Global Policy Forum

By Sukumar Muralidharan

IT was just under a month since the invasion of Iraq began and United States Defence Secretary Donald Rumsfeld had much reason for satisfaction. Events over the previous few days had been for him a personal triumph and vindication. But it was not so much the conduct of the war that he had the greatest reason to crow over. After war comes the reconstruction and the celebration of corporate profit. And the first major contract from the U.S. government had gone to a firm with a distinguished lineage of Republican Party political operatives. Without so much as a pretence of competitive bidding, the task of evaluating and restoring the devastated power, water and sewage systems in Iraq had been awarded to the California-headquartered Bechtel Corporation. The contract, which is subject to ratification by the U.S. Congress, is estimated to be worth $680 million.

Rumsfeld has argued the case for the invasion of Iraq since perhaps September 2001. He has been a fervent advocate of Bechtel's commercial interests in Iraq since at least 1983. On a visit to Iraq as special envoy for President Ronald Reagan in December 1983, Rumsfeld presumably had much to discuss. Reverses in the war against Iran were compelling Iraq to look with favour on the possible resumption of diplomatic relations with the U.S., broken off in 1967. U.S. interests in the stability of the oil exporting states of the Gulf were obviously at stake. And the Israeli invasion of Lebanon, which created a power vacuum that Syria filled with alacrity, had effectively partitioned the country and created another potential source of instability in the region.

The record of Rumsfeld's meeting with Iraqi President Saddam Hussein was recently declassified under the Freedom of Information Act. By any interpretation, the meeting was a feast of concord. Rumsfeld was given a lengthy account by Saddam of the crucial issues facing the region and told of Iraq's acceptance in principle of the need to resume diplomatic relations. In response, Rumsfeld articulated the Reagan administration's appreciation for the robust position taken by Iraq on regional issues, and assured Saddam that it was not in U.S. interests for the war to have an outcome "which weakened Iraq's role or enhanced (the) interests and ambitions of Iran". Departing from an agreed agenda, Rumsfeld brought up the subject of a new pipeline to take Iraqi oil through Jordan to the seaport of Aqaba. Saddam responded perfunctorily. Iraq, he said, had not been interested in the pipeline through Jordan because of the threat that Israel could disrupt it. But if U.S. companies were seriously interested, Iraq would be willing to re-examine the proposal.

Rumsfeld brought up the pipeline project the next day at an unscheduled meeting with Tariq Aziz, Iraq's Foreign Minister. Aziz said that he was familiar with the proposal, which he knew had come from a U.S. company. Having a number of countries involved in the project would perhaps immunise the project from the risk of Israeli attack. In his own account of the meeting to the U.S. State Department, Rumsfeld resolved parenthetically that the matter could be raised with Israel at the "appropriate time". Aziz repeatedly pressed the U.S. to do what it could to cut off the supply of arms to Iran. Rumsfeld assured him that the U.S. was doing all it could and was keen to mediate an end to the war. Then with obvious reluctance, he mentioned two factors that were constraining the U.S. from an active mediatory involvement in the region: Iraq's use of chemical weapons and its human rights record. Iran had been complaining of Iraq's use of chemical weapons since earlier that year, receiving no more than anodyne reassurances from the world community.

On November 1, 1983, U.S. Secretary of State George Shultz was briefed in detail by his Department on Iraq's use of chemical weapons almost on a "daily basis". A former president of the Bechtel Corporation, Shultz evidently viewed these reports as a minor distraction. As the man who was overseeing directly Rumsfeld's mission, his main concern evidently was the oil pipeline to Aqaba, which Bechtel was pushing hard for. Nothing much came of the commercial engagement. In March 1984, the U.S. Export-Import Bank classified Iraq as a high-risk destination because of its high external debt and the ongoing war. Among the firms mentioned as the most likely beneficiaries of project linked credits to Iraq were Bechtel and Halliburton, now best known as the firm that U.S. Vice-President Dick Cheney headed until he got the Republican ticket for the 2000 elections.

