<, Wright State University
===========================================================
Despite the opinions of my wife and children, I do not always like being
right. This paper is an excellent case in point.
The Second Gulf War, combined with the effects of a decade of general
sanctions, left Iraq's infrastructure in shambles. Some degree of
reconstruction was -- and is still -- necessary to allow Iraq to fully
rejoin the world economy. It is not just a matter of justice, or
humanitarian need. As other's research has shown, economic stability is
strongly correlated with political stability. A politically stable
Iraq -- and Middle East -- is in the interests of the United States.
Therefore, creating a robust Iraqi economy is vital to the national
security of the United States.
The Bush administration has compared the reconstruction of Iraq to the
Marshall Plan. Despite that allusion, the methodology chosen for
reconstruction has ignored several relevant historical examples. This
paper identifies two major obstacles to Iraq's continued economic
growth: (1) the shift in funding of reconstruction from donations from
the United States and its allies to IMF loans, with the policy
restrictions such loans incur; and (2) the trend of placing highly paid
contractors in supervisory positions instead of Iraqi nationals. It
outlines the specific detrimental effects each of these can have on the
economy of Iraq.
This paper argues that the historical precedents of the Treaty of
Versailles, the effects of IMF policies in Nicaragua, and the British
Raj in India all have great relevance to the economics of Iraq in 2006,
and the problems it faces. The examination of these examples' failures
leads directly to suggested methods to avoid the pitfalls of the past.
Since the first words of this paper were written, there has been a large
increase of violence and political strife in Iraq. The intensity and
frequency of the conflict has grown to the point where many are calling
it a civil war. I have to wonder how much of this violence was
preventable, how much is tied to the problems in Iraq's economy. I
wonder if it is already too late, if the problems presented here are now
playing out in bloody partisan battles. I hope that my bleak analysis
of Iraq's economy is completely wrong.
I am very much afraid that I am right.
Read the full paper [here](https://stevensaus.com/iraq/iraq_paper.pdf) as
a PDF.
This paper was presented at the [2006 AURCO conference](http://www.wayne.uakron.edu/aurco/).
The slideshow with the text of the presentation is below.
All text of this work is original, and is copyrighted under a Attribution-NonCommercial-NoDerivs
Creative sCommons license.
The Bush Administration invoked the spirit of the Marshall
Plan to describe Iraq's reconstruction, but it's a different road,
with large obstacles down the way our country has chosen. In the next
few minutes, we will quickly look at two major obstacles in Iraq's path
and find ways around them. We will do this in three sections: The First
Obstacle - sources of funding; The second obstacle - Human Investment;
and finishing with conclusions and concrete steps that can be taken to
avoid these obstacles.
In January 2006, things already looked pretty grim for
Iraq. Reconstruction wasn't done, with billions of dollars of work
left. Electricity was only on for half the day - or less. Unemployment
rates are similar to ours during the Great Depression. There simply
isn't the money in the Iraqi economy to finish the job. Profits from
the oil industry, which was supposed to pay for everything, were at the
lowest point since the war began. The US is planning to stop aid at the
end of this year - and the "Coalition" has only given a quarter of
what it promised. So where's the money going to come from?
Iraq is going to have to borrow money from lenders like the
World Bank and the International Monetary Fund (or IMF). In fact, the
first IMF loans have already been approved. This method of funding
reconstruction is the single biggest difference from the Marshall Plan.
Let me explain.
The origins of the Marshall plan can be traced to the
treaty of Versailles after WWI. Despite warnings from prominent
economists such as John Maynard Keynes, the Allies made huge demands on
Germany for reparations. The economic consequences were disastrous, and
set the stage for WWII. Since then, this pattern has been noted in
other, smaller conflicts: Economic hardship correlates with political
strife. In contrast, the Marshall Plan was developed after WWII, which
reinvested "repayments" for loans into aided countries. As a direct
result, the GDP (or gross domestic product) of Europe was soon growing
at a good 5% a year.
The IMF is the major modern lender to developing countries.
It has different policies than the Marshall Plan; requiring standard
repayment of loans. It also has a history of overstating projected
growth, which determines how much a country can afford to borrow. The
IMF typically also requires economic reforms of its choosing. This
combination is a one-two punch that has hurt many weak economies.
Nicaragua is a typical example from Central America.
Overstated projected growth (and thus larger-than-payable loans) meant
that paying their debt required cutting human investment
programs…like healthcare and education. The reforms of the IMF
focused on short-run growth, encouraging unsustainable exploitation of
the rainforest, with disastrous long-run results. Now the IMF wants
Nicaragua to focus on "good governance and controlling corruption" to
improve their economy - even though a lack of corruption has no
correlation to economic growth. These all imply a disconnect from
economic realities.
