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.