At roughly the same time, the U.S. government circulated a draft statement condemning Iraq's use of chemical weapons and holding the Iranian insistence on "eliminating the legitimate government of neighbouring Iraq to be inconsistent with the accepted norms of behaviour among nations". The elaborate effort to be even-handed did not win the U.S. any points in Iraq. In briefing notes issued for Rumsfeld's second visit to Iraq in March 1984, Shultz warned him that circumstances had deteriorated. Iraq had taken heavy casualties in a massive Iranian offensive in a strategic sector. And it had not taken kindly to the U.S. condemnation of its use of chemical weapons. The Iraqi leadership was unlikely to devote much attention to regional issues except "as they may impinge on Iraq's increasingly desperate struggle for survival". At the same time, Shultz asked Rumsfeld to reassure Iraq that financing possibilities for the Aqaba pipeline project still remained open. Shultz evidently knew that the task was a difficult one. "Iraq," he said, "is confused by our means of pursuing our stated objectives in the region.... Their temptation is to... retreat to the line that U.S. policies are basically anti-Arab and hostage to the desires of Israel."

The Aqaba pipeline project died a natural death as the war wore on, though the U.S. remained actively engaged on Iraq's side for much longer. It furtively extended patronage to Iran through Israeli proxies in what came to be known as the Iran-Contra affair beginning 1985. But the profits that U.S. corporations such as Bechtel and Halliburton saw in Iraqi contracts remained elusive. It has taken an armed invasion and the decimation of Iraq's infrastructure for those profits once again to emerge as an alluring prospect on U.S. corporate horizons.

The company most advantageously placed today for the corporate colonisation of Iraq is Halliburton. Cheney earns an annual $1 million from Halliburton as part of his severance package negotiated in 2000, while a number of former employees have lost their retirement benefits on account of the meltdown of the company's stock portfolio. The construction arm of Halliburton won the contract to set up the U.S.' detention centre for "illegal combatants" at Guantanamo Bay. And with expertise in oilfield repairs and civil construction, Halliburton could be the big gainer from Iraqi "reconstruction" contracts.

THERE is one great imponderable, though, in the celebrations launched by the Bush administration and its corporate cronies: where is the money going to come from? Of the special appropriation of $70 billion that Bush requested from Congress just days after the invasion of Iraq began, no less than $62 billion is for the military component. Of the rest, Iraqi reconstruction accounts for only a small part, as yet unspecified. Indications now are that Congress would like to hold down the committed reconstruction fund to $2 billion, in an effort to coax other prospective donors to step up their contributions.

The outlook is grim and the warning that has been sounded by the economist William Nordhaus, a mainstream figure with no pretensions towards radicalism, is very clear: if the U.S. taxpayers were to "decline to pay the bills for ensuring the long-term health of Iraq", the outcome of the war would be "mountains of rubble and mobs of angry people". "The cost of a botched peace" would in this sense "be even higher than the price of a bloody war". Evidently, it is the last thing on the minds of the Bush cabal to ask the U.S. taxpayer to bear the burden of Iraqi reconstruction.

As the war of invasion entered its fourth week, and Baghdad, Basra, Mosul and Kirkuk were being gutted by the anarchy that followed conquest, Congress managed provisionally to adopt the Budget plan for fiscal 2004. Deep partisan divisions persist over the size of the tax cuts the Bush cabal wants to give out to the rich. The administration's proposals conceive of tax cuts of $726 billion over a 10-year period. By a narrow margin, the U.S. House of Representatives approved of relatively more modest cuts of $550 billion. The Senate, however, baulked at the shaky arithmetic, finally adopting a resolution - though only after Cheney's deciding vote - holding down tax cuts to no more than $350 billion. A bitter dispute is now foretold, with senior members of the House and the Senate already accusing each other of recklessness, a lack of determination or worse. Even in the most optimistic scenarios of the Bush cabal, the budget proposals are likely to aggravate fiscal imbalances and engender a relentless string of deficits till at least 2012, cumulatively totalling $1.4 trillion.

But as the economist Paul Krugman has pointed out, the administration's calculations have been seriously askew in past years and should continue being so. Even with the more modest tax concessions proposed by Congress, the fiscal imbalances could get much worse than current projections suggest. There is, in other words, not the remotest prospect that the U.S. taxpayer is going to support any part of Iraqi reconstruction. This reality would not be evident from the swaggering, contemptuous attitude that top officials of the Bush administration have shown in arrogating to the U.S. the sole right to determine who the agencies of reconstruction should be.

In underlying logic, the locutions coming out of the Bush administration are clear in their intent and incredible temerity. The U.S. will destroy what it pleases and rebuild in a manner of its choice. It will pay for its mission of destruction but will expect the rest of the world to contribute to the reconstruction, though without any kind of voice in determining the broad directions or contours of the project. The fanciful talk in the U.S. today is of a "self-financing Marshall Plan" - a reconstruction programme modelled on post-Second World War Europe, though with the important difference that financing would come entirely out of Iraqi oil revenues. It does not take long to see why these expectations are unfounded.

