TCS Daily

A Model for OPEC

By Ariel Cohen - April 11, 2003 12:00 AM

As the fire-fights in downtown Baghdad continue, the post-Saddam administrations of Iraq - the U.S. one, headed by General Jay Garner, and the Iraqi one, which is yet to emerge - should be planning for the right economic model to save the country and win peace. Just as Japan and Germany were delivered from the devastation of World War II by free-market models, so Iraq can be salvaged by privatization and rapid introduction of the market mechanisms, the rule of law, and property rights. This is the upshot of recent consultations senior Treasury officials held with leading free marketers from around the nation, including Milton Friedman.

In the post-war Iraq, economic issues loom as large as political ones. For four decades, Saddam's Ba'ath socialists grossly mismanaged Iraq's economy and oppressed its people. Sound economics are desperately needed to help the Iraqi people rebuild their lives.

Saddam's regime has succeeded in bankrupting the country even though it boasts the world's second largest oil reserves after Saudi Arabia. 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.

Saddam's unaccounted revenues are between $6.6 billion and 10 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 on Iraq after the Persian Gulf War to force him to give up his WMD. According to the U.S. General Accounting Office and the British intelligence sources, oil smuggling and illegal surcharges of 25 cents to 50 cents on a barrel of legal oil provided the funds to bolster Saddam's regime during the decade of sanctions.

The road to economic prosperity in Iraq will not be easily paved, but the post-Saddam administration can help the new Iraqi government achieve fundamental structural reform with massive, orderly, and transparent privatization of various sectors of the economy, including the oil industry. The United States should offer its guidance on establishing sound economic and trade policies to stimulate growth and recovery.

As Saddam's brutal and repressive regime ends, 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. To succeed, Iraqi opposition leaders will need a political commitment from the United States and international organizations that they will furnish the necessary expertise and technical assistance. To gain that commitment, Iraq will need to abandon statist policies of the past and become fully committed to the principles of a market economy.

Privatization efforts in other countries demonstrate 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.

In particular, the future Iraqi civilian administration should work with indigenous leaders in Iraq to convince them now that a future Iraqi federal government must develop mechanisms for privatizing these industries and taxing oil sales. Proceeds from oil should be equitably shared among the three major ethnic regions-the Shiite Arabs in the South, the Kurds in the North, and the Sunni Arabs in the central region. On the other hand, continuation of the oil-for-food program under U.N. supervision beyond addressing minimal humanitarian needs over a short time frame, such as twelve weeks, will be counterproductive. It will add an additional layer of international bureaucracy to the task of managing extraction of oil - a global commodity. In the twenty first century, neither the U.N. nor national governments should be in business of managing productive assets.

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, the next Iraqi government must take steps to create a modern legal environment that recognizes property rights and is conducive to privatization. Furthermore, it should educate and prepare the people of Iraq for structural economic reform and privatization through a public information campaign.

To bring modern economic expertise and management skills the government will have to hire Iraqi expatriates as well as other Western-educated Arabic speakers with financial, legal, and business backgrounds to fill key government positions on economic reform and privatization. To improve fuel efficiency of the Iraqi economy, the future Iraqi regime will have to deregulate prices internally, including in the utilities and energy sector. Most importantly, it will have to prepare state assets, including industries, utilities, transportation, ports and airports, pipelines, and the energy sector, for privatization. It will have to keep the budget balanced and inflation, taxes, and tariffs low. Finally, it should liberalize and expand trade and launch an effort for Iraq to join the WTO.

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.

Such a strategy will prove beneficial for the industrial world, the countries of the Middle East, and the developing world. Iraq's return to the global markets would allow a more abundant and stable energy supply and a greater revenue flow for the Iraqi economy, foster a higher living standard for the Iraqi people, and provide numerous business opportunities for the region and the world. If successful, Iraq's privatizations of its oil sector, refining capacity, and pipeline infrastructure could serve as a model for privatizations by other OPEC members, thereby weakening the cartel's domination of the energy markets.

Ariel Cohen, Ph.D., is Research Fellow in the Kathryn and Shelby Cullom Davis Institute for International Studies at the Heritage Foundation. The views expressed here are his only.

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