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Coalition economic policies in Iraq:motivations and outcomesBassam YousifPublished online: 22 Aug 2006.
To cite this article: Bassam Yousif (2006) Coalition economic policies in Iraq: motivations andoutcomes, Third World Quarterly, 27:03, 491-505, DOI: 10.1080/01436590600587770
To link to this article: http://dx.doi.org/10.1080/01436590600587770
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Coalition Economic Policies in Iraq:motivations and outcomes
BASSAM YOUSIF
ABSTRACT Explanations of the current violence and instability in Iraq rangefrom stubborn ethnic rivalries to insufficient troop levels. While not contestingthese hypotheses, this essay nonetheless posits an alternative position:inappropriate economic policies. The Coalition Provisional Authority’s abruptliberalisation of prices and markets aimed to improve efficiency in the allocationof resources and to expand output, yet resultant joblessness has promotedinsecurity, which, in turn, has reduced Iraq’s already low capacity to absorbinvestments, essential for transition. Moreover, Coalition measures havereinforced public anxiety about the arbitrary nature of markets, underliningthe historically uncertain character of property rights and ironically fuellingresistance to future reform. People-centred approaches, structured around aguaranteed public employment scheme, offer an alternate economic path.
It is almost an article of faith that the US administration lacked a postwarplan for Iraq. This article poses a challenge to this view, as it will be arguedthat, at least in the economic realm, the USA did have a plan, and the plancentred on the sweeping and simultaneous liberalisation of labour and capitalmarkets, reforms in taxation and foreign trade, and the privatisation of stateassets. The reforms were intended to open up Iraq’s relatively closed state-directed economy and therefore improve efficiency in the allocation ofresources domestically, as well as to align Iraqi relative prices with inter-national prices in order to expand the country’s consumption possibilities. Inan immediate sense the reforms have succeeded, for Iraq’s economy has nowbecome one of the most open and unregulated in the world. Yet sustainablegains in output remain elusive, as incoherent reforms have aggravatedstructural difficulties and cultivated the conditions for their own failure.The intellectual point of departure for these measures is the notion that
prices reflect relative social scarcities in conditions of perfect competition,where actions are pursued until marginal social costs equal marginal socialbenefit. When prices fail to do this, either because of endogenous or policy-imposed distortions (arising, for example, from government intervention),resources do not flow to activities with the highest social rates of return, andoutput and incomes are consequently lower than what would otherwise be
Bassam Yousif is in the Department of Economics, Indiana State University, IN 47809, USA.
Email: [email protected].
Third World Quarterly, Vol. 27, No. 3, pp 491 – 505, 2006
ISSN 0143-6597 print/ISSN 1360-2241 online/06/030491–15 � 2006 Third World Quarterly
DOI: 10.1080/01436590600587770 491
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attained. Reforms aim to free prices and hence to encourage the flow ofresources to high return activities. Parallel to this reasoning concerning thedomestic economy, the liberalisation of international flows of capital andgoods—though usually not labour—is advocated, as this allows a society toconsume a combination of goods beyond its own production possibilities,thus increasing income and well-being.While there may be agreement about the attractiveness of market-based
systems of resource allocation, there is substantial disagreement about theproper role of the state in economic transitions and how best to bring aboutsystemic change. Proponents of ‘shock therapy’, responsible for the economicreforms in Eastern Europe and in Russia, argue that the simultaneousliberalisation of all prices concentrates and minimises the inevitable hardship;fragmented reforms are thought to be ineffective.1 Others point to the successof economic transformation in China, where reforms have been appliedsequentially by liberalising individual sectors or a defined set of activitiesrather than the through comprehensive and simultaneous liberalisation of allsectors.2
The differences are highlighted by dissimilar attitudes towards privatisa-tion. Those who advocate shock therapy tend to view the state sector aslargely inefficient and unprofitable, and hence a burden on the exchequer. Ofcourse, the presence of externalities of various types implies that profitabilityis not the proper yardstick with which to measure efficiency for publicenterprises, as these are concerned with social costs and benefits that maydiverge substantially from market costs and benefits. Consequently, relyingon the market to allocate resources under these conditions would result ininefficiency. But some proponents of shock therapy have another argumentagainst state intervention: even in conditions of market failure, stateintervention may not be desirable as the possibility of ‘government failure’is considered to be at least as likely as market failure.3 That is, governmentattempts to correct market distortions may magnify the distortions andincrease inefficiency. Except for those engaged in the production of publicgoods, it is argued, state enterprises should meet the market test. If they areunable to do so, they should be privatised. In contrast, proponents ofgradualist approaches view the state sector as providing employment and asafety net for much of the population, a much-needed complement tosystemic change. The inevitable layoffs that would result from privatisationwould, they argue, magnify the sense of gain and loss in society, de-legitimisethe reform process and, ultimately, delay the transition.4
Coalition policies in Iraq have followed the first approach, namely theabrupt liberalisation of markets and prices. This article examines the natureand impact of these policies, with the emphasis on the policies implementedduring the first year of occupation, and highlights the difficulties associatedwith directing job-creating capital formation towards the desired high returnactivities. It may appear premature to make judgements about Coalitioneconomic policies in the current conditions of intense political and socialturmoil in Iraq. Yet, as we shall see, inappropriate and disharmoniouseconomic policies are in part responsible for this turmoil.
