Monetary Options for Postwar Iraq

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Following a swift military campaign toremove the Saddam Hussein governmentin Iraq, it has become clear that preparationsfor the postwar period have beeninadequate and that the occupying forceslack a workable exit strategy. Specifically,the Coalition Provisional Authority hasfailed to anticipate the challenges that facethe postwar Iraqi economy, including theintroduction of sound money to facilitateexchange.

Recent actions by the Coalition ProvisionalAuthority to institute an independent centralbank in Iraq are wrongheaded. TheCentral Bank of Iraq will be able to operateonly through financially repressive measuresthat are inconsistent with a market economy.It will be prone to fiscal abuse from a provisionalgovernment and future Iraqi governmentswith more proposals for expenditurethan probable sources of revenue. Accordingly,the central bank cannot in any way be consideredindependent. In light of the currentrealities in Iraq, central banking can only beregarded as an inferior monetary regime oflast resort.

Two alternative monetary regimes thatwould work well to introduce sound moneyin postwar Iraq are a currency board regimeand official "dollarization." Both regimeshave worked well to produce confidence andstability in postconflict situations and couldbe introduced in postwar Iraq rapidly.Moreover, both regimes have been employedpreviously in Iraq, with success. The quickintroduction of either regime will help theCoalition Provisional Authority to establisheconomic stability and pave the way for atimely exit from the increasingly costly post-warengagement.

Steve H. Hanke and Matt Sekerke

Steve H. Hanke (hanke@jhu.edu) is professor of applied economics at the Johns Hopkins University and a senior fellow at the Cato Institute. He is the author of a number of currency reform proposals and has participated in currency reforms in Montenegro, Bosnia and Herzegovina, Bulgaria, Lithuania, Estonia, and Argentina. Matt Sekerke is a research associate at the Johns Hopkins Institute for Applied Economics and the Study of Business Enterprise.