Seven Questions: Iraq’s Economy

FOREIGN POLICY: What do you think of the U.S. approach to Iraqs economy following the fall of Saddam?

Ali Allawi: There was work done on the economy in seminars and discussion groups organized by the State Department. These reports did not filter into the policymaking apparatus. If there was a policy theme, it was a kind of crude version of the Washington Consensusthat all Iraq needed was quick and surgical action, shock therapy. And there was a group, then led by M. Peter McPherson, the former president of Michigan State University, that tried to introduce radical economic reforms in the first few weeks. But it ended chaotically, because the economy wasnt the top priority of the political administration.

In the banking sector, there was an attempt to offset basically all the government deposits against government liabilities. [U.S. officials] also wanted to sell off the state-owned enterprises, expecting that they would then be reorganized under the private sector. They also talked about a radical undoing of the price subsidies for the food basket and rolling back subsidies for petroleum products. There was an attempt to create a legal framework for a quickly privatizing economy, but there was no follow-through or implementation.

FP: Did U.S. officials or Iraqi officials discover that this approach wasnt working?

AA: Very few [formerly exiled] Iraqis who came back had any awareness of the economys structure or understanding of how it functioned. There were even fewer Americans [who understood]. The coalition came with a certain perspective, which quickly clashed with the bureaucratic realities. The best way to keep government going was to simply continue with the old and tested ways. Then the second phase was when the governing council was formed in September of 2003 and then began to pursue a kind of alternative, or a guerrilla war, against the economic team led by the Coalition Provisional Authority [CPA]. And the whole thing turned into a big messy stalemate.

Paul Bremer, the head of the CPA [from May 2003 to June 2004] was not aware of the nuances of economic policy or economic management. He let most of the work devolve to his deputies who were supposed to be interested in that field. The representative from the Treasury Department knew what was going on because his taskthe reform of the central bank and currency reformswas narrowly defined and was done expeditiously and well. The rest had very little understanding of what their theories and experiences were going to be worth. For example, a friend of mine who came in as a privatization expert made his fortune in leveraged buyouts. It was improbable that the same rules applied in the context of Iraq, where there is no functioning banking system. So after a period of months of knocking his head against the wall, he just left. There wasnt any serious work done to increase the investments going into the oil sector through the oil ministry, because the prevailing paradigm early on was that all investment in the oil sector was going to be done by private foreign companies.

FP: Some expertshave suggested to FPthat as much as 50 percent of Iraqs national budget may be wasted through corruption. Is that true?

AA: That figure is off the wall. But you can easily say that corruptionwhich ranges from bribe taking and influence peddling to contract padding and price gouginghas been very, very widespread in the country. It takes up a significant portion of the national income. Whether its 50 percent of the budget, I dont know. All in all, Id say 25 to 30 percent is a more realistic figure. In the Ministry of Defense, for example, there is significant information that indicates that there has been a lot of alleged theft and plunder.

FP: Do you think that Iraq has the ability to take over reconstruction when the U.S. troops leave?

AA: Yes and no. If we dont undertake serious administrative reforms to the way that decisions are made and that projects are managed, the answer would be no. [Reforms] would go into a black hole; they would be subject to the same abuses. But if you have the right management structures in the public sector, and if we are able to increase our oil production revenues to a level of 2.5 to 3 million barrels a day of exports, then I think we have a fair chance of solving, first, the revenue gap, and second, the implementation, effectiveness, and governance issue. If we pursue the right policies of forming effective reconstruction, management, and administration in a different guise from what we have now, and we simultaneously increase our oil production, I think we stand a good chance.

FP: Do you have any sense of the distribution of reconstruction funds? How much is going toward actual reconstruction, as opposed to security and other ancillary costs?

AA: Ive seen the figures from the U.S. Government Accounting Office. Something like 30 percent of the U.S. reconstruction budget goes to security. Id say that another 30 percent goes to layering. That is, they use subcontractorswhich are necessary given the procurement policieswhose costs may be too high for Iraq. So Id say that 60 percent, maybe even 70 percent, of reconstruction aid goes into nonproductive expenditures.

The U.S. taxpayer is paying $20 billion to support Iraq and we are getting something like $6 or $7 billion in actual hard assets. There is also the issue of the ongoing management of these projects and the operations and maintenance. This frequently costs quite a lot; it can sometimes cost as much as 20 percent of the capital cost. On the Iraqi side, I think the cost effectiveness ratio is much better. [As of late 2005], our investment budget[was] the equivalent of something like $6 billion, and the grant assistance program and loans[were] about the same. So the effect of foreign assistance is very high in terms of reconstruction. I believe that is going to go back down drastically by 2007, because by then, the United States will have committed all of its funds and dispersed them. Therefore, we will have to either rely on international aid agencies or bilateral aid. And it wont be on that scale that it is now.

FP: What is your opinion on how the U.S. has handled military and nonmilitary contracts?

AA: I think, by and large, if I was grading it, Id give it a D, maybe a D+. But, I mean, [Iraqis] should not look a gift horse in the mouth. The United States is our majorfrequently our onlyally, so I wouldnt be too harsh on them. But the procurement policies of the Pentagon and USAID are designed mainly for U.S. conditions. And in the chaos of Iraq, I think there has been a lot of slackness in controls and in the way that these contracts have been allocated.

FP: Do you think the U.S. should set a timeline for withdrawing troops?

AA: No. I dont think the U.S. should even consider discussing this unless it leaves behind a political order that is able to stand on its feet. Whatever the order is, it should have the necessary scaffolding to live by. Im not very good at these things, but this would be maybe two or three years, at a minimum.