US Opens Iraq's Economy, but to What?

The US occupying forces blatantly contravened the Fourth Geneva Convention on Monday, announcing that they were opening the Iraqi economy to foreign investment and setting low trade tariffs. The economy has been plagued by massive unemployment (estimated by many observers at 60%) since the fall of the Baath regime, which had channeled oil money to employees through state industries and patronage. US civil administrator Paul Bremer, a fanatical devotee of the "Washington Consensus" on the absolute benefits of "free trade," has managed to get the Interim Governing Council to sign off on a wideranging set of new economic regulations.

The new rules allow foreign corporations potentially to dominate important sectors of the economy. Especially worrisome is foreign ownership of banks and deregulation of currency transfers, since it was the proliferation of such approaches in the 1990s that led to the 1997 meltdown in East and Southeast Asia. (Malaysia spared itself by clamping on currency controls, in defiance of the Washington Consensus, and it was spared the worst of the burst bubble that plagued Thailand and South Korea).

The new law allows foreign corporations to buy 100% of Iraqi firms, which is highly unusual in that part of the world. There is no provision for the state to license this activity or to screen the investors, according to the NYT. Worse, any profits can be immediately repatriated abroad, in full. So Iraq becomes an ideal place to launder money; this is the way to fight a war on terror? Don't these people remember the Savings and Loan Scandal of the Reagan Administration, which cost us all billions? Wait, maybe the same people designed these regulations.

Note that the level of import tariffs, 5%, is exactly the level imposed by Great Britain on the Ottoman Empire in the Treaty of 1838 and on a defeated Egypt at the Treaty of London in 1840.

On the other hand, attempts at privatization in Egypt and Turkey have often been plagued by difficulties and the process has gone very slowly. This is because bloated state industries are not very attractive investments for the private sector. In Iraq, there is the added problem that you can't drive your car in much of Baghdad and Basra without risking it being stolen from you at gunpoint. Not a lot of investors will rush to put money into a country with that profile. So far the US has virtually ignored the crime wave afflicting the ordinary Iraqis, apart from trying to train and stand up some Iraqi police, who from all accounts aren't getting the job done. It will have to actually bring security to the country if it wants foreign firms to invest there.

I received the following note from an informed reader, concerning these "reforms:"

I met with a high ranking military lawyer who had reviewed drafts of new
proposed laws concerning economic issues in Iraq, such as foreign investment.
He stated that the laws had been drafted in Washington, DC, and that the
attitude in DC and in the Republican Palace is that the IGC's opinion on
their content would not be decisive .

It is also worth remembering that in July the US Government awarded a
contract to Bearing Point (KPMG consultants) to redesign the framework for
Iraqi economic regulation, including the drafting of tax laws. Hardly a
democratic and inclusive approach.

The legal power of the Occupying Power to introduce such changes in economic
arrangements is doubtful. The IGC has no formal legal power at all, as it
is officially a creation of the Occupying Powers and can do no more than
"recommend" arrangements to be ratified by Bremer. Hence, the IGC does not
have the legal authority to introduce widespread changes in economic
arrangements in Iraq.