Iraq’s economic reforms

Less than five months after the end of major combat operations, Iraq’s newly appointed finance minister has announced extensive free-market economic reforms, including “allow[ing] up to 100 percent foreign ownership in all sectors except natural resources.” The new policies have the potential to bring about momentous change — not only for Iraqis, but for hundreds of millions of impoverished Arabs and Iranians who populate the rest of the Mideast. Iraqi Finance Minister Kamil Mubdir al-Gailani announced the new initiatives at the annual meetings of the International Monetary Fund and World Bank in Dubai. Establishing an independent central bank and a maximum individual and corporate tax rate of 15 percent, the reforms also will permit 100 percent foreign ownership of several Iraqi banks and the full repatriation of profits, as well as other incentives to attract desperately needed foreign investment.

The embrace of an entirely new economic model is clearly a major step in the right direction. While not a sufficient condition for Iraq’s economic development, the adoption of free-market policies represents an indispensable condition for the nation’s economic advancement. In the Arab world, moreover, the step can be fairly characterized as revolutionary. But, if Iraq’s 25 million citizens are to realize the potential that free markets offer, their efforts cannot be stifled by the smothering foreign-debt burden bequeathed by Saddam Hussein. Massive relief from weapons-related debt and war reparations also will be necessary.

At the moment, it is understandable why the evolving Iraqi government chose to exclude the oil industry from those subject to foreign control. Iraq’s natural-resource patrimony includes more than 100 billion barrels of proven oil reserves and more than 100 trillion cubic feet of proven natural gas reserves. Many oil-industry experts believe Iraq’s oil endowment is at least double the official estimate of 112 billion barrels, which already makes Iraq’s oil reserves the world’s second-largest, trailing only Saudi Arabia’s 264 billion barrels. The decision to welcome foreign investment in the oil industry is best left to an elected government. But it is an option that Iraq will need to seriously consider if it wants to develop its untapped oil fields quickly enough to finance the nation’s redevelopment.

Russia, which is the world’s second-largest oil producer, recently accepted a 50 percent stake in its third-largest oil company by British oil major BP because it wanted to develop its oil and gas reserves more rapidly. With BP’s agreement to invest nearly $7 billion, Russia achieved the collateral benefit of legitimizing itself as an acceptable place to invest billions of dollars. As Treasury Secretary John Snow pointedly observed in Dubai, “Capital is a coward.” As such, it is thus unlikely to flow to Iraq until stability is achieved. If Iraq then wants to prove it is an acceptable destination for foreign investment and to increase its oil output, it may want to follow Russia’s path.