As the US-led illegitimate war against
Iraq draws to its 'desired' end, attention is heavily focussed on who
will be in-charge of the post-war reconstruction programme and how the
sharing of the Iraqi booty will take place. While initially there was
the conundrum of whether the UN should be co-opted into providing ex post
de facto legitimization for this illegal war, the legal opinion that prevailed
was that only a UN resolution can provide legitimacy to any post-war programme
in Iraq, whether it be to provide governance or to help reconstruct the
economy. More importantly, concerns regarding the economic and political
implications of Iraq being under the total control of the US seem to have
swayed international opinion unambiguously towards demanding a central
role for the UN in post-war Iraq.
But the 'vital' role of the UN in post-war Iraq so far appears to be limited
to humanitarian aid. The US remains very clear in its stand that while
it expects international financial support to cover its own humanitarian
obligations under the occupation, it has no intention of sharing authority
or decision-making with anyone, either in issues of governance or in the
sphere of reconstruction. The Pentagon's Office of Reconstruction and
Humanitarian Affairs (ORHA), headed by retired US General Jay Garner,
has assembled a 'government-in-waiting' of Iraqi exiles and American advisers
and is gearing up to do it all-govern the Iraqi people, provide humanitarian
support and administer the lucrative business of reconstruction. Under
the plan, the government will consist of 23 ministries, each headed by
one American and four Iraqi advisors appointed by the Americans.
The US is clearly aiming for a large share of the reconstruction booty.
It was only after widespread criticism erupted regarding the selection
process of USAID, which limited the biggest reconstruction contracts to
five of its largest MNCs, that the US promised to throw open the bidding
to non-US firms as well. It will be interesting to see how 'fair' a private
sector-driven, military industrial state like the US will be in keeping
this promise. A significant counterbalance in this whole process are the
economic interests of Iraq's major creditors and other economic partners,
and the overall balance-sheet of Iraq itself. While the present war has
brought about ruinous destruction of the Iraqi economy, it was already
in severe decay before the occupation, brought about by a decade of sanctions.
The State of Iraq's Economy and its Financial Obligations
As a UN report on Iraq rightly notes, data on economic and social conditions
in Iraq are notoriously incomplete and sometimes contradictory. However,
what has been clearly established is the acutely negative impact that
the economic sanctions of 1990–96 have had on the Iraqi economy.
The blockading of oil exports as part of the UN-imposed sanctions completely
crippled the economy, which was heavily dependent on oil exports. Even
after the oil-for-food programme began in 1996, Iraq was permitted to
sell only $1 billion of oil every 90 days. During the six-year-long oil-for-food
programme, Iraq thus earned less revenue than it did in 1980 alone. The
average GDP growth rate, which stood at 4.7 per cent during 1960–80,
dropped to –6.4 per cent during 1980–2000. It is estimated
that GDP per capita may have fallen to as low as US$ 500–700 by
the year 2000.[1] The destruction caused
by the coalition forces during the present war has caused a further delay
in the resumption of oil exports, exacerbating the situation even more.
However, the countries that will be a part of the reconstruction project
only stands to gain from all the destruction and misery caused to Iraq.
For instance, consider the fact that Iraq is almost totally reliant on
imports for most of its needs, as its non-oil sectors are undeveloped.
The flow of imported durable goods, which constituted about 75 per cent
of Iraq's imports before the sanctions were imposed, had dropped sharply
during the sanctions period itself. Following this squeeze in the normal
supply chains, annual inflation, running at 45 per cent before 1990, jumped
dramatically to an estimated average of 500 per cent the very next year,
and continued to sharply contract the purchasing capacity of the Iraqis.
The drastic drop (54 per cent) in employment in four key sectors-construction,
manufacturing, water supply and electricity-during 1989–96 also
contributed to this drop in purchasing power. Most Iraqis have long since
used up their financial and material assets. The agriculture sector too
has steadily declined over the last decade. From a situation before 1990
when Iraq had the highest rate of per capita food availability in the
region, food security had become a mounting issue even before the present
war. This was because, even under the oil-for-food programme, only about
66 per cent of the approved export revenue was available for importing
the essential humanitarian needs in the permitted list; the remaining
one-third of Iraq's export income went towards compensating companies
and individuals for losses incurred during the 1991 Gulf War. All the
destruction brought on by the present war adds to this already desperate
situation.