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Initial economic conditions
The problems confronting the Iraqi economy and society on the eve of the2003 US/UK invasion were immense and included a physical and industrialinfrastructure that had been shattered by the 1991 Gulf War and deprived ofthe ability to rebuild under economic sanctions; a sizeable, partly destroyedand in places inefficient state sector; an agricultural sector characterisedby low productivity; widespread unemployment; and generally low anddeclining levels of human development. In sum, Coalition forces took controlof a largely ruined economy.Damage to infrastructure and the inability to export oil under sanctions
resulted in drastic declines in income per capita. Before the 1991 war andsanctions the economy was thoroughly dependent on oil. The sectoraccounted for most of GDP (75% in 19905), provided almost all the foreignexchange (oil was 97% of all exports in 1988 and 19896), paid for imports offood, medicine, machinery and industrial inputs, and financed governmentcapital and current expenditures. The ban against oil exports resulted in a72% decline in per capita GDP between 1990 and 1992 and an additional 51%drop between 1992 and 1996.7 Although incomes recovered somewhat afterthe implementation of the Food for Oil programme, IMF estimates of percapita GDP in Table 1 show incomes to be only modestly higher than theaverage for low-income economies on the eve of the US/UK invasion in2003. As the figures illustrate, war and economic sanctions had reduced Iraqto a low-income economy.Parallel to the sanctions-induced declines in incomes, there was a drastic
drop in living standards. Sanctions resulted in a severe shortage of foreignexchange and hence in the depreciation of the Iraqi dinar vis-a-vis foreigncurrencies. This in turn increased the relative price of tradable goods,including food and medicine (most of which were imported), to domesticallyproduced goods and with respect to wages.8 Government was denied access tofinance expenditures as physical and social infrastructure remained depleted.There was a decline in caloric consumption and, consequently, a sharp rise
in malnutrition. Famine was probably only narrowly averted by theimplementation of a largely efficient and egalitarian government-run foodrations programme. Farmers received state subsidised inputs and in return
TABLE 1. GDP per capita at current prices (US$)
Year Iraq Low income economies
2001 770
2002 596
2003 449** 450*
Notes: *Refers to per capita Gross National Income; **Preliminary estimate.
Sources: IMF, Iraq: Macroeconomic Assessment, 21 October 2003, p 22, at http://www.imf.org/external/np/
oth/102103.pdf, accessed 8 October 2005; and World Bank, World Development Report, New York:
Oxford University Press, 2004, p 257.
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were obliged to sell their entire output of grains to the state, which thendistributed these as rations. As a result of reduced electricity generationcapabilities, there was a decline in both the quality and availability of pipedwater. This resulted in a spike in water-borne diseases and in a sharp rise ininfant mortality, which, as shown in Table 2, more than doubled undersanctions. The reduced health care system was ill-equipped to cure or preventdisease brought on by the consumption of unclean food and water andamplified by malnutrition.The change in relative prices made agricultural activities relatively more
profitable, and this encouraged labour to flow into agriculture. Modestincreases in agricultural output were achieved on the extensive margin throughincreases in labour and cultivated area, but labour and land productivityremained low.9 Meanwhile, the collapse in real wages forced workers to seeksecond or third jobs, typically in low-skilled, low-wage activities. Layoffs weregenerally avoided in the large state sector, but private enterprises, especially inurban industrial activities, laid off workers, largely because the decline inearnings resulted in inadequate demand. Agriculture absorbed some idle labourfrom other sectors, but was unable to absorb all, and there was consequently asharp rise in both underemployment and unemployment.Beneath the surface lurked additional problems, namely the economy’s low
absorptive capacity for investment and a largely ruined and often inefficientpublic sector. In the 1970s and the early 1980s, infrastructure bottlenecks anda lack of skilled labour, rather than funding, constrained capital formation,as evinced by government investment spending, which consistently fell shortof investment allocations.10 Since little capital formation occurred in the1990s, the issue of absorptive capacity did not emerge as a problem. Still,destruction of infrastructure and emigration of a large number of people withtechnical and managerial expertise in the 1990s could only have reduced themodest absorptive capacity of the economy.
TABLE 2. Malnutrition and child mortality
Total daily caloric consumption; provided byChild mortality rates (per ‘000)
Year ration in parenthesis (Kcal.) under-five under-one
1990 3150 50 40
1996 2277 (1295) 126 97
1998 – 125 103
2002 (2215) 125 102
Sources: Richard Garfield & Ron Waldman, ‘Review of potential interventions to reduce child mortality
in Iraq’, USAID, 2003, pp 9, 17, at http://www.basics.org/pdf/iraq-child-health-review_garfield&
waldman_final.pdf, accessed 8 October 2005; Richard Garfield, Morbidity and Mortality among Iraqi
Children, from 1990 through 1998, Fourth Freedom Forum, 1999, at http://www.fourthfreedom.org/
Applications/cms.php?page_id=7, accessed 8 October 2005; Peter Pellet, ‘Sanctions, food, nutrition and
health in Iraq’, in Anthony Arnove (ed), Iraq Under Siege: The Deadly Impact of sanctions and War,
Cambridge, MA: South End Press, 2000, p 161; and UNICEF, at http://www.unicef.org/infobycountry/
iraq_statistics.html#7, accessed 28 November 2004.
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Iraq, like other Middle Eastern countries has a large public sector, com-posed of 190 state owned enterprises, producing a variety of goods andservices, which employs 650 000 people.11 Some, perhaps most, of theseenterprises would not be able to compete under international prices. Physicalassets in this sector are by and large antiquated, damaged or have beendestroyed through wars or the lawlessness that followed the Coalition’soccupation in 2003.
