Center for American Progress

Putting People Last: Iraq’s Economy One Year Later
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One year after the invasion of Iraq, its reconstruction has registered only modest gains. Ongoing security problems, the Bush administration’s need for almost exclusive control, and its failure to invest in the Iraqi people have limited economic growth and done little to lay the ground for Iraq’s sovereignty. Left uncorrected, these trends – and the wishful thinking that drives them – will severely damage prospects for long-term growth and threaten Iraq’s transition to democratic rule.

This is not the first time that the United States has had to confront the challenges of post-crisis reconstruction. But it appears that the Bush team has ignored any of the lessons learned in the recent past. Putting a country back together again in the wake of convulsive regime change requires many complex parts to move in sync= At the very least, the rebuilding process requires a workable budget, local knowledge and engagement, institutional development, the overhaul of the productive sectors of the economy, and sufficient transparency to convince the local citizenry that the future will be better than the past.

But on all these fronts, the administration merits less than a passing grade.

As in other aspects of reconstruction in Iraq, progress has been constrained by the Bush administration’s dual failures to plan for the inevitable challenges posed by the collapse of a highly-centralized authoritarian regime and to enlist international support. Witness the administration’s wildly optimistic estimates of how quickly Iraq’s oil production would return to prewar levels, and its claim that oil revenues would soon pay for reconstruction.

Or consider its pledge that the burden on American taxpayers would be eased by the contributions of other nations. This too has dissolved in reality, as most donor countries have rejected the dominance of the Pentagon-led Coalition Provisional Authority and instead opted to channel their funds through the United Nations and World Bank. U.S. taxpayers contributed $18.6 billion in the latest round of funding, while other nations, the World Bank and the IMF combined have pledged approximately $14 billion.

Meanwhile, the administration has failed to include additional funding for the Iraq reconstruction in its FY 2005 budget request. The White House claims it does not know what the additional costs will be, but many in the United States see this as a pre-election ploy aimed at easing sticker shock for taxpayers and their representatives in the face of a growing deficit. But playing politics at home also has a corrosive effect on Iraq’s ability to plan and move forward. In turn, this raises the question of whether the U.S. is genuinely committed to reconstruction and, crucially, whether it has a long-term financing plan.

In Iraq, the overwhelming dominance of the Coalition Provisional Authority (CPA) – and its refusal to share real power – lies at the heart of the troubles. While Iraq’s Governing Council does, in fact, have a budget, there is little or no connection between it and the budget controlled by the CPA.

Perhaps the most glaring omission in the administration’s grand but elusive economic plan is investment in the Iraqi people. Over the years development practitioners have learned that economic growth, strong institutions and democracy cannot take hold without the active participation of civil society – in ensuring transparency at national and state levels, institutional development and providing necessary checks and balances. But with the reconstruction led by the Pentagon and implemented by American and other coalition corporate contractors, the role of civil society appears to be more an afterthought than a central tenet of the administration’s reconstruction philosophy.

The Coalition Provision Authority gets higher marks when it comes to putting in place a market-based economic program – setting up the Central Bank, developing the legal framework for the banking system, creating an oil trust fund, re-writing the foreign investment law, and setting new taxation rules. And it will surely be interesting to see whether a flat tax – an impossible conservative dream in the United States that is now a live experiment in the Iraqi laboratory – will work, who will collect the taxes, and whether there will be a tax base from which to collect.

While these may be laudable accomplishments in a textbook case study, what is most notable is that most of these changes have been implemented without meaningful Iraqi participation. The case can be made that some of these changes were necessary in order to jump-start the collapsed Iraqi economy, but it can also be argued that many of these reforms should have been designed and implemented in concert with Iraqi leaders and citizens, not least because it is the Iraqi people who will have to live by these new rules. The message sent is that market economics matter, but local ownership matters less.

The CPA can also reasonably tout the gains made in rebuilding the infrastructure that was destroyed during the war. But refurbishing buildings and roads is the easy part. Populating those buildings with capable officials and engineers and filling the roads with producers en route to market will be the ultimate measure of success. And shiny new buildings mean little in the face of continued insecurity. An indigenous private sector will not emerge without incentives for locals to invest, or some assurance that investments of hard earned capital will not be destroyed.

More ominous for the future development of the economy is the dominance of American companies in Iraq’s private sector. Those charged with implementing U.S. government contracts are far more prosperous than would-be Iraqi competitors. The cost of this short-term profit for a small number of U.S. firms may be the failure to develop a dynamic Iraqi private sector. When U.S. companies withdraw, the result will be a vacuum – or an Iraqi economy far too dependent on American firms rather than home-grown companies.

The reform of the oil sector is at the center of Iraq’s economic and political future. But Americans and Iraqis must work together to make sure the nation does not fall into the "resource trap" that has befallen other major oil-producing nations. Very few countries have been able to manage excessive resource wealth successfully, and most have instead fallen victim to governance without transparency, rampant corruption, and significant income disparities.

The United States has an opportunity to avoid this same problem in Iraq. But the administration is doing just the opposite – relying on oil revenues to fund both reconstruction costs and the operations of the Iraqi government instead of reforming the sector. Meanwhile, the U.S. approach to the Iraqi oil sector is clouded by the same lack of transparency that characterizes its reconstruction plan and budget, contracting operations, and overhaul of the Iraqi legal system.

The key to future economic growth and a market-based economy that provides for greater equity in Iraq is to move beyond oil. The greatest challenge for the United States is to create the conditions for a diversified domestic economy with an alternative tax base. Achieving this requires investment in the "plumbing" of the economy, and in particular, in the broad range of institutions needed to achieve sustained growth.

Again, this means an investment in the Iraqi people – new lawyers who can understand and implement new laws; economists who can analyze progress and failures; rural producers who need and want to remain on the land; entrepreneurs who can create and serve new markets; civil servants who can make the new government work. And, of course, security forces and police who can help contribute to political and economic stability. If the administration truly wants democracy to take hold, the quality of institutions matters – but quality institutions cannot be built by June 30, and cannot grow without funding and a long-term commitment.

It is fair to argue that it has been less than 12 months, and that rebuilding war-torn societies takes years, and indeed generations. But the shape of the Iraq reconstruction experiment has already been cast. Unless it changes dramatically – to include greater transparency, less dominance by the CPA and more involvement by Iraqi citizens, and a transformation of the oil-based economy – the Iraq of the future will bear far too many of the features that characterized the Iraq of the past.

Gayle Smith is a senior fellow at the Center for American Progress. Sonal Shah is the associate director for International and Economic Policy at the Center for American Progress.

 

 

 

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