Neoliberalism, conflict and an oil economy: the case of Iraq.

INTRODUCTION

THREE MAIN ECONOMIC PRESUPPOSITIONS underlie the view that in March 2003 Iraq's economy was in need of extensive and rapid liberalization and privatization. The first is an assumption that the private sector was severely constrained by public ownership and strict etatist policies including allocation and pricing policies that distort economic incentives and outcomes. Second, that the public sector was inefficient and corrupt, and so bureaucratic and technologically backward as to be beyond the possibilities of rehabilitation and reform, and that privatization would inevitably enhance productivity, help develop much-needed managerial skills and improve the utilization of resources. The third premise is that Iraq was and remains in need of great infusions of foreign capital, and that skills and advanced technology can only be accessed by creating an especially attractive business and regulatory environment for foreign capital and multinational enterprise to commit to a country that is otherwise risky. A fourth and separate premise for a radical liberal economic agenda relies on the operational and political arguments that the destruction of a highly centralized and authoritarian political system and the breakdown of law and order have made it impossible to operate any coherent intervention into the economy, thereby arguably necessitating a liberal market agenda.

This article critically examines the above presupposition with reference to Iraq's actual economic structure and its evolution during the period of war and sanctions up to the 2003 occupation of the country. It is argued that many of the presumed policy, administrative and economic shortcomings are in fact characteristic of structural and historical features of the Iraqi situation, which are respectively, the state of conflict and an economic dependence on oil. In failing to address these characteristics through appropriate economic policies, the neoliberal agenda does not serve to rehabilitate the economy and accentuates conflict. Furthermore, that agenda itself is also faltering.

NEOLIBERALISM BETWEEN ECONOMIC REFORM AND POLITICAL EXPEDIENCY 

Economic arguments advanced in support of a neo-liberal policy agenda tend to rely on little in the way of analysis of Iraq's own economic conditions and the policy environment prevalent over the prolonged period of war and sanctions prior to the invasion in 2003 and in its immediate aftermath. These arguments were framed mainly by US officials, international organizations, policy think-tanks and advocacy groups. The discourse upon which they were based have tended to offer a partial and selective interpretation of the historical record, ignoring many specific attributes of the Iraqi economy and disregarding changes in policy, economic institutions and prevalent conditions. Assessments by senior US officials underpinned their government's declared economic agenda, usually downplaying the effects of prolonged sanctions and the military destruction of the infrastructure and overemphasizing the role of failed non-market and interventionist economic policies. (1) A wide gap exists between these assessments and the main academic research on the Iraqi economic malaise, especially the work of Alnasrawi (1994 and 2002) who emphasizes the debilitating consequences of the Iran-Iraq war and the devastating effects of the 1991 war and the prolonged sanctions. These studies point to the monumental blunders of waging war, the consequent militarization of the economy and the harsh international response as the major causes of Iraq's economic malaise, rather than inherent inefficiencies and failures of the government's economic policy orientation. Similar conclusions are implied in other assessments. Al-Shabibi argues that given the strategic vulnerability of a structurally oil-dependent economy, waging a war that further exposes the country's weakest economic link amounts to major political folly (Al-Shabibi 1997). Similarly, the Economy and Infrastructure Working Group of the US State Department's Future of Iraq Project, while identifying economic problems and limitations resulting from the Iraqi government's low tax policy, deems the main consequence of this policy to have been the political one of foregoing accountability. (2)