Coalition policies
The Coalition’s response to these conditions consisted of the sweepingliberalisation of markets and prices, which began in earnest with the arrivalof Ambassador Bremer in Baghdad in May 2003. In the labour market theCoalition fired 500 000 state employees, as the Iraqi army was dissolved andended the employment of an additional 25 000 to 30 000 former Baathists.12
In total, about 8% of the labour force was made idle. Yet workers retained inthe public sector received substantial salary increases, six-fold on average.13
Saddam’s labour law of 1987, which restricted union activity and collectivebargaining, was left intact, possibly in order to complement the Coalition’sprivatisation plans.These were accompanied by reforms in currency, foreign trade, taxation
and capital markets. A new currency, the ‘new dinar’ was successfullyintroduced; its value has been stable and has in fact appreciated vis-a-visthe US dollar.14 Import tariffs and other restrictions on trade were elimi-nated, although a uniform (nominal) duty of 5%, named ‘reconstructionsurcharge’, would later be instituted.15 Corporate tax rates were reduced,foreign companies were allowed to acquire Iraqi assets (except in the oilsector) and to repatriate profits, and foreign banks were invited back—all inorder to encourage investment.The Coalition initially planned to privatise state enterprises, but the 1949
Geneva Convention blocked such plans as it prevents occupying powers fromselling assets they do not own. When it became clear that privatisation wasnot feasible, the Coalition inserted a clause into Iraq’s interim constitutionmandating that Coalition orders, including those relating to privatisation,could be changed only by an elected government. The bank accounts of theenterprises were frozen and subsidies (where they existed) were withdrawn,but the coalition continued to pay the salaries of public employees.16 Inagriculture input and other subsidies were terminated, despite World Bankand UN advice to the contrary.17
Finally, the USA secured the absolution of 80% of Iraq’s debt from majorcreditors and has encouraged the World Bank and IMF to make fundsavailable for reconstruction.
Discussion of policies
Some Coalition measures have been creditable, such as the decision to notdollarise the economy and the successful US efforts at reducing Iraq’s debt.
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Dollarisation would have been fairly easy to effect but would have subjectedIraq, whose economic structure is vastly different from that of the USA, toUS monetary policy. More importantly, the political implications of Iraqisdenied their own currency by an occupying power would have been unwel-come. Likewise the success at reducing Iraq’s debt had symbolic import.While Iraq, in reality, could not conceivably pay the debt, its reductionsymbolised international interest in the country’s rehabilitation. This sec-tion, however, will concentrate on the impact of the reforms in labour andcapital markets, for these are central in determining the success or failure ofpolicies.
Impact on employment
The Coalition’s demobilisation of labour raised unemployment. Althoughsparse and incomplete, population data are nonetheless informative.Estimates of population and labour force, calculated from census data, arepresented in Table 3. Except for total population, all figures for 1997 excludethe three Kurdish provinces, which were outside the control of the centralgovernment.18 The figures suggest that 16.8% of the labour force wasunemployed; among young males between the ages of 15 and 24 the rate was26.6%. That is, even before the demobilisation, unemployment rates,especially among the youth, were high.Employment has contracted in both the private and public sectors since the
beginning of the occupation. A survey of small and medium-sized privatebusinesses soon after the end of hostilities revealed that the average numberof workers had declined, from 16 employees before the war to 12 in August2003.19 Following the invasion conditions of chronic insecurity have impelledminimal employment-generating investments. Moreover, the discontinuationof subsidies to farmers and the appreciation of the dinar have turned the
TABLE 3. Population and employment
Category 1997
Total population 22.05
Labour force (millions)
Female 0.50
Male 4.36
Total 4.86
Proportion in agriculture (%) 19.0
Unemployment rate 15 to 24 years old cohort
Female 7.6
Male 26.6
Total cohort 25.2
Entire Labour force 16.8
Source: Calculated from Central Statistical Organization, Annual Abstract of Statistics 2001, Baghdad,
undated, pp 39, 57 – 60.
