Privatization of Iraq Economy

Introduction:

One of many important tasks waiting any administration in Iraq is to solve the current and expected political, economic and social problems. A new direction must be established for the development and reconstruction of the new Iraq. One of the most controversial issues will be the future of the public sector in Iraq.

Voices will rise to privatize all publicly owned businesses. Some will even demand to privatize the natural resources, including oil. Others may ask to keep everything the way it used to be because they don’t know any other way. All these and other topics are legitimate subjects for discussion. My main conclusion will be that:

* Privatization of the Iraq economy is a process in the right direction to stimulate free market economy. However, this process must not be prompt and without careful planning.

* Privatization of the Iraq economy does not necessarily mean privatizing the public sector. It means to create a healthy environment for the new emerging small businesses to be able to grow without legal and political restrictions.

* Privatization of the public sector does not necessarily mean the sell out of companies that employ hundreds of thousands and provide vital services to the public. It means to establish accountability, based on its ability to survive by its own without being a burden on the government. And, it may be able to generate a profit, and even pay taxes.

In this writing I would like to briefly review the history, and the role of government involvement in the Iraq economy. Also, I would like to give my detailed opinion and my recommendations for the future role of the public sector.

Background:

1- Both in theory and in practice there are four levels of government involvement in how comprehensive, and to what degree, they get involved in influencing the economy.

1. Free-Market Economy, such as the United States of America, where the government interferes only when the market fails in achieving its goal.
2. Central-Planned Economy, where the government has complete control of production, consumption, and distribution of all products and services, such as the Soviet Union during the communist regime era.
3. Free-Market Economy with a strong influence and interference of the government. The role of the government will be to assure the society of getting the basic products and necessary services at affordable prices to the public, such as many Western European countries, like U.K., Sweden, and France.
4. Totalitarian Regime, with a strong grab on the economy to strengthen their influence on the society for political gain and survival, such as Saddam Hussein in Iraq, Marcus in Philippine and Muammar Qaddafi in Libya.

The first three models of governments are very well known for its advantages and disadvantages. The last model is the worst of all, because it depends only on the will of the dictator in that country to do whatever he thinks will strengthen and prolong his regime.

During the 1920’s through the 1950’s, Iraq under the British influence started like a model “C” where the economy was under free market condition with a strong government influence on the direction of the construction to rebuild the new nation. But as we will see that Iraq under strong political influence came very close to model ”B” during the mid 1960’s through early1980’s. Then turned to the worst version, model “D” during Saddam era from the early 1980’s till his fall.

After the liberation and during the occupation, Iraq has been in total economic and social chaos.  The new administration and the Iraqi economists should conduct serious research to find the most efficient and suitable way to start re-building the nation and redefine the role of the government.

To be able to contribute an opinion about this matter, one must review some of the highlights of the major development for the last hundred years. One note in advance that we will see is that the public sector in Iraq was established well before Saddam’s regime. Also, to the contrary of many, we are going to discover that Saddam has systematically destroyed the public sectors that once were the best establishments of modern Iraq.

The beginning:
1- In the 1920s, the monarchy established civil institutions in Iraq.  The government started by expanding the vital infrastructures, like opening up roads, public transportation, electricity, drinking water, health services, school systems, a higher education system, irrigation, and whatever else was needed at the time.

2- In 1931 the Iraqi government issues a degree number 84 authorizing the municipalities to establish commercial and industrial companies.  In 1935 the government established the first bank to finance agriculture and industrial projects. In 1941 Rafidain Bank was established to lead the national commercial banking.

3- Because it was the sole major public enterprise in the country, the new monarchy state became involved in establishing the infrastructures and civil institutions. The task of planning and overseeing the construction was given to a newly adopted body named        “The development Board” ” “مجلس الأعمار with  a budget of 70% of total state oil revenue. This Board adapted ambition and comprehensive development plans for all the sectors in Iraq. The main sources to fund the plans came from collecting oil, land, and income taxes. In the early 1950’s the late Dr. Musadaq of Iran succeeded in increasing Iran’s share of oil to be 50% of the total oil revenue. In 1952 Iraq reached the same deal with the oil companies after preceded by Venezuela and Saudi Arabia. With this sudden abundant revenue, the board got a real boost in its revenue and achieved many important major projects such as dams, irrigation, and bridges.

