The Heritage Foundation

WebMemo #356 on Iraq

October 22, 2003

October 22, 2003 | WebMemo on Iraq

Recommendations for the Madrid Donor Conference On Iraqi Reconstruction

Finance ministers from across the world will gather in Madrid, Spain on October 23 and 24 to discuss the reconstruction of Iraq. The Bush Administration will be seeking international financial support for the rebuilding of the country, which may cost as much as $55 billion. The White House has called for the US to contribute $20 billion towards the total cost of reconstruction.

 

The Madrid Conference will be an excellent opportunity for the US to show leadership on the international stage, and convince skeptical nations that a successful and secure post-Saddam Iraq is in the world's interest. The Administration should also:

  • Oppose UN/World Bank control of reconstruction funds, and
  • Advocate debt forgiveness

International Support

As it goes into the meeting, the Bush Administration will be boosted by the announcement by Japan that it plans to provide $1.5 billion in aid to Iraq in 2004, rising to a total of $5 billion over the next four years.

 

Several other nations have also pledged financial support. The UK has pledged $900 million, Spain $300 million, and Canada and South Korea $200 million each. Disappointingly, the European Union has promised just $230 million, a fraction of the $3 billion it controversially invested in the Palestinian Authority over the past decade.

 

As President Bush faces mounting pressure domestically to reduce the financial burden on US taxpayers posed by the reconstruction of Iraq, the Administration should resist the temptation of seeking short-term solutions in an effort to secure more international support.

 

The prospect of a UN-controlled reconstruction fund may well result in limited additional offers of aid from international donors, but could also create major problems for the US/British administration of Iraq. It will undermine the authority of the Coalition government, and is likely to result in a conflicting command structure in the reconstruction process, with two competing funds in operation. A UN/World Bank fund will also add a huge new layer of bureaucracy, which could result in paralysis of Iraqi reconstruction.

 

Oppose UN/World Bank Control of Reconstruction Funds

  • The US should oppose the establishment of a separate reconstruction fund for Iraq administered by the United Nations and the World Bank.[1] A UN/ World Bank fund is unlikely to generate substantial additional foreign investment in Iraq, and may greatly complicate the reconstruction process. Indeed, Japan had already pledged billions of dollars before it was announced that a UN fund would be set up. France, Germany and Russia have already stated they will provide no financial support for Iraqi reconstruction.
  • The Bush Administration should instead call for all international donations to be placed into the official Development Fund for Iraq, run by the Coalition Provisional Authority. The Development Fund, which works in tandem with the United Nations International Advisory and Monitoring Board, has already been endorsed by two UN Security Council resolutions.
  • The United Nations' administration of the Iraq 'oil for food' program was shrouded in a veil of secrecy, with little transparency, and it should not be given a similar opportunity again.
  • Similarly, World Bank involvement in Iraqi reconstruction may actually impede the long-term economic progress of the Iraqi people by fostering a culture of financial dependency as has happened in many developing countries "aided" by the World Bank, from India to Kenya.[2]

Advocate Debt Forgiveness

  • Another chief priority for the Bush Administration at the Madrid Conference should be to seek a reduction in the level of Iraqi foreign debt.[3] If the stated desire of European and Arab leaders to help Iraq is sincere, easing the debt burden would be the best way to demonstrate this.
  • The Bush Administration should formally call upon European countries (primarily Russia, Germany and France) and Arab nations (including the Gulf states and Egypt) to forgive the huge debts owed by the Iraqi government.
  • The US should advocate debt forgiveness as opposed to debt restructuring. Debt restructuring would not create a realistic prospect for debt elimination, and would only prolong poverty among the Iraqi people.
  • Iraq's total debt is estimated to be $127 billion, of which $47 billion is accrued interest (based on 2001 World Bank figures). Iraq owes a further $199 billion in Gulf War compensation, and $57 billion in pending contracts signed between the Saddam Hussein regime and foreign companies and governments. Iraq's overall financial burden is over $380 billion.[4]
  • Even with Iraq's huge oil wealth, the country will be unable to get back on its feet as long as it is saddled with huge debts and faces mounting terrorist attacks on its oil infrastructure that prevent oil production from recovering to even pre-war levels.[5]

Leadership and Vision in Iraq

The Bush Administration should seek to raise several billion dollars in additional pledges at the Madrid Conference. However, while doing so, Washington should avoid making major concessions by handing over further political or economic control to the United Nations and World Bank. What Iraq needs is clear direction and leadership, which is best provided not by faceless international bureaucrats but by the Coalition Provisional Authority working together with the Iraqi Governing Council. Ultimately, the key to the advancement of economic freedom in Iraq lies in the creation of a vibrant market economy, based upon the rule of law and the protection of individual liberty.

 

Nile Gardiner Ph.D. is Jay Kingham Fellow in International Regulatory Affairs in the Center for International Trade and Economics at the Heritage Foundation.



[1] See 'US To Cede Part of Control Over Aid to Iraq', The New York Times, October 20, 2003.

[2] The failure of World Bank intervention is explored in more detail in Ana I. Eiras, IMF and World Bank Intervention: A Problem, Not a Solution, Heritage Foundation Backgrounder No. 1689, September 17, 2003.

http://www.heritage.org/Research/InternationalOrganizations/bg1689.cfm

[3] For further background, see Nile Gardiner Ph.D. and Marc Miles Ph.D., Forgive the Iraqi Debt, Heritage Foundation Executive Memorandum No. 871, April 30, 2003.

http://new.heritage.org/Research/TradeandForeignAid/em871.cfm

[4] These figures are drawn from A Wiser Peace: An Action Strategy for a Post-Conflict Iraq, Center for Strategic and International Studies (CSIS), January 23, 2003.

[5] For in-depth analysis of the problems facing the Iraqi oil industry, see Ariel Cohen Ph.D., Restarting the Flow: Restoring Iraqi Oil Production, Heritage Foundation Backgrounder No. 1693, October 1, 2003.

About the Author

Nile Gardiner, Ph.D. Director, Margaret Thatcher Center for Freedom
The Margaret Thatcher Center for Freedom