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terms of trade against agriculture and made the sector relatively lessprofitable, inducing a flow of labour into urban areas and other activities.US contractors have hired some local labour—too little, however, to alter
the employment picture significantly. Construction activities are thought tobe characterised by substantial opportunities to substitute labour forcapital.20 Yet abundant Iraqi labour has been underutilised in reconstruction,since US firms, largely responsible for the reconstruction effort, do not faceIraqi relative factor prices. It is probably more profitable for these firms toutilise their fixed assets of physical capital rather than to hire local labour.The cost of hiring Iraqis is greater than appears, as they are considered to bea security risk. As one Coalition procurement officer attests: ‘from a forceprotection standpoint, Iraqis are more vulnerable to bad guy influence’.21
And, since the Coalition does not require contractors to hire local labour, fewIraqis are hired directly by US contractors. Of course, Iraqi subcontractorsdo utilise local labour, but they face competition from non-Iraqisubcontractors, who rely on imported, mostly Asian labour. Whatever costadvantages local subcontractors enjoy over US contractors disappear incertain reconstruction tasks in respect to foreign subcontractors. As a result,imported foreign workers in Iraq are thought to number in the tens ofthousands.22
As concerns the public sector, there was a net loss of more than 100 000jobs as of April 2004. The Coalition sacked over half a million employees buthas created only 395 000 jobs (mostly in security and defence activities wherelabour attrition rates are famously high), well below the target of 850 000 setby the US administration.23 Unemployment has swelled in consequence.Although it is unclear whether its methodology is consistent with that of thecensus in 1997, Iraq’s Central Statistical Organisation surveys reveal thatunemployment climbed to 28.1% in late 200324 and declined only marginallyto 26.8% in the first half of 2004.25 Although these surveys show a slightdecline in early 2004, independent estimates of the unemployment rate arehigher and average from 27% to 40% for the period January to August2005.26
Despite the high unemployment, the public sector salary hikes induced aboom in consumption. Rising incomes generated demand for consumergoods, and, as most of these goods could not be produced domestically, thisinduced a sharp rise in imports. The latter was facilitated by tradederegulation and the relative stability of the new dinar. Yet, while therehas been a rise in command over tradable goods in sections of the populationthat experienced rising incomes, no parallel expansion over non-tradablegoods has occurred, as prices of non-tradable goods have risen along withincomes. Real estate prices in Baghdad, for example, have quintupled.27
Nevertheless, the tight control of the money supply has kept inflation reinedin, as general prices rose by 32% and 20%, respectively, in 2004 and 2005.28
These policies induced sharp and arbitrary changes in the distribution ofincome. Rising incomes for retained workers paired with growing unemploy-ment has magnified the sense of gain and loss in society at large, and de-legitimised the reform process itself. Worse, most of those demobilised were
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young men from the poorer classes, who had few skills or employmentalternatives. Thus, coalition policies made idle those most likely to riot or joinmilitias and have undoubtedly fuelled insecurity. As one young, exasperatedjob seeker in Sadr City, a poor neighbourhood on the outskirts of Baghdad,explained: ‘I haven’t been working for the last two weeks. If I stay like this foranother week, my family will starve; and if someone comes with $50 and asksme to toss a grenade at the Americans, I’ll do it with pleasure.’29
Indeed, it is difficult to detect either a political or economic rationale to thedemobilisation. Coalition officials have suggested that the Iraqi army mostly‘melted away’ soon after its defeat and so the official act of demobilisationwas essentially a formality.30 This does not explain, however, why the armycould not be reconstituted with, for example, financial inducements to returnto work, especially as former soldiers were pressing the Coalition to pay theirsalaries. Even less convincing is the claim that the historically destabilisingrole played by the Iraqi army necessitated its disbanding.31 Control over thisassumedly destabilising force is surely preferable to a loss of control. Disar-ming and mobilising this largely conscript army in alternative civilian acti-vities, such as in the country’s reconstruction, would surely have enhancedrather than diminished stability.The curious combination of mass layoffs for some state workers along with
large pay increases for others is equally perplexing. Labour market reformsare pursued so that wage rates reflect social opportunity costs of labour. It is,however, difficult to understand how the cost of the retained labour—muchof which was idle at state enterprises that were deprived of working capital—was high and rapidly rising, but zero for all other workers. Far frompromoting efficiency in labour allocation, these policies precipitated drasticand arbitrary changes in income distribution, which, in turn, cultivatedinstability and diminished political support for the reforms.Whatever the rationale, the rise in unemployment has been accompanied
by a decline in human development outcomes. Investment difficulties havedelayed the restoration of basic services. For example, March 2003 levels ofelectricity generation were reached in August 2004, but have since declined.As a case in point, electricity output in Baghdad, from January to April2005 was two-fifths of its pre-occupation level.32 In a near repeat of post-sanctions conditions in the 1990s, the lack of electricity has, in turn, lead to adiminished availability of safe water and to a rise in water-borne disease andchild malnutrition, which has almost doubled according to a UN study.33
Mortality rates increased during the invasion period of March/April 2003 andhave remained high. Most deaths have been the result of violence, frequentlyfrom coalition military action but also from crime.34
Nor are there signs that the security situation is improving; if anything, thereverse appears true. Crime remains rampant and the insurgency may begaining strength,35 so much so that insurgents run a ‘parallel administration’in some areas, levying taxes and dispensing justice. Moreover, the claim thatthe insurgency is largely non-indigenous is no longer sustainable: of theroughly 2000 men arrested in the battle for Fallujah in late 2004, only 30 werenon-Iraqi.36
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Impact on investment
In such conditions of lawlessness Coalition reforms proved ineffective inencouraging private investment. Few foreign investors have been willing todo business at these levels of risk. Proctor & Gamble and GM, for example,put on hold their joint venture plans and Siemens AG has withdrawn most ofits staff from the country.37 Even non-governmental organisations, accus-tomed to conditions of instability, have been reluctant to return to Iraq; infact, some have left.Iraqis and US-funded contractors have engaged in some capital
