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http://www.harktheherald.com/modules.php?op=modload&name=News&file=article&sid=7032 Analysts say market-based economy is reckless in Iraq 25.11.2003 [10:17] Sunday, November 23, 2003 - 12:00 AM Top economists are making dire predictions about the Bush administration's plan for a shock-therapy style reorganization of Iraq's postwar economy -- a policy that met with mixed success across eastern Europe after the fall of the Soviet Union a decade ago. Experts say the U.S. plans, which aim to upend Iraq's closed state-run economy and convert it to one of the most open, capitalist economies in the world, would unleash new waves of unrest in an already strife-weary Iraqi population. International law forbids occupying powers from making such deep changes, they say. To revive Iraq's wilting economy, U.S. administrators and their Iraqi allies approved a plan to abolish most restrictions on trade, capital flows and foreign investment, allowing, for instance, foreign banks to open branches and buy Iraqi banks. It sets the top personal income and corporate tax rates at 15 percent, while slashing import tariffs to 5 percent. The new investment law approved last month doesn't address one of the most contentious issues -- privatization of state-owned companies other than those dealing with oil -- that the U.S.-led Coalition Provisional Authority and its Iraqi allies are considering. Such moves would be controversial anywhere. In Iraq, the society-transforming actions would happen in the midst of a guerrilla war, and be imposed by occupying powers of disputed legitimacy without Iraqis' consent, economists say. "This is all reckless in the context of Iraq. There's no peace, no stability, no rule of law, no court system," said Jeffrey Sachs, director of Earth Institute at Columbia University and architect of the post-communist transformation of Poland's economy. "We don't even have a legal standing to make the changes we're talking about." A Congressional Research Service report concurs, saying the sale by an occupying power of state assets violates the 1907 Hague Convention on the laws of war. Iraqi law still on the books strictly limits foreign investment, the CRS report states. "Most authorities believe that Iraq will need a legitimate government before permanent changes can be made in its laws, economy and institutions," states the June report written for Congress. Peter McPherson, former top economic adviser in Iraq, told a congressional committee earlier this month that Iraqis have had a significant say in economic reforms. He described Iraqi members of an economic council as sophisticated and assertive. U.S. occupation officials reviewed the new investment law and decided it did not violate international conventions, McPherson said. The law is "more sweeping, frankly, than anything in the Middle East," McPherson said in an interview with The Associated Press. Even so, he added, "We cannot expect substantial, real growth soon. There is no evidence that that happens in a case like this." There is little doubt that Iraq's economy needs a boost. Iraqis' personal incomes have been in free-fall for decades, with the average compensation shriveling to the equivalent of $600 a year, from $3,600 in the early 1980s. The nation, kept alive through subsidies on everything from food to gasoline, is straitjacketed by $120 billion in foreign debt, including $8 billion it owes the United States. Access to electricity, clean water and health care has plummeted. More than half of Iraqis are unemployed -- which leaves many angry and easily recruited into battling the U.S.-led occupation. In such a dire situation, delaying economic reforms isn't a viable option, McPherson said, explaining, "It would've deferred recovery." In October, the U.S.-led administration sold cellular telephone development rights to three foreign companies and issued a new Iraqi currency -- one that doesn't bear an engraving of deposed Iraqi President Saddam Hussein. Subsidies for state-run companies have been rolled back, and will be cut more next year, McPherson said. The Iraq Central Bank has been granted independence, and six foreign banks are being screened for operations inside Iraq, McPherson said. Some private enterprise has sprung up with no government help. On the superhighway that crosses the western desert, convoys of empty trucks can be seen rolling west into Jordan and returning laden with air conditioners, refrigerators and the essential portable generators. The goods wind up stacked in the shops and on sidewalks of the teeming commercial boulevards of Baghdad and other Iraqi cities. It is the prospect of shock-therapy-style privatization of state-owned industry that has economists issuing the direst predictions. Before the U.S.-led invasion, Iraq counted some 200 state-owned firms that had about 500,000 workers making everything from steel pipe to medicine to tires. State firms mine sulfur, weave carpets and extract oil and gas. Most are still operating and many are overstaffed. There have been discussions about selling off state industries, but not the lucrative oil sector, which is too politically sensitive, McPherson and others said. "We have an enormous record of shock therapy and it's almost unambiguously a disaster," said Joseph Stiglitz, a former chief economist for the World Bank who now teaches at Columbia University. "There's no reason to suspect that the special circumstances in Iraq will make it a special case. I think it's a crazy strategy." Given the violence and the uncertain legality of the sales of state enterprises, the only way foreign investors will be enticed to enter Iraq is to be allowed to purchase assets for far less than they are worth, economists say. The result, say Sachs, Stiglitz and others, could be deep resentment by Iraqis at the stripping and sale of publicly owned companies and assets -- mirroring the anger of Russians who saw the bargain sale of state property create an instant class of tycoons. Experts argue instead for a gradual economic transition that would preserve some subsidies and delay privatization until a sovereign Iraqi government takes office. Some suggested using oil revenues to fund public works jobs aimed at relieving unemployment. Sachs said he made his feelings known to U.S. planners who solicited his advice. Shock therapy in post-communist eastern Europe was a quick path to capitalism through selling public industries and abolishing subsidies and controls on prices and wages. Critics say the process fueled corruption as it sparked recessions and deep unemployment, an eventuality U.S. planners are keen to avoid in Iraq. To that end, McPherson said the U.S.-led administration in Iraq ordered state-owned factories be kept open and workers paid through U.S. subsidies. The U.S. taxpayer will also be funding many of those jobs next year, McPherson said, through the $18.6 billion reconstruction package just passed by Congress. Much of Iraq's economic future hinges on oil, with Halliburton Co. frenetically renovating the oil infrastructure even as guerrillas blow up pipelines and crucial power pylons. Output next year is expected to produce about $12 billion for Iraq's national budget, which, added to the $18.6 billion in U.S. grants, still leaves the country with a deficit of over $8 billion, according to the International Monetary Fund. Iraq floats atop the world's second largest oil reserves -- 112 billion barrels, second only to Saudi Arabia. Bush administration officials insisted before the war that Iraq's oil wealth would cover the country's reconstruction -- a prediction that has thus far proven false. The oil sector also generates few jobs, which means oil wealth must be funneled into social programs if it is to benefit most Iraqis. Sachs and others say the best way to jump-start Iraq's economy is to keep U.S. involvement to a minimum by transferring power to Iraqis so reforms are seen as legitimate. "What the economy needs is a sense of order that an army can't impose," Sachs said. This story appeared in The Daily Herald on page E1. _______________________________________________ Sent via the discussion list of the Campaign Against Sanctions on Iraq. To unsubscribe, visit http://lists.casi.org.uk/mailman/listinfo/casi-discuss To contact the list manager, email firstname.lastname@example.org All postings are archived on CASI's website: http://www.casi.org.uk