TCS Daily

Paging Hernando de Soto, Paging Hernando de Soto...

By Austin Bay - March 1, 2007 12:00 AM

Call it an economic and political victory for "New Iraq" -- and an indication that we may see more in the future.

This past Monday, Prime Minister Nouri al-Maliki's cabinet finally agreed to a reformed "oil law." The cabinet will forward the legislative package to the Iraqi parliament for action later this spring.

The "oil reform" program in Iraq is long overdue, but the Iraqi government also deserves kudos for the effort. Democracy is often a slow, muddled and tedious operation (look at the U.S. Congress).

Until Iraq's democratically elected parliament was seated and the government selected, Iraq lacked "full sovereignty." Any "permanent oil reform" implemented by the Coalition Provisional Authority or an interim Iraqi government would have been portrayed as inherently illegitimate. The new bargain has its flaws (what legislation doesn't?), but illegitimacy isn't among them. The Iraqis have worked through the snarl on their own.

Implementing the new program will strengthen the national government while giving all regions an economic stake in its political success.

Oil is both Iraq's blessing and bane.

The blessing is obvious -- "black gold" is a vital natural resource and an economy-priming commodity. As for the bane, that's the battle for control of oil production and precious oil revenues.

Iraq's biggest-producing oil fields lie in the predominantly Shia Arab south and Kurdish north. In 2007, Iraqi Sunni Arabs fear Shias and Kurds will deny them a fair share of the wealth. Many Shia and Kurds retort that it's time they were compensated. For decades, Sunni Arab elites controlled Iraq's oil industry. Kurds and Shias never received a "fair share" of the income.

Despite the Kurd and Shia resentment, and the Sunnis' fears, Iraqi leaders quickly agreed to an oil revenue sharing formula. The Kurds, however, demanded oil contracting concessions. Remember, the Kurds have enjoyed a degree of autonomy since 1991. The Kurd demand bedeviled negotiations for months, with an interesting collection of Sunni and Shia arguing the demand undermined the central government's authority.

The compromise that emerged permits contracting by region but establishes a Federal Oil and Gas Council. The FOGC has a final say on negotiated contracts. Political sleight of hand? Welcome to democratic government. In a press statement, U.S. Ambassador to Iraq Zalmay Khalilzad praised the entire process: "This is a significant political achievement because leaders representing all of Iraq's communities have demonstrated that they can pull together to resolve difficult issues of vital national importance."

The Iraqi government should consider two other economic reforms.

A logical follow-on is the establishment of an Iraqi "oil trust" program, similar to the one implemented by the state of Alaska where every qualified citizen gets a share of state oil revenues. An oil trust would put several hundred dollars a year into the pockets of every adult Iraqi -- that serves as an instant economic "fire-starter." The oil trust immediately invests everyone in the economic success of Iraq's new democratic government.

Clarifying and affirming individual property rights is another important reform. Peruvian economist Hernando De Soto's "Mystery of Capital" (published in 2000) argued that Egypt's poor have around $240 billion in "dead capital," most of it tied up in property that they cannot properly mortgage. De Soto said that individual property rights and a legal system that protected contracts would instantly energize Egypt's sclerotic economy.

In 2004, while serving in Iraq, I read a short, unclassified study that made the same argument for Iraq. The potential economic payoff is huge.

The Iraqi government needs to hear from De Soto. I know of one economist who thinks a speech by De Soto to the Iraqi parliament and government ministries would not only benefit Iraq, but do wonders for reform advocates throughout the developing world.



de Soto MIA
Good article and of course very sensible. But the only problem is that if some money goes into the pockets of oridinary Iraquis, then that means it won't be in the pockets of some other people who want it. Before it all went to Sadam, now others are lusting after it. And I don't mean the Americans because they have no record of stealing oil from anybody.

Too true
But, if this becomes a solid, implemented policy, I think it could go a long way toward ending the violence as the various parties develop, at least an uneasy, truce.

Who knows, maybe this is the break the country needs to begin getting back on its feet.

Great Idea
I wholeheartedly support this idea and have been very disappointed that this hasn't been instituted a couple of years ago. I think that shared ownership of oil royalties by the Iraqi people will at least give them a sense of control and benefit and may promote a common defense of the pipelines and facilities. It may even reduce the violence. The Iraqi people deserve this in such a fundamental fashion, after 20 years of abuse by Saddam and his Baathists, that it seems to me it is practically a civil right. I live in Alaska and have benefitted from the Permanent Fund Dividend by direct deposit into my IRA - 20 years now. Those drops of crude have been well managed by the State's PF management board, adding signficant value through conversion to cash and invested, with distributed dividends, which are in turn invested again in index funds. the federal government also benefits on the captial gains taxes I've been paying on the dividends. It's been tremendous and I sincerely wish this benefit for the citizens of Iraq (and Iran, Nigeria, Mexico and Venezuela for that matter). This will do another good thing and that is to squash the lie that the U.S. is there to steal the oil. It is so much easier and cheaper to just buy it from them.

I'm all for it.

Spot on correct!
Couldn't agree more! With one caveat; noting the bread of idleness is a curse -- unearned income, for anyone, can be a disincentive to work, as obeserved within the al Saud family of Saudi Arabia. So, as a safety net -- a very good idea.

They're mailing in absentee ballots
Mercury must be in retrograde this morning, digger, because I agree with you totally. This would mark a significant return to the spirit of Iraq's old constitution, which stipulated that all national assets were the property of the Iraqi people.

Such a return would certainly add focus to negotiations behind any future development of oil field operations. And there may in fact be a fresh round of these at some point, if rumors of a possible large field in Anbar have any substance. At last there would be a field on Sunni territory, easing the way toward an equitable split of the proceeds.

So congratulations are in order for the chronically missing members of Iraq's national assembly. One hopes they will get off the golf courses of Jordan and Europe for long enough to hop back to the Green Zone, and stay long enough to vote this idea into law before heading back to safety.

And you are also correct
Some would turn this dividend to their own benefit, whereas, others would turn it over to the local whiskey dealer. Nevertheless, it is a personal choice. Here in Alaska, it serves as a significant boost to local economies - wisely or un-wisely spent. I think the greater value is the sense of common ownership in a national resource and common interest in the government that administers the resource.

Two years ago I made similar suggestions in a Brazilian Newspaper. Good to see this article too.


oil for the people
I think there's a mixup when everbody around here gets so enthusiastic about oil for the people like Alaska. Does Alaska have something like 'The Alaska People's National Oil Company'? I don't think so. I think real companies, who actually know how to work the stuff, just pays a royalty to the state govnmt, and they in turn dole it out. Tell me if I'm wrong there. But in contrast, on this forum many of the statists do not recommend that at all, but rather that states actually nationalize oil companies kick out the foreigners, and try (and fail) to produce it themselves. For example, Roy above is a champion of Hugo Chavez' national socialism in venezuela, where they produce about half as much as they did when privately owned. So what do people want for Iraq, to be like Alaska or, venez, or the old soviet union? Tin pop countries COULD dole out all the massive oil revenues, but they DONT, because the corrupt elite prefer it to be in their own pockets.

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