Mismanaging Iraq: the economics of insurgency.

• Author: Doe, John
• Position: Business & Economics

HOW CAN we best understand developments in Iraq? The picture emerging from journalistic and official reports suggests that senior-level civilians in the White House and Pentagon were guided by a mix of ideology and the desire to have their decision to go to war validated. This repeatedly led them to underestimate the risks and challenges posed by the occupation. They hoped Iraq might rapidly become a clean slate on which to construct a new Middle Eastern society. By most accounts, the prospect of an ongoing insurgency scarcely appeared in their scenarios.

And so one misstep followed another: failure to prevent immediate postwar looting of buildings, infrastructure and arms depots; too few coalition forces; disbanding the Iraqi army; excessive de-Ba'athification, creating a sizeable class of angry and idle middle- and higher-level managers and bureaucrats; failure to seal the borders with Iran and Syria, in part because, having disbanded the army, resources for doing so were lacking; inadequate outreach to Iraqi civil society; not understanding the depth of Iraqi disaffection with the occupation; failure to enforce criminal law and coalition anti-militia measures against radical Shi'a cleric Moqtada Sadr and his Mahdi Army; and carelessly beginning the high-risk military operation in Fallujah in April that could not be completed.

Missteps in economic policy followed the same pattern. The coalition's overall objectives for Iraqi economic development were sensible enough--replacing a one-industry oil-pump economy, replete with war- and dictatorship-related corruption, with a diversified market economy. This would require the introduction of contract law and property rights, reduction of subsidies so that the economy might respond to price signals, encouraging enterprise and foreign investment, revitalizing the monetary system and banking sector, and encouraging private sector development. The coalition also intended that oil sector recovery and U.S. and international reconstruction funds would generate an economic boom.

With the exception of the last, these were long-term goals. And the goals were important, insofar as regime change in Iraq was intended to introduce national or regional economic liberalization. But the game plan offered little mechanism for moving from the chaos of a collapsed, state-dominated economy to the liberalized end-state the planners would prefer. To the extent that anyone had a plan for recovery itself, it was a combination of pouring on infrastructure contracts and cold-turkey privatization of state-owned enterprises.

By fall 2003, it was clear that large-scale unemployment persisted, with estimates that as much as 70 percent of adult males were affected. It was equally evident to many, including senior coalition military officials, that economic distress was an important contributor to support for insurgency--high unemployment was a critical political and military problem.

And so, even before the Abu Ghraib abuses became public, it was clear that support for the occupation among Iraqis was rapidly eroding. One year after the invasion, physical security was deteriorating, and, despite indicators of modest economic improvement, large numbers of Iraqis could not find regular work.

THE ANSWERS should have been almost as clear as the diagnosis. Where an economy generates insufficient demand to put people to work, the government should step in to boost demand. This is especially the case where investment outlays are constrained by the uncertainties of war, and where market imbalances are unlikely to be self-correcting. Much of the Iraqi budget nevertheless has not been apportioned in a way that would boost employment or demand for domestic production. Much government spending is used to import goods, often in large bulk purchases of food and refined fuel products, or is distributed to citizens who then use it for consumption imports. Growing amounts are now also spent for military and security purposes, which do indeed create employment--but often without boosting the supply of...