formation, but investment rates have been low. The binding constraint oninvestment has not been availability of funds, but rather the economy’slimit at absorbing investments, reduced further by the spiralling violence.Violence and insecurity have both delayed implementation and raised thecosts of reconstruction. US-financed rebuilding proceeded very slowly inthe first 18 months of occupation, so that, by 15 September 2004, out of the$18.4 billion allocated by the US Congress for reconstruction, only $1.1billion had been spent; of the $4.2 billion earmarked for water andsanitation projects, $16 million had been utilised; and of the $786 millionfor health, a mere $2 million had been spent.38 These outcomes are con-sistent with the responses of Iraqis in a May 2004 poll in which mostthought that rebuilding had yet to commence.39 Reconstruction acceleratedin 2005: a total of $8.6 billion had been spent as of 28 September 2005,including $390 million on water and sanitation projects and $242 million onhealth.40
Even so, the figure for total expenditure falls substantially short of theallocated expenditures and gives a distorted picture of the actual reconstruc-tion. Much of the US-financed spending on rebuilding has been unrelatedto civilian reconstruction: as of 28 September 2005, spending on security andlaw enforcement—encapsulated in the rushed training and equipping of localsecurity personnel, often to secure vulnerable civilian infrastructureprojects—was the largest expenditure item, representing $3.6 billion, ormore than two-fifths of the $8.6 billion total.41 In other words, US spendingon all other items, including electricity, oil, civil society, roads and bridges,education, health, transport and sanitation, has amounted to only about $5billion.42 But even this modest sum overstates the extent of US-fundedcapital formation, as the real value of spending is almost surely lower thanthese statistics indicate. According to a Center for Strategic and InternationalStudies report, fraud and mismanagement are responsible for soaking up anestimated 15% of reconstruction expenditures.43 Furthermore, because a size-able portion—two-thirds, in terms of value, in 200344—of the rebuildingcontracts were awarded to US companies on a non-competitive basis, thecosts of reconstruction have swelled. The real value of capital formation isconsequently lower than even the small total for US-funded reconstructionsuggests. Meanwhile, the Interim Governing Council spent $1.87 billion onreconstruction in 2003,45 $3.5 billion in 2004,46 and planned to spend morein 2005. Yet this is a fraction of the $17.5 billion that the World Bank and
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UN estimate is required to restore infrastructure and public services to pre-invasion levels.47
Coalition officials point to the welcome removal of cumbersome red tapethat small and medium-sized businesses faced under Saddam.48 Thesebusinesses could indeed play a key role in rebuilding and job creation,especially as they tend to use labour-intensive production techniques. But theremoval of abstruse regulation is insufficient when replaced with anarchy,and rates of employment-generating capital formation in these businesseshave been low as a result of insecurity.Meanwhile, the Coalition’s freezing of bank accounts of public companies
has denied these firms access to working capital, let alone investment funds.Thus, even firms that could compete under international prices (such ascement producers) have been incapable of contributing to reconstruction.Unable to privatise these companies, yet unwilling to concede privatisation asa goal, the coalition in effect ignored public companies, with the result thatmost of the employees in the sector have effectively become idle, not fortechnical reasons, according to Iraq’s Industry Minister, but because of theCoalition Authority’s ideological distaste for the public sector.49 This hasencouraged the belief, not unreasonable under the circumstances, that theseenterprises have been deliberately neglected so they could be sold cheaplylater—a hindrance that future Iraqi governments will face when the timecomes to privatise inefficient firms.
Policy parallels
While Coalition policies may appear to be rather disharmonious, they arerepresentative of the approach used to transform the state-directedeconomies of Eastern Europe and the former Soviet Union into marketeconomies. Of course, the level of state ownership and intervention in Iraqnever reached that of the former communist world, but a comparison of theoutcomes is instructive nonetheless.The abrupt liberalisation of markets and prices in former communist
countries induced widespread inflation and unemployment, a collapse ininvestment and, consequently, in output,50 so much so that incomes percapita in some of these countries have yet to recover to their pre-reformlevels.51 Although there was an abrupt change in relative prices followingliberalisation, there was no corresponding change in the structure ofproduction. As such, these countries by and large were unable to takeadvantage of changed relative prices. Immobility and sector specificity ofresources imply that resources cannot be easily or costlessly transferred fromactivities with low social rates of return to the desired high return activities.Under these circumstances, the speed of structural transformation, orwhether it occurs at all, depend critically on the rate of investment in highreturn activities. But because price liberalisation in these countries inducedrampant inflation, price signals were weak and failed to direct investment tohigh return activities, resulting in a sharp decline in output and, in turn, in
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additional contractions in investment. Jeffrey Sachs, a proponent of theshock therapy approach, blamed the prolonged difficulties faced by countriesusing this method of adjustment on the unwillingness of Western countries toprovide the financial assistance required for macroeconomic stabilisation andprice stability.52
In contrast, investment difficulties in Iraq have stemmed not from the lackof financial capital but from the low capacity of the economy to absorbinvestments, as demonstrated by the inability of the USA to spend itsallocated reconstruction funds. These difficulties have been magnified by thesecurity crisis, for which Coalition policies are partially responsible. Ifentrepreneurs are to be encouraged to engage in capital formation, agovernment that is able to enforce property rights is essential to systemictransformation. Yet this has been absent in Iraq, in contrast to the formercommunist countries where, although its powers were eroded, the state couldstill enforce rights.Reforms inevitably produce winners and losers. In the absence of
investment and job growth in high return activities, political opposition tothe reforms from losing sections of the public, such as those who haveexperienced job loss or declining real incomes, is likely to intensify andtherefore taint the reform process. This explains why, with one exception, allgovernments in Eastern Europe that pursued radical price liberalisation werevoted out of office. The exception, Latvia, received substantial internationalfinancial assistance and was under authoritarian rule, with little prospect of achange in government.53 This underscores the importance of financialassistance to the success of shock therapy and brings out an interesting ironyto this approach: the liberalisation of markets, often justified in ethical termsof expanding freedom, is more likely to succeed under repressive rather thandemocratic political regimes.The parallel with Iraq is of interest, as coalition economic policies have
been unpopular and have induced resistance to further reforms. Had Iraqisbeen able to vote out the Coalition, they would have undoubtedly done so: ina poll conducted in March/April 2004 80% of respondents had a negativeattitude towards the Coalition Provisional Authority, while only 14%expressed a positive attitude.54 And, when given the choice in January 2005,Iraqis sent the US-backed interim Prime Minister Iyad Allawi packing,awarding his party only 14% of votes—this despite the prominence given tohis candidacy in the local media.55