Getting the economy back on track will generate immense opportunities
for companies across a large spectrum of sectors. Normalizing imports
to meet the humanitarian needs of food, clothing, medicines, agricultural
goods, seeds, etc., will itself generate a large market for the private
sector in post-war Iraq. In the context of a recessionary global economy,
Iraq could thus offer the coalition powers a guaranteed market in barter
for oil. Further, there are huge opportunities in sectors like transportation
and communication infrastructure, which have been totally destroyed. Essential
public services such as health, education, water supply, power and sanitation
systems will also have to be restored. All this will require a large quantity
of capital goods, for which the natural choice would be US companies.
Their advantage lies in the fact that it is the US that will define the
scope of this emerging market, as it is expected to call for a total revamping
of the existing economic structure in Iraq.
In fact, the US seems to be going all the way to expand the scope of this
potential market. One cannot but agree with Robert Fisk's cynicism, who,
writing in The Independent on 14 April, noted a pattern in the response
of American forces to the looting in Baghdad. He writes about how the
US troops sat back and allowed mobs to wreck and then burn selective ministries
like those of Planning, Education, Irrigation, Trade, Industry, Foreign
Affairs, Culture and Information as well as the National Museum and hospitals.
"The Americans have, though, put hundreds of troops inside two Iraqi
ministries that remain untouched and untouchable-the Ministry of Interior
with its vast wealth of intelligence information on Iraq, and the Ministry
of Oil with its archives and files of Iraq's most valuable asset, its
oilfields and massive reserves. Both are safe and sound, sealed off from
the mobs and looters, and safe to be shared, as Washington almost certainly
intends, with American oil companies."
However, coming in direct conflict with the US plans for restarting and
expanding its market in post-war Iraq is the country's external financial
burden, which is an estimated $383 billion and includes foreign debt,
Gulf War compensation claims and pending contracts. The pending contracts
are with public and private foreign companies, in Russia, Holland, Egypt,
the UAE, China, and France, and are estimated at $57.2 billion, primarily
in the energy and telecommunications sectors. The US reconstruction package
will have to settle these contracts with the countries concerned and also
coerce some agreements on the reduction and removal of war compensation.
Mostly owing to its war with Iran in the 1980s, during which time it had
easy access to credit with the backing of the US, Iraq had generated a
debt of $42 billion by 1990. Subsequently, no debt payments could be made
because all economic and financial transactions were frozen under the
sanctions regime. Iraq's debt since then is estimated to have mounted
to between $62 and $130 billion.[2] Most
of this is in the form of short-term loans from private commercial banks
and private companies, though it also includes some long-term loans from
foreign governments. It has been estimated that Iraq now has a debt-to-export
ratio that would place it in the World Bank's most burdened category,
far surpassing the average of 3:1 for highly indebted poor countries (HIPC).
Iraq will legitimately need to be freed from this overwhelming debt burden
before its oil revenues can be used to help stabilize the economy.
The precedence of Yugoslavia's debt restructuring process, a country that
has a parallel experience with Iraq in terms of sanctions, may be encouraging
to some extent.[3] However, the process
in Yugoslavia has been long-drawn, and although government-to-government
debts have been forgiven, no agreements have been reached with the private
sector. This kind of debt work-out will not provide adequate relief to
Iraq where private creditors dominate. In fact, investors owning previously
worthless Iraqi loans can make huge returns, mirroring the performance
of the Yugoslavian economy during its regime change. As Iraqi loans that
trade at between 8 and 10 cents on the dollar look set to bounce,[4]
private investors will have a clear enough interest in prolonging the
restructuring process by holding out. Thus, along with substantial debt
forgiveness, complete debt standstills will need to be in place during
the process of negotiation and restructuring. But, the fact that, under
pressure by its private sector creditors, the US recently blocked a move
from the IMF to proceed with a new sovereign debt restructuring mechanism
(SDRM), under which debtor countries could have hoped for the ability
to declare a moratorium on debt servicing during a debt renegotiation
process, does not offer encouraging signals to the prospects for a quick
settlement in the Iraqi case. This could further burden the efforts to
rebuild Iraq's ruined economy, which is already considered to be one of
the costliest reconstruction projects since World War II.
