At least the Editors at "The New Republic" no longer believe that restoring the Iraqi socialist state would work. That's progress.
______________________________________________
THE WORLD
Socialist Realism
by Robert Lane Greene
Only at TNR Online
Post date: 10.21.03
The average pundit, politico, and administration official refers to the process now underway in Iraq as "reconstruction," the implication being that the Iraqi economy need only be restored to some version of its prewar self in order for the country to prosper. As Commerce Secretary Don Evans explained it last week:
As I drive through the streets of Baghdad, I see commerce is coming back--I see--I talk to people--I talk to the Iraqi people. ... I have talked to a lot of young entrepreneurs who are excited about the opportunity to now be real entrepreneurs and start new companies, thousands of new companies as a matter of fact have started since the end of the war.
In fact, while the $55 billion the World Bank estimates Iraq needs over the next few years may fix up the country's prewar infrastructure, it's unlikely to have the same effect on its economy--for the simple reason that Iraq never had a modern capitalist economy to begin with. Much has been made of the comparison between aid to postwar Iraq and the Marshall Plan that rebuilt Europe after the Second World War. But the reconstruction of Germany, France, Britain, Italy, and others was, in fact, mainly a reconstruction of physical infrastructure destroyed during the war. That alone more or less returned these economies, previously among the most advanced in the world, to their prewar norms. Iraq, by contrast, has in modern times been a socialist basket-case propped up only by oil, in the middle of a region beset by much the same problem. In a sense, postwar Iraq combines the worst features of postwar Germany with those of post-Soviet Russia.
And, in the end, it's the socialist legacy that may actually prove tougher to overcome. Not only does a former socialist country have to dismantle hugely inefficient state enterprises and recycle their capital and labor into more productive parts of the economy. It must also create the institutions upon which a capitalist market depends--property rights, bankruptcy laws, financial markets, etc.--and instill in its citizens a basic respect for these institutions.
The historical record suggests that neither of these tasks is especially quick or easy. Between 1989 and 1991, the command economies of Eastern Europe were abruptly liberalized, with results ranging from stuttering progress to stagnation to failure and collapse. Hungary is one of the brightest stars of the region. Reasonably affluent before the communist seizure of power, it was hobbled by only a mild form of communism ("goulash communism") for the two decades prior to 1989. These relatively favorable circumstances and a decade of capitalist rebuilding and reform (not to mention big handouts of EU aid) have led to impressive GDP growth: about 4.3 percent per year from 1998 to 2002. Yet, even so, Hungary's GDP per head today is only about $6,500 per year. That's just three-fifths that of Greece, the poorest European country that doesn't suffer from a communist past.
And remember, Hungary is a shining star. Russia's economy is now growing strongly--about 4 percent per year for the past four years, thanks mainly to high oil and gas prices. But the collapse of communism was deeply disruptive to the Russian economy, leading to a massive shrinkage of output--officially 45 percent (though an unknowable proportion of this is attributable to the discovery that Soviet-era statistics were science-fiction). Russia's per capita output today is just $2,400, ranking it alongside developing countries like Brazil.
For its part, Iraq became an essentially socialist country when the Baath party consolidated power in 1968. Except for some agriculture, the only free-market elements of the Iraqi economy were the few sectors (mostly export-related) in which Saddam granted cronies licenses to operate outside the command economy--hardly a promising capitalist nucleus for postwar Iraq. Baathist economics, like its Soviet cousin, poured investment into heavy industry, and with Soviet-style results. Iraqi manufacturing was never the envy of the world, or even of the Middle East: As of 1990, oil still accounted for over 95 percent of Iraq's foreign currency-earning exports.
Iraq begins its life as a free-market economy just half as wealthy as Russia. And it has the added misfortune of being in a bad neighborhood, not just geopolitically but economically. The countries that border Iraq are all either oil-rich statist plutocracies or oil-poor statist satrapies, with the exception of Turkey (not the most inspiring example itself). Unfortunately for Iraq, the presence of productive neighbors is an important factor in economic growth. The eastern European economies have the advantage of abutting rich western countries, which, in addition to forking over aid, provide ready and easily imitated examples of capitalist success, as well as bountiful export markets. On a continent like Africa, by contrast, corruption and political instability frequently travel across borders. Iraq, with few positive examples to look toward, is likely to find itself in the situation of a newly independent African country rather than an Eastern European one.
What about Iraq's oil? Even assuming that output steadily increases beyond 1990 levels, this is no panacea. Oil wealth can hurt the economy by sucking in foreign capital, driving up the value of the currency, and making other exports (mainly manufacturing and agriculture) uncompetitive. Because of its seductively large revenues, it can also cause a country to neglect development of the rest of its economy--particularly higher-value-added sectors. And, politically, oil is all too often a curse, since it propels a political system toward excessive centralization and its frequent corollary, corruption. The Venezuelan Juan Pablo Pérez Alfonso, one of the founders of OPEC, once famously called the black stuff "the devil's excrement" for the waste it bred in his country. Nearly 30 years later, Venezuela is still a mess. One recent study by the Open Society Institute demonstrated that resource-rich countries actually grew more slowly than resource-poor ones between 1960 and 1990, controlling for initial levels of wealth and other variables. If we want to prevent it from hopelessly distorting the economy, Iraq's oil wealth must be used to slowly diversify the country's economy away from oil.
Hence the need to take Don Evans's optimism with more than a grain of salt. It is far too early to know if the American project in Iraq will be a success. But the one sure way to ensure it isn't is if we fail to realistically assess just how big the task is.
Robert Lane Greene is countries editor at Economist.com.
tnr.com |
