Iraqi Finance Minister Kamel al-Kilani has announced his intention to undertake economic reforms “to build a free and open market economy in Iraq.” The reforms include permitting foreigners to invest and own firms in the Iraqi communication, banking, and industrial sectors; lowering tariffs to 5%, and capping tax rates for individuals and companies at 15%. Iraqi industries that are owned by the state will be sold to private firms.
The idea of oil-industry privatization has been ruled out because the US wants to avoid criticism that this was the whole reason for the invasion. Also, first reports suggested that former Russian prime minister Yegor Gaidar, mastermind behind Russian economic reform of the 1990s, would lead the team in advising the US occupational government in Iraq. Gaidar later denied the whole thing. “We should keep our advice to ourselves,” said Gaidar as he returned from Baghdad. “The formation of economic policy is ultimately the task of the Iraqi authorities.”
The US should be as wise. With the announcement of these reforms, we are supposed to imagine the future of Iraq as a big democratic Hong Kong, with bustling businesses everywhere, with an international flavor, where taxes are low and property is secure and commerce is the watchword above all else. Utopia! And what a contrast to today, where no one is safe under a US military dictatorship. And just think: the US will shepherd the whole transition.
If you believe this, the US has a bridge in Baghdad to sell you. There are very few details available about the plan, but we do have history to inform us. The US has so far not allowed anything resembling a laissez-faire commercial atmosphere to take root after the bombing and killing campaign that began last spring. Foreign cell phone companies that have come to the country to set up shop have been kicked out. Would-be commercial air services have been refused. The interests of merchants have not been protected during the upheavals.
Not even the billions and billions of dollars in contract money, looted from the American taxpayer to be given away to firms reconstructing what the US destroyed in Iraq, have been sent out for competitive bids. The contracts were awarded to Halliburton and Bechtel, of course, so that the government and its friends can win before, during, and after the war. Even now, the US admits that “US Government contracts…continue to be the leading business opportunities in Iraq. It’s hardly surprising that proposed privatization would be widely interpreted as a complete sell-off of the country — like a criminal gang holding a yard sale of all its holdings. It could discredit the whole idea of free enterprise in Iraq.
Let’s take a step back and examine the idea of “privatization” itself. For a decade or two, this word has been batted around policy circles. In theory, it is a great idea to sell off or give away property owned and operated by government, so that it can be in private hands and so that property titles can be made exchangeable on an open market. The failure of socialism has shown that without ownership and exchange, waste and deterioration will prevail at the expense of efficiency and development. With private ownership and exchange come rational valuation, technological improvement, and service to the public. By all means, privatize the whole world.
And yet, once an idea, no matter how good, gets in the hands of the political elite, it becomes liable to abuse and even reversals of meaning. For years, the federal government has conflated the idea of privatization with contracting out, and they are very different things. Under privatization, the property ends up in the market and the owners can do with it what they want, including selling it or shutting it down. The usual standards of profit and loss apply. Under contracting out, the government determines whether the good or service is necessary, and pays a private company to build or provide it. There is no profit and loss test.
The continuum of corruption extends from there. Under one bogus approach, state agencies are permitted to raise the price of their monopoly products, allowing the government to loot the people ever more. Or the government can sell off or give away property to its friends to do with what they want. In Russia, this process created a “mafia” that is still ruling the country, prosecuting its enemies when they get power, or avoiding prosecution when they don’t have power. Partial privatizations can lead to disaster, as when banks are backed by government and the property sold to them thereby becomes socialized once again (as happened in the Czech Republic). Another phony form allows “competition” among state institutions, as when “public school choice” is fobbed off on the population as a form of market reform.
What kind of privatization will take place in Iraq? You would have to be absurdly naïve to believe the Hong-Kong model. Just as one example: the plan says it is privatizing the government’s central bank by creating an “independent” central bank. Now, if you look at the Federal Reserve, “independence” is not the first word that comes to mind. Its board is appointed by the president and it enjoys complete monopoly privileges as granted by the US Congress. True, it doesn’t serve the government exclusively; it also has the banking industry to think about. But if the Fed is the model for privatized industry, we can look at privatization in Iraq as nothing more than a cover for US control.
In Iraq, the US authority is caught between two conflicting goals. On the one hand, it desperately wants to escape the criticism that it has wrecked the country. Even today, even in the most developed areas, most people don’t have clean water or reliable electricity or phone service. Iraqi authorities are saying that it will take two years to fully restore electricity, but this is just another way of saying that it can’t be done under the present circumstances of unrelenting violence and chaos. The US would like to see the country approach normalcy if only to dampen fevered criticism from all over the world that has discredited the whole military operation. The only way to do this is by permitting (not “creating”) a market economy to flourish.
On the other hand, the US authority wants to maintain total political control. To this end, it has voided elections, hand-picked a puppet government that it still can’t entirely manage, and has insisted on dictating the reconstruction process at every level. Here’s the trouble: the only real path to lasting reconstruction is through radical liberalization. But liberalization means loss of political control. So the US faces a choice in Iraq. Does it want reconstruction or hegemony? The attempt to have both — which is all we’ve seen so far — has not and cannot work.
This dilemma is not unlike that which Gorbachev faced in Russia in the 80s. He knew that liberalization was the key to ending the grinding Soviet poverty, but he also worried that liberalization might lead to the collapse of the regime. He tried to liberalize while beefing up party control, but eventually it didn’t work. The whole system came unraveled, and he eventually had to let the Soviet empire go. The US will have to do the same. In fact, the US as an occupying foreign military power is in an even worse position than Gorbachev, who at least was a Russian who rose up through the ranks.
As a final observation on this Iraq privatization proposal: there is more than enough privatization to accomplish right here at home. For Heaven’s sake, why in the age of mass blogging and instant private delivery of everything does the government still believe only it can deliver mail?
And why, instead of privatization in the US, is the Bush administration going in the opposite direction: increasing government control over medicine, education, and trade? Let Bush increase private control and reduce government at home before he pretends to do it abroad. The biggest-spending and biggest war-mongering administration since LBJ has a credibility problem when it claims to bring free markets and the rule of law to anyone.
There is a sense in which Iraq needs to be privatized. The US government needs to leave the country. This is “shock therapy” that most Iraqis and most people in the world would welcome.