Global Policy Forum

By John Sfakianakis*

The fact the Ministry of Oil was well-protected by US forces upon their arrival in Baghdad is indicative of American priorities. Oil will definitely be the most important component of Iraq's economy, and the US will make sure that Iraq is able to produce and export oil fast. However, the way the US structures the Gulf country's economy will be more important than the mere pumping of oil. Who controls the oil and, more importantly, how its revenue is managed and distributed will tell us a lot about the way Iraq's political economy will evolve.

Economists refer to oil revenue as economic rent. Basically, rent is the difference between market price of a good and its cost. Oil has a low production cost -- Iraq's is expected to be around $2-3 per barrel -- but its market price is currently around $23 per barrel. In the Middle East, as in Venezuela, Nigeria, Angola and in some other oil-rich countries, governments are the sole proprietors of the oil and its revenues. Oil rent has allowed governments, including that of Saddam, to act as distributive agents of wealth to their citizens -- particularly those that support the regime. Accountability in such a system is low and taxation tends not to be the main source of government revenue. Hence, if there is little taxation, the argument goes, how can there be representation?

Neo-conservatives and others thinking about Iraq's future economy have been reading about the problems associated with rent economies and the distributive character of a state-owned oil economy. Oil revenues will be closely monitored by the team of General Jay Garner, who heads the Pentagon's Office of Reconstruction and Humanitarian Aid, and it will be interesting to observe the priorities it sets. In 1950, control over the expenditure of Iraq's oil income was given to an eight-man team, the Development Board. It consisted of six Iraqis and two foreign observers, one American and one British. The board was divided over priorities. Even so, it pumped most of its money into large scale infrastructure for flood control on the Tigris and Euphrates. The board was criticised for neglecting projects that could have had an immediate positive impact on Iraq's rural and urban populations, especially in housing and the provision of drinking water.

The US is expected to attempt to change the relationship between citizen and state by restructuring the way oil revenues are managed. The plan will be for oil revenues to go directly into the hands of the Iraqi people -- at least partially. That income will be taxed. Hence, a greater sense of accountability will be created, according to the plan. Since some of the oil money is to be diverted to the people, the government will have to find alternative sources of revenue, mainly from taxes.

Tax collection in Iraq will be another challenge for any government. The private sector, a source of income for the government through taxes, is still nascent. It is believed that many private companies will spring up next to those brought in by the US, in both the contracting and service sectors. However, it will take some time before they become a substantial force in the Iraqi economy.

The involvement of the private sector in oil will be important to watch. Post-Cold War Russia offers very important lessons in this respect. The way the Russian oil industry was privatised to end up in the hands of a few well-placed oligarchs should be avoided in Iraq. The new business elite of Russia swiftly amassed a huge amount of wealth that made many people wonder whether state monopolies had merely been transformed into private monopolies. And if the US tries to purposely prevent prospective oligarchs from emerging in Iraq, then how will it ensure that outsiders, either diaspora Iraqis or foreigners, from monopolising the market? And if such dichotomies are enforced by the US, how will domestic Iraqi private capital react? Will such practices really be democratic and accountable?

Agriculture is another sector to watch. In the early 1980s, the regime began to institute some reforms to the sector, selling state-owned enterprises, and initiating a programme to distribute state land and that obtained through land reform to private individuals. By 1989, almost all Iraqi land was either privately owned (about 53 per cent) or rented from the state (about 46 per cent). Agriculture in the 1990s was left to disintegrate, partly as a result of the sanctions that halted the import of certain machinery because of its potential for "dual use". Within a decade, Iraq went from food exporter to importer. About 80 per cent of Iraq's food needs are met through imports. Irrigation and flood management have to be addressed, but would require massive investment in all agriculture-related sectors. Land ownership deeds will have to be drawn and proof provided for these by thousands of villagers. Titles are likely to be disputed, especially in the northern Kurdish-dominated areas where forcible seizure of property is reported to be an ongoing process since armed Kurds entered the region.

Wages and prices are also problematic matters for US administrators of Iraq. Information might be more readily available in Kurdish-controlled areas since wage and price data continued to be collected there in recent years, although it has not been forwarded to Baghdad since 1991. US Treasury officials have stipulated that wages and prices must be liberalised. However, if they are allowed to fluctuate freely this would worsen inflation, already estimated to be about 100 per cent. Even if national income data are produced one will also have to account for the perks government officials received according to seniority and rank within the Ba'ath Party. The extent of the state's ownership of various parastatal agencies and institutions will also have to be explored. Tracking, for example, the complex web of civilian companies owned by the military, senior government officials and the secret services will be a laborious but necessary undertaking. A more daunting problem that faces US administrators is estimating the wages for Iraq's civil service and those within various government departments. Finding out who works for the government is an important task to estimate its obligations and finances.

Currency is another issue that has to be dealt with in the immediate future. At the moment, the dollar is the currency that rules in the marketplace. Bank robbers throughout Iraq went after all currency found in vaults but always opted first for dollars rather than the Saddam dinar. Workers hired by US and British soldiers are paid in dollars. Even if a new currency is issued, as it was in Afghanistan, the dollar will continue to play a very important role in daily life.

The cost of reconstruction is currently estimated between $100 billion and $200 billion. More importantly, Iraq's debts will also affect the level of economic growth in Iraq. It is estimated that Iraq owes between $62 billion and $120 billion to international creditors -- obligations that it defaulted on long ago. It also owes up to $300 billion in reparations to Kuwaitis and others as a result of the 1991 war. Under the UN oil-for-food programme, Iraq has paid about $16.7 billion thus far in reparations related to the 1991 war. Of course, some of this debt will be renegotiated and some will be written-off. However, a substantial sum will be payable.

Any thinking about Iraq's economic future involves the price of oil. Iraq currently has the capacity to produce about $20 billion-worth of oil a year. It could double production in the next seven to 10 years, after billions of dollars of investment in oil production. However, oil prices are expected to fall in the next few years as countries that aren't members of the Organisation of Petroleum Exporting Countries (OPEC) increase production. Increasing Iraq's oil production would find Saudi Arabia, the only country with such a capacity to allow it to swing prices, in the difficult position of cutting production to maintain prices whilst facing continuous deficits.

As for tracing Saddam's personal wealth and that of his cronies, it remains to be seen whether the smoke screen of various front men and multiple accounts in Western banks and investments will outwit US inspectors. Some will be found, like the $630 million that was recently discovered in stacked aluminium boxes in Baghdad, but a substantial amount will remain hidden. Finally, US companies will play an important role in the reconstruction and post-Saddam Iraqi economy. The Bush administration awarded Bechtel a $680 million contract to help rebuild war-torn Iraq. What was more important was the fact that the contract was awarded in a closed-bid deal, where only a handful of US companies were permitted to compete. The US government said it was necessary to bid out much of the postwar reconstruction work in secret because open bidding would have hampered the process at the expense of Iraqi economic and political stability. Certainly, the bidding process was far from being competitive and transparent. Restricting competition to a few companies could inflate the cost of rebuilding.

The Iraqi economy faces many challenges. The way the US deals with many of these problems will determine the extent to which its efforts to establish a free-market economy based on a pluralistic political system will succeed or fail.

*About the Author: John Sfakianakis is a research fellow at the Centre for Middle Eastern Studies, Harvard University.