The price of liberation.

Privatizing Iraq

The Bush administration’s neoliberal blueprint for the post-Saddam state

BY Eric Laursen

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By now, it’s no secret that the Bush administration’s plans for its new satrapy in Iraq are as much economic as military. The most visible signs of the future it has mapped out for the Middle East’s second biggest oil storehouse are the huge contracts the White House has awarded its corporate cronies. Halliburton’s Kellogg Brown & Root subsidiary received a contract worth up to $7 billion over two years. Bechtel has a contract worth $680 million the first 18 months and perhaps as much as $100 billion overall.

But the bigger picture of Washington’s Iraqi dreams is forming more gradually. The most important element to date is a document titled “Moving the Iraqi Economy from Recovery to Sustainable Growth,” revealed by the Wall Street Journal in early May. Created by the Treasury Department and the U.S. Agency for International Development (USAID) as a blueprint for prospective contractors, it lays out a series of steps the administration wants to achieve over the next year in Iraq, steps that will launch the country as a test case for exporting the neoliberal economic model to the Middle East. Key goals include privatizing state-owned assets, including oil, creating a “world-class [stock] exchange,” and instituting a consumption tax and a new Iraqi currency.

A USAID spokesperson says the document is not a definitive statement of Washington’s intentions, and that not everything it describes will actually take place. But the scenario it lays out, added to other moves the Bush administration is known to be making, indicate that the path ahead for Iraq will probably look much like the force-fed economic transformations that devastated many ex-Communist states in the ’90s.

Overseeing the reconstruction of Iraq’s financial system is Peter McPherson, head of USAID under Ronald Reagan. USAID has enthusiastically pushed privatization and marketization in countries as disparate as Kazakhstan, Hungary, Poland and Macedonia, often collaborating with the World Bank, which the White House is now also prodding to play a big role in Iraq. The Bank, in turn, has been the driving force behind structural adjustment programs, which are comprised of selling off state-owned enterprises and turning public services into for-profit businesses, often owned by foreign contractors, in scores of countries around the globe. The blueprint is remarkably similar in almost every case.

Here’s how it’s supposed to work. State-owned enterprises, especially those controlling demonstrably valuable natural resources, are sold off, or their shares distributed to the public. This is supposed to provide capital to be sold on local stock and bond markets. To kick-start the markets, state-sponsored retirement systems are converted into individual accounts, in a way similar to U.S. citizens’ 401(k) plans, to which workers contribute to fund their retirements. A consumption-based rather than income-based tax system is supposed to encourage workers to spend less and save more, further fueling capital markets. And a stable currency—or, better yet, a “dollarized” system in which U.S. currency becomes the coin of the realm—serves to reassure foreign investors that they can play, too, without significant risk to the value of their holdings.

Unfortunately, this idealized “virtuous cycle” has seldom come to pass. In Chile, longtime poster child for pension privatization, financial vendors’ marketing costs, passed on to workers in the form of ballooning management fees, have drastically shrunk pension returns.

In 1999, working off a plan that USAID, the Asian Development Bank, and the World Bank funded and helped draft, Kazakhstan required all workers to put 10 percent of their salaries into one of 13 privately managed investment funds. Privatization of the biggest publicly owned companies jump-started the market, and the project received a great deal of laudatory press.

But it didn’t last. Both the privatizations and the pension conversion were rushed into place before the country had the infrastructure or investor sophistication to support them. Net result: Salaried Kazakh workers’ retirement savings have shrunk severely. The dream of a funded pension system that nurtures the local economy and grows alongside it has turned out to be just that.

Indications are that Iraq will follow much the same path. The World Bank has a close relationship with the Adam Smith Institute, a London-based, free-market think tank that recently published a paper advocating the privatization of Iraqi industry and the replacement of Iraq’s state-guaranteed retirement system with private pension funds.

The Heritage Foundation, an influential American neoconservative think tank, is calling for Washington to administer a “comprehensive economic reform” of Iraq that includes preparing “state assets, including industries, utilities, transportation, ports and airports, pipelines, and the energy sector, for privatization.” That recommendation is closely echoed in the Treasury-USAID blueprint document, which schedules the next year for a propaganda offensive to persuade the Iraqi people that privatization is in their best interest, then the following three years for shifting the assets. The blueprint calls for all this to begin by July.

The short timetable has some longtime observers worrying that Iraq will suffer from another problem that has plagued privatization projects in developing countries: a headlong rush to get it all done fast. “There’s a political imperative to dismantle the centrally planned state, and they’re more concerned with that than with setting up proper regulatory structures,” says Bea Edwards of Public Services International, the international trade union federation. “Regulation takes a long time. You have to make sure the people you put in charge are credible and ethical. But there just isn’t time to vet them, and it’s not the priority.”

With tensions rising in the Middle East and the Bush administration eager to furnish Iraq as a shining new example of the “Washington consensus,” the race is on.

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