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May 06, 2003

Rebuilding The Iraqi Economy
by Hans F. Sennholz

Allied forces may not have delivered the world from the danger of Iraqi weapons of mass destruction but they surely freed the Iraqi people from terror and tyranny. They now face the formidable task of rebuilding the war-torn country where many people fear and despise the liberators who abandoned them to their dictator's bloody revenge when they rebelled during the 1991 Gulf War. Most Iraqis also hold Americans responsible for their dire deprivations since then which they attribute to the economic sanctions imposed by the United Nations. They apparently are unaware, as are the media throughout the world, that it was Saddam Hussein's hyperinflation together with brutal price and wage controls that brought the Iraqi economy to a state of ruin and wrought poverty and suffering on the people. And few Iraqis understand that the American forces, by liberating them from the yoke of economic controls, may become a force for good in their lives.

The key to economic reconstruction is very old; it is the very key that rebuilt the ravaged economies of Germany and Japan after World War II and that opened the doors to a new life in the Republics of the former Soviet Union. It is the individual enterprise system, commonly called the market order or capitalism, which builds on private property in the means of production, unhampered competition, and free market prices reflecting the supply and demand of goods and services. It is the very system that has rewarded the American people bountifully throughout history.

President George W. Bush apparently placed his trust in the economic ability and reconstruction know-how of a retired general Jay Garner. We are uninformed about his training and qualifications, but we do believe that every individual has his special skill and excellence. Generals and officials may be competent in commanding their troops and directing the army of civil servants, but they undoubtedly lack the required qualifications for breathing new life into a war-torn economy. An English proverb best describes such appointments: "Everyone must row with the oars he has." The generals and officials surely do not wield the oars of economic productivity and prosperity. They may understand and appreciate the Iraqi economy which is marked by all the characteristics of a command economy similar to those of the former Soviet system. It has been laboring under central planning, fixed prices and wages, nationalized healthcare, education, and many other services. Government even managed the distribution of basic foods through a complex system of food-ration cards.

Upon Hussein's invasion of Kuwait in 1990 the international community imposed stringent economic sanctions on Iraq, banning all imports except foodstuff and medicine. As could be expected, the restrictions soon gave rise to considerable illicit trade especially with Turkey, Kuwait, Jordan, and Saudi Arabia and made the Iraqi port of Basra a bustling center of unsanctioned activity. The UN ban on sales of Iraqi oil abroad soon became a sieve that allowed some exports and impeded others. To Hussein, the sanctions afforded a welcome opportunity not only for the propagation of his economic interpretations but also for new denunciations of the U.S. government. He let it be known that the sanctions inflicted immense hardship on the people, especially among the poor. He managed to have the sanctions modified progressively in 1996 and thereafter, but they remained the object of incessant Iraqi protests and charges. In time, they caused much international humanitarian concern and reaction, leading the governments of France and Russia to favor their immediate repeal and cause the old coalition to crumble. Many French politicians found their way to Baghdad.

While Saddam Hussein made much of the UN sanctions and the world commiserated with his people, he continued to inflate and depreciate the Iraqi dinar at inordinate rates. Few foreign observers ever realized that it was Hussein's hyperinflation and rigorous price and wage controls rather than the UN sanctions which inflicted the hardships on the people. Surely, the import restrictions reduced the stock of many items manufactured abroad, but they hardly affected the basic necessities of daily life. In fact, the country usually exports large quantities of agricultural and pastoral products, especially barley and wheat. It is the largest world exporter of dates with about 80 percent of world sales. It imports textiles and capital goods such as machinery and vehicles. The UN trade restrictions obviously tended to depress agricultural and pastoral product prices and raise the prices of import goods, but they could hardly be charged with inflicting immense hardship on the people, especially the poor. The Hussein inflation of some 6,000 percent in just four years (1990-1993) and 200 percent thereafter nearly every year together with comprehensive price and wage controls paralyzed the economy, as they would any other. He even conducted a currency reform that voided the popular 25-dinar notes, allowing its owners at home and abroad just six days for an exchange. When living conditions visibly deteriorated and crime waves deluged the country Hussein sought to maintain order with barbaric penalties: thieves would lose the right hand, repeat offenders a leg, and black marketeers were executed. Amputation penalties applied also to farmers who neglected to sell their crops to the government. (Britannica Book of the Year 1995, p. 422). Throughout those years large-scale executions enabled him to cling to power. Few eminent families were spared the loss of a member.