Reconstruction Costs and Oil Revenues
Estimates of the overall costs of Iraq's reconstruction vary widely. An
action strategy drawn up for post-conflict Iraq by the Washington-based
think-tank with strong links to the US armed forces-the Centre for Strategic
and International Studies (CSIS)[5], has
estimated that the reconstruction will cost tens of billions of dollars
in the first year alone, and as much as $25 to $100 billions overall.
The UNDP has estimated it at $30 billion in the first two years, while
a study by William Nordhaus of Yale University has offered scenarios ranging
from $100 billion to a staggering $1.9 trillion over the next decade.
The US government's allocations of $500 million in humanitarian aid and
$1.7 billion to rebuild Iraq (out of a total $75 billion in the war budget),
come nowhere close to even the most optimistic of these cost projections,
even taking into account the $1.4 billion in Iraqi government money frozen
in US banks since 1990, reported to have been seized by the US Treasury
Department. This money, along with $600 million frozen by Britain and
ten other countries, is expected to be used to help defray the costs of
rebuilding Iraq.
The US government expects the bulk of the reconstruction costs to be covered
by Iraq's oil revenues. The American plan is to instal a friendly government
in Iraq with which they can do business. Under this arrangement, the post-Saddam
Iraqi regime will either drop out of OPEC (with American prodding) or
ask for a long quota holiday under the pretext of rebuilding the nation.
Iraq has so far been producing less than 2.8 million barrels of oil a
day, down from a pre-sanctions peak of 3.5 million barrels. According
to oil industry analysts, new exploration will probably raise Iraq's production
to 200–300 billion barrels of high-grade crude, which is extraordinarily
cheap to produce. This will unleash a flow of Iraqi oil into the world
market, pushing prices down. In such a situation, Saudi Arabia will have
to either risk losing its market share or boost its own production, and
this will effectively dismantle the OPEC's production quotas and its control
over international oil pricing.
This would support the suggestion that, apart from the strategic energy
concerns, the American need to support the falling dollar is the underlying
reason for its push to control the world's second largest oil reserves
in Iraq. It has been reported that Iraq changed over to the euro in November
2000 as its oil transaction currency and such continuing momentum by the
OPEC threatened to undermine the dollar's hegemonic position. For Iraq,
the political decision taken as a rebuff to the US against its hard-line
stand on sanctions, in fact turned out to be profitable, as the dollar
has depreciated vis-à-vis the euro since late-2001. Saddam also
converted his $10 billion reserve fund at the UN to euros. A widening
move within OPEC towards the euro as the 'oil transaction standard currency'
would have threatened the dollar's reserve currency position.[6]
Thus, it has been suggested, the US would achieve two goals by bringing
Iraq's large oil reserves under its control and controlling oil prices:
one, dismantle the OPEC mechanism with its production quotas leading to
artificially high prices of oil, which has been hurting the world's largest
oil importer for too long[7], and two, pre-empt
a wider shift towards the euro.
However, the US ambition of creating massive investment in the Iraqi oil
sector, boosting oil output beyond the current OPEC quota of 2 mbd, is
premised on the 'successful' reconstitution of Iraq into a 'functioning'
(read western-friendly regime) state. If the current churning in Iraq
throws up an Islamic state, as some religious leaders envision, this would
surely run counter to the US administrative plans for the country. It
has been suggested that even a democratically elected government in Iraq
might not necessarily play the oil game as sought by the US. The examples
cited include Kuwait, which was liberated by the US twelve years ago and
has not yet opened up upstream oil to foreign companies, and Venezuela,
where democracy did not bring in a friend of Washington. The nationalist
sentiment in the oil sector in Iraq, which prides itself on being the
first country to have nationalized its petroleum wealth in 1972, is said
to be very strong. For 75 years since oil was first discovered in Iraq
in 1927, modern Iraqi nationalism has defined itself around the issue
of control of oil and resistance to foreign intervention. Therefore, privatization
of Iraq's huge oil reserves may not be that easy to carry out.