The most recent report on the United Nations has concluded that Iraq's sustainable petroleum export capacity today is roughly 2.1 million barrels per day (mbpd). With a substantial investment and rehabilitation effort, Iraq's oil industry could be rebuilt to resume its 1979 export level of 3 mbpd. The annual revenue at current market prices would then be in the region of $25 billion. The bulk of this revenue would be needed in the initial phases for imports of food and other humanitarian needs. Of the total revenue generated by the U.N.-administered "Oil for Food" (OFF) programme since its inception, no less than 72 per cent has gone towards humanitarian supplies. And yet the level of fulfilment is abysmal. The U.N. puts the nutritional value of the food rations distributed under the OFF in its last phase at the bare subsistence minimum of 2,257 kilocalories of energy and 52 grams of protein per person per day. Water supply to the Iraqi people is currently well below levels of adequacy. In comparison to these dismal statistics, the U.N.'s own estimates show that before 1991 the Iraqi people enjoyed plentiful availability of the basic necessities: average caloric intake was above 3,100 kilocalories per day and "90 per cent of the population had access to an abundant quantity of safe drinking water".

It remains to be seen what standard of living targets the U.S. viceregal dispensation will adopt when it embarks upon its reconstruction effort. But the system of provisioning built up through the last decade, which could not check a catastrophic slide in living standards, but managed to hold the social peace - has effectively been dismantled. And it is conceivable that in its zeal to destroy all vestiges of the old regime, the U.S. could hand over administrative authority to some rather unsavoury elements. Certainly, the U.S. Defence Department's current partiality towards Ahmad Chalabi, a former banker convicted for embezzlement in Jordan, shows an absolute lack of discrimination in personnel choices. If the provisioning system put in place by the old regime were to be endangered by the intrusion of similar elements elsewhere in the administration, costs of procurement and distribution could easily go up.

In relation to the massive amounts that the Bush cabal plans to give away as tax breaks to the rich in the U.S., the costs of Iraqi reconstruction look modest. A U.N. estimate after the 1991 war put the current funds requirement at $22 billion. At today's prices, that could amount to $30 billion. Adding on the effects of war damage and the subsequent looting and anarchy, that figure could go up by an unspecified amount. The initial estimate is contentious. Rehabilitation costs for the power grid alone have been put at $20 billion, and for the oil industry at $6 billion.

Unsurprisingly, the high-end alternative that Nordhaus has put on reconstruction costs is in the region of $105 billion. One financing option for the U.S. would be to restore all existing oil installations in Iraq to full capacity and develop a few more. Over the last decade, Iraq has signed contracts - notably with Russia and France - to develop an additional 5 mbpd of petroleum extraction capacity. These contracts were not executed because of the sanctions in force, and the U.S. has held out ample warning that it would not honour them in the post-bellum dispensation. The U.S. could then presumably take over these projects and raise Iraq's oil output to the region of 8 mbpd. This could increase Iraq's annual export revenue, though at the cost of international oil prices crashing. Important oil producers such as Russia, Venezuela and Mexico - already in serious economic distress - would be plunged into desperate crisis. And even the Gulf states of Saudi Arabia, Kuwait and the United Arab Emirates, regimes relatively well disposed to the U.S., could see their economies reduced to tatters.

An alternative would be to keep the value of the U.S. dollar up against other world currencies. Much of the global trade in oil is denominated in dollars and if world prices were to be under pressure from an output increase, oil exporters' earnings could be safeguarded by a proportionate escalation in the value of the dollar. This would have the added benefit of insulating the U.S. consumers from adverse price movements. Needless to say, the impact for oil importing countries could be serious. A further phase of cruel deflation would be inevitable, crushing the world's poor under a vastly augmented burden of debt.

YET the reassertion of the dollar hegemony is precisely what the invasion of Iraq is all about. Indeed, the most striking feature of the current world economic conjuncture is the large and growing imbalances on external account between the major economies. The World Economic Outlook of the International Monetary Fund (IMF) issued in January 2003, had a detailed, if finally rather superficial, analysis of this question. It identified the main deficit countries as Australia, New Zealand, Britain and the U.S. These four English-speaking countries, in other words, constitute one pole of the growing imbalances in the global economy. Take away New Zealand from this group and the "coalition of the willing" that invaded Iraq begins to acquire quite another identity: the "coalition of the terminally bankrupt".