American authorities do realize that the price and wage controls must be lifted, but they are afraid of rapid price increases that will aggravate the poverty. They may not be aware that, immediately upon their arrival in Baghdad, the brutal command system of Hussein gave way to a free-market order, commonly called the "black market." It sprang forth with the power of natural law as soon as the Hussein executioners passed out of sight; it has sustained the Iraqi people ever since. There is no greater benefit which the victors can now confer on Iraq than to formally and legally convert black markets to free markets.

Elementary economic knowledge cautions against the reimposition of the Hussein controls by the Coalition authorities; it would be a tragic blunder, calamitous for the Iraqi people but congenial to and welcomed by the grudging world. Without the threat of inhuman penalties price controls are totally ineffective; they merely cause confusion, derange the markets, and alienate the people who would ascribe their harm to the liberators. The admiration that was earned by the American military would soon be lost by American regulators and administrators.

The black markets throughout Iraq are supplied by local merchants, manufacturers, and farmers as well as Coalition troops. They allow private businesses to repair and rebuild, employ labor, or just readjust from production for the government to manufacture of consumer goods for free markets. Without much danger from informers and spies, everyone now feels free to resume his economic existence. It would be tragic indeed for the military authorities to devise new dangers.

There is no need for currency reform. Surely, the dinars displaying Saddam's picture may be replaced in time with currency portraying Iraqi art or landscape. No one probably knows how many billions or trillions the Iraqi central bank actually printed and issued, and no one can possibly calculate the volume of fiduciary credit which the commercial banks created on the basis of their central bank dinars. But such knowledge, which excites all controllers and regulators, is utterly unimportant as long as the central bank does not print any more. Market prices and wages tend to adjust readily to any quantity of money in use. They also adjust in all money markets where U.S. dollars are traded freely for Hussein dinars. Provided the Coalition does not rebuild the Iraqi central bank and reactivate its printing presses, the dinar may in time actually rise in all exchange markets.

The U.S. Government is likely to reconstitute the Iraqi people's ownership of the country's vast oil industry, although it may temporarily restructure its management. The personnel is bound to change; the Hussein team of managers will be replaced by a new team unencumbered by Hussein favors and Baath Party membership. The industry will be overseen and directed by an American official who will have to answer to a board of advisers with managerial powers similar to those of a board of directors of an American company. However, the important decision of how the money earned from production and sale of oil may be spent will be made by the newly appointed administrator of Iraq, by General Jay Garner. Of course, as soon as a new Iraqi government is in place, the general will be expected to surrender his powers to a new Iraqi minister.

Few Americans, if any, favor government ownership of any phase of the American petroleum industry, be it exploration, production, refining, or sales. There would be a great outcry and public protest if Washington politicians of any party were to propose its confiscation or nationalization. But few Americans seem to take notice of the United States government confirming and reassuring Iraqi nationalizations. And even fewer are pointing out that the United States government thereby is validating the expropriation of American, British, French, and Dutch companies that discovered the oil deposits and developed the industry. Americans seem to be unaware that it was bloody military regimes that nationalized the foreign companies without compensation or with merely token payment in the form of the companies' own property. They have forgotten the stockholders throughout the Western world who lost their investments when the Iraqi government seized their corporate property. The U.S. government is not proposing to compensate them but plans to return the seized property to the seizers as soon as possible. Admittedly, it would suffer deafening condemnation by the kings, emirs, and sultans of the Muslim world and all the politicians and officials around the globe feasting on nationalized industries, and it would risk murder and insurrection in the Arab world if it were to propose fair compensation of the former owners and the sale of the nationalized property to the highest bidders, whoever they may be. Privatization not only would return the industry to rational professional management but also raise huge sums of capital the income of which could readily bear the legitimate expenditures of government, that is, police, courts, and national defense. The proceeds invested in the capital markets of the world might even facilitate the abolition of all taxation, which could make Iraq a free and attractive country on earth.