While Sultan Barakat, Margaret Chard and Richard Jones warn againstthe hasty evaluation of post-conflict reconstruction efforts, they neverthelessemphasise ‘the need to assess wider social and political impact, not justmeasurable and immediate socioeconomic outcomes’.56 In reference to thislarger impact, the ramifications of Coalition policies for two fundamentalfeatures in Iraq’s modern history—namely public apprehension about themarket and the indefinite nature of property rights—is of great interest.Coalition policy aimed to nurture pro-market sentiments on the part of
Iraqis and so reduce reliance on the state.57 This aspiration was never goingbe easy given Iraq’s economic history. But Coalition policies have promoted
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the reverse—a solidification of the view of the market as largely arbitrary andunfair. Coalition officials expressed disappointment that 49% of Iraqisindicated a desire for a political platform that called for more governmentemployment as opposed to private sector jobs.58 Yet support for stateintervention in the economy is well established; in fact, it predates theBa’ath regime and was formed in the context of historically devastatingmarket failures and intense economic insecurity.59 The desire to correctthese failures impelled successive Iraqi governments, including pro-marketadministrations under the monarchy, to intervene in the national economy.Oligopoly control of markets by foreign (particularly British) companiesand local merchants resulted in domestic shortages and runaway inflationduring and after the Second World War, when shortages prompted highprofits for merchants and landowners but severe declines in real wages andsalaries.60 Activist and interventionist measures by successive governments,including the nationalisation of the oil sector in the early 1970s, were thusgreeted with general acclaim as these were seen to promote domestic pricestability. Indeed, as most Iraqis recognise, had market price mechanismsbeen relied upon to allocate food during sanctions, a famine wouldprobably have resulted. In contrast, coalition policies have worked toreinforce, rather than alleviate, the suspicions that Iraqis harbour aboutmarkets.Nor have Coalition reforms helped fortify the historically precarious
nature of property rights in Iraq, where frequent and arbitrary changesstand as the norm not the exception. In order to secure the administrationof rural areas and, later, to check the power of the more nationalist urbancentres, the British favoured tribal Sheiks during their occupation of Iraqbeginning in 1917. In time, ‘a society of generally free tribesmen becametransformed into one of groups of near-serfs’ as new Sheikh-landlordsgained power.61 With the overthrow of the monarchy in 1958, this landedgroup would lose political power, through the abolition of parliament thatthey dominated, and economic power, via land reform. Subsequentnationalisations in 1964 of large banking, commercial and industrialestablishments and later measures under the Ba’ath eroded the rights of thedomestic industrial and commercial bourgeoisie. Under sanctions, while thesavings of the lower and middle classes were wiped out, a hated class of‘nouveaux riches’,62 composed of Sunni and Shia Arabs as well as Kurdswith close ties to the former regime, emerged as a social force. Yet none ofthe instability surrounding assets has been assuaged by Coalition policies. Ifanything, the chronic lawlessness that has resulted from these policies hasaggravated the issue. To note one example, neither Coalition nor Iraqiauthorities have been able to prevent returning Kurdish refugees—workingwith the active support of Kurdish political parties represented in the Iraqigovernment—from seizing the properties of and expelling the Arabinhabitants of Kirkuk—a relatively peaceful city.63 Hasty and inappropriateCoalition policies have therefore reinforced the extant anxieties about themarket and buttressed the traditionally tentative character of propertyrights.
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Conclusion
The brusque liberalisation and rushed privatisation in Iraq has to date failed.Moreover, the failure to appreciate the political dimensions of economicpolicies has de-legitimised the reform process and, ironically, made futurereform more difficult. Overthrowing a dictatorship, however repressive orviolent, is not enough to establish legitimacy for a reform process.None of this implies that the reform of Iraq’s economy is not needed, but
instead suggests that there ought to be a change in focus, away from radicalattempts to restructure the economy and towards a more people-centredapproach. Many state-owned enterprises may need to be privatisedeventually, but insistence that this be done immediately would further swelljoblessness and doubtless prove self-defeating.Iraq’s real GDP is estimated to have increased by almost 50% in 2004 and is
projected to rise, albeit by much less, in 2005, largely because the price of oil(the chief export) has been increasing and is expected to remain high.64 Yetan oil-induced rise in GDP will not necessarily bring about a general rise inincomes, because the oil sector, which generates most of the income, employsonly 1% of the labour force.65 The real challenge will be to convert oilincome to increased employment and output in sectors with high social ratesof return, thus raising living standards for the majority—not easy given thecurrent technical and security constraints.What are needed are policies that perceptibly and rapidly raise the living
standards of the population, especially the poorest and most destitute, andimprove the economy’s aptitude to absorb investments. As such, a pro-gramme of guaranteed public employment in labour-intensive reconstructionwork, at relatively low wages in order to minimise labour marketdistortions,66 would greatly assist rebuilding and transition. The programmeought not to be perceived as a public assistance effort, but as a publicinvestment programme that encompasses a range of activities from rubbishcollection and street cleaning67 to the construction of a physical infra-structure and the repair of agricultural drainage canals. When possible,labour that resides close to project sites ought to be utilised, as this willreduce transportation costs for labour and give the employees of theprogramme a sense of participation in their own communities. That is, such aprogramme would have the advantage of involving large numbers of Iraqis intheir nation’s rehabilitation, with resultant gains in political legitimacy andimproved security, essential to alleviating the investment difficulties.Properly designed, such a programme, while it may require a change in the
composition of expenditures, need not be a large fiscal burden. This issignificant in the light of the present fiscal difficulties facing the Iraqiauthorities. For, in conditions of rampant insecurity, the Iraqi authoritieshave been unable to increase the quantity of oil exports68 (and hence fiscalrevenues to the extent desired), despite the rise in the price of oil. The state isconsequently in substantial fiscal deficit. In contrast, in providing muchneeded jobs to reduce poverty and in assuaging the investment and securityconstraints, a programme for human development would save money in the
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medium to long-term. No less important, the success of these indigenousefforts—in contrast to those of a global superpower—would imbue Iraqiswith the self-assurance essential for nation building.