In the absence of much reliable data and lack of a conducive environment for research on the Iraqi economy, the discourse of mainly US official institutions and policy establishments has attained wide currency especially in policy-making circles. Neoliberal policy agendas are also reflected in comment straddling the academic and policy domains (Looney, August 2003; Foote et.al.2004), and they are presented completely uncritically in yet more cases (Cohen and O'Driscoll 2002). Studies and reports of multilateral financial institutions have also leaned towards the assertion that the dominance of the state in economic activities and the interventionist policies are a main cause of Iraq's present economic malaise (IMF 2003; UN/World Bank, October 2003). While a critique of the economic role of the state is necessary, this expedient approach where policy agendas drove the analysis rather than the reverse, is at odds with research into the economic and political environment, institutions and policies, and into what Owen (2006) describes as Iraq's economic trajectory. Furthermore, the adopted approach ignored research into specific economic problems and issues arising in war situations and failed to formulate appropriate post-war economic policies. Established research identifies numerous characteristics of war economies that call for better understanding and specific tailored policies to address the rigidities of war economies. The prevalence of duality and parallel markets, the low responsiveness to price and exchange rate adjustments, the behavioural emphasis on risk aversion, the inefficiency of markets in synchronising signals in favor of restructuring economies away from war-time requirements and many other aspects of post-war economic management require nuanced and locally specific policies. (3) In these circumstances, externally imposed policy agendas and the tendency to dismiss policy advice, (4) even from the closest quarters with little reference to the social and economic costs inevitably yield negative outcomes.

Given the multiple and severe nature of the shocks suffered by the Iraqi economy and society since the 1970s, beginning with oil boom and bust, political turmoil, destructive wars and the militarization of society, and the long period of sanctions, it would be impossible to determine the effects of any one aspect of past economic policies upon the outcome. The full range of state intervention measures, including price regulation, subsidies, trade restrictions, discretionary high welfare spending, development programs and public-sector owned or supported enterprises are to be found under different economic systems and are part of the experiences of most countries of the region, including non oil-exporting countries and a number of countries that had not adopted widespread programs of nationalization. All these measures were part of the post-colonial economic and political order that had privileged state-led national development strategies and economic policy regimes that relied upon industrial policies and attempted to use sectoral and expenditure priorities as well as social policies to influence income and wealth distribution. Such were the experiences of, among others, Egypt, Syria, as well as Iraq.

The problems faced in implementing these strategies and the retreats from them have usually led to prolonged periods of policy uncertainty. Reforms in most countries of the region were slow and undecided, the agendas being driven by competing domestic and international pressures. The thrust of the reforms demanded by International Financial Institutions (IFIs) was focused on macroeconomic adjustment, leaving the transformations necessary for meeting the conditions of adjustment to be subject to domestic political balances among competing interests (Kienle 2001, 144), some of which are generously aided by US and other external programs. (5) In other words, much of the liberalization policy rhetoric was little more than just that. To be sure, cuts in subsidies required by IFIs generated wider effects and opened the way to radical policy changes in property rights (Bush 1999, 29-39), but competitive markets and equity considerations come as secondary objectives to that of strengthening property rights, and these secondary objectives are not pursued beyond the changes that widen the scope for private capital.

These reforms had to be negotiated through the tensions between on the one hand, a neo-liberal vision advocated by outside forces, and on the other hand, the economic structures, livelihoods and institutions of the real world. Though these real world structures and institutions were acknowledged not to have delivered the aspiration of "development," radical reform agendas lacked strong bases of social and political support, especially since the business sector was also dependent upon state patronage and wary of external competition. In other words, institutional and sectoral reform programs are subject to different political and social pressures that do not always result in a coherent program. Attempts to reach consensus on a coherent program are also confronted by the reality that the terms according to which a small backward economy engages the international system do not permit effective regulation of open externally oriented markets. This is what leads MacEwan (2001, 5) to argue that "the rise of a market-oriented policy is a major obstacle to democratic economic development."

