How To Rebuild Iraq

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Tommy Franks at the Kuwaiti Humanitarian Office for Iraq. The military's role is just the beginning

Retired Army LT. General Jay Garner, who will serve as civil administrator in charge of reconstruction and humanitarian until an interim Iraqi government is formed, has direct responsibility for setting Iraq on the road to democracy and prosperity. His self-imposed timeline: three months to complete the task. Slightly less optimistic is the United States Agency for International Development (USAID), which has given itself 18 months to set everything right.

These timelines seem wildly optimistic. Iraq is economically, socially and politically crippled. It is unlikely that a quick fix solution will be found. The country will have to be totally rebuilt, a task that requires not only the sustained political, economic and military involvement of the U.S., but also the cooperation of other nations. It will also need the assistance and coordination of dozens if not hundreds of NGO's and their activities. Some roadblocks on the road to recovery:


Iraq entered its death spiral in 1980, when it launched its army at Iran. Prior to that war the average Iraqi earned about $5,000 per year; the country was just at the point where the World Bank says an economy creates a large enough middle class that it enters on a virtuous cycle of rapid economic growth. If those trends had continued, Iraq today would be ranked as a member of the newly industrialized nations. The average Iraqi would now enjoy an annual income of $15,000 and the country's GDP would be close to $400 billion — almost 20 times its current level. Instead, the average Iraqi takes in $800 dollars a year. Industry has ceased to exist and unemployment is optimistically estimated to hover at over 50%. Food is often in short supply with more than 60% of the population dependent on handouts from the oil-for-food program and around 40% of the children suffering from malnutrition. Clean drinking water is becoming rarer and electricity generation cannot even meet the reduced needs of an impoverished nation.


1. The Debt Bomb

Every plan for Iraqi prosperity is based on the assumption that it will be mostly financed by revenue from oil. Even though the country is sitting on sizable reserves, that will be still be tough to pull off. Iraq currently produces two million barrels of oil a day and with a sizable investment may get up to three million bpd in a few years. At a projected an average price of $25 a barrel (which may be very optimistic) this would be only enough to provide each Iraqi citizen $1,125 per year. Contrast this to Kuwait, where oil sales could provide every man, woman and child over $10,000 a year. In order to raise the living standards of the average Iraqi oil, revenue will have to be one pillar used as a base to build a modern economy and not a magic elixir capable of creating a transformation on its own.

But before oil revenue can be used for the good of the Iraq people it will be necessary to remove the demands already encumbering it. The biggest factor: a crushing debt burden. Putting an exact figure on Iraqi debt is a matter of contention. For instance, Iraq considers $55 billion given to it by the Gulf States during the 1980's as grants, while the givers consider them loans. However, an average of the most generally accepted figures puts Iraqi commercial and official debt at $116 billion and claims for war reparations at a bit over $200 billion. Some estimates put total debt at close to $400 billion. To put that in perspective, Iraq's per capita debt is over 10 times as great as Argentina's, the worlds previously leading economic basket case.

It's clear that current oil revenues will not even keep the interest payments current. Before Iraq can begin to rebuild its economy it will have to either get massive amounts of debt forgiveness or repudiate these debts. At present, the capital markets are pricing Iraqi debt to reflect an expected 90% reduction in official and commercial debt, while reparations are expected to be reduced to under $40 billion. Again, this may be an optimistic assumption, and certainly Iraq's creditors are talking a tough line. "We not only expect to get our money back," says German Finance Minister Hans Eichel. "We will get our money back." Germany, France and Russia appear set to drag their heels on debt forgiveness as a way to pressure the U.S. to give the United Nations more of a role in the reconstruction of Iraq.

However, these nations have received no payment on these debts for over ten years and would never have collected a penny if Saddam had remained in charge. In all likelihood they probably already assume that they will never recover more then a fraction of the current debt. Their real game is to ensure the UN as a key player in the reconstruction effort, allowing European countries to get on the gravy train for future reconstruction contracts, particularly for the development of large gas and oil projects. The U.S. Treasury Department still assumes a deal will be brokered.

One radical option is for Iraq to repudiate all of its international debt. This action would be based on making the case that Saddam government was an odious regime and that the debt it incurred should not encumber the people of Iraq. The legal case for this has its roots in America's repudiation of Cuba's debts after the Spanish American War. After World War I Alexander Sack, a French economist developed the legal theory that loans to despots were personal loans and not sovereign debts. Lenders to Iraq warn that adopting this policy could do irreparable harm to Iraq's ability to borrow in the future.

