Friday, September 26, 2003

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The Iraqi free trade zone

It appears that after a day of wavering, Iraq's Governing Council is now endorsing Iraqi Finance Minister Kamil Mubdir al-Gailani's plans for sweeping liberalization of the economy. This includes allowing 100% foreign ownership of Iraqi businesses in all economic sectors except oil. Among the proposals:

Six foreign banks will be permitted to take over local Iraqi banks completely in the next five years, al-Gailani said. Other foreign banks will be allowed to purchase 50 percent stakes in local banks.

This plan has drawn criticism from the usual quarters -- namely, Palestinians and the left -- as somehow generating a fire sale of Iraq for Western looters. Actually, the big winners here are the Iraqis themselves.

Since the fall of Saddam, Iraq has essentially functioned as a free trade zone. The benefits of this of this for Iraqis are readily apparent in the explosion of consumption over the past five months. The San Francisco Chronicle reported on this over the summer, and now USA Today follows up with a report indicating that the rise in cobsumption is also sourring entrepreneurial activity (link via Glenn Reynolds and Virginia Postrel). The key grafs:

Iraq's new finance minister, Kamil Mubdir al-Gailani, announced sweeping economic changes this week that will allow foreign ownership of companies in every industry except oil and other natural resources. The 25-member Iraqi Governing Council hopes that Iraq's 24 million people will be an attractive market and workforce for global businesses willing to invest in the country.

But merchants such as [Kurdish merchant Massoud] Mazouri already are cashing in. Television sets, refrigerators and boxes of satellite receivers are stacked 10 feet high on the sidewalks of Baghdad's shopping districts. Shoppers who have waited for years to be able to spend their hoarded dollars are out in force.

''When I started in late April, I was receiving one container of DiStar goods per month,'' Mazouri says. ''Now, I am getting five to six containers.'' Each container holds about 270 television sets or 3,800 satellite receiver units. He says he is grossing $20,000 a day. ''All the sales are done in cash.''

There was plenty of pent-up demand. Sanctions imposed by the United Nations after Iraq invaded Kuwait in 1990 kept a lot of goods out of the country. Before that, an eight-year war with Iran drained the life from Iraq's economy. For nearly 20 years, there was little to buy. And during three decades of rule by Saddam's Baath Party, virtually all companies were state-owned or state-controlled. In 2001, Iraq's gross domestic product was $27.9 billion, compared with $47.6 billion in 1980.

Since the collapse of Saddam's regime, police Officer Gailan Wahoudi, 31, has bought a new television, a refrigerator and an air conditioner. ''It is a new freedom I never had before,'' he says.

The buying spree has been helped by the suspension of customs duties, import taxes, licensing fees and similar surcharges for most goods entering and leaving the country. The U.S.-led coalition's order on June 7 that suspended such charges has made Iraq a virtual free-trade zone at least until the end of the year. The coalition authorities had little choice: Iraq lost its ability to adequately control its borders when Saddam's government collapsed. Immigration and customs controls are only now being restored.

For consumers, the bottom line is lower prices.

Opening up investment to foreigners is crucial to preventing Iraq from reverting back to the statist nightmares that Egypt, Syria, Iran, et al are currently experiencing. Permitting foreign ownership of banks helps ensure that capital markets won't be repressed by the state as an act of political favortism. The policies being put forward to liberalize Iraq's economy are an excellent first step to installing the proper restraints on state intervention in the economy.

As a coda, I'm always amused by people who simultaneously supported the anti-globalization movement and condemned the sanctions against Iraq. In one case, the exchange of goods and services is evil -- in the other case, the exchange of goods and services is essential.

UPDATE: Josh Marshall links to a Guardian story suggesting that even with a small Iraqi state, there will still be favortism. And check out this Chicago Tribune story on the Iraqi entrepreneurial class.

posted by Dan on 09.26.03 at 11:43 AM


"This includes allowing 100% foreign ownership of Iraqi businesses in all economic sectors except oil."

If only we would do here what we tell Iraq it should do.

posted by: Seb on 09.26.03 at 11:43 AM [permalink]

"Permitting foreign ownership of banks helps ensure that capital markets won't be repressed by the state as an act of political favortism."