OIL, STATE AND THE NEO-LIBERAL MODEL

Iraq's economic system and its domestic and external economic policies have a strong connection to the dominance of oil over the country's economy. Oil dependence is a historic structural characteristic that cannot be altered by quick fixes and political decisions without destructive consequences. Attempting to radically change, the relationship between oil and the economy is a long-term strategic goal that is theoretically aspired to by oil exporting states generally, but one that has eluded most of these states. Extensive literature covers the relationship between oil revenues on the one hand, and the politics, economics and societies of oil exporting countries on the other. The literature tends to emphasize the processes through which oil production and revenues affect economics, politics, institutional structures, social behaviour and even cultural attributes. This literature is well-known and major studies beginning with the pioneering work of Mahdavy (1970) have informed analyses of the experiences of oil exporting countries. The economics side of the literature was subsequently enriched by the literature of the Dutch Disease, the relationship between the exploitation of natural resources and a decline in the manufacturing sector (Corden W.M., Neary J.P. 1982, Van Wijnbergen 1984), and it was also partly reflected in the study of Britain's de-industrialisation (Rowthorn and Wells 1987). Development economics literature investigated the manner in which oil rents affect the economy at different stages after initial expenditure injections, and over time as injection levels fluctuate (Gelb et. al. 1986). This literature also analyzed other country's experiences individually and comparatively (Auty 1993, Gelb et. al. 1986, Askari 1990). There are also specific sectoral studies dealing with the impact of oil (Mahdi 2000), and studies of the effects of different types of expenditure upon growth (Askari 1990). The influence of rentier economies predicated on rent revenues development on institutions is also extensively researched in (Chaudhry 1997, and Karl 1997).

A part of the rentier state literature focuses on the smaller states of the Arabian Peninsula and Saudi Arabia where the pre-oil economies were either very weak or not greatly integrated (Beblawi 1990, Luciani 1990 and Luciani 1994). The dominance of the state over the economy is highlighted as a structural feature, and the impact of oil on the political process is taken up in detail in some writings (Ismael 1993, Crystal 1995, and Okruhlik 1999). Beblawi (1990) also advances the notion of a rentier culture built on the expectation of success of rent-seeking behaviour, and all this literature emphasizes the importance of oil in many different aspects of the economy and society.

In analyzing the experiences of oil exporting countries, the researchers mentioned above and also many others have generally deployed concepts and tools to specific situations in their wider historical contexts. This is at variance with a new body of literature that attempts to abstract the histories of the countries concerned and to deduce general behavioral patterns allegedly broadly applicable to political systems in oil exporting countries. (6) In particular, this latter literature addresses questions of the incidence of dissent and civil war, and of regime survival and the presence or absence of democracy in a statistical approach that uses pooled data from a large number of very different countries over time. Some of the discussions of rentier states have postulated a relationship between authoritarian and repressive rule on the one hand, and the availability of oil revenues on the other (Claes 2001, 114-21). However, even where such a relationship is suggested, it is accepted that this can only be a complex one, depending upon several other characteristics of the countries concerned, including country size, diversity of economic structure and social make-up, regional variations and the relative size of the oil sector (ibid.). While oil has been a factor in Iraq's conflicts, dependence on oil revenues does not explain the outbreak or development of conflict. In the Iran-Iraq war, both protagonists were oil-exporting states, but they had radically different positions regarding the financing of their war-time economies, reflecting different relationships between the people and the respective regimes (Parasiliti 2003). (7) One can therefore reject the notion that the Ba'ath regime's militaristic behavior and its destructiveness can itself be explained in terms of Iraq's finances and the country's economic system. However, it remains correct that oil revenues and the strategic importance of oil sway policy options and political and economic developments.

Given the complexity of the rentier state and Dutch Disease phenomena, the ahistorical approach tends to shed detailed research into social processes and the dynamics of relevant factors in favour of investigations of apparent co-incidences. Conclusions about likelihood of events based on analyses of international patterns in a specific recent period shed little light on our understanding of why such patterns may be reproduced in any specific case. The generic descriptions of these patterns are even more questionable when they are taken to imply causation, and when a link is postulated between oil revenues on the one hand, and poor economic management and arbitrary government on the other.

A different way of approaching the question of the rentier state is by acknowledging the specific nature and the limitations of oil revenues and the limitations of their role in the development process. This would mean that the dominance of finance over the development must be addressed, as must the role of the state. The issue of finance is not a problem that can be solved by means of establishing fixed rules that prevent the distorting effects of revenue fluctuations. To be sure, rules can theoretically be established for the smoothing of oil financed government expenditure and for reducing the pressures on real exchange rates, and at the same time separating the use of oil revenues from the arbitrary intervention of politicians or from a political cycle (Stiglitz 2005). However, as Stiglitz himself acknowledges, the issue is not so much a technocratic one, but more of a political and institutional one (ibid.). Moreover, as Streeten (1997, 230) argues, policies are substitutable and avoidable, and conditions that are externally imposed may be met by a government which then uses "other policies [to] circumvent the intended result of the condition" (1997, 230). While Streeten was referring to aid conditionality, the same principle applies to other imposed conditions or constitutional hurdles. In other words, resort to fixed rules can be circumvented and the principle behind those rules can be subverted.

