TCS Daily

Economic Mecca

By James D. Miller - April 10, 2003 12:00 AM

America should make Iraq the Mecca of economic freedom for the Muslim world. Taxes, regulation, corruption and instability are normally barriers to economic prosperity. In Iraq, however, the U.S. could craft an economy largely free of these impediments.

Taxes reduce growth and repel businesses. A post-war Iraqi government, however, could run on oil revenues rather than tax receipts, thereby lowering business costs and eliminating many opportunities for graft. Companies worldwide pay legislators to enact favorable tax provisions and bribe revenue collectors to lower their tax obligations. Firms also engage in economically inefficient activities just to shelter taxable income. A tax-free Iraq could avoid these wastes.

Of course, corruption arises from spending authority as well as taxation power. Perhaps the greatest economic danger to a democratic Iraq arises from politicians diverting oil revenues to friends, clansmen and Swiss bank accounts. To combat corruption, the U.S. should create an economic supreme court of Iraq - a court authorized to veto spending and regulations. As a purely negative check on the government's economic powers, the court could only increase economic freedom.

Such an economic supreme court might seem undemocratic, but it would actually allow for speedier transfer of governmental powers to the Iraqi people. Iraq's strategic location makes it in the U.S.'s vital interest that Iraq become friendly, rich and free. Alas, a lesson of European imperialism is that democracies installed by western governments often turn into kleptocracies. President Bush will therefore be reluctant to transfer powers to a democratic Iraq until he is confident that it won't mire itself in corruption. Consequently, a solid check on potential corruption would increase President Bush's willingness to give Iraqis their political freedom.

Foreign and domestic militaries pose another threat to Iraqi freedom and commerce. Sadly, many Arab governments use their own military power to suppress democratic dissent. The U.S. wouldn't want the next Iraqi president to use his military to win reelection with 100% of the vote. To protect Iraqis from their own military, the U.S. should make Iraq a U.S. protectorate. Iraq should not have its own military but rather pay the U.S. for military protection from foreign foes. This would simultaneously secure Iraq from external enemies and eliminate the chance of a military coup. Given the contrasting treatment Iraqis have faced from the Iraqi and American armies such an arrangement would probably prove popular.

If Iraq becomes rich, it will attract immigrants. Such attraction could help end the Arab-Israeli conflict, a conflict fueled by the Palestinian refugee problem. The U.S. should help these refugees find economic security by insisting that any Palestinian refugee who could find a job be allowed to work in Iraq. Since working immigrants increase a nation's wealth, such a policy would boost the Iraqi economy.

Iraqis are divided into differing religious and tribal communities. A socialist Iraq would promote hostility among these groups. Under socialism you gain economic advantage through political power, and the easiest way to acquire this power is to form political alliances with people like you. Consequently, if the quest for wealth takes place primarily in the political arena, then the most significant struggles in a post-war Iraq will be religious and ethnic as different communities fight to take resources from each other. In contrast, the successful capitalist learns to avoid religious and ethnic strife as they are bad for business. Capitalism is primarily a non-zero sum game where you gain by satisfying the needs of others. Consequently, to minimize friction among different communities the U.S. should make Iraq a free market paradise.

James D. Miller writes The Game Theorist column for TCS and is the author of Game Theory at Work.

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