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Now to repair the Iraqi
economy
By Mark Baker
PRAGUE
- The United States government is literally flying in
millions of dollars to Iraq - in $1 and $5 denominations
- as part of plans to rebuild that country's war-torn
economy.
The money, taken from frozen Iraqi
assets held in the US, will be doled out to public
servants in the form of onetime, $20 payments as an
inducement for them to come to work. The hope is that
the money will move its way through private transactions
and ultimately aid efforts to build a functioning market
economy - a goal economists say is probably years away.
The dollar scheme is just a small part of what
ultimately could be a long and difficult undertaking to
repair and transform an economy suffering from decades
of conflict as well as economic sanctions imposed by the
United Nations (UN) after the 1991 Gulf War.
Sultan Barakat is the director of the Postwar
Reconstruction and Development Unit at Britain's York
University. His unit specializes in advising countries
rebuilding after years of conflict. It has been active
in the Balkans and Afghanistan.
Barakat said
that before real reconstruction can begin, order must be
restored. "The most important task for now is going to
be security, to make sure that the country is stabilized
in one form or another," he said. "And then having done
that, [the US-led coalition] will have to look into
issues of welfare and providing safety for those who
have lost either as a direct result of the war or as a
result of many years of sanctions and economic
difficulties."
Barakat said that a major
difficulty in the transformation to a market economy is
posed by Iraq's socialist past. Saddam Hussein's Ba'ath
regime was modeled loosely after the command economies
of Eastern Europe and the Soviet Union. Much of the
economic activity was centrally directed. The market has
to be invented.
"Iraq was a highly structured
economy, a centralized economy, and the state owned many
of the enterprises within the country, and also
controlled many of its export and import activities,"
Barakat said. He used the example of Iraq's construction
industry to underscore the scope of the challenge. These
state-owned companies played a major role in rebuilding
the country after the 1991 Gulf War, but their existence
is now in question. It's not yet clear who or what will
take their place.
The Iraqi economy, once
relatively successful in the 1960s and 1970s, was
especially hard-hit by UN economic sanctions. Hania
Farhan, Middle East regional director for the Economist
Intelligence Unit (EIU) in London, said that the impact
of the sanctions was felt disproportionately by the
local population, not by members of Saddam's regime. She
said that living conditions in the Shi'ite south and
Sunni-Muslim hinterland were especially bleak.
"Living standards definitely suffered much more
than the official statistics reflect, because the total
figures reflect total GDP divided by the total
population, which is just not the way it was happening.
Because of the sanctions you had extreme poverty,"
Farhan said. Now, long-suffering local populations will
be looking to the US and its allies to make good on the
promise to improve their lives.
The US-based
Council on Foreign Relations, in a recent report titled
"Iraq: The Day After", outlined a series of initial
steps for rebuilding the economy. The author of the
report was not immediately available for comment, but
the report is expected to guide US decision-makers in
the early days.
The first step, the report says,
is to stimulate demand by creating jobs in the private
sector and ensuring wages for workers in the public
sector (government workers, police, health care workers)
are paid on time. This is what the airlift of dollar
bills is expected to do in the short term. The report
then says that financial institutions must be revived to
provide Iraqis with access to capital. Iraq, the report
says, had a "relatively sophisticated" financial sector
that declined during Saddam's rule.
The EIU's
Farhan agreed: "The banks are in an absolute state [of
collapse]. They really need a complete overhaul. They
are under-capitalized. They were just set up to serve
the interests of the ruling elite. Rather, they ended up
just instruments to support the interests of the elite."
The council also recommends special attention be
paid to agriculture, which provides a livelihood for
about a third of Iraqi citizens. It says food output
declined 40 percent since 1990. At least part of the
decline, the report says, is attributable to UN
sanctions, which resulted in inputs like seed and
fertilizer falling under control of government cronies.
But any effort to develop the Iraqi economy will
be hampered by the country's formidable debt. Estimates
of Iraq's debt to commercial banks and governments
amount to between $60 million and $120 billion (sources
vary widely). The country's total external debt,
including war reparations to Kuwait and Iran and
unresolved compensation claims, amounts to something
like $400 billion, although much of this likely will
never be paid.
Iraq stopped servicing its debt
around a decade ago and has few resources to start
making those payments now, but all sides agree a
framework must be put in place to identify the debt and
work out a reasonable time frame for paying it back.
The International Monetary Fund and World Bank,
at a meeting last weekend in Washington, said that they
would be willing to assist in the effort, but said a UN
mandate would be needed first. Creditor countries like
Russia, France and Germany, which are owed billions of
dollars, have indicated they would not forgive Iraq's
debts outright, but would be willing reschedule the
repayment timetable.
Even though international
groups have said the UN's role is crucial, it's not
clear what that role will be. The US has said the
countries that participated in toppling Saddam's regime
- not the UN - should lead the process of
reconstruction. This position is opposed by many
countries around the world.
In spite of the fact
that Iraq sits atop the world's second-biggest known oil
reserves - after Saudi Arabia - it's not clear how much
of the initial reconstruction can be financed from oil
revenue. Iraq's oil infrastructure is badly depleted and
much of the proceeds from oil sales will go toward
repairing the industry and emergency humanitarian needs.
Over time, of course, Iraq's oil output can be
expected to rise, making more money available for direct
reconstruction. Much of that money, however, could be
siphoned off to pay back debts.
Copyright (c)
2002, RFE/RL Inc. Reprinted with the permission of Radio Free Europe/Radio
Liberty, 1201 Connecticut Ave NW, Washington DC
20036
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