In the meantime, the US administration is pressing ahead with its unilaterally
drawn-up plans. It is reported to have installed a former Shell Oil Co.
chief executive, Philip J. Carroll, to oversee Iraq's oil exploration
and production. It is believed that foreign oil companies' participation
will be sought under production sharing agreements (PSAs) that allow them
a guaranteed favourable profit margin and, unlike royalty schemes, insulate
them from losses incurred when the oil price drops. Even if the US succeeds
in bringing Iraq's huge oil reserves under its control, which it would
then use for breaking up OPEC by undermining the cartel's pricing policies,
this could itself trigger accelerated adoption of the euro as the oil
standard by OPEC-an eventuality that will weaken the dollar. Again, a
privatized oil sector in Iraq pumping large amounts of supply into the
market, with a view to profiteering, could push crude prices down, as
other oil producers also compete to retain their market share. The ensuing
fall in prices may also squeeze the proposed reconstruction fund availability.
Conflicting Interests of Major Economic Partners
As the complexities on the ground in Iraq are being unravelled by the
day, the Bush administration's plans for rebuilding Iraq are being laid
bare faster and faster. The USAID reconstruction plans have called for
private American corporations to undertake much of the work, sidelining
UN development agencies and other multilateral organizations. This is
a sharp departure from similar reconstruction efforts in the last decade,
which were largely undertaken by international peacekeeping operations.
Only a handful of US companies have been allowed to compete for the reconstruction
contracts under a provision of the US federal procurement law that allows
for streamlined bidding in special circumstances. These companies are
all giant engineering firms: Bechtel Group, Fluor Corp., Halliburton Co.'s
Kellogg Brown & Root (KBR) unit (a subsidiary of Halliburton Company,
which Vice President Dick Cheney once headed), Parsons Corp. and Louis
Berger Group. Several of them are major Republican Party donors and are
close to the White House. The Louis Berger Group has a reputation for
water and transport privatization, and is presently involved in Afghanistan
too. At least four of the favoured five companies are involved in some
kind of investigation or the other for cost over-runs, false invoices,
questionable accounting practices, etc., which the Bush administration
has apparently chosen to ignore.
Even before the fighting was over in the city of Umm Qasr, USAID awarded
a $8 million contract to the Seattle-based Stevedoring Services of America
(SSA), to manage this key Persian Gulf port; the company has never worked
in a war zone before. After the basic infrastructure is restored, American
telecommunications and IT companies are also believed to be strongly placed
to get contracts for these systems. The returns expected from these investments
in Iraq outrun expected returns on same investment levels domestically.
But the US administration is already feeling the pressure to expand the
list of nations and corporations for reconstructing Iraq. The reconstruction
package will have to take into account the interests of a wide range of
Iraq's economic partners. Although France, Germany and Russia stubbornly
resisted the US waging a unilateral war on Iraq, nobody wants to be left
out of the potential economic benefits to be gained from sharing reconstruction
contracts. Consider the following details about Iraq's major economic
partners:
partners:
- France controls over 22.5 per cent of Iraq's imports. Some 60 French
companies did $1.5 billion in trade with Iraq under the UN oil-for-food
programme.[8] France's largest oil company,
Total Fina Elf, has negotiated deals to develop and explore the Majnoon
and Nahr Umar oil fields, which are estimated to hold 25 per cent of
Iraq's reserves. From 1981–2001, France also accounted for 13
per cent of Iraq's arms imports.
- Russian business has had long-standing interests in Iraq. Russia
controls 5.8 per cent of Iraq's total imports, and supplied half of
all Iraqi arms imports during 1981–2001. Further, a Soviet-era
debt to Iraq of about $7–$8 billion, generated by arms sales during
the Iran–Iraq war, is still outstanding. Russian oil and gas companies
have contracts to service and develop sites throughout Iraq, with a
$40 billion economic agreement between Iraq and Russia reportedly having
been signed in 2002 to allow oil exploration in western Iraq.These contracts
can be fully realized only if the UN sanctions are lifted. Meanwhile,
Russia believes that the US has brokered a deal with the coalition of
Iraq's opposition forces that it backs, whereby support to them against
Saddam is conditional on their declaring-on taking over power-all oil
contracts conceded under his rule to be null and void. US access to
Iraqi oil and its ability to dictate oil prices can spell major trouble
for Russia, which is poised for major production expansion over the
next one to three years, and hopes for an expanded market share in the
US too.