In Iraq, the IMF demanded a large increase of gasoline
prices. That's reminiscent of another historical situation - Bolivia in
1985. Bolivia had massive hyperinflation, and sharply increasing gas
prices stopped the inflation. Stopping that hyperinflation helped more
than the increase in gas prices hurt businesses. Iraq, however, doesn't
have hyperinflation. The new dinar - and inflation - has been relatively
steady from 2004 until Jan 2006. Increasing gasoline prices raises the
cost of doing business, so this is simply hurting the free market in
Iraq. Does this indicate another disconnect from reality?
Projections of Iraq's GDP growth also remind us of the
IMF's historical overestimations. In January, the IMF and US treasury
were predicting Iraq's GDP to grow over 10% in 2006, even though
Iraq's 2005 GDP growth was only about four percent. Why would there be
a difference of this degree? Is it simply optimism or something else?
John Perkins, in his memoir \_Confessions of an Economic Hit Man\_,
pointed out that a high predicted GDP meant large loans were given to
countries. Thos large loans meant large profits to foreign contractors
called in to work on these projects. Though he personally worked on
projects in the late seventies and eighties, it's hard to ignore the
similarities between his memoir and current events in Iraq. Besides, as
we've seen in our own economy over the last six years - or in Iraq over
the last three months - things can change, rapidly. You wouldn't take
out a larger mortgage if the bank guessed you'd get a raise that year -
but that's exactly what Iraq's being asked to do.
So, to summarize the funding obstacle: Iraq needs more
money to finish reconstruction. Their economy isn't up to paying for it
yet, and aid money from the US and the coalition is drying up after
2006. They'll need loans, and the main lender has a history of
over-lending and requiring burdensome policies that make it hard to
repay the loan. And this is only the first obstacle.
The second obstacle deals with people, and investing in
human capital. It's more subtle than the funding problem, but it
magnifies the problems caused by the first obstacle - a switchback in
the road after a long dangerous grade. Most of the contractors working
on Iraq's reconstruction are from the US and its allies. They're
bringing in third world labor for menial jobs, and reserving the
absurdly high-paying jobs - the skilled labor and manager positions -
for their citizens and expatriates, not Iraqis. All those wages are
quickly leaving the country they're supposed to be helping.
But that's not all. Because the contractors are relying on imported
skilled workers and managers, there's no training for locals - and
those locals who already had job skills are leaving if they can. When
the contractors prepare to leave, there isn't going to be any local
talent ready to "stand up when we stand down" - because we didn't
train them. That leaves Iraq with only one choice - to keep paying the
same foreign companies to keep importing skilled labor. When that
money's coming from loans, that only makes the debt burden worse.
This has happened before - during the British Raj (or
rule) in India. While Britain brought technological advances, they were
for the benefit of Brits, not for the Indians. British companies didn't
train local Indians or put them in management positions. Those policies
kept India's GDP growth under a third of a percent until independence
in 1947 - and the effects took decades to shake off. It wasn't until
the Green Revolution in the late 60's that India's GDP got above 2%
growth per year, and it was the human investment of the
government-funded Indian Institutes of Technology that has given India
the ability to have sustained high growth in the technological sector
over the last 25 years.
To summarize the human investment obstacle:
Wages for reconstruction are largely going to non-Iraqis
Iraqis are not being trained to replace the contractors
Which will leave Iraq without a skilled workforce and dependent on
foreign companies.
So in conclusion, our planned method of funding Iraq's
reconstruction through loans is going to put a large burden on Iraq's
economy, making it hard for it to be self-sufficient. Our contractors'
policies enrich themselves, their stockholders, and the countries in the
Coalition - but reduce the long run economic stability of Iraq.
In order to survive these obstacles, the expansion of
Iraq's economy from reconstruction must be larger than the contraction
due to the debt. Further, Iraq must keep enough money to invest in its
own people, or make it attractive (and safe) for skilled workers to
permanently emigrate there.
There are some concrete steps America can take to give
Iraq a better chance of having a stable economy: We can eliminate no-bid
contracts, complete plans for debt cancellation and provide a true
Marshall plan. These steps would still allow American companies to make
a profit - but without sacrificing Iraq's long-run economic stability.
Since the first words of this paper were written in
January, there's been a huge increase in violence in Iraq. The
intensity and frequency of the conflict has grown to the point where
many are calling it a civil war, with new atrocities nearly every day.
I wonder how much of this violence was preventable, how much is tied to
the problems in Iraq's economy. I wonder if it is already too late, if
the problems presented here are now playing out in bloody partisan
battles. I hope that my bleak analysis of Iraq's economy is completely
wrong.
I am very much afraid that I am right.
by [Steven Saus](https://stevensaus.com), Wright State University
Read the full paper [here](https://stevensaus.com/iraq/iraq_paper.pdf) as
a PDF.
This paper was presented at the [2006 AURCO conference](http://www.wayne.uakron.edu/aurco/).
The slideshow with the text of the presentation is below.
All text of this work is original, and is copyrighted under a Attribution-NonCommercial-NoDerivs
Creative sCommons license.
]]>