The answer ultimately lies in creating an active, lively and flexible policy environment, and policy-making institutions under the effective oversight of monitoring bodies, a free media, political institutions and above all, an informed public. Simply emasculating the state's policy-making capability does not address the problem, but can complicate it instead. Fixed rules separating the current from the development budgets were in operation in Iraq under the Development Board in the 1950s, but they did not prevent government expenditure from serving powerful interest groups, nor did they guard against a rentier effect on the economy (Mahdi 2000). Similarly, constraints on monetary policy were effective through Iraq's membership of the Sterling Area until 1959, but that only confirmed an existing passive monetary policy (Penrose and Penrose 1978, 257) without preventing inflation.

Policies that lay emphasis on the reduction of government discretion and that stress the alienation of its economic and financial authority by means of fixed and pre-determined rules do not address the economic problems of a rentier state and may in fact accentuate them. The literature on oil-exporting countries helps us understand relevant problems and issues of development and can indeed guide policy formulation. Yet, the variety of policies and strategies adopted by oil exporting countries is considerable, and they do not lend themselves to uniform explanations of performance. Moreover, the criteria of measuring performance has frequently not been comparable. In particular, the so-called "resource curse" has variously been interpreted as one of absolute impoverishment (Hausmann and Rigobon 2003), or relative poor performance in comparison with resource availability (Auty 2001). Periods and coverage of data are also highly sensitive to oil market fluctuations, to national accounting idiosyncrasies and to the damaging effects of wars and sanctions. Thus, the phenomenon of the "resource curse," the Dutch Disease effects and the distorting effects of a rentier state are sometimes exaggerated or unduly generalised, and taken out of a particular historical context and misinterpreted. As Chaudhry (1997, 187) notes, "efforts to stretch the theory of the rentier state to fit the case often result in contradictory analytical trajectories that originate in the same set of initial observations." In particular Chaudhry notes that the rentier state concept has been held responsible for both political stability and instability and that rentier states have variously been portrayed as "strong" and "autonomous" or "weak" and "ineffectual" (Ibid, 188). In other words, it is necessary to go beyond the notion of a rentier state by adopting a more intricate understanding of the state without ignoring the rentier phenomenon. The main conclusion to draw from these studies of oil exporting states and economies is that the role of the state and of economic policy are more not less necessary than in non-oil economies, and that the task of economic management and regulation is more intricate for it to succeed in effectively utilising available resources, diversifying the economy and enabling the growth of productive business and private initiative. Contrary to these conclusions, neoliberal prescriptions for Iraq promoted by IFIs continue to rely on notions of an adversarial dichotomy between state and market, leading to recommendations that incapacitate the state's ability to develop appropriate policies.

WAR, SANCTIONS AND APPROPRIATE POLICY RESPONSES

Since 1980 Iraq has been in an almost continuous state of open conflict involving consecutively, and at times contemporaneously, full scale military hostilities, comprehensive economic sanctions and total foreign occupation. Aside from the loss of human life and the degradation of labor capabilities, the extent of the destruction of assets and of production capacities, and even the loss of opportunities that can be directly attributed to war have been considered in a number of writings (Alnasrawi 1994). The 2003 joint United Nations and World Bank assessment of reconstruction costs is also an implicit estimate of the costs of the US-led invasion and its immediate aftermath however there can as yet be no full assessment of the catastrophic consequences of the occupation and conflicts since.