- China controls 5.8 per cent of Iraq's annual imports. Under the food-for-oil
programme, China's Aero-Technology Import-Export Co. (CATIC) was contracted
to sell metereological satellite and surface observation equipment to
Iraq. CATIC had also received UN approval to sell optic cables to Iraq.
Further, during 1981–2001, China was second only to Russia in
sales of arms to Iraq.
- The United States, too, traded with Iraq and provided large military support to Saddam Hussein during the 1980s. However, US sales to Iraq stopped after the Gulf War, and resumed on a greatly limited scale only in 1997, when the UN oil-for-food programme kicked in. Last year, Iraqi imports from the United States totalled just $31 million, mostly in technology for oil production. On the export side, Iraq sold the United States some $3.5 billion in oil.
Companies based in countries like India, Indonesia, Syria and Vietnam,
which had exploration or development contracts with the Saddam regime
in Iraq, are also likely to try to enforce their claims in the post-war
environment. South Korea's big construction companies, including the Hyundai
Group, hope that the war in Iraq will produce a bonanza for them in a
lucrative market they had to abandon twelve years ago. There has also
been lobbying to include companies from Egypt and Jordan to show appreciation
for their cooperation in the war effort.
Thus, while all these countries are waiting to seize and utilize the new
opportunities that Iraq's reconstruction will throw up, the US will have
to strike deals with them for existing contracts. If the Bush administration
wants significant international help, it will have to make concessions.
Resentment across the world will rise again if Washington is perceived
as being interested in the UN only as an instrument to serve its own purposes.
Amidst mounting criticism, Halliburton has now been dropped from the bidding,
either at its own request or of the US governments. At this stage, however,
according to USAID, the only scheme for including foreign corporations
is as sub-contractors to the American companies that win the bids.
A Taste of Things to Come
Numerous studies have highlighted the shortcomings of previous international
efforts in post-conflict reconstruction. For example, about 75 per cent
of the $1.5 billion spent on assistance in Afghanistan thus far has been
devoted to military expenditure and short-term humanitarian assistance
rather than longer-term reconstruction. This has severely limited the
Karzai government's ability to deliver benefits to its people, and undermined
its legitimacy. In Kosovo, three-and-a-half years into its mission, the
UN is only now beginning to seriously focus on development.[9]
Further, every recent instance of post-conflict reconstruction has suffered
from problems due to lack of donor accountability, double counting of
pledged funds, and delays in disbursement, all caused due to the lack
of a transparent tracking and accounting mechanism. The imbalance and
lack of coordination among donors willing to provide funds directly to
a post-conflict government through UN-led trust funds, and those that
insist on providing funds bilaterally or through international NGOs, have
also hampered efforts to support fledgling post-conflict governments.
Meanwhile, the report of the Commission on Post-Conflict Reconstruction
convened by the Association of the US Army (AUSA) and the Centre for Strategic
and International Studies (CSIS) in January 2003 has concluded that despite
more than a decade of experience in post-conflict reconstruction, the
capacity of the US to address these challenges, even as part of an international
coalition or in a UN-led mission, remains woefully inadequate.[10]
The report unambiguously states that a major lack exists in USAID's ability
to address the issue of livelihood creation for crucial parts of the affected
population in a cohesive and effective manner.
The US, then is, clearly not in a position to take up reconstruction of
post-war Iraq on its own. On the other hand, the UN, which effectively
implemented the oil-for-food programme and made a positive impact, has
the relevant and useful experience to undertake and coordinate the reconstruction
programme. The insistence of the US that it needs to be in control is
a blatant display of its desire to dominate and rule over the oil revenues
and the contract-awarding process.
Even if the US eventually comes around to giving a central or coordinating
role in post-war Iraq to the UN, under which its own agencies would operate,
will the UN be able to provide anything better than multilateral legitimacy
for a policy set by Washington hardliners? The current US plans are to
replace the Iraqi dinar with the dollar, parcel out contracts to US companies
and set forth free market parameters for the future 'interim Iraqi administration',[11]
strengthening the future demand for dollar. Meanwhile, the favoured Iraqi
in-charge, Ahmed Chalabi-part of the old Iraqi ruling class who last set
foot in Baghdad 45 years ago, and convicted of fraud and embezzlement-is
being lined up as the head of the Interim Iraqi Authority.
