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April 30, 2003

Now the Hard Part

Post-war Iraq is a country with desperate needs—and those needs must be met quickly. Hoover national fellow Lisa D. Cook on the challenges of rebuilding Iraq.


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The military planning for the Second Gulf War was clearly exhaustive. Unfortunately, far less effort appears to have gone into planning for the post-war reconstruction of Iraq beyond providing immediate humanitarian assistance and keeping the oil flowing. Post-war Iraq is a country with desperate needs—and those needs must be met quickly.

The immediate challenges facing those working to rebuild Iraq are to (1) distribute humanitarian aid as quickly as possible, (2) begin work on the reconstruction and rehabilitation of the country, and (3) begin the reconciliation process, which will involve confronting and moving beyond the legacy of Saddam Hussein. Given the economic disruption caused by the war, as well as the significant erosion in living standards among the Iraqi people during the last two decades—which is largely the result of Saddam Hussein’s economic mismanagement and a decade of harsh U.N. sanctions—rebuilding Iraq will clearly be an enormous task.

Humanitarian Assistance

Speed in delivering humanitarian aid throughout Iraq is of the essence. In addition to the problems that have already arisen, including shortages in clean water, electricity, and medical care, other urgent problems could arise. Refugees and displaced persons are likely to return quickly now that the war is largely over (as happened in Afghanistan after the Taliban was ousted), which will put heavy demands on resources. Although it is reported that Iraqis were given basic supplies to last for four months before the outbreak of the war, shortages of certain items may still arise, particularly of food and perishable goods.

The Iraqi economy is in shambles. The inflation rate was 60 percent at the end of 2001, and all indications are that high rates of inflation persist. Since the end of 2001, the currency (the dinar) has lost nearly half of its value, and its plunge has rapidly accelerated since the outbreak of war. Given Iraq’s small agricultural sector and heavy reliance on imported food, a devalued dinar will buy fewer imports, which will lead to higher food prices in the short run (although food donations and subsidies could reduce price increases). The rapid delivery of food and basic supplies and the return of the rule of law could lessen the likelihood of a further deterioration of the economy and the social tensions that might ensue.

Second, humanitarian aid distribution under Saddam Hussein was directly tied to party, ethnic, and religious affiliation. In post-Hussein Iraq, distribution of aid must be equitable, and the composition of food aid should be sensitive to the real or imagined fear of direct competition with preexisting Iraqi agricultural production.

Third, the United Nations Development Program (UNDP) could be recruited to dispense and coordinate humanitarian aid. The UNDP, which has extensive experience in humanitarian assistance in post-conflict economies, coordinates a multitude of other U.N. agencies and other bilateral and multilateral donors. Although Iraq may not attract the same influx of well-meaning donors that descended on Kosovo and Rwanda following their respective conflicts, there will nonetheless be a need to maximize efficiency and minimize waste through coordination of assistance, no matter what the source.

Finally, humanitarian aid and reconstruction efforts are not perfectly separable. Among military planners, conventional wisdom renders the following sequence of events: obtaining security, stabilizing the country (including the distribution of humanitarian assistance), and then beginning economic reconstruction. Most economic activities are scheduled for the third phase. It has been demonstrated recently—including during the last few weeks in Iraq—that this ordering is flawed and that humanitarian assistance should not be divorced from economic recovery and reconstruction efforts. In Afghanistan, for instance, refugees began returning before Afghan and international agencies deemed it safe to do so. Likewise, trade and agricultural activity began while U.S. forces were still hunting remnants of the Taliban.

Reconstruction

The planners of Iraq’s reconstruction must assess and respond to three preexisting economic conditions: the breadth and depth of overall economic development before the conflict, the economic damage caused by the near-constant state of war since 1980, and the existing levels of income distribution and inequality.

