Commentary: How to Get Iraq's Economy On the Mend

Life at the Al-Nasr farm 40 kilometers south of Baghdad seems to be returning to normal. Its 6,000 Holstein cattle loll in the sun waiting to be milked. Newborn calves nuzzle up to visitors. But when Abdel Khalik Fakhry, the farm's manager, climbs into a Toyota LandCruiser to visit outlying acres on the 3,500 acre spread, he grabs an American-made machine gun and test-fires it with a thunderous burst into the air. Marauding gangs, he says, have been probing the farm's defenses. So far, guards have driven them off with salvos of rocket-propelled grenades. "There is no law, day or night," says Fakhry, a retired Iraqi army colonel. "He who is strong will take everything."

Rule by the gun is not what the Americans had in mind when they liberated Iraq. Nor was near-anarchy in postwar Baghdad, the breakdown of fundamental services, the isolation of the U.S. mission, or the rise of gangs. "With good management, you could do a lot with this country," says Mustafa M. Al-Bunnia, 40, who stayed on in Baghdad minding the family business -- including the Al-Nasr dairy farm -- while most of the family rode the war out in Jordan. But so far, good management -- at least in the crucial area of reviving postwar Iraq -- seems sorely lacking.

It's up to L. Paul Bremer III, a former counterterrorism expert from the State Dept. and America's new pasha in Baghdad, to supply that missing management. Bremer arrived on May 12 to restart the U.S. administration of Iraq -- and replace his hapless predecessor, Jay M. Garner. Instead of being a mere coordinator, Bremer will have authority over "anything done by anybody," says a top Administration official.

What does Bremer have to do? Everything. Get the lights working regularly. Organize garbage collection. Set up a police force. Recruit aid from the allies. Start the gasoline flowing. The to-do list is depressingly obvious. But here are a few economic issues Bremer should keep in mind as he prepares to run Iraq.

-- Watch out for inflation. To inject some purchasing power into the economy, the U.S. is giving every Iraqi civil servant who shows up for work $20, usually in single dollar bills. Some 550,000 have been paid so far, and Iraqis do need the money. They are running out of food and other necessities. The next step will be to start regular salaries flowing.

But you don't just need money sloshing around the system. Money without anything to buy will mainly feed inflation. A first priority should be to fill Iraq's market with goods. Since domestic production has been slammed by the war, several billions of dollars' worth of food and other essentials per year will have to be imported. With lower-paid workers making only $25 a month, "a lot of goods are too expensive for people's ability to pay. It all depends on aid and emergency assistance," says Sinan Al-Shabibi, an economist and former senior Iraqi planning official, who has been trying to develop a post-Saddam economic strategy. Raging inflation in Baghdad's souks could harm the U.S. cause as much as delivering too few police.

-- Don't count on oil to solve all the problems. Washington-based consultant PFC Energy projects Iraqi revenue at a maximum of $15 billion, mostly from oil, for 2004 and 2005. That will be just enough to cover current expenditures, PFC predicts, while leaving little capital for development. "Even under the very best of circumstances, Iraq will not have the funds from oil revenues to pay for reconstruction over the next three or four years," says Raad Alkadiri, an Iraq specialist at PFC. "If the U.S. thinks Iraqi oil is going to fund their project, they are sadly mistaken." The U.S. has to find funds from other sources such as the World Bank and private investors to rebuild Iraq.

-- Expect unpleasant surprises. The biggest shock is how primitive the Iraqi economy is. From 1980 to 2001, according to a study published in Middle East Economic Survey, Iraq's gross domestic product per capita fell by almost 90%, to $237, making it one of the world's poorest countries. In Saddam's last years, Iraq "was almost a totally closed economy," says David M. Nummy, a U.S. Treasury official serving as senior adviser to Iraq's Finance Ministry. "The economic mechanism was extremely distorted. Almost everyone who was fully employed was employed by the state."

This is weak material to work with, and Bremer and his lieutenants should proceed carefully. Thoughts of privatizing state assets, for example, should be dropped until a real foundation is built. It's hard to figure out which Iraqis could even buy state companies. The Al-Bunnias, for instance, own what may be Iraq's largest private company, H. Mahmood Al-Bunnia & Sons Group. But their annual revenue is only around $30 million. "The private sector has been grabbed by the government. It will take many years to privatize this economy," says Abdel Razzak Mohamad Ali, managing director of Iraqi Middle East Investment Bank, one of 17 private banks permitted to open in recent years.

The banking system, a sine qua non for a healthy private sector, needs a complete revamp. Local bankers say the large public-sector commercial banks, Rafidain and Rashid, are full of venal and incompetent employees. And in 2001, total assets of the four largest private banks amounted to only $70 million, according to a bank study. Business sources say loans above $20,000 are a rarity. So this economy will be on life support for a long time.

-- Expect pleasant surprises. They're possible, even in Iraq. The best so far is a private sector that survived Saddam. The Al-Bunnias and other merchant families can be tapped later for expertise in the rebuilding. Of course, all had to deal with Saddam's regime to survive. But these groups appear to be operating real businesses, not just offshoots of the state.

Bremer should make sure these private players survive. Small as they are, they can help generate growth and bring down unemployment. The Al-Bunnias employ some 2,000 people -- and are paying them. Their 41 food factories are still making everything from yogurt to cookies, and they have ties, suspended over the last decade, to such companies as PepsiCo and Nestlé. "The economic future is going to be very, very good," says Al-Bunnia. "If you are on the ground, you can only go up." That's the kind of hope the Americans should not disappoint.

By Stanley Reed

With Stan Crock in Washington

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