Restore peace in Iraq first, then repair the economy

  • Dick Startz
  • Tuesday, July 13, 2004 9:00pm
  • Opinion

Here’s a forecast that’s guaranteed: The near-term news from Iraq is going to be tough. More Fort Lewis soldiers are headed overseas and some of our neighbors in the Individual Ready Reserve face call-up.

No matter whether the situation gets better or worse in the short term, life in Iraq won’t be anything like what we had hoped for when the war began. The federal government’s General Accounting Office reports that electrical service has yet to recover to pre-invasion levels.

But there may be a glimmer of a brighter future. Let’s consider the economic fundamentals and try to look ahead a few years.

We tend to think of Iraq as a poor country, not famine-level poor perhaps, but nonetheless impoverished. In fact, Iraq has two historical factors going for it that offer significant economic potential. Let’s come back to these two factors in a minute. First, the key to understanding today’s Iraqi economy is to use the word “impoverished” as an active verb, as in:

“Saddam Hussein impoverished Iraq.”

When Saddam seized power 25 years ago, Iraq was a moderately well-off nation. Economic output per person was a little bit higher than it was at that time in Mexico, and about 40 percent more than in South Korea. In the ensuing 25 years, the Mexican economy performed well and the Korean economy skyrocketed.

In contrast, by 1998 Saddam had driven Iraqi output down by a factor of five; that is for every dollar the average Iraqi made in 1973, he only made 20 cents by 1998. Usually, economies grow given enough time. Occasionally, economies have long flat spells. Saddam’s feat of wiping out Iraq’s economy is nearly unprecedented.

America can’t undo Saddam’s use of torture or poison gas. Possibly, just possibly, America can help the Iraqis undo the damage to their economy.

What are the two factors that offer the glimpse of hope for Iraq’s economy? The first factor is Iraq’s economically successful past. Recreating prosperity is an easier task than is building prosperity from scratch. The second factor is, of course, oil.

If we go back 50 years, long before Saddam was on the scene, Iraq’s economy was about at the level of Puerto Rico, Greece or Japan. The hope is that the Saddam economic disaster buried the underlying ability of the Iraqi economy without actually destroying it. People remember – or heard from their parents – how to build a business, how to be an entrepreneur and how to invest for the future.

There are numerous examples of countries that have dug themselves out after long periods of economic disaster. Think Western Europe after World War II. Think Eastern Europe after being freed from communism.

The optimistic view is that the older generation in Iraq retains the memory of how to build economic success. However, literacy in Iraq is down to 40 percent, and less than a quarter of women can read. (Contrast neighboring Iran with an 80 percent literacy rate overall, and where three-quarters of women can read.)

The pessimistic view is that the current generation of young Iraqis hasn’t had the opportunity to learn much other than how to be cannon fodder.

Factor two is crude oil. Iraq possesses about 10 percent of the entire world’s oil. Proven reserves are something like 110 billion barrels. At today’s (admittedly inflated) prices, that’s $4 trillion worth of oil. Dividing Iraq’s oil wealth by the size of Iraq’s population comes pretty close to the same value you get by dividing all American assets by America’s population. So while current Iraqi income is awfully low, Iraq’s wealth level is quite high.

In principle, Iraq’s oil reserves provide sufficient collateral to borrow against in order to educate the population and modernize factories. If Iraq can re-enter the world of international commerce as a peaceful, trustworthy trade partner, a rapid restoration of the economy should be possible. Full restoration of a much higher standard of living will take years, but needn’t take decades.

When nations trade, they learn to deal decently with each other out of self-interest. After World War II, America turned battlefield foes into economic partners.

Perhaps after Gulf War II, America can reprise this role in Iraq. If we succeed in helping the Iraqis restore peace and security and become a nation of laws protecting both persons and property, if we succeed in helping the Iraqis re-establish a healthy economy, then it will follow that Americans and Iraqis can become first economic partners and then real friends.

Dick Startz is Castor Professor of Economics and Davis Distinguished Scholar at the University of Washington. He can be reached at econcol@u.washington.edu.

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