Background Besides the adventure of visiting Iraq and associated with it personal excitement and insecurity, I believe the idea to held this CEE Economic Transformation: Lessons Learned for Iraq’s Reconstruction Conference in Baghdad (20-21 September), on the eve of so many important events developments was absolutely useful and perhaps crucial. The group consisted of eighteen 1990’s reformers from eleven post communist countries most of who are currently involved in design and promotion of free-market reforms at home and across the globe. There were four finance ministers, three central bankers, and number of minister of trade and other areas, a prime minister and former members of parliament, managers of privatized state owned utilities and infrastructure companies, three think-tankers. The Conference was moderated by Ambassador Mirek Belka, himself ex-finance minister of Poland. To my knowledge, after similar groups advised reforms in Serbia, this is the first such councilium; it was sent outside Europe; and the public standing of the members was higher than many groups of top advisers. The events that coincide are the debates on additional US budget for Iraqi reconstruction, Dubai IMF/World Bank Annual Meeting and France-Germany-Britain talks on the top regarding Iraq. I think the group managed to legitimize, if not formulate, some policies to be undertaken by the CPA. It was due to the fact that participant shared common philosophy of economics and that in their respective countries their political involvement has been bold and timely. All participants were volunteers, they were not paid for the consultation and their risk insurance was offensively minimal. Messages Part of the problem discussing economic reconstruction of Iraq is to separate economics from security and the need for prompt action from legitimacy. In addition, there are two “holy cows” in Iraq: its foreign debt and petrol/fuel prices and prospects. On these tricky issues there was a relative but strong consensus on the following: - An action on the economic front will help the security front; Regarding economic policies as such, the abstract form the messages can be summarized in the trinity: liberalize (prices and trade), privatize, and provide for sound money, as Marek Dabrovski formulated it. The devil, however, as everyone recognizes, is in the details. Here are some introductory statements. “Compromise with the past under the excuse of reducing the pain of reforms or the need for reconciliation is the single most costly policy mistake.” “Liberalize trade and finance immediately. At the same time, pay high attention to the protection and promotion of competition. The competition is more important than asset evaluation. Public procurement, foreign aid, and military supplies should be handled impeccably and serve as examples of highest public virtue and respectability.” “Be rigid in areas that deal with “other people’s money” (monetary policies, taxes, savings) and liberal in instances when citizen use their own assets at their own risk (private sector market entry and exit). Such strategies coincide with both Islamic tradition and rules of contemporary finance.” “Lower taxes while broadening the tax base. Think about introducing wherever you can flat taxes: simplicity and neutrality wins. Delicate social engineering can wait for higher GDP per capita. The budget has to regain confidence of the poorer segments of the population by paying on time.” “Make sure that every policy action is transparent, that in each of them everyone recognizes the answer to the following four questions: who wins, who loses, who pays the bill, and how the things will be like after some years.” “Provide for private provision of formerly public -- but today, dysfunctional -- services, especially in pensions, healthcare and education. The aim is to create conditions for individual and private responsibility for the future, and thus establish sound prospects for capital formation.” “Privatize quickly, not gradually. Remember that often privatization is the best and politically most acceptable method to liquidate loss-making enterprises. Combine methods, but do not leave power with bureaucrats for too long. Do not be afraid to sell “untouchables” – banks, most developed industries, etc. In a global economy, the difference between domestic and foreign capital diminishes. Open the economy.” “Handling challenges requires long, systematic and thankless work, and it is not advisable to undertake this mission for those keen to be awarded and applauded by the citizenry.” Feasibility of all these A number of impression and observations provide insights on whether
all of the above mentioned is feasible. Currently, the foreign debt is traded at 10-15%. This is perhaps the
share that can be retained, not to be cancelled, irrespective of the
Paris Club June idea to discharge all claims. Iraq is not one resource-dependant economy, or at least there is a potential not to be such an economy. It has the highest in the region fresh and renewable water resources, option for agriculture and – due to Babylonian heritage and cooler climate to the North – potential for tourism. The structure of the economy is more destroyed in terms of ownership, business attitudes and entrepreneurship compared to any of the countries represented in the group. It is, however, the social fabric that was torn and partially destroyed by both previous regimes and wars and social controversies. The situation resembles only semi-protectorates of the Balkans, in political terms, and Serbia – in terms of economic deconstruction (estimated at 65-70% of GDP). The administrative capacity of the Coalition Provisional Authority (CPA), i.e. the interim government - to the extent there was opportunity to judge – is higher or equal to that of European emerging democracies in 1990-1991. There might be speculation on how unfortunate is a situation of “weak government” of Iraq – a fashionable complaint among political scientists around the globe. “Weakness” is typical for post-totalitarian constellations and, thanks to it, change is possible. The path toward sound monetary foundations, liberalization and privatization
to provide for competition and openness, combined with low, simple and
transparent taxes could limit the government of Iraq to essential tasks
– securing the rules of the game in the first place, rigidly and
with needed strength. The legitimacy of these rules depends heavily
on the ability of the coalition forces and the CPA to ensure public
order and security. As one of the participants mentioned, there is one principal advice: “to be ready for broad and real compromises in the situation when the political regime is still nascent, there is no constitution, the boundaries and the territorial structure are unclear, and there is a huge mass of challenges, an uncontrolled stance which leads to the inevitability of a direct confrontation, and, in some cases, to a civil wars.” Economists from the IMF and the World Bank simply do not deal with such situations. At the same time, inactivity and indecisiveness on the economy is just another recipe for disaster. With regard to the imagination, the mission seems to have been useful, judging from the headline and quotations in the Financial Times and New York Times. It worth mentioning that whenever Iraqi or international members of the CPA were opposing the message listed above, they were using the same rhetoric as the one that blocked reforms in some CEE countries. The policy choices are difficult and their legitimacy is key. Post war Balkans also teaches lessons. First, foreign coordination and mediation is essential: it can mobilize resources and is non-partisan. Second, the coordination in two Balkan protectorates, Bosnia and Herzegovina, and Kosovo, often fails. This is due to its loose nature; with overlapping and frequent substitution, Americans do taxation; Britons – registration of businesses, EU and UN – the law enforcement units, Germans – the real estate registries, World bank – the privatization, Fins – the court reform, etc. It is not always clear who is in the driver’s seat, but everybody comes with own receipts and little local knowledge. As mentioned, on the economic and security fronts, prompt and bold action is needed. The inefficiency in international public governance, notorious in the Balkans, calls for a cautious approach when coordination is at stake.
* The event was initiated and organized by the Coalition Provisional Authority (CPA) in Baghdad, the Department of State, USAID and the International Resources Group. Participants from Bulgaria were Martin Zaimov, executive director of Postbank and ex-deputy governor of the Bulgarian National Bank, and the author of these lines, executive director of the Institute for Market Economics. |
