TCS Daily

Government Is the Solution

By Arnold Kling - April 9, 2003 12:00 AM

Once the fighting dies down in Iraq, new sets of challenges will appear. These involve putting together a new government and a new economy. In order for Iraq to be successful as a democracy, its economy will have to be successful, also.

In What Causes Prosperity?, I wrote that economic success requires three ethics: a work ethic; a public service ethic; and a learning ethic. As Ralph Peters has pointed out, these ethics have been missing in many Arab societies, so that cultivating them will require some effort.

Focus on Jobs, Not Oil

Often, when pundits look at the Iraqi economy, the focus is on oil. For example, Morris Adelman wrote an op-ed piece for the Wall Street Journal about the importance of selling Iraq's oil assets to the highest bidder.

Instead, the issue of privatizing Iraq's oil can wait. Oil should remain government property at least until oil production is stabilized, and perhaps longer - until the economy and an Iraqi government have gotten on their feet.

In the short run, the most important focus of economic policy should be to develop the work ethic. Nothing is more dangerous and destabilizing than large contingents of unemployed men with guns. Iraq is saturated with guns. We need to focus on eliminating the unemployment.

Because Iraq has so much oil to export, its prospects for developing a large manufacturing sector are not promising. Employment is likely to be in construction and services.

The new government in Iraq should encourage the growth of a private sector, by keeping taxes and regulation on businesses to a minimum. However, for the next several years, the government itself may have to be a large part of the economy. It can finance expenditures by using oil revenues and even by borrowing against future oil revenues.
For unskilled Iraqi citizens, the government should provide work in construction and clean-up, in order to rebuild the infrastructure of the country. For well-educated citizens, the government can provide work in civil service and education.

No Welfare State

In proposing that the government ensure employment for Iraqi citizens, I am going against the grain of many economists, who see big government as debilitating. However, I believe that it is the nature of government rather than the size of government that matters.

What is important to avoid is a dependency culture, in which the government is expected to disburse welfare payments and oil profits to cronies or to people unwilling to work. With its oil assets, the Iraqi society can afford a government with a large payroll. What it cannot afford is a large welfare roll. In order to promote a work ethic and steer its citizens away from violence, the government needs to pay people for working rather than for remaining idle.

In the long run, a private sector can develop to complement the public sector. Private construction and service industries will develop naturally, as long as they are not stifled by taxes, corruption, or kleptocracy. What is critical is that the government develop a public service ethic, in which government officials serve the people, rather than the other way around.

A Bad Example

The main point of this essay is to stress that the rapid privatization of assets is not a panacea. In the former Soviet Union, where the work ethic failed to take hold, the benefits of privatization were dissipated by criminal behavior and corruption. We should learn from that example in the reconstruction of Iraq. In order to work, capitalism requires ethical foundations. Only when the ethics of work, public service, and learning have been cultivated can we expect a successful conversion to a modern capitalist economy dominated by the private sector.

TCS Daily Archives