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Iraq: U.S. Slows Once-Ambitious Plans To Restructure National Economy

The success of any transformation of Iraq into a more democratic state depends in large part on moving from a centralized economy to a market system. But several initiatives originally planned for the U.S. occupation period -- such as privatization and price liberalization -- have had to be modified or put on hold due to concerns over Iraq's political stability.

Prague, 22 January 2004 (RFE/RL) -- U.S. officials are increasingly backing away from early plans to rapidly convert Iraq's centralized economy into more of a market system as they face continuing political uncertainties in the country.

Last summer, the head of the U.S.-led Coalition Provisional Authority (CPA) often spoke about the need for sweeping economic reforms to give Iraqis a greater stake in their own economic and political future. He told an economic forum in Jordan at the time that Iraq would soon start privatizing more than 40 government-owned companies making packaged foods, steel, and other items.
"We have to remember that in Iraq, the social costs of reforms are counted in additional deaths, not more strikes."

"The New York Times" quoted L. Paul Bremer as saying then that: "Everybody knows we cannot wait until there is an elected government here to start economic reform." Today, however -- as the newspaper reported this month -- "Mr. Bremer says repeatedly that such decisions must await Iraqi self-rule."

To learn more about where plans for Iraq's economic transition stand today, RFE/RL spoke with Neil Partrick of the Economist Intelligence Unit in London. Partrick returned last week from a trip to Baghdad and the south of Iraq, during which he spoke widely with U.S., British, and Iraqi officials about economic reconstruction issues.

The analyst says that recent months have seen CPA officials slow down or postpone several once-ambitious initiatives to rapidly introduce market reforms. He says the slowdown is partly due to a sense that Iraq's political and security environment need to stabilize first, and partly due to worries that dramatic changes might only add to unemployment levels. Iraq currently suffers an estimated 50 percent unemployment rate.

"I think both amongst economic advisers, as well as political ones, in the CPA, there is a very strong sense of political realities, and this obviously feeds into wider security concerns, with the overlap issue being the challenge of unemployment. So the radical approach which appeared to be driving policies initially across the board is something that I think there is now an understanding needs to be reined in," Partrick said.

He says that in place of an immediate privatization effort, the CPA and Iraqi Governing Council (IGC) now are opting for leasing some state industries to foreign or Iraqi investors for temporary periods. "There seems to be a kind of interim approach in terms of the privatization objective, in that the Ministry of Industries and Minerals has just launched a pilot program to seek bids for leasing 30 state-owned enterprises. Now, they cover the waterfront in terms of the kinds of spheres they are in -- food processing is one of them, pharmaceuticals is another, packaging, stationery production for schools is a further one," Partrick said.

The analyst says this interim approach has attracted a lot of interest both from Iraqi and foreign companies and that decisions on awarding the leases are expected in the next few months. He also says that if the program is successful, the leasing process could be extended to a "much wider number" among the more than 200 state-owned enterprises in the country.

The leasing program excludes the oil and petrochemical sectors, which currently are the government's only significant domestic sources of revenue. Partrick says original hopes for rapid restructuring were also "reined in" partly due to fears among Iraqi officials that any privatization might not be seen as legitimate if it were undertaken by anything short of a sovereign, or even elected, government.

"What was interesting was that the minister [of Industries and Minerals] himself, and I've had this confirmed by other Iraqis, was reluctant to consider going beyond a leasing arrangement and possibly some limited joint ventures in terms of offering permanent sale to private investors of state-owned enterprises until there was what he called a sovereign, elected government," Partrick said.

The CPA plans to hand over power to a transitional sovereign government at the end of June, with national elections to follow sometime next year. Washington dramatically moved up the date of its handover of power -- originally planned after several years -- in November 2003 amid widespread calls in Iraq and in the international community to have a sovereign government in place in the reconstruction period.

At the same time, many foreign investors are reported to be unenthusiastic about buying up state enterprises now when any privatization legislation passed today risks being reversed by a new sovereign government tomorrow.

Other initiatives that were often discussed six months ago but have made little progress since include the liberalization of price controls and ending state subsidies to select sectors. Like privatization, such steps are considered essential for freeing an economy from its dependence on the government and fostering the kind of strong entrepreneurial system that characterizes democracies.

Partrick says the now cautious approach to economic restructuring leaves the CPA in the position of currently funding the same centralized system it once hoped to dramatically overhaul. He says the CPA officials he spoke to recognize the irony of their position but see no other course until a sovereign government takes over in six months with -- the U.S. hopes -- substantial popular support for instituting reforms.

"A large part of the budgets which they are overseeing that are going to the newly constructed ministries and to the old ministries at the moment are, of course, going in wages and salaries in the classic pattern of [centralized economies maintained by] Arab governments throughout the region. It is not something they deny, but of course they then say that all these options are open after six months," Partrick said.

Despite the scaleback of the CPA's original plans, significant changes to Iraq's economy are in progress, however. Partrick says there are signs the IGC may seek to partially end the cheap supply of power and water to some state industries during the next six months. The experiment could tell a great deal about Iraq's ability to absorb further restructuring.

"One area in which subsidies will be removed, it seems, within the six-month period, and possibly a fair bit sooner, is the internal subsidization of the state-owned enterprises in terms of the cheap supply of power and water and electricity. It is within that sector, at least, that I was told that state-owned enterprises will be expected to be thrown into some version of the market system. So it could be a fairly rude awakening that I think could put some pressure in terms of employment levels, which are normally relatively distorted, shall we say, within these companies," Partrick said.

As they have put off more sweeping market reforms, U.S. officials have focused much of their energy to date on revamping Iraqi governmental institutions, such as the tax authorities and the central bank.

Marek Belka, who heads economic policy for the CPA, told Reuters last week that "Reforms which could potentially increase the risk of social tensions in the run-up to the transfer of power are not getting the green light from America."

Belka was twice Poland's finance minister and helped oversee its own "shock therapy" transformation from a centralized to free-market economy. He also said that "undoubtedly it will be harder, not easier, to introduce these reforms as time goes by."

But, he added, "We have to remember that in Iraq, the social costs of reforms are counted in additional deaths, not more strikes."

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