Notes
1 See Jeffrey Sachs, ‘What is to be done?’, The Economist, 13 January 1990, pp 19 – 24.2 See, for example, Keith Griffin & Azizur Khan, ‘Lessons for Russia and Eastern Europe from theChinese Experience’, in Keith Griffin (ed), Studies in Globalization and Economic Transitions, NewYork: St. Martin’s Press, 1996, pp 150 – 191.
3 See John Marangos, Alternative Economic Models of Transition, Burlington, VT: Ashgate, 2004, ch 4.4 Griffin & Khan, ‘Lessons for Russia and Eastern Europe’.5 Haris Gazdar & Athar Hussain, ‘Crisis and response: a study of the impact of economic sanctions inIraq’, in Kamil A Mahdi (ed), Iraq’s Economic Predicament, Reading: Ithaca Press, 2002, p 36.
6 Calculated from Organization of Petroleum Exporting Countries (OPEC), Annual Statistical Bulletin1998, Vienna: OPEC, 1999, pp 4 – 7, 24.
7 Calculated from the UN Economic and Social Commission for Western Asia (UNESCWA), StatisticalAbstract of the ESCWA Region, New York: UNESCWA, 1997, p 214; and UNESCWA, Statistical Abstractof the ESCWA Region, New York: UNESCWA, 2001, p 153.
8 Gazdar & Hussain, ‘Crisis and response’, p 39.9 Congressional Research Service, Iraq’s Economy: Past, Present, Future, Report for Congress, 3 June2003, pp 25 – 26, at http://www.export.gov/iraq/pdf/crs_iraq_economy.pdf, accessed 8 October 2005.
10 Bassam Yousif, ‘Development and Political Violence in Iraq, 1950 – 1990’, PhD dissertation,University of California, Riverside, CA, 2001, ch 3.
11 International Crisis Group (ICG), Reconstructing Iraq, ICG Middle East Report No 30, 2 September2004, Amman/Baghdad/Brussels: ICG, p 6.
12 Christopher Foote, William Block, Keith Crane & Simon Gray, ‘Economic policy and prospects inIraq’, Journal of Economic Perspectives, 18 (3), 2004, p 55.
13 ICG, Reconstructing Iraq, p 1.14 For exchange rate statistics since October 2003, see Brookings Institution, ‘Iraq Index: tracking
variables of reconstruction & security in post-Saddam Iraq’, at http://www.brookings.edu/fp/saban/iraq/index.pdf, accessed 8 October 2005.
15 Foote et al, ‘Economic policy and prospects in Iraq’, p 64.16 Ibid, p 66.17 ICG, Reconstructing Iraq, p 5.18 Unemployment data for these provinces are unavailable, but since their combined population is only
15% of the total, the unemployment data for the entire country are unlikely to be changed significantlyby the addition of the missing data.
19 Iraqi American Chamber of Commerce and Industry (IACCI), ‘Conditions and expectations for privateenterprise in Iraq’, p 4, at http://www.cipe.org/pdf/iraq_survey_final.pdf, accessed 8 October 2005.
20 Ian Little, Tibor Scitovsky & Maurice Scott, Industry and Trade in some Developing Countries:A Comparative Study, Oxford: Oxford University Press, 1970.
21 Quoted in ICG, Reconstructing Iraq, pp 17 – 18.22 Ibid.23 John Howley, The Iraq Jobs Crisis, Education for Peace in Iraq Center, Issue Brief No 1, June 2004,
p 2, at http://www.transafricaforum.org/documents/EPIClaborreport.pdf, accessed 8 October 2005.24 Ibid, p 3.25 United Press International (UPI), ‘Iraq unemployment drops despite violence’, 4 December 2004, at
http://washingtontimes.com/upi-breaking/20041204-061822-5610r.htm, accessed 8 October 2005.26 Brookings Institution, ‘Iraq Index’.27 ICG, Reconstructing Iraq, p 1.28 Brookings Institution, ‘Iraq Index’.29 Quoted in Foote et al, ‘Economic policy and prospects in Iraq’, p 58.30 Ibid, p 55.31 Ibid.32 Brookings Institution, ‘Iraq Index’.33 Karl Vick, ‘Children pay cost of Iraq’s chaos’, Washington Post, 21 November 2004, at http://
www.washingtonpost.com/wp-dyn/articles/A809-2004Nov20.html?sub=AR, accessed 8 October 2005.34 Les Roberts, Riyadh Lafta, Richard Garfield, Jamal Khudairi & Gilbert Burnham, ‘Mortality before
and after the 2003 invasion of Iraq: cluster sample survey’, Lancet, 364, 20 November 2004, pp 1857 –1864, suggest that the war resulted in 100 000 civilian deaths.
