Iraq will learn from our mistakes

For many, an invitation to a weekend conference in Baghdad would seem like an un-hoped-for opportunity to take gratuitous risks and to explore new sources of adrenalin. But I viewed my letter of invitation from Paul Bremer, America’s chief administrator in Iraq, as a noble opportunity to share the experience of Lithuania’s economic reforms with the newly appointed Iraqi government. The forum was organized by the U.S. Department of State and the U.S. Agency for International Development. I accepted the invitation. I thought that the trustworthy organizations that were in charge of the event offered both security guarantees and an opportunity to help a country devastated by an authoritarian regime and war. Although foreign trips were not a novelty for me, right after I accepted the invitation I began to follow closely the information released by international news agencies and to collect data about the Iraqi economy.
The news was not optimistic. The United Nations’ headquarters were bombed and several international organizations, including the World Bank, announced that rampant insecurity precluded them from carrying on their mission and so they were leaving the country. As to the economy, the information about the pre-war or post-war Iraqi economy was so scant that it was virtually impossible to get any preliminary picture of it. So I decided to rely on what I was going to learn when I got there.
That the conference organizers took the security issues very seriously became clear right from the beginning. We, the conference participants, were warned not to publicize too much about the upcoming event and trip and not to attract media attention. In the light of these requirements I was quite baffled to hear on the news that Boris Nemcov, a Russian MP, announced to the Duma that his party colleague Yegor Gaidar, a former Russian prime minister and a renowned reformer, was going to Iraqi to rescue the country’s economy. Naturally, many news agencies caught this message and spread it widely, causing some more anxiety for us all going to Baghdad.
When we landed at the Kuwait military airport we realized that we were already in a war zone. Although seeing guns was nothing new for someone who was in the army, the very thought that this was a real war, not exercises, made them appear to me in a completely different light. All soldiers of the coalition forces were armed and wore security vests and helmets. At 45ŗC above zero such an outfit and heavy guns were a trying ordeal even for tough men, so at first I was bewildered to see many female soldiers around. We had a good chance to witness the frequently cited exceptional female powers of endurance. All soldiers carried water flasks on them and had tubes by their faces so that they could drink water without taking hands away from their guns.
Even though the abundance of security measures was supposed to calm us down, many of my fellow travellers said that the more guns and military equipment there were around, the more anxiety it caused. All of us took the security issues very seriously. We were „equipped” with security vests and helmets right after we descended from the military transport plane. After we were familiarized with security instructions, we were put on a bus with dropped curtains which, escorted by two armoured vehicles, dashed through the streets of Baghdad to the safe-zone. During this „excursion” we could explore the city of Baghdad only through a small opening between the curtains.
At first we were surprised to see fewer and fewer people as we approached the safe-zone, or the so-called green-zone. Apparently the people of Baghdad had a different understanding of security and stayed away from the protected places. The post-war Baghdad looked strange: the housing estates were intact, while the nearby administrative buildings were either totally ruined or had smoking holes from missiles. The first glance at these buildings made it clear what modern military technology and precision was.
Every time we dashed through Baghdad we could feel tension spreading from the soldiers that escorted us. And they had good reasons to be tense. During the few days we spent in Baghdad the UN headquarters came under another attack and a member of the Iraqi Governing Council, Akila al-Hashemi, was killed. This news touched all of the conference participants very personally since the victim’s brother was our interpreter at the conference and we all talked with him a lot trying to figure out what the situation in Iraq was. And even though we were accommodated in Baghdad’s safest hotel, Al Rashid, the residential compound of the military chiefs and the Coalition Provisional Authority, the very fact that a week after we had left the hotel came under a mortar attack showed that nobody in Baghdad could be guaranteed when it came to security.
The guerrilla war, which the Americans and other coalition partners have so far failed to end, has claimed more lives than the military operations. The resident diplomats in Baghdad have taken the biggest security precautions which, in turn, have largely paralyzed their activities. They cannot freely meet with the coalition leadership or the Iraqi Governing Council or other diplomats. The Czech ambassador for special missions rejoiced that the event gave her an opportunity to talk to many people with whom it was almost impossible to meet otherwise.
Going in the streets alone is dangerous as the followers of Saddam Hussein do not distinguish between soldiers and diplomats or representatives of aid agencies, and Europeans and most Americans do not need to make an effort to stand out in the crowd in the streets of Baghdad. This apprehension made me skeptical about the possibilities for Lithuanian firms to work in today‘s Iraq and about the possibilities of Lithuanian diplomats to contribute to Iraq’s foreign policy.
The Event
The concept of the event was based on a very simple and logical assumption that Central and Eastern European countries and Russia have accomplished fundamental economic reforms over the past decade or so, and have acquired unique experience that could be valuable for Iraqi reconstruction. This experience has been shared only once so far – in rebuilding the Serbian economy.