USAID envisions important contributions from the IMF and World Bank as
well. But, a UN mandate is a pre-condition for their involvement. The
World Bank has stated that even providing technical assistance to Iraq
might not be possible without a UN Security Council resolution. The Bank's
stand that it cannot lend to Iraq without an internationally recognized
government sealed by a UN mandate has now been accepted by the US, reflecting
how the US might consider this necessary to break any potential deadlock
and proceed with its economic plans for post-war Iraq without any delay.
Indeed, the involvement of the IMF and the Bank will provide the US plans
to 'reconstruct' Iraq into a foreign-owned market economy with just the
required multilateral 'legitimacy', if one goes by the recommendations
in the latest volume of IMF's quarterly magazine, Finance and Development
(March 2003).
This volume is fully devoted to studying the Middle Eastern and North
African Countries (MENA). Predictably, the Fund locates the problems inflicting
the mineral-exporting MENA countries and the reasons for their slow down
since the mid-1980s in opaque and highly politicized fiscal systems, lagging
political reforms, dominant public sectors, underdeveloped financial markets,
high trade restrictiveness, inappropriate (pegged or narrow band) exchange
rate regimes, etc. The solutions, again, are predictable-accelerated and
broad action on structural reforms, including a fundamental reassessment
of the role of the state in the economy; the creation of appropriate incentives
for private sector initiative; faster trade liberalization; financial
market reform; improved transparency, governance and quality of state
institutions. Following these mandates will achieve the dismantling of
Iraq's national economy with the speed and efficiency of a structural
adjustment programme.
For the Fund, public sector reform is one of the keys to reinvigorate
these stagnating economies that have been 'missing out on the benefits
of globalization and world economic integration'.[12]
While it criticizes the centrally planned Arab economies for their 'mismanagement'
of oil revenues and the creation of welfare-oriented public sector monopolies,
it conveniently forgets that the so-called efficient capitalist economies,
since the sixties, have thrived directly or indirectly on the extra-normal
profits derived from their technology sales,[13]
and that the surplus has been used to build up their economic and social
infrastructure. The public did not have to pay for the price of infrastructure
development unlike the present capitalist neoliberal consensus on privatization
of public utilities and infrastructure provision which mandates that prices
have to reflect their costs, and imposes a heavy economic burden on the
population.
The country and region experts at the BWIs have time and again proved
their convenient ignorance of the history of economic development and
its linkage with social and political factors. Under the prevailing paradigm,
none of the direct and indirect forms of support to public utilities,
such as price controls on public utilities, or bank support for public
entities requiring periodic bail-outs by the government, or low interest
rates, or written-off bank loans, have 'a good economic rationale'. One
is left wondering about the 'good economic rationale' behind the repeated
bail-outs that the US government have been undertaking on behalf of its
beleaguered airline industry firms.[14]
Iraq has a large technocratic middle class of which the state is the largest
employer currently. To avoid any further disruption to the economy, at
the least, the coalition will need to retain them in their present jobs
and continue paying salaries to government employees. But, going by the
existing neoliberal consensus, reconstruction will in all likelihood involve
privatization of public utilities. Experiences from across the globe suggest
that such privatization will impose heavy costs on the ordinary Iraqi
people who have been previously accustomed to free health and educational
services, and gasoline, electricity and water at negligible costs, thanks
to subsidies from the state. There will be increasing conflict between
the old practices and the private sector-dominated, capitalistic economic
policy framework that the US wants to see in place in Iraq. This will
be another challenge that the new administration will have to address.
Eventually, the outcome of Iraq's 'reconstruction' will hinge on how the
major countries trade off their individual interests for a share in the
reconstruction project. As seen across the board in the past, bilateral
solutions will also be choreographed by the US itself. Thus, as the US
readies to 'reconstruct' post-war Iraq into a foreign-owned, free-to-trade
and fully liberalized market economy, the interests of the Iraqi people
will be thrown by the wayside.