Almost all of the personal claims arising from Iraq's previous wars have been settled. What remains, is reparations demanded by other countries. After World War I, history's preeminent economist called reparations on Germany "Abhorrent and detestable." Iraq could easily build a good moral and probably legal case that the current government should not be burdened for the sins of a deposed dictator. The IMF and World Bank are owed about $1.1 billion and these debts will probably have to be serviced or renegotiated, before these institutions will agree to lead any future lending syndicates. They may be bending with the political wind at the moment, but it is doubtful they could stand up to sustained U.S. pressure to act. As for the rest of Iraq's international debt, creditors will probably be forced to play the hand Iraq deals to them. Prolonged legal wrangling over past, but now repudiated debts, means that they would be locked out of future lucrative contracts in a country with the world's second highest oil reserves.

2) The Legal Mess

Even with its debt burden behind it Iraq will need to raise billions of dollars in capital just to rebuild. Most of that money is supposed to come from oil revenues. However, the legal framework of the UN sanctions regime is still in place and it forbids the sale of Iraqi oil except through the oil-for-food program. This program is set to expire in early June and unless it is extended by a vote in the Security Council it will be illegal for Iraq to sell its oil on international markets. Once again France, Russia are playing the role of obstructionists and are refusing to allow a positive vote on the sanctions extension without greater UN involvement in reconstruction.

While the U.S. and Britain would like a UN agreement to extend the oil-for- food program, they are also examining alternative methods. Most international legal scholars, led by R. Dobie Langenkamp (Director of University of Tulsa's National Energy-Environment Law & Policy Institute) agree that there is a strong case that the U.S. and Britain will be able to administer and sell Iraqi oil as they see fit under the rules of the Hague Convention that provide an occupying power specific guidelines when it comes to administering natural resources like forests, mines and oil fields. Such resources remain the property of the territory's people and shouldn't be used in a manner that will permanently damage them, the convention states. It is also widely interpreted to require that revenue from the resources should go toward occupation costs or otherwise benefit the territory's people.

3) What Cash Will Be Available?

After the debt burden is erased and the legal restrictions have been put aside Iraq still needs to be rebuilt. After 25 years of spiraling economic destruction there is no sector of the economy or society that does not require a massive capital infusion. There are three ways that Iraq can finance its redevelopment; international aid, new debt and oil. The U.S. has earmarked only $2.4 billion over the next six months for Iraq and most other nations are still holding out on aid, except for the most critical humanitarian needs, until they see how the U.S. will administer Iraq. So far, 18 other nations have pledged a paltry total of $675 million. New debt is an option for the future, but given Iraq's track record creditors will want to see a predictable revenue stream and have enhanced assurances of repayment before they make new loans. Iraq is probably still years away from being able to borrow significant sums on the global capital markets. Even with IMF and World Bank support it's unlikely that more then ten billion in debt financing could be raised in the short to medium term.

That leaves oil. Optimistically, Iraq will be able to earn $25 billion a year through oil revenues, but since the U.S. is likely to privatize the Iraqi oil industry, only a fraction of those revenues may be available for government consumption. Still, any well- planned privatization initiative would provide the government with a substantial windfall. It is conceivable that just auctioning the production rights to operating fields to international consortiums, even with a requirement that they have a substantial participation by Iraqi nationals could provide upwards of $50 billion. Morris Adelman, an MIT economist, claims that selling production rights on currently no-producing reserves will bring in another $100 billion. Properly administered, this $150 billion total could underwrite most Iraq's currently known reconstruction needs. It will also put most of the bill for rebuilding the Iraqi oil industry squarely on the backs of oil multinationals.

Before oil production rights could be sold there is a further legal hurdle to be overcome. Both France's TotalFinaElf and Russia's Lukoil negotiated multibillion- dollar contracts with Iraq to explore and produce oil as soon as sanctions were lifted. Lukoil has already threatened to impound tankers carrying Iraqi oil if their contracts are not honored. Clearly, it would not be in the best interest of the Iraqi people to restrict any firm from future auctions. So, both of these firms, despite American desires to punish them should be allowed to participate in future contract bidding. By extension the contracts already signed while Saddam was in power were not in the best interest of the Iraqi people either, since firms that abided by the sanctions were locked out of the bidding process. Many legal scholars agree there is a strong case for throwing out these contracts.