“You philosophers are lucky men. You write on paper and paper is patient. Unfortunate Empress that I am, I write on the susceptible skins of living beings.”
—Catherine the Great

Introduction

The travails of the Coalition Provisional Authority in Iraq and its economic philosophers provide history’s latest cautionary tale. The quiet failure of their economic reforms, overshadowed by the search for non-existent weapons of mass destruction, laid the foundations for much of the chaos that followed, and the lessons of that experience should inform U.S. policy going forward.

The United States invaded Iraq in 2003 to replace its government with one more amenable to U.S. interests. According to Toby Dodge, perhaps the West’s foremost Iraq scholar, the Defense Department saw reforming Iraq’s economy as essential to the wider reform of a corrupt and invasive state that had used Iraq’s economy to enrich its corrupt elite. The Coalition Provisional Authority therefore envisioned “a vibrant free market to constrain the behavior of any future government.”[1] When the body disbanded in 2004, however, many of Saddam’s market distortions remained.

Iraq’s Economic History

Little in Iraq’s history boded well for free market reforms. In 1914, the British Mesopotamian Expeditionary Force invaded Ottoman Mesopotamia. After a series of armistices, uprisings, and reprisals, Iraq found an uneasy equilibrium.[2] A High Commissioner held executive authority, the old Ottoman elite administered the state, and sheiks settled local disputes and collected taxes, all under the nominal authority of the Hashemite King Faisal and later his descendents King Ghazi and King Faisal II. During the 1930s, a British report to the League of Nations examined Iraq’s economy. With 60 percent of arable land under government control, “the state had come to mean a set of instruments for acquiring title to land whilst simultaneously avoiding possible fiscal obligations.”[3] The report considered an austerity program of higher taxes and lower expenditure, but found a convenient out: debt financed on anticipated oil revenue.[4] Before the birth of Saddam Hussein, Iraq’s economy was rife with state patronage and corruption, subordinate to a government using resource extraction to avoid hard choices.

In 1958, the July 14 Revolution overthrew the monarchy and initiated a 10-year run of strongmen.[5] While the emphasis on Pan-Arabism or Iraqi nationalism varied by ruler, the state’s intrusion into the economy continued apace. In 1961, the government commandeered over 99 percent of the Iraqi Petroleum Company’s drilling concessions, in a prelude to full nationalization in 1972.[6] In 1964, the regime seized all banks, insurance companies, and 27 industrial firms.[7] In words that resonate today, historian Charles Tripp wrote:

"The genuine and widespread hopes for a radical break with the past and for the creation of a more open society that were awakened by the events of 1958 were gradually disappointed."[8]

The ascension of the Ba’ath Party in 1968 accelerated these trends. The party was the largest landowner in the country, able to bestow or withhold favors from the three percent of landowners controlling a third of arable land.[9] Faced with confiscation or quiescence, most chose the latter, even as it rendered Iraq a net grain importer by the early 1970s.[10] Having failed to offer small farmers a viable means of building wealth, the Ba’ath Party began subsidizing basic commodities such as fuel and electricity. Iraq balanced its books thanks to an 800 percent increase in oil revenue between 1973 and 1975.[11] While Hussein would prudently lavish much of this windfall on his military, he also stimulated Iraq’s industrial sector, albeit:

...seemingly without regard for transportation or supply bottlenecks… [without] clear priorities for development. Workers often did not possess the technical capabilities that were required to operate the plants and there existed a shortage of managerial and administrative skills.[12]

In 1980, after revolution and purges destabilized Iran, Hussein saw his chance to seize territory from its neighbor along the Shatt al-Arab waterway near the southern port city of Basra. On the pretext of liberating Arabs in Iran’s Khuzestan province, Hussein could portray himself as the Arab world’s foremost leader.[13] What began as a limited action, though, became a war of attrition after the Iranian counterattack of 1982.[14] Unwilling to impose austerity on a potentially restive populace, Hussein kept much of the state’s spending in place. By 1990, debt service consumed 55 percent of Iraqi oil revenue.[15] When Iraq’s creditors attempted to collect, Hussein invaded his tiny southern neighbor Kuwait, achieving total victory within days.

Unfortunately for the Iraqi people, this invasion ran counter to Western interests. Led by the United States, an international coalition launched an air campaign that demolished Iraq’s civilian infrastructure prior to ground combat operations in Desert Storm.[16] Post-war sanctions banned more or less anything essential to a modern civilian economy as a dual-use potential weapon.[17] Starved of everything from fertilizer to spare parts for water purification plants, Iraqi living standards plummeted.[18] Starting in 1996, the United Nations Oil-for-Food program allowed Iraq to sell oil to international companies, who then deposited the funds in a U.N.-controlled escrow account. While this alleviated some suffering, it left 60 percent of the population dependent on imported food baskets for survival.[19] Meanwhile, cronies at Iraq’s state owned enterprises booked imports at no cost and sold as pure profit, a distortion that would haunt the Coalition Provisional Authority.[20] To stay atop his tottering state, Saddam Hussein still had to pay some bills, but with over 85 percent of Iraq’s money supply held as currency and much of the economy informal, taxation wasn’t feasible.[21] He instead chose the uncreative and predictably destructive route of printing money, to the point that inflation reached an absurd 100,000 percent in 2002.[22] By that time, for better or worse, the United States had decided to act.

