Global Policy Forum

By Fareed Yasseen

The Coalition Provisional Authority (CPA) has made some decisions that have alienated the Iraqi population. Though inadvertent, such mistakes make the CPA's mission -- successful regime change in Iraq -- more difficult to achieve. The dismissal of the entire officer corps of the Iraqi army in the absence of a social safety net comes to mind. In this light, L. Paul Bremer, the CPA's chief administrator, should avoid decisions that only a legitimate government can make acceptable to the Iraqi population.

The CPA should therefore vet its decisions carefully, and adopt the approach of a conservative investor. Decisions that may reasonably be expected to yield counterproductive outcomes should be shelved. In other words, the Authority should avoid downside risk. In the highly charged context of Iraq today, this is even more important than maximizing upside gain.

In the economic sphere, however, the CPA seems to be opting for bold, yet risk-laden measures. Plans for the Iraqi economy were first presented in a highly visible speech by Mr. Bremer at a meeting of the World Economic Forum last June. This was followed up by the appointment of Thomas Foley, corporate turnaround expert and chairman of TB Woods, to head privatization efforts in Iraq. And recently, Mr. Bremer signed sweeping liberalization laws announced by a newly-appointed minister of finance at the IMF-World Bank meetings in Dubai. Many of the measures discussed in June by Mr. Bremer and some of those announced in Dubai should be implemented: they have benefits and no significant drawbacks. But some of the measures are too risky, and should be abandoned; I will address two of these measures.

The first is a scheme to distribute profits from oil sales to Iraq's citizens as dividends. Such a scheme might work in Alaska, an example quoted by Mr. Bremer, but it will not in Iraq for several reasons. To begin with, such payments are disincentives to work. Extended families could live off their pooled dividends, even if the amount paid out is modest. Also, in the highly patriarchal Iraqi society, these payments would serve to enrich clan and tribal leaders, instead of distributing wealth evenly. Further, inflation might erode the dividend's benefit. (This happened in 1972 when, following the favorable resolution of a conflict with foreign oil companies, the Iraqi government instituted salary increases to all state employees.).

The second, and more far-reaching, of these measures is the privatization of Iraq's state-owned enterprises. Mr. Bremer's motivations are justified: Iraq's state-owned enterprises must increase their efficiency if they are to survive in an open market environment. His premise, based on the experiences of the last 15 years, is that there is no substitute for a vibrant private sector. True enough. But the conditions in Iraq today differ from those prevailing in Eastern Europe and the former Soviet Union 15 years ago, in two important aspects.

One, countries that transformed their economies during the '90s (e.g., Poland) were led then by democratically elected governments, unimpeachably legitimate in the eyes of the population. The CPA, in contrast, is an occupying authority without a popular mandate. Economic measures implemented by the CPA will not have the popular legitimacy needed for popular acceptance. The social unrest likely to follow job losses or sales of state-owned assets could well be magnified by nationalist feelings. Such consequences could derail the all-important but delicate political processes taking place now. The recommendation here is to defer these measures to a legitimate and sovereign Iraqi government. Two, Iraq does have a private sector and private wealth. That was not the case in the former Soviet Union in the late 1980s. At first glance, this seems like a plus, but a closer look reveals some serious pitfalls.

Thirty-five years ago, Iraq had about 50 families each of whose worth was in millions of dollars. This number now stands at 3,000. The wealthiest among them control billions of dollars. Meanwhile, the population, the middle classes in particular, has grown much poorer.

Many of these wealthy families kept their distance from the former regime. Some even managed to increase their wealth legitimately. But many others acquired or increased their wealth thanks to intimate association with the regime, which gave them access to high commissions from government construction and procurement contracts, to state assets at heavily reduced prices, and to hard currency at very favorable rates. These arrangements, which were not weakened by the U.N. embargo, made it possible to obtain a tenfold return on investment very quickly. Of course, members of the former regime had a cut in these profits.

Here's the problem: It will not be possible to privatize Iraq's state-owned enterprises without involving the Iraqi private sector. But it will take time to distinguish those with legitimately acquired wealth from those who profited egregiously from the former regime. Privatizing too soon could end up giving away state-owned assets to cronies of the former regime. Not only would this be morally indefensible, it would also create a class of oligarchs in control of key sectors of the Iraqi economy. This concentration of power in the hands of people owing their wealth to the former regime would pose a serious threat to a fledgling democracy. Again, the recommendation here is to defer decisions on privatization to a sovereign and legitimate Iraqi government.

This has implications for foreign companies interested in the Iraqi market. Like Mr. Bremer, they should seek to avoid downside risk. These companies should select Iraqi partners only after due diligence: Association with a partner too closely involved with the former regime, however well-suited to immediate needs, could jeopardize their future chances in the country. In the long run, they would lose out. And so would Iraq.

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