Iraq, just like many Central and Eastern European countries, was isolated from the surrounding world for a long time. At first it was the religious regime that did it, then Saddam Hussein. The embargo policy of the United States helped deepen Iraq’s isolation. This separation and the Iraqi military policy moved the country backwards – from a level comparable to that of Italy in the sixties to a level of a backward African state.
The conference brought together several reformers who over the past decade played an active role in reforming their economies according to free market principles and who are now prominent experts, consultants, politicians or business leaders. The group contained four former finance ministers, three central bank governors, economic, trade and privatization ministers and three leaders of public policy institutes devoted to the ideas of the free market.
During our first meeting ambassador Marek Belka, Poland‘s former finance minister and presently chair of the International Coordination Council in Iraq, asked us to speak more about the experience and lessons learned in our countries. After I talked with the Iraqi representatives I understood why the ambassador insisted on focusing on lessons learned.
The first conversations and discussions made it clear that most Iraqi leaders had the same outlook as Lithuanians did ten years ago. Everybody spoke about national interests and national economy, about a gradual liberalization of trade and a gradual privatization of state property, about national banks and national currency. The fear of open competition with other nations and reluctance to allow foreign capital prevailed.
We had been warned right from the start that oil-sector privatization was a taboo subject. The prices of fuel and basic food products continue to be regulated, stimulating the spread of the shadow economy. For example, fuel officially costs approximately one euro per litre, while the black market price is ten times higher. The oil sector is completely depreciated. Even if its pre-war capacity were restored, enormous investments would be required to maintain this level. Despite all that, the Iraqis have so far been reluctant to speak about foreign investments in the oil industry.
The conference took place amid significant events. Its timing coincided with the annual IMF/World Bank meeting in Dubai which devoted much attention to Iraq issues. The leaders of France, Germany and Great Britain tried to dovetail their views about the situation in Iraq. Paul Bremer, America’s administrator in Iraq, testified before Congress to justify new outlays for Iraqi reconstruction. Preparations for a donor conference in Madrid were underway.
The event was scheduled for one day, therefore the conference participants were divided into groups that focused on the experience of the represented countries in state property privatization, private sector development, free trade and budget formation and tax policy. A separate panel was devoted to strategies and techniques of drafting economic reform programs and securing political support for reforms.
Recipes for Iraq
Although the experience and proposals that the attending experts presented at the conference were not identical, most of the opinions were quite similar. The question of security and of ending the war was seen as pivotal. Without it, talks about economic reconstruction would not make any sense. All the experts emphasized that fast reforms were crucial. Many of the reformers admitted that, although they had once been called shock therapists, now that they looked back at the work they had done, they wished they had been more radical. Therefore many insisted on not waiting for political support for radical reforms, as this early window of opportunity was the best time to implement them.
It was also recommended to reschedule the repayment of Iraq’s foreign debt and to oppose the strict requirements of the Paris club. The conference advised letting in private foreign investments as the country‘s reconstruction with loans granted by foreign states would augment foreign debt and the country‘s dependence on other governments. Abolishing price controls without delay and creating a transparent monetary system were recommended. Although new dinar banknotes had been printed already, there was no unanimous opinion on what monetary policy Iraq had to pursue. The expert recommendations differed too. Some proposed a floating regime, others were in favour of a currency board, while yet others recommended a classical central bank with its usual functions.
The recommendation regarding foreign trade was unanimous. Only the Iraqi finance minister’s proposal to introduce a 5% import duty raised doubts, as no one could figure out why a war-blasted country would need import duties. Likewise, everybody upheld the idea of a simple and clear tax system with a flat income tax. True, a proposal to cap the income tax rate at 15% provoked some disputes, as most of the experts considered it as too heavy a burden for the Iraqi people. Russian Duma member Yegor Gaidar pointed to Russia with its 13% income tax as a worthy example.
Admittedly, the conference devoted most attention to privatization. The Iraqi public sector is not large. There are only about 200 enterprises that need to be privatized. However, this is the oil and military industry. It has been in the government’s hands for a long time, so the Iraqi find it difficult to understand how it could ever become private. Discussions were exceptionally animated and spirited. The Iraqi representatives were active and did not fear asking straightforward questions. Their wish to emphasize the uniqueness of their situation was astonishing. It reminded me of East European countries which, not so long ago, used every occasion to demonstrate their uniqueness, until they gradually began to follow common principles.
Post Script
The lively discussions and work that the experts accomplished in Baghdad gives hope that we managed to bring home to the Iraqi leaders our mistakes and lessons learned over the past decade. The conference organizers admitted that they had not expected all of those invited to be there. It was only there that I realized how complicated the Iraqi situation was and how important it was to restore security and local government, to put an end to the guerrilla war and to begin the country’s reconstruction. I would not bet on brisk business in Iraq, unless of course it had security from armed soldiers. I trust that our advice to build the Iraqi economy along free market principles would serve the Iraqis no less than it has served the nations who have followed them in the past decade.