Many Iraqis say Iraq is not ready for rapid liberalization

By Phillip Kurata
Washington File Staff Writer

Baghdad -- Fourteen prominent economists and trade experts involved in the economic transformation of Eastern Europe and Russia in the 1990s have offered recommendations to Iraqi officials about the creation of a free-market economy.

The conference, called Central and Eastern European Economic Transformation: Lessons Learned for Iraq's Reconstruction, took place in Baghdad September 20-21. Poland's former Finance Minister Marek Belka played a leading role in organizing the conference, which drew participants from Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Russia, Serbia and Montenegro and Slovakia.

Belka, currently the chairman of the Coalition Provisional Authority's Council for International Coordination, said there are three key lessons that Iraq could draw from the reforms of Eastern Europe.

-- Unproductive state-owned enterprises should be sold off immediately without efforts to salvage them with public funds.

Belka called attempts to restructure state-owned enterprises with taxpayers' money or proceeds from oil sales "a recipe for disaster." He said every attempt of this sort in Eastern Europe and Russia failed.

"We want to tell them the best way to save budget money and help the new private sector grow is to privatize what you have, that is, privatize the state enterprises. In Iraq, the situation is not extremely difficult," he said.

Belka said Iraq has about 890 state enterprises, but all except 150 of them are connected with the oil industry, which he said is a separate political issue outside the scope of the conference.

Belka said the privatization of 150 state enterprises is a minor problem, by Eastern European standards.

Mindful of the fact that Iraq has had a closed economy for the past 30 years, Belka said, "Iraq is a case where we have to be forceful in advocating privatization." He said the Iraqi people, similar to the peoples of the former Soviet bloc in the early 1990's, are largely opposed to the sell-off of state enterprises because it would throw many people out of work.

Nevertheless, Belka said privatization could be more easily carried out in Iraq than in the former Soviet bloc because Iraq's state sector accounts for about 15 percent of its economy, while the state sector in the former Soviet bloc countries accounted for at least 75 percent of the economic output.

-- Develop the private sector, starting with the elimination of subsidies.

Belka said elimination of subsides is the most sensitive immediate issue facing Iraq.

"It's much more important and divisive than privatization. Just think, one liter of gasoline costs a little bit more than $0.01," he said. He also noted that under the Saddam Hussein regime, 60 percent of the people in Iraq got government food baskets that cost them $0.17 per month. He said gasoline smuggling can not be brought under control until subsidies are lifted because gasoline is much more expensive outside Iraq.

He said price liberalization is a necessary step to create a free market.

"You have to liberalize prices so that business gets the right signals from the market. You have to install a working banking system, so that scarce resources are properly allocated," Belka said.

-- Establish a sound currency, a sound budget and an effective tax system.

Iraq needs a taxation system that is simple and broadly applicable and is administered by qualified people who are given incentives to collect taxes, Belka said.

"In Arab societies, 80 percent of the people are employed in small business, family businesses, trading companies. Those are very hard to tax," Belka said.

"People have to understand, and it is difficult to understand given Iraq's history, that they have to pay for electricity. They have to pay for water, food and gasoline, and most important of all, if they are engaged in a productive activity, they're supposed to abide by the tax law and pay very simple and very moderate taxes," he said.

Belka said the CPA aims to help Iraq build an economy that is not fully dependent on oil, but rather one that is driven by private business and is capable of creating jobs. He said that is the message that the CPA and the Iraqi Governing Council will take to the international Iraq donors' conference in Madrid in late October.

The Iraqi participants generally disagreed with the recommendations presented by the Eastern Europeans.

The minister of industry and minerals of the Iraqi Governing Council, Shakir Al-Zaidi, said privatization was carried out in the former Soviet bloc in order to break the economic power of the political system.

"Iraq does not have that problem," Al-Zaidi said.

He maintained that the Iraqi economy under Saddam Hussein was not dependent on the public sector. He said the main challenge facing the new Iraq is to destroy the power of the security agencies, which were the primary lever of power used by the ousted leader.

In the post-combat situation in Iraq, security is weak and unemployment is high, and some people, especially ex-soldiers, are armed and angry, Al-Zaidi said. He asserted that privatization would increase instability by putting more people on the street and price liberalization would heighten public anger by causing a surge in inflation. He added that health standards in Iraq are comparable to those of Bangladesh, and people in many parts of Iraq are on the verge of starvation.

"We are fighting to win the political support of the population," Al-Zaidi said. He said the measures recommended by the Eastern Europeans would undermine that effort.

The managing director of the Bank of Baghdad, Mowafaq H. Mahmood, rejected the suggestion by the Eastern Europeans that Iraq privatize its banks and allow unrestricted foreign investment.

"I believe this is most unfair for a country which went through suffering for more than 35 years, for a country which was subject to sanctions for more than 12 years," Mahmood said. "I must say I haven't learned any lesson from your experience for foreign investment." He said Iraq would lose its economic identity if it allowed unrestricted foreign investment. He suggested that the Eastern European countries offer training on matters such as economic indicators, balance of payments, and exchange rates.

Another Iraqi participant said the security situation in Iraq is too fragile to permit the implementation of market reforms that would cause popular anger and short-term economic dislocation.

On the issue of foreign investment, one Iraqi said it would be difficult to justify to the people the sell-off of a state enterprise that had cost a huge sum of money to build.

Belka said in Poland's experience, foreign investment never exceeded 20 percent of all the investment in the country.

"You will never have a flood of foreign investors that will dominate domestic investment. It's the domestic investment, small but massive, that will dominate the economy," he said.

He said that large foreign investment projects attract a lot of media attention but are not decisive for the economy. As for the sell-off of costly state enterprises, Belka said, "the value of a productive asset is not determined by the cost of constructing it. A fertilizer factory may have cost $100 million to build and its value now is zero or negative. We have to pay subsidies for this company to continue employing people. If I have spent $50 million to build a factory but I'm making losses, it's not worth $50 million. It's worth zero."

"What is decisive is to provide a business climate for domestic companies to invest. Why then are we so adamant about the need to have a good law on foreign investment? Because if something is good for foreign investment, it's good for domestic investment," Belka said.

With regard to banking reform, former Vice Governor of the Czech National Bank, Pavel Kysilka, said it is imperative for Iraq to allow international banks to operate in the country. All the domestic Czech banks failed after privatization was implemented, he said.

(The Washington File is a product of the Bureau of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)