Iraq and the “Benefits” of Liberalism
Author: Joe Schumache
Originally Published at Peace and Conflict Monitor on: 10/20/2003
Category: Analysis
Two weeks ago, Iraq’s U.S controlled ruling body, the Coalition Provisional Authority, introduced wide sweeping reforms of Iraq’s economy – effectively putting a large part of it up for sale. Underpinning the plan is the selling off, of Iraq’s state owned companies and allowing foreign firms unprecedented access to the Iraqi economy. The new rules, announced by finance minister, Kamil Mubdir al-Gailani, permit Iraqi companies to be wholly owned by foreign interests, except those in the oil, gas, and mineral industries. There will be no regulations on the amount of profits that can be repatriated or on using local products. Corporate tax will be set at 15% and a raft of tax breaks and the virtual elimination of tariffs are intended to create a modern market economy, virtually from scratch.
Iraq, which the US administration has already announced its intention to turn into a beacon for democracy in the mid east region, is now also complimented by the installation of one of the world’s most liberal economies. The measures will open Iraq up far more than most developing economies, and in some areas such as foreign ownership and in scrapping agriculture subsidies, exceed the US. Given that 30% of the workforce is currently employed by the state and that the population has lived off food rations for ten years the audacity of the plans have caught many by surprise, including America’s British allies.
The plans have raised consternation amongst Iraqi businessmen, yet the privatization of Iraqis 192 public sector companies was presented as a fait accompli by Paul Bremmer’s administration. Most Iraqis have realized for some time that the American invasion would mean a completely new way of doing business: something many are less than happy about, blaming the occupying powers for worsening a pre-war unemployment rate of 50%, by dismantling much of the more odious aspects of Saddam’s vast state apparatus. The actualities of Iraq’s brave new economic order started to sink in when Paul Bremmer, the top American Civil administrator was appointed in May. One of Bremmer’s (a former Reagan advisor) first acts was to cut subsidies to Iraq’s state enterprises. In a harbinger of the things to come, he said at the time: “short term sacrifices would create a level playing field with the private sector. Inefficient industries would have to close down or be privatized”.
Though the latest reforms should come as no surprise, the reaction with in Iraq’s business community has been of dismay. An Iraqi businessmen, Wadi Surab, told the BBC that the economic reforms would “destroy the role of the Iraqi industrialist”, adding that Iraqi entrepreneurs would be unable to compete with foreign companies in privitisation tenders. He added that if a poll were taken he was certain a 100% of Iraqis would vote against the measures – a not unheard of electoral occurrence for Iraqi ballots.
To jump-start the radical economic overhaul, the US flew in some of the leading architects of Eastern Europe’s transition from communism to market economies in the 1990’s, to a conference in Baghdad at the end of last month. The central and eastern European experts were there to advise and cajole Iraq’s leading civil servants and bankers regarding the US’s privatization plans. Eighteen speakers from eleven countries spoke about the lessons that can be learnt from their country’s transformation, including the cancellation of fixed exchange rates and sweeping fiscal reforms.
The conference was given the highest endorsement by the Bush administration. US secretary of state, Colin Powell, said in a video address “Our European colleagues…know the challenges of (moving) from command economies to free markets…They can attest that staying the course of reform is well worth the struggle”
Corporate America is now mobilizing itself to do its part for operation Iraqi freedom, having been assured by the US government that its role in Iraq is as vital to the Bush administration’s vision for Iraq as the military’s.
George Bush has said that he envisions a ‘US-Middle East free trade area’ within 10 years, ’replacing corruption and self dealing with free markets’. Even more succinct about the economic doctrine to be installed in Iraq was the leading Bush advisor, who recently told a forum of the American Enterprise Institute:
“We have a responsibility, a stewardship, not to turn Iraq over to institutions incapable of seeing this through to a successful conclusion…the last thing the Iraqi’s need is French statism or German labour practices”
The difficulties in rebuilding Iraq’s shattered economy and those facing the American companies that are lining up to undertake the task, may turn out to be two different things – though obviously intertwined. The Guardian in a September 23rd editorial iterated the clear dangers of introducing rapid and unfettered market reforms to Iraq’s malnourished and primitive economy.
“Any dream of a rapid transformation to a free market in Iraq must be tempered by the fact that most of the population is dependant on state handouts. Not only is the State Iraq’s biggest employer but the Iraqi people depend on a heavily subsidized system of inputs to industry and the inexpensive goods and services that result. In privatizing Iraq’s industries, one would expect businesses to become profitable – by raising prices or cutting costs and staff. The outcome could be unemployment and inflation, a recipe for chaos.”
The road facing foreign companies buying into Iraq will be a uniquely difficult one. In a paper just released by Chaltam House, a London based research institute, about the ‘post war’ business environment in Iraq, academics Malaika Culverwell and Andrew Newton identify legitimacy, as the most important quality to successfully establishing a western commercial culture in Iraq. They argue that stability will not eventuate while the US controlled governing regime itself is regarded as illegitimate. A situation, which evidence suggests is the case at present, for the majority of Iraqi’s. This sense of marginalization and the resulting illegitimacy reflected onto the Iraqi Government will be exacerbated by any reconstruction and privatization programme, which ignores local sensibilities and sidelines homegrown business interests.
As Culverwell and Newton warn:
“If western companies set up services while the local providers are recovering, or indulge in a business buying spree, it could chime too readily with the existing sense that the war was undertaken to enable foreign powers to enter colonial-style and acquire the countries resources”.
Ironically, this warning should resonate strongly with a southern President such as George Bush, as it mirrors the complaints about Northern carpetbaggers pillaging the economy of the vanquished south after the American civil war.