The United States government is in the awkward position of a liberator and reformer. It is a great opportunity for winning the peace, generating prosperity, and creating a stable Arab democracy. But it may also botch and bungle the opportunity to revive the moribund economy and create a democracy. In fact, it is bound to fail to live up to the great expectations of the American people if it seeks to impose a social and economic order similar to that of the United States today. Several U.S. agencies, under the direction of Lt. General Jay Garner are planning the reconstruction of the country. He has arrived in Baghdad with a core team of 230 active and retired U.S. government officials. In the coming weeks the Garner team will grow much larger. In addition, U.S. Treasury employees are drafting an Iraqi budget and designing Iraqi banking regulations. The Transportation Department is sketching a new air-traffic control system, and the Commerce department is drawing up plans for a new customs system. Even the Justice Department is becoming involved, planning to revise Iraq's civil and criminal law. The bill to American taxpayers for all this assistance and reconstruction presently is estimated at some $60 billion over the next several years. It is a political estimate which undoubtedly greatly understates the actual costs.

The Bush Administration may recount the miraculous revival of the German and Japanese economies after World War II. Unfortunately, many historians not only misinterpret economic history but also misrepresent the very nature of military conquest and administration. They completely ignore the actual disintegration of both economies and the indescribable want and poverty of the population under military command. Surely, the Marshall Plan, which was signed into law in April 1948, promised to foster economic recovery in certain European countries. By that time German production, for instance, had ground down to one-half of prewar output. Allied occupation Edict #1, which renewed and extended all Nazi price and wage controls, completed the economic disintegration.

In 1948, the Western powers decreed a German currency reform that proved to be rather successful. But contrary to the stated contentions of the generals, the operation proved to be successful only because the new Adenauer administration simultaneously conducted an economic reform. Professor Ludwig Erhard, the Secretary for Economic Affairs, abolished all price and wage controls, restored the freedom of markets, and thus gave free play to the demand and supply forces. Contrary to the generals' insistence, it was the competitive market order that gave new hope and instilled new life into the economy. It was unadulterated capitalism that surprised the world, giving rise to "the miracle of German recovery." The generals watched the economic reform with great anxiety and dismay. General Lucius D. Clay, the Allied Commander, in fact sent Professor Erhard a stern memorandum reminding him that the economic edicts of the military government could not be altered without permission. Although most Germans did not comprehend the significance of the Erhard reform they applauded his courageous reply: "General, I did not alter your controls, I abolished them."

In Japan, General Douglas MacArthur, the supreme commander for the Allied powers, immediately embarked upon land reform. He changed the ownership pattern of over two-thirds of Japan's cultivated acreage by redistributing the land from owners to tenants and thereby reducing average family holdings to under 2½ acres. Confiscatory profit taxes, capital levies, inheritance and graduated income taxes sought to reduce large fortunes and concentrations of wealth. New laws which established a labor ministry and promoted labor unions were modeled on New Deal legislation in the United States. They gave rise to a strong and vigorous labor movement and a new Socialist party which rose to power under Prime Minister Katayana Tetsu. The confusion and economic hardship that followed even provided a favorable climate for communism which claimed some 10 percent of the vote in the House of Representatives. Japanese economic conditions improved finally when some government controls were abolished and the country was called upon to provide numerous services for the American military effort during the Korean War (1950 - 1953).

The Iraqi economy is marked by all the characteristics of a despotic socialistic system. For the sake of social peace and economic cooperation, the role of government in the lives of the people must be reduced drastically, for government dispensing spoils, favors, and privileges is the primary source of much social conflict and strife. By limiting their task and function to the protection of human life and private property and by constraining Iraqi administrators to do the same, the Coalition forces will plant a tree of liberty which hopefully will grow in years to come.

Hans F. Sennholz
www.sennholz.com

Copyright © 2002-2007 Hans F. Sennholz

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