What Iraq Needs Most Is Pro-Market Reforms

Muslim nations were leaders in commerce for centuries. It's bad modern policy, not Islamic culture, that has stalled growth

By Gary S. Becker

The U.S. and Britain have the opportunity to end decades of economic stagnation in Iraq by formulating economic guidelines before handing over control to an elected government. The task will not be easy, however, because not a single major Muslim country in the Middle East has achieved sustained economic development.

Many attribute this lack of economic success to the influence of Islam on Middle Eastern culture. But this assertion ignores the fact that traditional Islam is perhaps more sympathetic than Christianity to private enterprise and a market economy. Muhammad, after all, was a merchant before he received the revelation. The Koran teaches respect for private property, business contracts, and trade. Muslim nations were leaders in world commerce for hundreds of years, starting in the 9th century.

Islam forbids the taking of interest. Over the centuries, however, lenders have found ways around this restriction through equity financing and by combining loans with other services and products, thereby disguising interest as payment for these services and goods.

The main obstacle to modern economic development for Middle Eastern nations has been bad policy, often inspired by the teachings of Karl Marx and other Western intellectuals. State enterprises and government regulations still dominate the economies of Egypt, Iran (under both the Shah and the mullahs), Iraq, Saudi Arabia, and Syria. Important industries, including oil production and refining, are controlled directly by the government or by private monopolies that depend on the state.

Coalition forces in Iraq have the chance to set an example for Islamic nations everywhere by promoting prosperity for the downtrodden and disadvantaged through market policies. An immediate goal should be the establishment of rights to property, contract law, and traditional Islamic ways of adjudicating disputes. Rules of commerce consistent with Islam are perfectly adequate institutions to help promote economic growth.

Early restoration of electrical power, trash removal, and other public services should lead to a rapid reopening of now-shuttered small businesses in retail and other sectors. The coalition administration can then encourage new businesses in farming, manufacturing, and services that would provide competition to the state enterprises that have dominated production.

These state entities pose an obstacle to reform because they are corrupt, rewarding cronies of the ousted Baath Party. There has been public discussion of the coalition's intent to begin a far-reaching privatization program. Yet the experiences of the former communist nations demonstrate that rapid and extensive privatizations are not necessary for substantial economic progress. China and Poland, for example, have achieved robust growth even though they only slowly privatized politically powerful enterprises. Those countries encouraged startups in new industries and allowed both imports and domestic businesses to compete against inefficient public companies. Privatizing state-controlled Iraqi enterprises is far less important than helping to restore Iraq's traditional, flourishing entrepreneurial culture to its earlier prominence in manufacturing and services.

An important advantage of leaving most privatizations to the new Iraqi government is that the coalition would avoid charges that it "gave away" assets to favored foreign and local companies. Still, coalition administrators can provide a timetable for privatizing, drawing on the experiences of other nations that have done so.

Obviously, it is immensely important to crank up the country's oil production: For the immediate future, those revenues will be the leading contributor to Iraq's gross domestic product. But it would be unwise, in the long run, to rely mainly on oil revenues, considering that many other nations -- Iran, Saudi Arabia, and Venezuela, for instance -- have squandered their oil reserves through corruption, military spending, and grandiose projects.

The Iraqi oil industry would be far more efficient if it were extensively privatized. But even a democratically elected Iraqi government could not immediately challenge the emotion in the Middle East behind government ownership of oil. Such a government might be able to transfer many complementary oil activities to the private sector through competitive open bidding by international consortiums that include Iraqi and other Middle East participants. Among these activities are maintenance of production facilities, refining of oil to produce gasoline and other products, exploration for additional deposits, and transportation of oil.

Muslim nations in the Middle East are not condemned to poverty and destructive envy of the U.S., Europe, and Israel. Proper reforms with an eye toward a competitive, open economy will bring growth in Iraq without compromising fundamental Islamic teachings.

Gary S. Becker, the 1992 Nobel laureate, teaches at the University of Chicago and is a Fellow of the Hoover Institution.

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