There are two obvious possible results from the Eastern European inspired privatization of Iraq’s economy, both with clear precedents; Poland’s hard won success or Russia’s descent into decade long recession and kleptocapitalism. Though clearly, the unique factors of transforming Iraq’s war geared economy and reviving its ruined civil society must be taken into account.
Unfortunately, Iraq’s parallels with Russia’s recent woes bear first consideration. Russia failed, in part, because of a perceived lack of legitimacy amongst Russians in their government; a break down during the 90’s of the social contract between citizen and state. The Russian people have had a long record of treating the state as both a provider and adversary; tax avoidance and relying on the black-market have a venerable history in Russia and are still a significant hindrance to Russia’s economic development.
Like Russia, the majority of Iraq’s populace was cowed into submission, by a dictatorship with whom they had a relationship based on a struggle for survival rather than genuine fidelity.
As Culverwell and Newton point out, “The removal of Saddam Hussein left a power vacuum resulting in the unmanaged devolution of power to a complex network of local ethnicities, tribes, religions, business and organized crime. These compete with the nascent central administration for control of business activities in their spheres of influence.”
The CPA now has the momentous task of uniting a collection of peoples connected mainly by the traumas of war, dictatorship, sanctions, and now occupation. As yet, the CPA has failed to inspire anything other than grudging support, in lieu of something better. Before it can create a country ripe for the most pure strain of market capitalism, it has to first, provide the basic services that make a populace trust its government. The question is whether a rapid grafting of free market capitalism onto a ruined state is the best way to deliver the services a traumatized society needs.
It can be maintained that the economic policies the U.S is introducing into Iraq, worked in many countries and only hit snags in others when it was not applied with enough zeal and intrepidness. However, it would take a very flexible definition of success to say it was anything less than catastrophic in Russia and other recalcitrant societies such as Rumania. The ‘Shock therapy’ remedy used in Russia to cure the rampant inflation caused by sudden economic liberalization, plunged that country into what the United Nations Development programme described as the ‘biggest recession of the 20th century. Iraq is not Russia. Though whether this bodes good or ill is impossible to tell.
The Governments in eastern and central Europe that did make a success out of the rapid economic liberalization programmes, that in some quarters have been called ‘shock therapy’, were those that had legitimacy already in the eyes of their populace, without having to go out and earn it through ‘no pain no gain’ economic restructuring programs. They had a wellspring of trust from which to expend. Poland and Bulgaria, had governments, which had been successfully infiltrated by liberalizers and reformists, prior to the meltdown of the soviet satellite regimes in Eastern Europe. The ‘Solidarity’ party in Poland was imbued with the legitimacy of having suffered and fought against soviet domination for many years.
In this regard, Iraq’s current Governing council may struggle. Newton and Culverwell: “The presence on the Iraqi governing Council of former exiles whose own credentials are questioned by many inside Iraq, and who remain the strongest supporters of the military intervention, does not strengthen its position. It cannot help the political transition that the occupying powers are also attempting to instill a new national ideology trusting of the US.”
Much of the fate of Corporate Americas foray into middle-eastern nation building will rest on the stabilization of Iraq’s security situation. The most important ‘invisible hand’ present in Iraq’s new economy may be that of the terrorists/resisters who will inevitably seek to torpedo the new comers. The establishment of a network of ‘soft targets’ – Western conglomerates, easy to attack, with their unavoidable symbolism of fast food joints and corporate head quarters will inevitably change any ongoing conflict. Unless these businesses can garner the kind of legitimacy that Newton and Culverwell talk of, their targeting and identification as ‘invaders’ could remobilize public support behind those attacking the occupying forces, which at present vacillates because of civilian causalities in recent attacks.
Though the architects of Iraq’s transformation have a timeframe of years before a local Iraqi MacDonald’s tauboullehburger goes on sale it’s hard to see a culture, such as Iraq’s – so imbued with its own values laying down to accept the indignity of cultural colonialism, in such a preplanned, uninvited and inorganic way.
Iraq has been a pawn in Western geopolitics since its inception in the 1920’s when it was drawn up by British administrators to take account of the region’s oil distribution. This is only the latest chapter in Iraq’s continuing encounter with western imperialism, and up until now it has generally confounded the doom-merchants: the most recent invasion succeeded with little of the catastrophic results that opponents of US military action had predicted – with more than a little amount of understandable sanctimony. There still remain significant factors to hearten the corporate boardroom generals who will now form America’s next strategic phalanx. The innate proclivity of the Iraqis people for business should spur the US liberalization programme. The return of Iraq’s’ educated and cosmopolitan Diaspora may be of huge beneficent rather than divisive. Most important, Iraq does sit on the second largest oil deposit in the world. The sixty billion dollar question is whether Iraq’s administrators can continue to resist temptation to use oil profits to pay for the mammoth rebuilding cost, which at present is mostly met by the U.S taxpayer.
Economic ideology aside, some would argue that Iraq’s fire sale is necessitated by this need for the private sector to share some of the reconstruction burden. This short-term pragmatic reasoning is why a gradualist liberalization program, similar to china’s – the most wildly successful economic transformation of all time, was unlikely to be chosen.
While the mechanisms of economic liberalism in Iraq are now very much set, a lot now rests on US Domestic politics. Iraqi public opinion and NGO indignation may inspire editorials around the world in the years to come, rallying against the profiteering of US conglomerates and the creation of a new breed of rich Iraqi entrepreneurs who have little awareness of the social inequality their wealth is built on. However, what will shape events most significantly is the current crop of U.S politicians who know that their career is now inextricably tied to Iraq’s future. This, more than anything, will determine the fate of America’s Middle East showroom of Western civil and business ideals.
