Iraq is now said to require tens of billions of dollars to restore it to economic health, beyond what is available from its slowly recovering oil exports. This figure is hugely in excess of aid budgets for much poorer countries in Africa, or for poorer, more populous countries such as Pakistan and Sri Lanka in Asia — and nobody has suggested spending tens of billions of dollars in the impoverished Afghanistan. So why does Iraq need more money?
The best comparison to show how extraordinary is Iraq’s economy is Pakistan, a country religiously similar to Iraq, and with a similar history of British rule followed by unstable and corrupt post-independence governments.
Pakistan, with 150 million people, has total exports of $9 billion, $60 per capita. Iraq, with 25 million people, has oil exports of about $20 billion, $800 per capita, when the oil industry’s running smoothly (before any further ramp-up in production that is undoubtedly possible given the size of Iraq’s oil reserves.)
Yet nobody is proposing giving Pakistan tens of billions of dollars of aid, even though that country is perfectly capable of acting as a haven for terrorist suspects and has indeed been shown to have sold nuclear weapons material to North Korea. Indeed, so far is the U.S. from taking Pakistan’s economic difficulties seriously that it has still not lifted quotas against Pakistani textile exports. Textiles and garments, taken as a whole represent no less than $6 billion of Pakistan’s meager $9 billion exports, and lifting the quotas would bring revenue and business possibilities to the most productive sectors of the Pakistani economy, thereby doing more good for the country than any amount of ill-spent aid money.
The contrast between Pakistan and Iraq is instructive in another way. Iraq, with $20 billion a year of exports, all of which could be and was used as a piggy bank by the government, appears to have been unable to build a functioning nuclear weapon (thank goodness!) Pakistan, a far poorer country with a government that is perpetually in need of funding for the most basic national requirements, was able to build and detonate nuclear weapons in 1998 with efficiency that would have been highly commendable in a better cause.
There is little difference in human resources between Iraq and Pakistan, and only moderate differences in geopolitical position, culture and history. The real difference between the two, that has made Pakistan hugely impoverished but relatively stable, while Iraq is a powder keg allegedly requiring hundreds of thousands of troops and tens of billions of dollars to stabilize it, is Iraq’s oil wealth.
Ousted dictators generally do not lead guerilla resistance movements, they retire to a friendly country with as much of the loot as they can lift from the various Swiss bank accounts where they put it. Idi Amin, the notorious and genocidal dictator of Uganda, for example, put up only moderate resistance when superior forces descended on Kampala, and lived out his days in considerable comfort in Saudi Arabia.
Two factors seem to have caused Saddam Hussein (if he is still alive) and his top henchmen to undertake a campaign of desperate resistance to occupying forces. First, the West has foolishly set up a system of war crimes trials for every Third World leader it doesn’t like, so there are no longer any safe havens, and dictators cling to power like limpets, making regime change much more difficult. Second, more germane to the present case, Iraq’s oil acts as a cash flow bonanza to whoever controls it, allowing them to indulge their wildest spending fantasies with only minimal attention to the Iraqi economy or the Iraqi people. Looting $1 billion from the Iraqi central bank, in order to give yourself a chance of outlasting American occupation and restoring yourself to a share in $20 billion a year, is a reasonable business proposition by any standard.
In the old days of course, this problem did not occur. If Exxon discovered oil in Saudi Arabia, or De Beers discovered diamonds in Botswana, it exploited the resource itself, paying some suitably modest royalty to the local ruler, which was nowhere near sufficient to distort the economy. The result was high profits for Exxon and de Beers, but also relatively stable government in the host country (the Exxon/de Beers payment was enough for a pleasant lifestyle, but not enough to finance megalomaniac dreams of terrorist conquest.) It also produced low oil prices for the Western consuming nations (but not low diamond prices, since de Beers controls the market) which was good for their economies but bad for their lifestyles. It wasn’t just oil, gold and diamonds; Honduras was impoverished but remarkably stable in the years when United Fruit Company controlled its output of bananas.
From about 1972, the world came to believe in a different paradigm, that peoples lucky enough to be living on top of vast mineral or energy deposits had the right to most of the income from those deposits. You can argue the morality of it — certainly if the Exxons of this world get the money, there is too great an incentive for them to concentrate only on the lowest cost resources, since these are by far the most profitable, which results in periodic “energy crises” as insufficient money is spent on developing new higher cost reserves. At a minimum, there is a case for a system where royalties paid by the oil companies are greater for lower cost resources, thus equalizing the cost between different sources and ensuring that low cost resources are not exhausted too soon.
