups should begin to advise the future leaders of Iraq's three primary ethnic groups to establish policies that will lead to a thriving, modern economy.

In particular, the Bush Administration should convince the future federal government of Iraq to come to an agreement on how oil revenues will be taxed and proceeds will be distributed to the country's three ethnic regions-Shiite Arabs, the Kurds, and the Sunni Arabs. Successfully privatizing the country's oil fields, refining capacity, and pipeline infrastructure will mean greater efficiency and higher tax revenues in the oil sector.

Though the costs of rebuilding the country will be high, if proper structural economic reforms are undertaken, Iraq's vast oil reserves are more than ample to provide the funds needed to rebuild and boost economic growth.

Outlook for Iraq and World Energy Markets
Following the demise of Saddam Hussein, it is unlikely that the Saudi kingdom would transfer a fraction of its production quota under the Organization of Petroleum Exporting Countries (OPEC) regime to Iraq to compensate for lost profits and facilitate its rebuilding. Iraq will need to ensure cash flow for reconstruction regardless of OPEC supply limitations. Combined with the potential privatization of the oil industry, such measures could provide incentive for Iraq to leave the OPEC cartel in the future, which would have long-term, positive implications for global oil supply.

An Iraq outside of OPEC would find available from its oil trade an ample cash flow for the country's rehabilitation. Its reserves currently stand at 112 billion barrels, but according to the U.S. Energy Information Administration, it may have as much as 200 billion barrels in reserve. Estimates by Iraqi oil officials are even higher: According to Oil Minister Amir Muhammad Rashad and Senior Deputy Oil Minister Taha Hmud, the reserves could be as high as 270 billion to 300 billion barrels, making them equal to Saudi Arabia's.

Iraq's 1990 output prior to the beginning of the Gulf War stood at 3.5 million barrels a day, while oil discovery rates on a few new projects in the 1990s were among the highest in the world: between 50 percent and 75 percent. Given Iraq's own output projections, it may be capable of pumping as much as 6 million barrels (by 2010) to 7 million barrels (by 2020) a day, more than doubling current production levels.

Such a surge in production may be opposed by OPEC countries, which would like to keep its quota around the current 2.8 million barrels per day, while historic market share is taken by the Kingdom of Saudi Arabia, which currently is pumping close to 8 million barrels per day. Depending on the dynamics of global economic growth and world oil output, Iraq's increase in oil production capacity could bring lower oil prices in the long term.

An unencumbered flow of Iraqi oil would be likely to provide a more constant supply of oil to the global market, which would dampen price fluctuations, ensuring stable oil prices in the world market in a price range lower than the current $25 to $30 a barrel. Eventually, this will be a win--win game: Iraq will emerge with a more viable oil industry, while the world will benefit from a more stable and abundant oil supply.

This WebMemo is excerpted from the authors', Ariel Cohen's and Gerald P. O'Driscoll, Jr.'s, Backgrounder: The Road to Economic Prosperity for a Post-Saddam Iraq. Full footnotes and analysis are available there.

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