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Iraq: Victors Now Turn To Repairing The Economy

One of the major challenges facing the U.S.-led coalition in Iraq will be to repair Iraq's ailing economy. While damage to economic infrastructure was relatively light in the war, the Iraqi economy has suffered more than 20 years of conflict and economic sanctions. Added to this, Iraq had a centrally planned, command economy on the model of Eastern Europe and the former Soviet Union. Restoring market mechanisms under these conditions could take years. RFE/RL spoke to economists and experts about the challenges ahead in Iraq.

Prague, 17 April 2003 (RFE/RL) -- The U.S. government is literally flying in millions of dollars -- in $1 and $5 denominations -- to Iraq as part of plans to rebuild that country's war-torn economy.

The money, taken from frozen Iraqi assets held in the U.S., will be doled out to public servants in the form of onetime, $20 payments as an inducement for them to come to work. The hope is the money will move its way through private transactions and ultimately aid efforts to build a functioning market economy -- a goal economists say is probably years away.

The dollar scheme is just a small part of what ultimately could be a long and difficult undertaking to repair and transform an economy suffering from decades of conflict as well as UN-imposed economic sanctions after the 1991 Gulf War.

Sultan Barakat is the director of the Postwar Reconstruction and Development Unit at Britain's York University. His unit specializes in advising countries rebuilding after years of conflict. It has been active in the Balkans and Afghanistan.

Barakat said the most important task, before real reconstruction can begin, is to restore order. "The most important task for now is going to be security, to make sure that the country is stabilized in one form or another," he said. "And then having done that, [the U.S.-led coalition] will have to look into issues of welfare and providing safety for those who have lost either as a direct result of the war or as a result of many years of sanctions and economic difficulties."

Barakat said a major difficulty in the transformation to a market economy is posed by Iraq's socialist past. Saddam Hussein's Ba'athist regime was modeled loosely after the command economies of Eastern Europe and the Soviet Union. Much of the economic activity was centrally directed. The market has to be invented.

"Iraq was a highly structured economy, a centralized economy, and the state owned many of the enterprises within the country, and also controlled many of its export and import activities," Barakat said.

He used the example of Iraq's construction industry to underscore the scope of the challenge. These state-owned companies played a major role in rebuilding the country after the 1991 Gulf War, but their existence is now in question. It's not yet clear who or what will take their place.

The Iraqi economy, once relatively successful in the 1960s and 70s, was especially hard-hit by UN economic sanctions. Hania Farhan, Middle East regional director for the Economist Intelligence Unit (EIU) in London, said the impact of the sanctions was felt disproportionately by the local population, not by members of Hussein's Ba'athist regime. She said living conditions in the Shia south and Sunni-Muslim hinterland were especially bleak.

"Living standards definitely suffered much more than the official statistics reflect, because the total figures reflect total GDP divided by the total population, which is just not the way it was happening. Because of the sanctions you had extreme poverty," Farhan said.

Long-suffering local populations will be looking to the U.S. and its allies to make good on the promise to improve their lives.

The U.S.-based Council on Foreign Relations, in a recent report titled "Iraq: The Day After," outlined a series of initial steps for rebuilding Iraq's economy. The author of the report was not immediately available for comment, but the report is expected to guide U.S. decision-makers in the early days.

The first step, the report says, is to stimulate demand by creating jobs in the private sector and ensuring wages for workers in the public sector (government workers, police, health-care workers) are paid on time. This is what the airlift of dollar bills is expected to do in the short term.

The report then says financial institutions must be revived to provide Iraqis with access to capital. Iraq, the report says, had a "relatively sophisticated" financial sector that declined during Saddam Hussein's rule.

The EIU's Farhan agreed: "The banks are in an absolute state [of collapse]. They really need a complete overhaul. They are under-capitalized. They were just set up to serve the interests of the ruling elite. Rather, they ended up just instruments to support the interests of the elite."

The council also recommends special attention be paid to agriculture, which provides a livelihood for about a third of Iraqi citizens. It says food output declined 40 percent since 1990. At least part of the decline, the report says, is attributable to UN sanctions, which resulted in inputs like seed and fertilizer falling under control of government cronies.

But any effort to develop the Iraqi economy will be hampered by the country's formidable debt. Estimates of Iraq's debt to commercial banks and governments amount to between $60 million and $120 billion (sources vary widely).

The country's total external debt, including war reparations to Kuwait and Iran and unresolved compensation claims, amounts to something like $400 billion, although much of this likely will never be paid.

Iraq stopped servicing its debt around a decade ago and has few resources to start making those payments now, but all sides agree a framework must be put in place to identify the debt and work out a reasonable time frame for paying it back.

The International Monetary Fund and World Bank, at a meeting last weekend in Washington, said they would be willing to assist in the effort, but said a UN mandate would be needed first. Creditor countries like Russia, France, and Germany, which are owed billions of dollars, have indicated they would not forgive Iraq's debts outright, but would be willing reschedule the repayment timetable.

Even though international groups have said the UN's role is crucial, it's not clear what that role will be. The U.S. has said the countries that participated in toppling Saddam Hussein's regime - not the UN -- should lead the process of reconstruction. This position is opposed by many countries around the world.

In spite of the fact that Iraq sits atop the world's second-biggest known oil reserves -- after Saudi Arabia -- it's not clear how much of the initial reconstruction can be financed from oil revenue. Iraq's oil infrastructure is badly depleted and much of the proceeds from oil sales will go toward repairing the industry and emergency humanitarian needs.

Over time, of course, Iraq's oil output can be expected to rise, making more money available for direct reconstruction. Much of that money, however, could be siphoned off to pay back debts.

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    Mark Baker

    Mark Baker is a freelance journalist and travel writer based in Prague. He has written guidebooks and articles for Lonely Planet, Frommer’s, and Fodor’s, and his articles have also appeared in National Geographic Traveler and The Wall Street Journal, among other publications.