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[casi] Analysts say market-based economy is reckless in Iraq

It is interesting what Jeffrey Sachs has to say - he was one of the
prime architects behind Russia's shock capitalism which caused such

Selling off state assets is emotive but to me the real problem is
that of selling off Iraq's assets too cheaply even if one agrees with
the policy.

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

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

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

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.

Jim Krane The Associated Press Via The Daily Herald

Mark Parkinson

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