The Iraqi free trade zone

It appears that after a day of wavering, Iraq’s Governing Council is now endorsing Iraqi Finance Minister Kamil Mubdir al-Gailani’s plans for sweeping liberalization of the economy. This includes allowing 100% foreign ownership of Iraqi businesses in all economic sectors except oil. Among the proposals:

Six foreign banks will be permitted to take over local Iraqi banks completely in the next five years, al-Gailani said. Other foreign banks will be allowed to purchase 50 percent stakes in local banks.

This plan has drawn criticism from the usual quarters — namely, Palestinians and the left — as somehow generating a fire sale of Iraq for Western looters. Actually, the big winners here are the Iraqis themselves. Since the fall of Saddam, Iraq has essentially functioned as a free trade zone. The benefits of this of this for Iraqis are readily apparent in the explosion of consumption over the past five months. The San Francisco Chronicle reported on this over the summer, and now USA Today follows up with a report indicating that the rise in cobsumption is also sourring entrepreneurial activity (link via Glenn Reynolds and Virginia Postrel). The key grafs:

Iraq’s new finance minister, Kamil Mubdir al-Gailani, announced sweeping economic changes this week that will allow foreign ownership of companies in every industry except oil and other natural resources. The 25-member Iraqi Governing Council hopes that Iraq’s 24 million people will be an attractive market and workforce for global businesses willing to invest in the country. But merchants such as [Kurdish merchant Massoud] Mazouri already are cashing in. Television sets, refrigerators and boxes of satellite receivers are stacked 10 feet high on the sidewalks of Baghdad’s shopping districts. Shoppers who have waited for years to be able to spend their hoarded dollars are out in force. ”When I started in late April, I was receiving one container of DiStar goods per month,” Mazouri says. ”Now, I am getting five to six containers.” Each container holds about 270 television sets or 3,800 satellite receiver units. He says he is grossing $20,000 a day. ”All the sales are done in cash.” There was plenty of pent-up demand. Sanctions imposed by the United Nations after Iraq invaded Kuwait in 1990 kept a lot of goods out of the country. Before that, an eight-year war with Iran drained the life from Iraq’s economy. For nearly 20 years, there was little to buy. And during three decades of rule by Saddam’s Baath Party, virtually all companies were state-owned or state-controlled. In 2001, Iraq’s gross domestic product was $27.9 billion, compared with $47.6 billion in 1980. Since the collapse of Saddam’s regime, police Officer Gailan Wahoudi, 31, has bought a new television, a refrigerator and an air conditioner. ”It is a new freedom I never had before,” he says. The buying spree has been helped by the suspension of customs duties, import taxes, licensing fees and similar surcharges for most goods entering and leaving the country. The U.S.-led coalition’s order on June 7 that suspended such charges has made Iraq a virtual free-trade zone at least until the end of the year. The coalition authorities had little choice: Iraq lost its ability to adequately control its borders when Saddam’s government collapsed. Immigration and customs controls are only now being restored. For consumers, the bottom line is lower prices.

Opening up investment to foreigners is crucial to preventing Iraq from reverting back to the statist nightmares that Egypt, Syria, Iran, et al are currently experiencing. Permitting foreign ownership of banks helps ensure that capital markets won’t be repressed by the state as an act of political favortism. The policies being put forward to liberalize Iraq’s economy are an excellent first step to installing the proper restraints on state intervention in the economy. As a coda, I’m always amused by people who simultaneously supported the anti-globalization movement and condemned the sanctions against Iraq. In one case, the exchange of goods and services is evil — in the other case, the exchange of goods and services is essential. UPDATE: Josh Marshall links to a Guardian story suggesting that even with a small Iraqi state, there will still be favortism. And check out this Chicago Tribune story on the Iraqi entrepreneurial class.