To quibble, it also means that there's no political downsides to nationalizing the banks; it's not like Iraqis will lose anything.

posted by: Jason McCullough on 09.26.03 at 11:43 AM [permalink]

Hopefully this succeeds, because a prosperous Iraq is just as important as a democratic Iraq in converting the hearts and minds of Iraqis and those in neighboring countries.

posted by: Hei Lun Chan on 09.26.03 at 11:43 AM [permalink]

reverting back is redundant and annoying

posted by: Eric on 09.26.03 at 11:43 AM [permalink]

Sorry to burst the bubble, but the positive twist given to Kamil Mubdir al-Gailani’s policies is a little too heavy on the academic benefits of a free market, and a little too unconsidering of the reality of Iraq. In reality Kamil’s statement and planned actions have nothing to do with opening the market to the advantage of the Iraqi people and are all about establishing control. Control of an emerging market before it emerges. Controlling access to Iraqi markets and funneling gain into his and his associate’s pockets. A game Chalabi knows well (Kamil is only another maw to feed his master).

Two points missing in the post: 1) Bremer was reported to be livid with Chalabi/Kamil on this issue and was vociferously opposed (though the last few days strangely silent; not a good thing) 2) Kamil’s policies allow gains to flow out of Iraq, removing the restriction that capital gains must remain and be reinvested in Iraq. Great for foriegn investors, not good today for Iraq.

I really hope Bremer can rein this back. But without high level Administration support behind him, it’s a done deal. This kind of economic policy change, at this juncture, is a very bad thing for Iraqi reconstruction.

In ten years when we look back on the history of the Iraqi reconstruction there will of course be good and bad. But when all of the bad are categorized and studied - all of the abortive strategies and tactics, false starts and misconceived good intentions attempted by the US in this matter are considered - the support of Chalabi will stand as one of, if not the, major blunder by the US during this time.

I want to be wrong about this, but I have a feeling that what we’re seeing now is just the opening gambit to a really bad nightmare

posted by: Jon on 09.26.03 at 11:43 AM [permalink]

An Iraq that is not prosperous stands no chance to be a stable democracy. There is no long-term downside to this plan. Free trade indisputably has more benefits than unfree trade. For all the criticism of NAFTA (jobs were, in fact, lost), objective analysis reveals it was much to our advantage (economic statistics show that the loss of jobs was more than made up for by the benefit to consumers of less expensive goods and job gains in the export sector).

posted by: Ben on 09.26.03 at 11:43 AM [permalink]

Agree, there is no long-term downside to free trade. But this plan is not about free trade, it is about consolidating political and economic control. I've lived, worked and developed relationships in the Middle East for 20 years. I know the culture and the business environment and seen where and how it can work effectively and where it goes awry. Kamil’s plan plays to the worst aspects of Middle East business conduct. If it goes forward as Chalabi would like the end result will not be a free democracy but a dictatorship behind a democratic store front bolstered by a bureaucracy based on influence and graft worse than anything currently in the Middle East. This is Chalabi et al playing the rhetoric as a smoke-screen to consolidate control, grabbing foreign investors by the purse to get the vested interest hooked and added to support his personal agenda. Using international financial concerns to mitigate US restraint on himself and the provisional Iraqi council by leveraging the influence of global, international investors (US, European, Russian, Asian Rim) where the money ties much more easily pass, and influence directly on, the national agendas of these nations which Chalabi cannot reach directly. Iraq has an opportunity to start fresh and this is a wonderful thing to establish the free market the rhetoric implies. But it is also a wonderful opportunity to completely fill this vacuum with an influence-based bureaucratic structure that will completely disenfranchise the Iraqi people and take decades, if ever, for the Iraqi’s to recover from. Absolutely, Iraq needs free trade and a free market to prosper and support its evolving democracy. But to achieve this takes time and patience. There are valid reasons for the time-table the Administration and the US’s Iraqi reconstruction team has set to build-up to free elections. These same reasons apply to establishing financial market freedoms. Kamil’s plan will undermine both.

posted by: Jon on 09.26.03 at 11:43 AM [permalink]

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