At a minimum the goal of economic planning should be to return the Iraqi economy to its pre-war pattern of long-run growth. By some estimates, Iraqi living standards have fallen to one-ninth of their 1979 levels. In this regard, expectations should be realistic and based on history. Iraq will not become an open market economy over-night. Both central planning, which was instituted in the 1960s, and the corrupt Baathist Party pa-tronage system led to widespread distortions in the economy. Family clans loyal to Saddam Hussein and the Baathist Party received cash payments, scarce luxury goods, and coveted political appointments (for example, management of the state-run oil sector). Less loyal clans were denied such payments and appointments. The inefficient and largely unsuccessful farm collectivization system ended in 1981, and, prior to the recent war, elements of a market economy were slowly beginning to emerge. Further market-oriented reform must be encouraged.

More important is Iraq’s increasing dependence on natural resources (specifically, oil, oil products, and natural gas). Before 1980, oil accounted for only 39 percent of Iraq’s economic output. By 1989, oil accounted for 99 percent of Iraq’s export earnings, and in 2001, natural resources constituted 81 percent of output. This should worry post-conflict policymakers for two related reasons. First, lack of diversification makes oil appear to be the only national asset. As a result, volatile world oil prices determine the well-being of Iraqis from one year to the next. Second, the national asset is centered in regions of the country dominated by minorities. If this primary national asset is viewed as being scarce and stationary, fierce competition for control of these areas might ensue. Both factors are compelling reasons for economic policymakers to develop other components of the economy quickly. For example, given the country’s reasonably good infrastructure (75 percent of the country’s roads are paved) and strategic location, Iraq could be a hub of international trade between the Middle East and the West. Also, with its relatively highly educated workforce and supply of raw materials, Iraq could develop a much larger manufacturing sector. Currently, industry represents only 13 percent of output, much of which is related to oil.

Further complicating Iraq’s recovery is the fact that the country’s oil infrastructure has been seriously neglected. Oil production has fallen by approximately 100,000 barrels in recent years. Instead of producing 3.5 million barrels of oil a day as it did in 1980, Iraq was producing between 2.6 and 2.8 million barrels a day before the U.S. invasion. Estimates suggest that it will take months, if not years, and billions of dollars to return to production of 3.5 million barrels a day; it is expected to take several years to reconstruct and rehabilitate the Iraqi oil infrastructure and to increase the country’s capacity to 6 million barrels a day.

The Iraqi economy was particularly hurt by the U.N. trade sanctions that were imposed following Iraq’s invasion of Kuwait in 1990. To mitigate the impact of the trade sanctions (and to keep Iraq’s oil flowing), the United Nations established an “oil-for-food” program. Proceeds from U.N.-monitored oil revenues were supposed to be used for food, medicine, infrastructure spare parts, and other humanitarian purposes. As sanctions continued, however, covert oil sales to neighboring countries increased significantly. Oil revenues that bypassed the U.N. system were used to enrich the regime and to build the largest military force in the region. The entire system of corrupt, opaque business practices must be addressed in order to restore normalcy to the economy.

The Lasting Economic Effects of War

In the short term, the end of hostilities should begin to reverse the effects of 30 years of economic decline. Significant improvements in the health of the Iraqi economy will take longer, however. With this in mind, two suggestions are offered.

First, American-negotiated investment notwithstanding, Iraq is unlikely to be able to attract significant levels of foreign investment in the immediate aftermath of war. Nonetheless, smaller steps can be taken to restart economic activity and to begin the process of attracting domestic and foreign investment. Given Iraq’s market-oriented tradition, microfinance and other interventions that can support the informal and small-scale private sector should be initiated in the early post-conflict stages. This would aid in spurring economic activity and result in small-scale job creation. Obviously, another major source of employment will be work on reconstruction projects. Also, given the downward spiral of currency depreciation, increases in the rate of inflation, and the increased circulation of U.S. dollars during the relief and reconstruction phases, serious and early thought must be given to currency reform.