In any case, while the theoretical paradigm was that the people got the benefit, what happened in practice was that the governments got it. The last thirty years have proved pretty definitively that this is NOT the same thing. Far from spending royalty monies on their people, or on developing their economy, governments have used them primarily to enrich themselves and to entrench themselves in power. It is notable that with the exception of the removal of the Shah of Iran (and, now, the removal of Saddam Hussein) all the Middle Eastern regimes, however ephemeral, that were in power in 1973 are still there, thirty years older and a great deal richer. The 1950s and 1960s, when oil revenues were still modest, were a time of turmoil in the Middle East; from 1973 onwards the story has been one of stagnation.
The result has not simply been that governments have wasted the money; it’s a good deal worse than that. Apart from mere self-enrichment, governments have spent the money on building up industries that are hopelessly uncompetitive when their inputs are valued on a true cost basis, driving up wage rates for the favored few employed in those industries, and recreating a scale model of the Soviet economy. Of course, if in 1991 we had attempted to make the Soviet economy work, that would have required tens of billions of dollars too, or even hundreds of billions of dollars. West Germany attempted it in East Germany, a country of only 15 million people, so far with catastrophic results. West German subsidies to East Germany failed to recreate the East German economy, and produced devastating unemployment and stagnation, while providing subsidies to workers who were already the richest in central and Eastern Europe.
In the same way, tens of billions of dollars in subsidies to Iraq would fail to create a viable industrial infrastructure, or to provide truly productive employment for the Iraqi people, while diverting resources from countries such as Pakistan that are much poorer, have economies that are viable in their current state, and would benefit more from the additional resources (rather than subsidies, though, much better to give the same benefit through removal of trade barriers.)
The U.S. objective in Iraq should not be to recreate the economy of Bosnia, a country with almost no autonomous productive sector outside the provision of service functions for the aid agencies, but to create an economy that uses Iraqi skills and manpower at a cost level that is competitive in world markets. The big “prestige” projects, created by the Saddam Hussein regime, must be abandoned, not renovated, just as were the Soviet behemoths; however much money is poured into them there is no way that most of them can be productive on a true cost basis.
Only thus can Iraq become a place where the majority of citizens are leading productive lives, and where young people can be sure that hard work and education, rather than terrorist gang warfare or religious fanaticism are the best ways to get ahead. Wage levels in an Iraq whose citizens are internationally competitive will be somewhat below those of Pakistan, because Iraq’s education system appears to be inferior to that of Pakistan, and its current infrastructure and skill set is far less suited than that of Pakistan for internationally competitive endeavor.
Iraqis will not however be as poor as Pakistanis, because they have the oil asset. $20 billion a year, diverted through the machine of a corruptible government, has been shown to endanger the peace of the region through excessive armaments and military adventurism, as well as producing a society in which the way ahead for the young is through theft and gangsterism. However $20 billion a year, delivered to each Iraqi citizen in the form of twelve monthly checks for $67 each, will produce a very different result, because it will be spent not by a corrupt central bureaucracy, but by individuals seeking to survive in a harsh world and to build a better life for the future.
The result will be a country in which individual Iraqis have modest amounts of purchasing power, and so can build a society in which their needs, rather than those of their rulers, are satisfied. All that is needed is an impartial and incorruptible means of distributing the checks; as I have written before I suggest Singapore as the ideal administrator of such a scheme.
In this way, and only in this way, can Iraq’s oil be used to benefit its people. Western aid will be necessary only to set the system up, after which the Iraqis can once again take control of their destiny (in this respect, the exodus of aid workers following the recent bombings is of unalloyed benefit to the Iraqi people; it makes the Bosnia syndrome much less likely.) Once the Iraqi people start getting monthly checks from their oil, no government will be able to separate them from their newfound income, and use it on destructive military adventurism, corruption and economic boondoggles.
Meanwhile, if the U.S. and the United Nations truly want to engage in nation building, they can separate the oil revenues from the clutches of government in other countries, too, so that Saudi Arabia and Iran can no longer use their revenues to fund the most primitive versions of Islam, creating the infrastructure for terrorism, and the Arab governing classes will no longer be the most privileged of all clients at the Mayfair casinos.
The Middle East is geographically part of Asia; it needs to adopt as far as possible an Asian social structure and work ethic.
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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)
This article originally appeared on United Press International.