4- In 1950 the first public national insurance company was established. In 1951 the first national mortgage bank started lending money to new home owners. Also in 1951 Iraq nationalized two oil refineries with compensation, and monopolized the distribution of oil products, such as automobile gas, to state owned companies. They also hired a united state contractor to build new refineries near Baghdad.

5- Between 1958 and 1963, the new republic issued many new degrees for land reforms, women’s rights, labor laws, and social justice. This period has established a record expansion in school system, public health, transportation, communication. The government encouraged small business in the trade and manufacturing sectors to expand through import regulation to protect the national industry.

6-In mid 1964 Taher Yahya’s government nationalized twenty seven of the large and medium scale privately owned manufacturing, trading and financial companies. Those companies were the most successful entrepreneurship in Iraq at that time. This was a set back to Iraqi entrepreneurs and small businesses.

7-By 1972, the oil industry was nationalized. The government had become the largest business institution in Iraq.  The government became the manufacturer, wholesaler and retailer of almost all products, from automobiles to table salt.  The system became so inefficient that despite the huge revenue from oil, people could not buy a frozen chicken without long, humiliating and stressful lines.

8- In the civil society, the government enforced its grip on trade unions, religious establishments, influencing the appointment of tribal leaders, rewriting history, influencing cultures, and redistributing the wealth to serve and to strengthen the regime.

The decline of state business:

9- During the Iraq-Iran war in the 1980s, a new way of manipulating economic activities in Iraq emerged. Gradually, the emphasis shifted from the state being the sole business manipulator to a new breed of shrewd businessmen led by the core of the family regime, their tribes, their allies, and their collaborators. Included in this new business scheme were the immediate family members of Saddam like his wife Sajeda, and their son, Uday. They worked as partners with the old merchants that already existed in the marketplace. New merchants were also created during the so called “explosive plan” which included a massive wave of construction during the seventies and the eighties. Those projects were of no added value to the economy because they were either for military purposes or to establish glory for the elite family governing Iraq through building statues, palaces, and ambitious military projects throughout Iraq.

10- During this period, the public sector almost vanished and family ran businesses associated with the regime were the dominant players in the marketplace. Those players were stealing from the public by buying good established businesses for way below its economic value. To give an example of that in the mid 1980’s the government auctioned “The flower mill in Medent Alhurria” في مدينة الحرية معمل الطحين”. It was sold to the one and only bidder “Hajj Khair Allah Telfah”. No surprise he is Saddam’s uncle and father in law.  What had happened in this period is very much similar to what happened in the immediate post Soviet era.

11- Kuwait was occupied by Saddam’s forces in the summer of 1990. During the spring of 1991 Kuwait was liberated and the brave uprising against Saddam in Iraq was brutally ended. The United Nations Security Council declared military and economic sanctions against Iraq. Iraqi oil stopped pumping to the international market and the huge revenue from oil exports ceased. Iraq entered a new economic era where the middle classes started suffering and lived as unfortunate poor people. A medical doctor or a university professor could not live off of their salaries. The majority of them started having second careers as cab drivers or as street sellers.

12- During the eighties, the Iraqi dinar started loosing value gradually. In the nineties Inflation became unbelievable. The 100 Iraqi dinars monthly salary received by an average state employee used to be equal to at least $300 in the seventies. After the Gulf War 1500 Iraqi dinars equaled one US dollar today. As the Iraqi currency started losing value, US dollars entered the open market as a second currency.

13- Because of the sanctions, the Iraqi government could not practice international trade through the normal channels or by the normal procedures. Oil started being exported through black market brokers. Those brokers found their partners represented by Saddam’s family and their inner circle. While Saddam and his followers were busy building their own personal wealth, average Iraqi families bore the suffering of the inflation.

