Neoliberalism, conflict and an oil economy: the case of Iraq.

• Author: Mahdi, Kamil

INTRODUCTION

THREE MAIN ECONOMIC PRESUPPOSITIONS underlie the view that in March 2003 Iraq's economy was in need of extensive and rapid liberalization and privatization. The first is an assumption that the private sector was severely constrained by public ownership and strict etatist policies including allocation and pricing policies that distort economic incentives and outcomes. Second, that the public sector was inefficient and corrupt, and so bureaucratic and technologically backward as to be beyond the possibilities of rehabilitation and reform, and that privatization would inevitably enhance productivity, help develop much-needed managerial skills and improve the utilization of resources. The third premise is that Iraq was and remains in need of great infusions of foreign capital, and that skills and advanced technology can only be accessed by creating an especially attractive business and regulatory environment for foreign capital and multinational enterprise to commit to a country that is otherwise risky. A fourth and separate premise for a radical liberal economic agenda relies on the operational and political arguments that the destruction of a highly centralized and authoritarian political system and the breakdown of law and order have made it impossible to operate any coherent intervention into the economy, thereby arguably necessitating a liberal market agenda.

This article critically examines the above presupposition with reference to Iraq's actual economic structure and its evolution during the period of war and sanctions up to the 2003 occupation of the country. It is argued that many of the presumed policy, administrative and economic shortcomings are in fact characteristic of structural and historical features of the Iraqi situation, which are respectively, the state of conflict and an economic dependence on oil. In failing to address these characteristics through appropriate economic policies, the neoliberal agenda does not serve to rehabilitate the economy and accentuates conflict. Furthermore, that agenda itself is also faltering.

NEOLIBERALISM BETWEEN ECONOMIC REFORM AND POLITICAL EXPEDIENCY

Economic arguments advanced in support of a neo-liberal policy agenda tend to rely on little in the way of analysis of Iraq's own economic conditions and the policy environment prevalent over the prolonged period of war and sanctions prior to the invasion in 2003 and in its immediate aftermath. These arguments were framed mainly by US officials, international organizations, policy think-tanks and advocacy groups. The discourse upon which they were based have tended to offer a partial and selective interpretation of the historical record, ignoring many specific attributes of the Iraqi economy and disregarding changes in policy, economic institutions and prevalent conditions. Assessments by senior US officials underpinned their government's declared economic agenda, usually downplaying the effects of prolonged sanctions and the military destruction of the infrastructure and overemphasizing the role of failed non-market and interventionist economic policies. (1) A wide gap exists between these assessments and the main academic research on the Iraqi economic malaise, especially the work of Alnasrawi (1994 and 2002) who emphasizes the debilitating consequences of the Iran-Iraq war and the devastating effects of the 1991 war and the prolonged sanctions. These studies point to the monumental blunders of waging war, the consequent militarization of the economy and the harsh international response as the major causes of Iraq's economic malaise, rather than inherent inefficiencies and failures of the government's economic policy orientation. Similar conclusions are implied in other assessments. Al-Shabibi argues that given the strategic vulnerability of a structurally oil-dependent economy, waging a war that further exposes the country's weakest economic link amounts to major political folly (Al-Shabibi 1997). Similarly, the Economy and Infrastructure Working Group of the US State Department's Future of Iraq Project, while identifying economic problems and limitations resulting from the Iraqi government's low tax policy, deems the main consequence of this policy to have been the political one of foregoing accountability. (2)

In the absence of much reliable data and lack of a conducive environment for research on the Iraqi economy, the discourse of mainly US official institutions and policy establishments has attained wide currency especially in policy-making circles. Neoliberal policy agendas are also reflected in comment straddling the academic and policy domains (Looney, August 2003; Foote et.al.2004), and they are presented completely uncritically in yet more cases (Cohen and O'Driscoll 2002). Studies and reports of multilateral financial institutions have also leaned towards the assertion that the dominance of the state in economic activities and the interventionist policies are a main cause of Iraq's present economic malaise (IMF 2003; UN/World Bank, October 2003). While a critique of the economic role of the state is necessary, this expedient approach where policy agendas drove the analysis rather than the reverse, is at odds with research into the economic and political environment, institutions and policies, and into what Owen (2006) describes as Iraq's economic trajectory. Furthermore, the adopted approach ignored research into specific economic problems and issues arising in war situations and failed to formulate appropriate post-war economic policies. Established research identifies numerous characteristics of war economies that call for better understanding and specific tailored policies to address the rigidities of war economies. The prevalence of duality and parallel markets, the low responsiveness to price and exchange rate adjustments, the behavioural emphasis on risk aversion, the inefficiency of markets in synchronising signals in favor of restructuring economies away from war-time requirements and many other aspects of post-war economic management require nuanced and locally specific policies. (3) In these circumstances, externally imposed policy agendas and the tendency to dismiss policy advice, (4) even from the closest quarters with little reference to the social and economic costs inevitably yield negative outcomes.

Given the multiple and severe nature of the shocks suffered by the Iraqi economy and society since the 1970s, beginning with oil boom and bust, political turmoil, destructive wars and the militarization of society, and the long period of sanctions, it would be impossible to determine the effects of any one aspect of past economic policies upon the outcome. The full range of state intervention measures, including price regulation, subsidies, trade restrictions, discretionary high welfare spending, development programs and public-sector owned or supported enterprises are to be found under different economic systems and are part of the experiences of most countries of the region, including non oil-exporting countries and a number of countries that had not adopted widespread programs of nationalization. All these measures were part of the post-colonial economic and political order that had privileged state-led national development strategies and economic policy regimes that relied upon industrial policies and attempted to use sectoral and expenditure priorities as well as social policies to influence income and wealth distribution. Such were the experiences of, among others, Egypt, Syria, as well as Iraq.

The problems faced in implementing these strategies and the retreats from them have usually led to prolonged periods of policy uncertainty. Reforms in most countries of the region were slow and undecided, the agendas being driven by competing domestic and international pressures. The thrust of the reforms demanded by International Financial Institutions (IFIs) was focused on macroeconomic adjustment, leaving the transformations necessary for meeting the conditions of adjustment to be subject to domestic political balances among competing interests (Kienle 2001, 144), some of which are generously aided by US and other external programs. (5) In other words, much of the liberalization policy rhetoric was little more than just that. To be sure, cuts in subsidies required by IFIs generated wider effects and opened the way to radical policy changes in property rights (Bush 1999, 29-39), but competitive markets and equity considerations come as secondary objectives to that of strengthening property rights, and these secondary objectives are not pursued beyond the changes that widen the scope for private capital.

These reforms had to be negotiated through the tensions between on the one hand, a neo-liberal vision advocated by outside forces, and on the other hand, the economic structures, livelihoods and institutions of the real world. Though these real world structures and institutions were acknowledged not to have delivered the aspiration of "development," radical reform agendas lacked strong bases of social and political support, especially since the business sector was also dependent upon state patronage and wary of external competition. In other words, institutional and sectoral reform programs are subject to different political and social pressures that do not always result in a coherent program. Attempts to reach consensus on a coherent program are also confronted by the reality that the terms according to which a small backward economy engages the international system do not permit effective regulation of open externally oriented markets. This is what leads MacEwan (2001, 5) to argue that "the rise of a market-oriented policy is a major obstacle to democratic economic development."

OIL, STATE AND THE NEO-LIBERAL MODEL

Iraq's economic system and its domestic and external economic policies have a strong connection to the dominance of oil over the country's economy...