Iraqi Markets and the Coalition Provisional Authority

Amid the violence and euphoria of Hussein’s fall, L. Paul Bremer arrived to lead the Coalition Provisional Authority in May of 2003. With the military nominally responsible for security, Bremer saw economic reform as his chief concern, planning to restore public utilities, reestablish liquidity, and privatize the inefficient Iraqi state-owned enterprises. Bremer wasn’t naïve about Iraqi public opinion, but saw the American guidance as essential:

It’s going to be a very wrenching, painful process...If we don’t get their economy right, no matter how fancy our political transformation, it won’t work ... we are the occupying power. It’s a very ugly word, but it’s true.[23]

Thomas Foley, the American official responsible for privatization, was more direct: “I don’t give a shit about international law. I made a commitment to the president that I’d privatize Iraq’s businesses.”[24] Perhaps they were more paternalistic than malicious, but these American administrators dismantled the Iraqi state without popular consent. If reforms failed, the Iraqi people would know whom to blame.

To understand what went wrong, first consider what went right in reviving Iraq’s currency. Appreciating the need for liquidity, the Coalition Provisional Authority began paying the salaries of civil servants in U.S. dollars in May 2003.[25] Nevertheless, officials understood that beyond the implicit insult to Iraqi sovereignty, dollarization would limit any future Iraqi government’s monetary policy. Awash with counterfeit notes, the country obviously needed new banknotes. But the once isolated Kurdish region had been cut off from Hussein’s inflation; their nominal prices and wages measured in dinar remained far below those in the rest of the country.[26]  American officials eventually decided to print a new dinar on modified Iraqi plates. Iraqis exchanged their old currency for over 4.6 trillion new dinars, with Iraqi currency at 1:1 and Kurdish at 1:150.[27] Within two months the currency appreciated against the dollar, and in 2004 inflation fell below 20 percent.[28] Bremer deserves credit for a genuine, unqualified success in working with existing infrastructure while mindful of divisions in the society, remaining sensitive to perceptions of imperialism, and keeping the effort limited in scope.

Unfortunately, Bremer sabotaged much of what would follow when he dismantled the Iraqi Army, cutting the knees out from under 7 percent of Iraq’s workforce.[29] That may have been the most significant economic decision of the occupation, as most other reforms emerged stillborn.

To economists with no experience in Iraq, the largely imported food baskets appeared to be a simple enough problem: a conspicuous market inefficiency and a reminder of the painful and now defunct U.N. sanctions. How better to stimulate demand and empower the populace than by replacing baskets with cash or debit cards? But Bremer canceled the project after a memo warned, “If even small numbers of people don’t receive their allotments, the transition to the new system is likely to be politically explosive,” and a survey revealed that almost 90 percent of Iraqis preferred the food to cash.[30]

Several attempts to spark economic growth reaped unanticipated blowback. Lacking the resources to prevent energy theft and, in any event, eager to encourage demand, the Coalition Provisional Authority decided not to collect electricity bills.[31] It also rerouted power to districts that had languished under Saddam.[32] That might have worked, had Iraq’s power infrastructure not required $18 billion in repairs.[33] While a team of U.S. Army engineers briefly restored power to its pre-war levels, production plummeted after their recall.[34] With power diverted but under no incentive to reduce demand, residents of Baghdad suffered through 12-hour blackouts unknown under Saddam.[35]

That same preference for equality led Bremer to allocate funding for the 100,000 Jobs Program evenly across provinces.[36] He faced an impossible choice: divert funds to those areas most likely to erupt in violence, but at the cost of discriminating against the very populations America promised to liberate. Economists at the U.S. Federal Reserve Bank and Treasury Department noted correlations between perceptions of economic growth and violence and urged the United States to tie economic efforts to a broader strategy.[37] Vastly greater resources could have alleviated the problem, but none appeared under an occupier convinced Iraq should finance its own reconstruction. America fell into the same trap as Iraq’s previous rulers, hoping oil exports could finance their ambitions without any meaningful sacrifice on their part.

In taking over Iraq, the Americans became the sole stockholders in a web of nearly 200 state-owned enterprises producing everything from vegetable oil to fertilizer to water purification equipment.[38] Many appeared profitable, courtesy of Ba’ath Party bookkeeping. Iraq’s Finance Ministry simply pretended the inflation of the 1990s didn’t occur. Businesses still nominally received material based on pre-Gulf War exchange rates, so that $6,000 worth of raw materials appeared to cost $1.[39] Either ignorant of currency markets or desperate to save face, Iraqi managers demanded Americans “adjust the currency back.”[40] The Coalition Provisional Authority settled on an imperfect solution whereby all state employees would continue to draw salaries, but subsidies were slashed and intra-government debts were canceled.[41] While missing and destroyed records prevented any accurate after-the-fact accounting, this action in effect subsidized the weakest state-owned enterprises  by erasing their debts. Iraqis began to import fertilizer and cement because those factories couldn’t resume production.[42] The emphasis on stability hampered any potential foreign investment. When the Coalition Provisional Authority solicited leases on 35 factories, but on the condition that no workers could be fired, not a single foreign investor signed on.[43] Floundering and unproductive factories were hardly part of the plan, but they brought some small measure of stability of welfare to a society in desperate need of it.