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35 See Steven Komarow, ‘US chipping away at al-Qaeda leadership, but attacks climbing’, USA Today, 2October 2005, at http://www.usatoday.com/news/world/iraq/2005-10-02-iraq-leaders_x.htm, accessed23 October 2005.
36 ‘When deadly force bumps into hearts and minds’, The Economist, 1 January 2005, pp 30 – 32.37 Naomi Klein, ‘Baghdad year zero’, Harper’s, September 2004, pp 43 – 53.38 Jonathan Weisman, ‘US plans to divert Iraq money’, Washington Post, 15 September 2004, at http://
www.washingtonpost.com/wp-dyn/articles/A21489-2004Sep14.html, accessed 8 October 2005.39 ICG, Reconstructing Iraq, p 2.40 US Department of State, ‘Iraq weekly status report’, 28 September 2005, p 23, at http://www.state.gov/
documents/organization/54230.pdf, accessed 8 October 2005.41 Ibid.42 Calculated from ibid.43 See Center for Strategic and International Studies (CSIS), Progress or peril? Measuring Iraq’s
reconstruction, December 2004, p 3, at http://www.csis.org/isp/pcr/iraq_funds.pdf, accessed 23 October2005. For an exploration of the role of corruption in Iraq’s reconstruction, see Philippe Le Billon,‘Corruption, reconstruction and oil governance in Iraq’, Third World Quarterly, 26 (4/5), 2005,pp 685 – 703.
44 Ibid, p 696.45 ICG, Reconstructing Iraq, p 2.46 Calculated from IMF, Iraq: Statistical Appendix, Report No 05/295, Washington DC, August 2005,
pp 8, 11, at http://www.imf.org/external/pubs/ft/scr/2005/cr05295.pdf, accessed 5 October 2005.47 ICG, Reconstructing Iraq, p 2.48 Foote et al, ‘Economic policy and prospects in Iraq’.49 Klein, ‘Baghdad year zero’, p 49.50 Griffin & Khan, ‘Lessons for Russia and Eastern Europe’.51 Joseph Stiglitz, ‘Iraq’s next shock will be shock therapy’, Project Syndicate, February 2004, at http://
www.project-syndicate.org/commentaries/commentary_text.php4?id=1476&lang=1&m=contributor,accessed 15 October 2005.
52 See Jeffrey Sachs, ‘Consolidating capitalism’, Foreign Policy, 98, 1995, pp 50 – 64.53 Marangos, Alternative Economic Models of Transition, p 106.54 Brookings Institution, ‘Iraq Index’.55 Tareq Y Ismael & Jacqueline S Ismael, ‘Whither Iraq: beyond Saddam, sanctions and occupation’,
Third World Quarterly, 26 (4/5), 2005, p 624.56 Sultan Barakat, Margaret Chard & Richard Jones, ‘Attributing value: evaluating success or failure in
post-war reconstruction’, Third World Quarterly, 26 (4/5), 2005, p 835.57 Foote et al, ‘Economic policy and prospects in Iraq’.58 Ibid, p 68.59 See Kiren Aziz Chaudhry, ‘Consuming interests: market failure and the social foundations of
Iraqi etatisme’, in Kamil A Mahdi (ed), Iraq’s Economic Predicament, Reading: Ithaca Press, 2002,pp 233 – 265.
60 Ibid, pp 236 – 241. For estimates of inflation and declining real earnings in this period, see HannaBatatu, The Old Social Classes and Revolutionary Movements of Iraq, Princeton, NJ: PrincetonUniversity Press, 1978, pp 471, 474.
61 Peter Sluglett, Britain in Iraq 1914 – 1932, London: Ithaca Press, 1976, p 231.62 Phoebe Marr, ‘Comment on Isam al-Khafaji, ‘‘The myth of Iraqi exceptionalism’’’,Middle East Policy,
7 (4), 2000, p 90.63 George Packer, ‘The next Iraqi war?’, The New Yorker, 4 October 2004, pp 64 – 79.64 IMF, Iraq Staff Report for the Article IV Consultation, 8 July 2005, p 30, at http://www.export.gov/iraq/
pdf/imf_report_0805.pdf, accessed 5 October 2005.65 Foote et al, ‘Economic policy and prospects in Iraq’, p 50.66 See Keith Griffin & Terry McKinley, Implementing a Human Development Strategy, New York: St
Martin’s Press, 1994.67 US military commanders used funds under the Emergency Response Program, designed for
humanitarian relief and reconstruction, to pay for precisely such activities. However, because only$140 million was allocated, the impact of the programme was insignificant. See ICG, ReconstructingIraq, p 18.
68 Oil output has yet to regain its pre-war, 1999 – 2001, level. See Congressional Research Service, IraqOil: Reserves, Production and Potential Revenues, 13 April 2005, pp 1 – 2, at http://www.fas.org/sgp/crs/mideast/RS21626.pdf, accessed 6 October 2005.
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