14- The Iraqi market moved from being strictly controlled by government procedures and tight regulations to total chaos and full deregulation. This opened the door to cross border trade with Jordan, Turkey, Iran and UAE ports.

The only positive side effect of this was the rebirth of entrepreneurship in Iraq. All the small merchants in the local marketplaces learned to be sophisticated in order to earn a living. A lot of them changed merchandise lines as needed, to where the profit could be gained

Discussion and Evaluation:

There are many problems with the way totalitarian regimes manage their economy.  When the political system changes, people go to extreme measures and turn the economy around overnight without any preparatory steps for these changes.  That is what happened in Russia, and earlier in Egypt after the death of the late Abdul Nasser.

When the Soviet Union collapsed in 1991, the new post-communist regime rushed to sell out the state owned properties. The selling prices were not determined by market forces.  It was handed over at wholesale prices, without proper public auctions or bidding. That led the wealth of the nation to be transferred to a band of corrupted individuals from the old regime who took advantage of the transitional period.  This caused the rise of the so called “Russian Mafia” and the severe inflation that followed. This was the main reason behind the huge income gap among the people, which has been affecting the living standards of millions of Russian people until today.

Sooner or later, the new Iraqi state must address and answer very important questions about the role and the extension of the private and state run public sectors. There are voices demanding that whatever is left in the public sector run by the government is inefficient and ought to be sold immediately and run by the private sector.  This diagnosis may be correct, but the solution is questionable for the following reasons:

1- Who has the right to sell the state owned properties? Nobody has the right to do so until a permanent legitimate government is established in Iraq with its own constitution, legislation, and judicial system.

2- Who would be able to buy these properties if they were declared “For Sale” tomorrow?  Only the wealthy that can measure the value of these properties would have a chance. Those are the ones who have already established themselves during Saddam’s regime. That will be the best farewell gift given by the newcomers to the old regime elements. The Baathist will run the Iraqi economy the way they see fit and maybe they will have the right set up to buy their way back.

3- How and who will determine the selling price for each establishment, land, building, farm, hospital and others. The market forces have not established a beyond crisis economy yet. There is no fair transparent bidding system in charge. Prices will remain unstable for a long time to come.

4- The free market requires many suppliers for each product and service. There are many products and services supplied by only one supplier – that is state owned companies. Privatizing that company will not give the market additional suppliers to compete with.

Let us take the Postal Services and Telecommunications Company in Iraq. Instead of selling it to a private party, the government should encourage, finance and support establishing new telephone companies and new companies for mail and parcels. This will give the market pluralism in supply for that particular service.

5- The future legitimate government in Iraq should decide in step by step procedures the termination of any government involvement in economic and social activities, taking into consideration all results and side effects.

6- In an underdeveloped country like Iraq, economic and social crisis are very much tied to each other. The government needs to be the watchdog of economic activities and needs to establish laws and regulations to prevent the creation of a monopoly in any of the vital products or services to the nation, such as establishing a healthy banking system, monetary system, free market conditions, easing import regulations and encouraging exports.

7- A few years later, the market will recondition itself from crisis and a bottleneck distribution economy to a free market, where prices are determined by supply and demand. Then and only then, the legitimate government can put unneeded public properties for sale to the public.

8- The reinvention of economic and social interaction cannot be influenced by only one model, like the United States of America. There are many models based on a free market economy with the implementation of social justice, such as the models of UK, France, Sweden and Japan.
Conclusion and recommendations:
* The previous regime abused its power and interfered in the daily lives of Iraqi citizens.  This has to be ended by a new era of policies to open up the economy that encourages small businesses, manufacturers, contractors, farmers, merchants, traders, and import-export activities.  Helping and promoting healthy activities of small businesses will be essential in promoting a free market economy, based on competition, supply and demand, and managing the economy without crisis.

* The State will remain in control of national resources, such as the oil and water. This will make funds available to spend for the reconstruction of the nation through building infrastructures and managing the most important and vital civil services (like the education sector, health sector, public transportation, water, irrigation, and major state manufacturing complexes). This public sector will be accountable to the legitimate Iraqi law makers.

