Priming the Iraqi economy

The new Iraqi government needs to commit to free markets and neoliberal economic thinking, or else.

Darren Bernard

When Iraq’s squabbling political parties finally put together a government – and that can happen any day now – Iraqi leaders will need to make up for lost time. Security situations and problems with corruption have spiraled out of control, sectarian powers need to be checked and big constitutional changes need to be made. The other hot topic will be oil, or more broadly, economic reform.

It will be up to Iraq’s new leaders to keep Baghdad pointed in the right direction. Arab governments – even the good ones – have a nasty tendency to turn into corrupted socialist pork barrels. If Iraq’s leaders want to avoid that, they will need to work around nationalistic sentiments and commit to truly free markets.

So far, Iraqis have depended on large public-works projects to repair old infrastructure and bring basic amenities back online. Banking reforms have been a success, and, among other projects, massive grants and loans have been provided to revitalize the country’s agribusiness.

The result of early efforts has been a three-fold rise in the average Iraqi income from time of the invasion to today. Internet cafés have sprung up around Baghdad and cellular phone use is at an all-time time. Some 30,000 new businesses have registered with the U.S. Agency for International Development since fall 2005, in spite of the ongoing violence and the government’s sporadic curfews.

If and when the violence subsides, small businesses will be most responsible for shrinking Iraq’s stubbornly high unemployment rate, which means nurturing them today is a big priority. Thus far, USAID has taken the lead by helping nongovernmental organizations establish microcredit finance programs through Iraqi banks and lenders. USAID also worked with the Iraqi government to create the Iraqi Trade Information Center, which provides private firms with information on investing in the country, and the Iraq Investment Promotion Agency, which looks to draw more foreign direct investment for Iraq’s provinces.

It’s baby-step progress, but it shows Iraq’s central government is on the right track. The cornerstone of Iraqi trade policy should be to encourage foreign direct investment, even in large and “sensitive” sectors of the economy. The central government sticks to that open borders policy pretty well – its meager 5 percent national tariff is lower than the average tariff rates of most developed nations. And unless Baghdad decides otherwise in the next few months, even that nominal imports tax will expire come September.

Baghdad’s stock market is another story. The Iraq Stock Exchange – not to be mistaken for Saddam’s corrupted Baghdad Stock Exchange – was opened in 2004 and since has doubled in value, despite being closed to foreign investors. Bank stocks are hot, especially now that the Iraqi dinar is stable and Saddam’s cronies no longer corrupt the system. Investors say they wish the market were open to foreign traders who would add more capital to the exchange. “I like the rush, the frantic pace on the floor,” one female Iraqi investor says, “I wish we had more money and tradings every day.”

Encouraging foreign direct investment also means loosening restrictions on Iraq’s oil reserves. Per day, 2.1 million barrels of oil are drawn out of Iraq – about the same amount as before the war. Attacks on oil pipelines in the north have limited supplies, but another problem is self-inflicted. Saddam let Iraq’s oil infrastructure and technology slip far behind international standards. Iraq really needs Western energy companies to modernize the industry and search out Iraq’s undiscovered oil reserves. Yet thanks to the paranoia of being seen as stealing Iraq’s oil wealth, American officials have avoided pressuring Iraqis on opening their oil industry to those all-important foreign investors.

For Iraq’s politicians, then, real economic development depends on having the political courage to avoid spurning foreign investors or nationalizing the oil industry, much as the Saudis have done and so many Iraqis want to do. Development also depends on the will of Iraqi leaders to eliminate lavish subsidies and Saddam-era social welfare programs. The socialist models of impoverished Arab countries have proved they don’t work, and in a democratic society like Iraq, they don’t have to. Only by curtailing government intervention can Iraqi leaders fix market distortions and make the populace more self-sufficient.

Iraqis only need to take to the basic ideas; the International Monetary Fund, the Paris Club, and American, European and Iraqi officials will sort out the rest. The silent majority of Iraqis are invested in their country’s future, even without political certainty. Going forward, Iraqi leaders can save themselves a lot of trouble by resisting their populist tendencies and promoting grassroots entrepreneurship, free trade and foreign direct investment. It might be decades off, but imagine the phrase, “Arab tiger.”

Darren Bernard welcomes comments at [email protected]

SOURCES:
http://www.opinionjournal.com/federation/feature/?id=110008212

http://usinfo.state.gov/usinfo/Archive/2005/Aug/16-52840.html?chanlid=washfile

http://www.guardian.co.uk/oil/story/0,,1686530,00.html

http://www.usaid.gov/iraq/updates/nov05/iraq_fs05_110405.pdf

http://www.globalpolicy.org/security/oil/2005/1010iraqioil.htm

http://www.forbes.com/business/energy/newswire/2004/02/24/rtr1273992.html

http://asia.news.yahoo.com/060226/afp/060226060015top.html

http://www.usatoday.com/news/world/iraq/2006-03-06-iraq-reconstruction_x.htm?csp=34