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
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
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
- Deregulate prices, including prices in the utility and energy
- Prepare state assets in the utility, transportation, pipeline,
energy, and other sectors for privatization;
- Keep the budget balanced and inflation, taxes and tariffs
- 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
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
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
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.