Second, international financial institutions should become involved early in economic recovery. Although their records are improving, these institutions move slowly with respect to post-conflict economies. In addition to bilateral donors and creditors, the World Bank, the International Monetary Fund (IMF), and regional multilateral agencies, such as the Arab Fund for Economic and Social Development, should be involved in economic recovery and reconstruction. The World Bank has developed expertise in, among other things, poverty, private sector, and infrastructure surveys. A full-fledged IMF program may not be feasible (or desirable) in the early post-conflict stages: a “shadow,” or preliminary, IMF program may be more appropriate. Regardless of its commitment to a program, the IMF can provide technical assistance to Iraqis for data collection and analysis purposes, which will be useful owing to the paucity of economic data available on Iraq. Because of the preexisting (estimates range as high as $200 billion) and new foreign debt burden, debt rescheduling, restructuring, and forgiveness should also be discussed with bilateral and multilateral donors and international private creditors. Finally, foreign governments and financial intermediaries should cooperate with the new Iraqi government to identify and return ill-gotten wealth that has been hidden in private bank accounts or otherwise stored abroad. These funds could be large, and, most important, they are rightfully owned by the Iraqi people.

Rehabilitation

Every aspect of Iraq’s economy needs to be revitalized. Most discussion of economic reconstruction has focused on the oil sector. Like Russia’s oil sector at the time of transition, Iraq’s oil industry has been neglected and requires repair and long-term investment. This issue is important because it will be the source of reconstruction financing in the medium to long term. As previously noted, however, economic policymakers must also focus on developing those sectors of the economy that have declined during Saddam Hussein’s tenure, such as agriculture, non-oil manufacturing, and trade.

Restoring the education infrastructure is a critical priority. Literacy and education levels have fallen dramatically, a trend that must be reversed. Equally important, as in the cases of Ukraine and Russia, the skills of the nation’s scientists have been disproportionately applied to weapons development and military applications. As those scientists who are deemed to have worked on weapons of mass destruction are being identified and brought to justice, policymakers must redirect the efforts of Iraq’s scientific community and create markets and outlets for their skills. It is critical that these scientists do not become “freelance” weapons developers for other groups or countries. Because investment in education has declined precipitously since 1980, the existing scientific community must be retrained to apply its skills to other industries and to academic research.

Reconciliation

In Iraq many of the institutions critical to the healthy development of a civil society—including those to resolve legal and economic disputes—are absent or have been diminished by years of benign or deliberate neglect, a pattern seen in many societies emerging from war or dictatorship. In such societies, the country’s most vital institutions are often taken over by short-sighted, megalomaniacal leaders and their appointed managers. Saddam Hussein—like the strongmen Mobutu Sese Seko, Slobodan Milosevic, Idi Amin Dada, and Sani Abacha before him—made a mockery of economic institutions, such as central banks, political institutions, and election boards. Without developed and independent economic institutions and data, it is difficult to identify the country’s true economic situation and to plan and execute strategies for improving the economy.

Dispute resolution will be key to securing and keeping the peace in Iraq. First, the number of claims against the government of Iraq by aggrieved citizens who have suffered economically and otherwise under the regime of Saddam Hussein will likely be large and contentious. Second, the number of Iraqis affiliated directly or indirectly with the Baath Party is large. Given the high probability of violent and disruptive reprisals, institutions of conflict management need to be given high priority. Because of the high number of Iraqis who have been tainted by association with the regime and the Baath Party, I would recommend a South Africa–style truth and reconciliation commission or a Rwanda-style local justice system by which terms of punishment and community reintegration can be determined. All Iraqis will need to be assured as soon as possible that the rule of law and property rights will be protected in the new Iraq. As in all other aspects of the recovery program, Iraqis should be intimately involved in designing appropriate mechanisms for conflict and dispute resolution.

Relieving, rebuilding, reconstructing, and reconciling post-conflict Iraq is going to be a Herculean task. Those involved in the reconstruction should heed the lessons of recent experiences in post-conflict countries. Recovery will be difficult, unpredictable, costly, and time consuming, and Iraqis and the world community will have to be patient. Years of economic decline take years to reverse, and results cannot be hurried into existence.


Lisa D. Cook was a research fellow at the Hoover Institution who came from the John F. Kennedy School of Government at Harvard University as a national fellow during the 2002–3 academic year.


Special to the Hoover Digest.

Available from the Hoover Press is Foreign Policy for America in the Twenty-first Century: Alternative Perspectives, edited by Thomas H. Henriksen. Also available is Using Power and Diplomacy to Deal with Rogue States, by Thomas H. Henriksen, part of the Hoover Essays in Public Policy series. To order, call 800.935.2882.