Conclusion

Whatever his intentions in the spring of 2003, Bremer couldn’t overcome the contradictions inherent in his mission. How to deregulate the economy without exacerbating the social disruptions feeding a nascent insurgency?

The inability to attract foreign direct investment could stand for the entire failure to reform Iraq. Even though the Coalition Provisional Authority specifically excluded natural resources from foreign ownership, they never assuaged Iraqi suspicions that the United States sought to plunder Iraq’s oil.

Whatever his intentions in the spring of 2003, Bremer couldn’t overcome the contradictions inherent in his mission. How to deregulate the economy without exacerbating the social disruptions feeding a nascent insurgency? Why should Iraqis accept painful economic reforms they had no say in passing? An exponentially larger stimulus program could have eased some problems with infrastructure and employment, but anything fast enough to work would have exacerbated corruption.

Over decades, oil revenue had served as a panacea for autocracy. The Bush administration heard that siren song, too, believing a decrepit nation could finance its own Marshall Plan. Understaffed and overwhelmed, the Coalition Provisional Authority almost immediately pared back its ambition, leaving Iraq much as they’d found it. In 2011, the U.S. military would finally do the same.

Communist dictators saw their people and economies as immune from history; uninhibited by tradition or the rule of law, a strong leader could alter their trajectory for the better. And while it’s rarely mentioned in the West, Stalin and Mao achieved significant gains in industrial output and health, respectively.[44] We hold our applause because they did so at unfathomable human cost. Western civilization delivers unprecedented wealth and freedom, but it evolved from myriad contingent circumstances and incredible violence. We don’t fully understand how we got here, much less how others might arrive.

Given their worldview and resources, the Coalition Provisional Authority did about as well as one could hope. But the next time the United States finds itself in the nation-building business, our policies should be guided less by ideology, and more by humility, historical understanding, and simple respect for the dignity of our foreign partners.

Jay Herndon was a Marine Officer from 2006 to 2010, serving as a Logistics Advisor on Military Transition Teams in Iraq. He is currently pursuing his PhD in economics at the University of Alabama.

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Header Image: Secretary of Defense Donald Rumsfeld and Coalition Provisional Authority Administrator L. Paul Bremer III (Foregn Policy.com)

Notes:

[1] Doge (2010) The ideological roots of failure: the application of kinetic neo-liberalism to Iraq. p. 1272.

[2] Tripp (2000) A History of Iraq. Chapter two provides a detailed look at Iraq’s internal politics during the British Mandate.

[3] ibid., p. 69.

[4] ibid., p. 70-71.

[5] ibid., chapter five.

[6] Congressional Research Service (2003) Iraq’s economy: past, present and future. p. 3.

[7] ibid. p. 8.

[8] Tripp, p. 148.

[9] ibid., p. 206

[10] ibid.

[11] ibid., p. 214

[12] Congressional Research Service (2003). p. 9.

[13] Tripp, p. 231.

[14] See Fleet Marine Corps Reference Publication 2-203 (1990) Lessons learned: the Iran-Iraq war.

[15] Foote, et al. (2004) Economic Policy and Prospects in Iraq. p. 7

[16] This occurred in the context of a bombing campaign that eliminated the Iraqi state’s capacity to wage war. For a thorough explanation of US strategic rationale, see Gordon and Trainor (1995) The generals’ war: the inside story of the conflict in the Gulf.

[17] Tripp, p. 261.

[18] ibid.

[19] Foote, et al., p. 2.

[20] ibid., p. 9.

[21] ibid., p. 8, 3.

[22] Dobbins, et al. (2009) Occupying Iraq: a history of the coalitional provisional authority. p. 197.

[23] Chandrasekaran (2006) Imperial life in the emerald city: inside Iraq’s green zone. p. 61-63.

[24] ibid, p. 126

[25] Dobbins, et al. p. 199.

[26] ibid., p. 203-204

[27] ibid., p. 204.

[28] ibid,. p. 202.

[29] Foote, et al., p. 11.

[30] Dobbins, et al., p. 221-222.

[31] ibid., p. xxviii.

[32] ibid.

[33] Chandrasekaran, p. 151.

[34] ibid., p. 156.

[35] Dobbins, et al., p. 241

[36] ibid,. p. 231

[37] Foote, et al., p. 13.

[38] ibid., p. 3

[39] Chandrasekaran, p. 103.

[40] ibid., p. 109.

[41] ibid., p. 121-122.

[42] Henderson (2005) The coalition provisional authority’s experience with economic reconstruction in Iraq. p. 12.

[43] Chandrasekaran, p. 226.

[44] Ofer (1987) Soviet Economic Growth: 1928-1925. In the years before and after the Great Famine, China saw a steady rise in life expectancy. See Banister and Hill (2004) Mortality in China 1964-2000