* Crude oil business should not be disturbed and should remain under state control for a long time to come. Crude oil is considered as valuable as a third river to Iraq and is vital to rebuild it. New oil refinery businesses and petrochemical industries could be very well opened to the private sector to improve the supply for oil products such as propane, petrol, and others.

* The State may remain a participant in economic activities, not as a sole monopoly for that product or service but as a competitor with the private sector to balance and relieve to prevent crisis.

* The private sector should be allowed to compete with the public sector’s main activities, such as public transportation, postal services, heath, education and telephone services, etc.

* The theme will be a healthy and aggressive competition between state run enterprises and private businesses managed by small companies. Gradually, this would give way for the private sector to lead the way.

* The marketplace will keep the profitable, efficient, socially responsible businesses and will flush out any companies that are public or private with disappointing activities and results.

* A lot of incentives have to be offered to the small businesses and a good regulation has to be established to protect the society from any corporate abuse.  This requires a balance of regulations and antitrust laws to motivate business on one hand, and to prevent corporate abuse on the other.

* Coinciding with that, the social security and pension system must be revised so the new market condition will not make life for the elderly, retirees, and state employees harder. Also, unemployment benefits and rehabilitation programs must be expanded to give an opportunity to all Iraqis to live with dignity.

* Encourage the independence of civil institutions from bureaucracy.

* Support the establishment and growth of non profit and non political groups.

* Free markets cannot be true tools for social progress and human justice unless they coexist with, and within, a politically free society including: freedom of speech, freedom of assembly, freedom of forming political parties, trade unions, associations, and freedom of press.

* The State should investigate all the major state owned properties sold during the last twenty years. It should point out those transactions that were carried out in an improper ways with prices under market value at time of sale. The State should have the right to repurchase those properties at the same value as they were sold.  These properties include state land, state buildings, state equipment’s, state firms, state crude oil, and state contracts.

Special Recommendations for Privatization:

* Privatization of Iraq economy is a process in the right direction to stimulate free market economy. However, this process must not be prompt and without careful planning. It may take at least a decade or two.

* Privatization of the Iraq economy does not necessarily mean to privatize the public sector. It means to create a healthy environment for the new emerging small business to grow without legal and political restrictions. The may even means that the state will support private sector to grow through financial support tax incentives.

* Privatization of public sectors does not necessarily mean the sell out of companies that employ hundreds of thousands and provide vital services to the public. It means to establish accountability, based on its ability to survive by its own without being a burden on the government. Also, it should be able to make a profit, and pay taxes.

* Privatization of the public sector does not necessarily mean to eliminate the role of the government in the market place. It means that the doors will be opened widely to the private investors to compete and that neither the state nor any single private company will have a monopoly on any economic activity.

* In the short run the industrial and commercial public sectors should be maintained in very good shape in order to play its role in this transitional period of providing the public with their products and services.

* In the long run the process of privatization should start working. Practical steps to modify the role of the government must be introduced. This process should take this timely order:

1. Privatize government involvement in retail business.
2. Privatize government involvement in distribution and wholesale business.
3. Privatize the non-essential public manufacturing companies with a condition that the new owners maintain the same employment and production level for at least five years after the sell-out.
4. The government will encourage each company to be purchase and manage by its own employees.

*Public sector will remain in the business of providing the basic, vital services to the public.  Such as: education, health care, transportation, banking, utilities, communication, and infrastructures.

*Strong anti-trust and precise regulations to prevent the concentration of power and wealth from falling into the hands of a few.

*Somehow regulations should be established to prevent the remnants of Saddam’s regime from taking advantage and holding a strong grip on the economy.

*Property, personal and consumption tax systems must be established. This system must be fair and stimulating to investors.  These taxes must be collectable. Strong and honest accounting and auditing regulations are necessary for tax computing and collection. Fraudulent tax return reports must be considered felonies punishable by jail sentence.

* Final note: “The sell out of state owned properties must be delayed until permitted by freely elected representatives governing Iraq.”

Mohammad Alnajafi

www.mhalnajafi.org

#Privatization, #Iraq