The Bush administration is proposing to reconstruct Iraq’s economy. As one of the last Soviet-style economies in the world, Iraq’s economy is in a shambles. That apparently came as a surprise to the administration, which now confronts the consequences of years of Baathist Party economic mismanagement.
If Iraq is to enjoy Western-style prosperity, its leaders must evolve the kind of institutions that brought prosperity to the West. More than anything else, free markets and an open, competitive economy are the source of prosperity in the United States and elsewhere. Economic competition is a form of social cooperation in which producers strive to satisfy consumers. All of that is what Iraq needs.
Competition ensures that goods will be available at the lowest possible price to consumers. But the system is much more than delivering commodities as cheaply as possible. Competition is dynamic. It spurs invention and innovation. It expands expanding opportunities and wealth creation for the greatest possible number of people.
Free trade is competition manifested internationally: the fullest extension of the system of social cooperation wrought by the market economy. International trade unites apparel workers in Mauritius with investment bankers in New York City in a cooperative bond, making all better off. The only groups left behind are those who do not participate in the international trading system.
In the post-World War Two period, expanded international trade brought prosperity to more people than in any other period of recorded history. It also helped improve health standards, education, and life expectancy for hundreds of millions of people around the world. Economic and political liberty expanded in the process.
The Middle East is conspicuous for not having participated in that economic miracle. The countries of the Middle East and sub-Saharan Africa are home to 70 percent of all major conflicts. Accordingly, their economies grow more slowly than those in other regions.
In all societies, individuals have conflicts of interest. Private property and competition facilitate the peaceful resolution of such conflicts. Indeed, a system of private property governed by a rule of law sets limits on the permissible form of competition for resources.
In societies without well-protected private property rights in resources, conflicts over resources are resolved by violence and war. By contrast, in a market economy those who want more of a resource purchase it peacefully on the market.
Conflict over natural resources drives many political conflicts, whether internal or external, in societies without private property. The outcome of elections determines not only political control, but control over vital resources. And, often, the losers cannot accept the outcome peacefully. An election is the difference between poverty and prosperity for the winners, and, conversely for the losers. Hence, societies in which key resources, such as oil, are state-owned are societies in conflict.
The only stable outcome in such conflict-prone societies is a dictatorship powerful enough to impose order and divide the spoils. That situation describes the government of Saddam Hussein in Iraq, and helps explain its longevity. The Baathist government controlled the “commanding heights” of the Iraqi economy (to employ Lenin’s famous phrase). The oil sector produced more than 60 percent of GDP and 95 percent of hard currency earnings for Iraq.
Regardless of one’s opinion on the wisdom of the Iraq war, the U.S. government must now decide on whether to keep the oil sector in state hands, or to privatize it. The Bush administration is terrified of privatization in Iraq and is set to keep oil in state hands. If it does that, then the war will have been for nothing. The source of internal conflict among the principal groupings in Iraq will remain. So internal conflict will result, and a new dictatorship is likely to emerge. The administration will thereby snatch defeat from the jaws of victory in Iraq.
The lesson from all this is that private property and free markets are the source of prosperity, the wellspring of progress. The only source of hope for the developing world is the same system of economic liberalism that led to the economic miracle of the West.