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September 29, 2003
On Iraq & the Privatization "Rules" - Economist commentary and my reflections
As it happens, The Economist has a fine article that I should share and comment on as it crystalized some of my as of yet not fully formed reaction to the "Rules" on economic liberalization that Bremer propounded recently.
The article then (which is 'premium content' and as such I shall quote extensively for comment) is:
Iraq's economic liberalisation
Sep 25th 2003
The article then makes the following points:
"A SHOCK programme of economic reforms signals a radical departure for Iraq. The changes ... could see its battered economy transformed abruptly into a virtual free-trade zone."
Keep in mind the key word, abruptly. People never like abrupt and unsettling change, ever.
The Economist notes that "[i]f carried through, the measures will represent the kind of wish-list that foreign investors and donor agencies dream of for developing markets." We know the key points from prior reporting. Foreign investment in any field other than primary resource extraction, 100 percent ownership of assets, full capital freedom of moment, equal legal standing with locals in commercial matters. Now let me highlight the item which I was most annoyed by: "Income and corporate taxes would be capped at 15%. Tariffs would be slashed to a universal 5% rate, with none imposed on food, drugs, books and other �humanitarian� imports." This taxation scheme strikes me as an American wet dream, specifically a Neo Con American wet dream, rather than something that is thought through in terms of what is likely to be collectible, tax wise, by an Iraqi government (in a region where tax evasion is not a marginal item, but a key aspect of operations) - although most Iraqis did not previously pay income taxes. Knowing this region, I have a hard time thinking this taxation scheme will survive contact with reality.
But let's get to reality. The Economist began the article by striking a positive note on the effect of this and other measures, however the journal is honest enough to look at the problems:
They note of course that the chronic violence and insecurity is not going to bring in investors any time soon, that aid funds take a notoriously long time to get moving, above all highly constrained American funds with all their strings, but most importantly "[q]uestions also linger over the durability of the new commercial rules."
Indeed they do, indeed they do.
The Economist notes "Naysayers question the motives and authority of a government that is still widely seen as an American puppet. The regulations were announced by Iraq's nominal finance minister, Kamel al-Gailani, but they bear the signature of Paul Bremer, who heads the American-run Coalition Provisional Authority, and the imprimatur of the American consultants it has hired to frame economic policies." I may add having met some of them, consultants without much experience with the region.
But here is the kicker: "The rules also bear an important caveat. They are subject to �adoption or replacement� by a future, elected Iraqi government. Given the shock and awe expressed by many Baghdad businessmen at the scale of the changes, it is not clear that such a future regime would be able to resist pressures to reimpose protectionism."
Not clear, no it is indeed clear - no Iraqi regime will be able to stick with this too fast, too soon program. None. It's a wish list program of American conservatives that can not even be achieved in America - now how the fuck does anyone think it will stick in a country where Arab socialist nationalism or Islamo-socialism are the most popular economic views and where these rules will be viewed as American impositions?!?! That is indeed a serious question. What would lead one to think that a radically economicall liberal economic structure that frankly would be quite advanced for most industrialized nations is going to work in (a) in a country that has never known real modern free markets, and for most of the past century been run on quasi-socialist if not Stalinist bases, and (b) in a situation where much of the population does not view the governing authority as being terribly legitimate. Further, even allowing for a positive reaction (there will not be, in grosso modo) the Iraqis quite frankly lack the skills to react in the near term.
Now The Economist argues: "Fears of invasion by multinationals keen to wipe out local competition are doubtless exaggerated" - no I don't think so, the Iraqi economy is a mess, Iraqis in large part lack the skills to compete commercially in a pure free market and will need some adjustment time, and further given the risk profile, FDI is not likely as safer export based competition is likely to be seen as a safer bet, meaing transition costs (layoffs, redundancies, etc.) to Iraqis are going to be high. Where is the legitamacy for those costs? It is one thing to note that "Iraq urgently needs outside investment and expertise", it is another to design a viable, politically as well as economically, transitional program that will get one to a set of conditions that will in fact attract FDI. Thankfully The Economist realises this and notes "the instant discarding of 40 years of national-socialist commercial culture is likely to create serious distortions."
Well, no kidding. Now, I do not believe one has to be a regional expert like myself to read serious distortions as being seriously politically problematic for any government running Iraq and thus potentially discrediting a government that tries to run with these rules (or is obliged to, by its "sponsors") as well as potentially the concept of privatization per se.
That is the real danger, one shall spoil what is in fact a necessary set of steps, ones that if done right will enrich and improve the lives of Iraqis and perhaps take a step to breaking the negative cycle of rigid, inefficient, value destroying nepotistic rent-seeking oligarchies. All for a short term political gain.
I think The Economist has it right when it says "The changes will, however, cheer another important constituency, the American Congress. Mr Bremer, testifying before American legislators to justify the demand for huge new outlays, cited the reforms as proof that Iraq is beginning to follow the American way. The unspoken wish is that this will create a poster-child for the recalcitrant economies surrounding it."
In short, the idiots in the American Congress (and frankly the idiots in American in general in their self absorbed yet messianic world view) have an entirely unrealistic, indeed spoiiled and self-regarding idea of "converting" Iraqis into little Americans. I am reminded of the possibly apocryphal quote of an American military officer who opined inside every Vietnamese there is an American struggling to get out. Regretably American foreign policy (not unique in this I may add, but it is my target for the moment) here is being blinded by a kind of messianic narcicism.
Posted by The Lounsbury at September 29, 2003 03:50 PM
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Jan-Dec 2003
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