Commentary

Privatize Iraqi Oil

As the U.N. Security Council is caught up in a chain of events that is likely to end up in removal of Saddam Hussein’s regime, the Bush administration should plan for the future of a post-Saddam Iraq. Economic issues will loom large. Iraq’s economy has been grossly mismanaged, and its people brutally repressed, for 40 years. Iraq desperately needs an alternative to the failed policies of its dictator. Sound economics are needed to help the Iraqi people rebuild their lives and their country after two decades of wars and four decades of repression under the current regime.

Saddam’s regime has succeeded in bankrupting the country even though it boasts the world’s second-largest oil reserves after Saudi Arabia. The oil sector provides more than 60 percent of the country’s gross domestic product (GDP) and 95 percent of its hard-currency earnings. Yet GDP for 2001, at the market-exchange rate, is estimated to be only about one-third what it was in 1989. Iraq also is hobbled by its $140 billion foreign debt. This devastation was wrought by such policies as the nationalization of the country’s chief export commodity, oil; extensive central planning of industry and trade; the 1982-1988 war against Iran; and the invasion of Kuwait, which precipitated the 1991 Gulf War.

According to the U.S. General Accounting Office and British intelligence sources, oil smuggling and illegal surcharges of 25 to 50 cents on a barrel of legal oil are providing the funds to bolster Saddam’s regime. Saddam’s unaccounted revenues are between $6.6 billion and $10 billion - money that he has been free to spend to develop WMD and support terrorism in spite of economic sanctions imposed by the United Nations on Iraq after the Persian Gulf War to force him to give up his WMD.

The road to economic prosperity in Iraq will not be easily paved, but the Bush administration can help the new Iraqi government achieve fundamental structural reform with massive, orderly, and transparent privatization of various sectors of the economy, including the oil industry. The U.S. should offer its guidance on establishing sound economic and trade policies to stimulate growth and recovery.

After Saddam’s brutal and repressive regime is ended, the new government established by the people of Iraq should represent all the major sub-national groups - the Shiite Arabs, the Sunni Arabs, and the Kurds. To succeed, Iraqi opposition leaders will need a political commitment from the United States and international organizations to furnishing the necessary expertise and technical assistance. To gain that commitment, Iraq will need to abandon statist policies of the past and become fully committed to the principles of a market economy.

Privatization efforts in other countries demonstrate that privately held infrastructure, oil, and oil service companies generate greater efficiency, improved production, and higher revenues than do centrally planned and state-owned industries. The same can be achieved in Iraq, whose oil industry cannot thrive without access to global capital markets.

In particular, the administration should work with opposition leaders in Iraq to convince them now that a future Iraqi federal government must develop mechanisms for privatizing these industries and taxing oil sales, and for sharing the proceeds equitably with the three major ethnic regions - the Shiite Arabs in the South, the Kurds in the North, and the Sunni Arabs in the central region.

The Bush administration, its allies, and international organizations should prepare, encourage, and support the future leaders of a post-Saddam Iraqi government in developing a comprehensive economic reform package. Specifically, the next Iraqi government must take steps to create a modern legal environment that recognizes property rights and is conducive to privatization. Furthermore, it should educate and prepare the Iraqi people for structural economic reform and privatization through a public-information campaign.

To bring modern economic expertise and management skills to Iraq, the government will have to hire Iraqi expatriates as well as other Western-educated Arabic speakers with financial, legal, and business backgrounds to fill key government positions on economic reform and privatization. To improve fuel efficiency of the Iraqi economy, the future regime will have to deregulate prices internally, including in the utilities and energy sector. Most importantly, it will have to prepare state assets, including industries, utilities, transportation, ports and airports, pipelines, and the energy sector, for privatization. It will have to keep the budget balanced and inflation, taxes, and tariffs low. Finally, it should liberalize and expand trade and launch an effort for Iraq to join the WTO.

Economic growth will be an important contribution to the stabilization of Iraq, allowing the United States and other forces stationed there to depart after assuring that Iraq’s WMD threat and repressive regime have ended. Structural reform and comprehensive privatization is a winning strategy for the people of Iraq, its future government, the region, and the United States.

Furthermore, such a strategy will prove beneficial for the industrial world, the countries of the Middle East, and the developing world. Iraq’s return to the global markets would allow a more abundant and stable energy supply and a greater revenue flow for the Iraqi economy, foster a higher living standard for the Iraqi people, and provide numerous business opportunities for the region and the world. If successful, Iraq’s privatizations of its oil sector, refining capacity, and pipeline infrastructure could serve as a model for privatizations by other OPEC members, thereby weakening the cartel’s domination of the energy markets.

Gerald O’Driscoll, a senior fellow at the Cato Institute, Ariel Cohen, Ph.D., is Research Fellow in the Kathryn and Shelby Cullom Davis Institute for International Studies.