he Bush administration is on the brink of snatching defeat from victory in Iraq. If the White House loses the peace, it will be for reasons wholly unrelated to the current political fracas over the reasons for America’s invasion. The administration appears committed to maintaining a Leninist-style economic model for the Iraqi economy. Such a course will ensure the failure of Bush’s Iraq policy.
Along with North Korea, Iraq was one of the last Soviet-style economies left in the world. The Baathist government controlled the “commanding heights” of Iraq’s economy. The oil sector produced more than 60 percent of the country’s GDP and 95 percent of its hard currency earnings. Only small-scale industry and agriculture were left to private entrepreneurship.
Dealing effectively with Iraq’s vast oil reserves is the central challenge for post-Saddam Hussein reconstruction. The nation’s oil reserves are second only to Saudi Arabia’s. Saddam so mismanaged the economy, however, that the vast oil reserves did not translate into a decent way of life for the Iraqi people. Creating private-property rights that cover natural resources is the key to unlocking the wealth otherwise hidden in such resources.
In Property and Freedom, Richard Pipes, Harvard’s distinguished Russian historian, chronicled how private property is the source of both political and economic freedom. In our Cato Institute paper, “Property Rights: Key to Economic Development,” we develop the connection between freedom and prosperity. The freedom and prosperity of the Iraqi people hang in the balance.
Bush administration officials are reportedly unwilling even to discuss privatizing Iraq’s oil. If the White House does not establish private-property rights in Iraq, especially for its principal resource, then the United States will have fought a war to maintain a Soviet economy in the Middle East. Before long, one dictator will be replaced with another. The lives lost and money spent will have been for naught.
Private-property rights provide a peaceful means for allocating resources where violence would otherwise reign. By establishing title to income streams, property rights enable people to trade money for more titles, or vice versa. The absence of private-property rights in natural resources drives civil wars. This is true whether the resources are oil or diamonds, and whether the locus is Angola and Nigeria, or Liberia and Sierra Leone.
Maintaining state ownership over the oil industry in Iraq will ensure a struggle among competing ethnic groups. Winning at the ballot box will bring the victor control over oil. Elections literally become life-and-death struggles. Losers cannot afford to accept the outcome. Again, that scenario has played out in Africa and the Middle East, regions that account for 70 percent of all major conflicts in the world.
State-ownership of natural resources, along with sharp ethnic differences, is a recipe for political instability and sub-par economic growth. The only stable political outcome is a dictatorship powerful enough to impose order and divide the spoils. That is precisely what happened in Iraq, and helps explain the longevity of Saddam’s rule.
The Bush administration must dismantle Iraq’s central-planning system. Implementing democracy without privatizing the oil industry could actually make the situation more volatile. Placing 500,000 troops in Iraq for 50 years will not bring peace in that circumstance. Ask the British.
There are numerous methods for privatizing state-owned enterprises in former Soviet-style economies. In Eastern Europe, some governments distributed tradable vouchers for shares in firms. Ariel Cohen of the Heritage Foundation argues that Russia’s privatization of its oil industry, as messy as that process was, holds lessons for Iraq. There is no shortage of sound ideas for bringing private property to Iraq. There does appear to be absence of will, however, in the Bush administration to take on the challenge, even though nothing less than the success of its entire Middle East policy is at stake.
— Gerald P. O’Driscoll Jr. is a senior fellow at the Cato Institute. Lee Hoskins is a senior fellow at the Pacific Research Institute. O’Driscoll is the former vice president of the Federal Reserve Bank in Dallas and Citigroup, and Hoskins is former president of the Federal Reserve Bank in Cleveland.