A mammoth external deficit has been a feature of the U.S. economy since the early 1980s. The consequences were recently spelt out by the World Bank with delicious understatement. "The debt-financed capital spending extremes of the boom years have left many companies across the industrial world with the need to scale back on spending for capital equipment," it observes in the most recent of its annual Global Development Finance reports. And yet, "in some cases, even severe corporate retrenchment has not been sufficient, and 2002 was a year of continued high-profile corporate restructurings and bankruptcies." And while the corporate sector was going through this wrenching adjustment process, growth in the U.S. was sustained by household spending and investment. Tax cuts and the declining interest rate notably, "provided an important stimulus to certain components of demand, especially consumer spending and housing investment in many English-speaking economies (led by the U.S.)".

Here again is a reference to a curious cultural aspect of the current global conjuncture - that speaking the English language mysteriously predisposes certain countries to high consumer spending and housing investment. The World Bank is willing to venture the tentative assessment that the corporate adjustment process has produced reasonably positive results. But for all its proclivities to see only the bright side of every event, the World Bank is unable to obscure another area of concern: "As evidence accumulates that the corporate debt overhang is being gradually reduced, new imbalances are emerging. For example, household debt in the United States has risen to a record 320 per cent of GDP as of the end of 2002, a rise of 50 percentage points of GDP since 1998. Similar trends, but of lesser magnitude, have emerged in other English speaking countries."

The cultural uniqueness of the English language is here stated twice over and explicitly. This time, the World Bank suggests, the English language seems to induce certain countries to live riotous lifestyles that land them in unsustainably high levels of debt. And the reasons why the people in these countries should stop living beyond their means (though not speaking the English language) are pronounced by the World Bank with customary reticence: "The U.S. current account deficit is now approaching 5 per cent of GDP, an unprecedented level for this stage of the business cycle. At the same time, financing the deficit has become less straightforward, given the substantial weakening of the dollar over the latter months of 2002."

Credible anecdotal evidence marshalled by the media indicates that housing investment in the U.S. is being held aloft by low interest rates, which have enabled a massive refinancing of mortgages. The resultant buoyancy in house prices has in turn partly offset the decline in household wealth from the crash of the stock market. This increase in "homeowner equity" has further underpinned debt-financed consumption, especially since major manufacturers of durables have been offering steep interest rate discounts to clear out inventories. The substitution of one form of household debt security for another is not a friction free process, though it does succeed in the short-term in obscuring a crucial difference. Shares are liquid and can be sold when debt payments fall due; houses are not. By all accounts, though, home mortgage-related security has become one of the biggest U.S. exports to the world, aside from McDonalds and the Daisycutter bomb. The IMF puts it with customary delicacy: "U.S. home mortgage-related securities have become a close alternative to government debt for U.S. and global investors." And the figures are compelling.

In 1990, the outstanding volume of "tradable mortgage-related securities" was less than half the volume of "marketable U.S. treasury securities" available in the market. By 2002, the two were almost on a par. When the flow of money stops, the U.S. economy could stall. And to restore these flows, a rise in interest rates would have to be engineered that more accurately reflects the magnitude of the twin deficits in the U.S. But as this adjustment process begins, the first of the social security payments on retiring members of the post-Second World War "baby boom generation" will fall due. The U.S. fiscal deficit will then lose the many layers of ideological camouflage that the Bush cabal has invested it with, and stand exposed as the disaster zone it is.

A consistent critic of Bush's economic legerdemain, Krugman recently made a telling public confession: "With war looming, it is time to be prepared. So last week I switched to a fixed-rate mortgage. It means higher monthly payments, but I'm terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits". Economic fundamentals demand that the interest rate should harden substantially or that the dollar should crash. Neither option is politically quite feasible. An immensely popular third option would then seem to suggest itself - to take over a country with a large share of world petroleum reserves, reimposing the dollar hegemony by force of arms.

But with conquest has come the obligations of reconstruction. And a resentful world is now being enjoined to underwrite the U.S. occupation and corporate colonisation of Iraq. It is worthwhile speculating what would be the consequences if the world community were to back up its principled objection to the war plans, with a refusal to under-write the U.S. occupation of Iraq. International law obliges the occupying power to meet certain responsibilities. Although not obliged to assist in the process, other countries could channel their emergency humanitarian aid through Iraqi civil society organisations and agencies such as the International Committee of the Red Cross, the World Food Programme, and the U.N. Children's Fund. But legally and morally, the international community would be justified in refusing all sustenance either to a stooge government in Iraq or to the U.S. directly. Far from being an act of cynicism in the context of the unfolding human tragedy in Iraq, this would be the only means of bringing the U.S. to account for its destructive rampage.

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