While all these studies show the enormity of the destruction wreaked on Iraq by war, calculations of costs and the emphasis on physical reconstruction do not normally address war's transformative impact on societies, economies and state institutions. In considering the prolonged period and deep consequences of Iraq's conflicts, it is necessary to take into account how the conditions of war and sanctions have been embedded in Iraq's economy and institutions, and to address the implications for appropriate policies based on the post-conflict reality. After 2003, a reconstruction discourse has become prevalent in official circles and sometimes popular outside of those as well. This discourse tends to treat war as a discrete event with consequences that can be identified, isolated and dealt with by ready-made measures and policy prescriptions. In contrast, Owen (2000, 326) questions whether war should be treated as a single unified object of analysis or whether we should be concerned with the "cumulative impact of repeated conflict." Here, emphasis is placed on qualitative change and on social dynamics, on the rapid emergence of new social groups and the altered relationships amongst pre-existing social groups. The combination of different kinds of war, different forms of external intervention, and sanctions adds pertinence to this observation. This is especially the case since the social responses and institutional developments that have evolved to deal with each of the consecutive conflicts have been different. In other words, wars must not be treated simply as political and military affairs with adverse economic consequences. Stewart and FitzGerald (2001,2) state that while

   much has been written by historians on the economic costs,
   and benefits (such as technological and organizational
   progress), of military activity in industrial countries, modern
   development economists tend to treat countries at war as
   subject to exogenous developments which take them outside
   the normal realms of analysis.

They also note that "the precise mechanisms through which these adverse effects [of war] occur, and whether they can be offset or prevented, is much less often discussed" (Ibid.). Moreover, international organisations that promote a neoliberal orthodoxy and which currently exercise a powerful influence on economic policy-making in Iraq, have themselves tended to either ignore the impact of war on the economy or to treat it as a "temporary disruption" to development paths (Ibid., 2-3).

What can be said for war also applies to the prolonged period of comprehensive economic sanctions imposed against Iraq during 1990-2003. The sanctions have frequently been considered in terms of their efficacy in achieving declared or intended political objectives, or in terms of their humanitarian consequences or economic costs, but again, they frequently are treated as external to any domestic social processes, and institutional responses tend to be taken as passive. Important exceptions and examples of social analysis can be found in Dreze and Gazdar (1991) and in Gazdar and Hussain (2002).

The neoliberal agenda advocated for Iraq takes as its starting point the status of Iraq's economic structure, its institutions, and its policies during the late 1970s before considering mainly quantitative changes since that time. Economic and social policies are taken as if they had been at a standstill, and the same discourse of reform and liberalization that spread elsewhere in the Middle East and in other underdeveloped regions is brought to Iraq in a ready made fashion, only twenty years later than most other countries. The neglect of the consequences of war on social and institutional change has been observed in other studies pertaining to the Middle East (Heydemann 2000). Both Heydemann (Ibid.) and Owen (2000, 326) emphasize the external dimensions of conflict and its historical context. In considering economic policy, we therefore need to examine the periods of war and sanctions for their effects on the regulatory role of the state, the development of its extractive processes, the structure of production, the direction of technological change, the formation of skills and mobilization of labor, the nature and role of the bureaucracy, and the wider questions of the redistributive functions of the state, state autonomy, state-society relations and the forms of legitimacy of state authority, all in as much as they circumscribe economic policy making.

Especially important for Iraq as for other cases in the Middle East and elsewhere is the phenomenon of the transnationalization of war (Heydemann 2000, 13). In economic terms, the ability to prosecute war is not based only, and perhaps not even mainly on the economic resources of the country concerned. Economic policy therefore has to be highly dependent on the state's relationship to its external environment as well as its role in mobilizing domestic resources and organizing economic life. The notions of location and strategic rent considered by Beblawi (1990, 95-6) with regard to the non-oil exporting states of the Arab region have also been used in the case of Iraq during the Iran-Iraq war (Al-Khafaji 2000, 273-4). Institutions and behavioural patterns that have developed to take advantage of strategic rent have been built into the political economy of the country, not only at state level, but also at sub-state level. In the Kurdish governorates, the administration set up in 1991 by the parties of the Kurdistan Front was profoundly affected by the flow of foreign aid and the activities of foreign non-governmental organizations (NGOs) (Graham-Brown 1999, 302-3). The Kurdish region continued to receive strategic rent, first as aid from western donors, and subsequently as an enhanced share of oil revenues under the Oil-for-Food program and beyond.

The relationship between strategic and oil rents is not a simple one. They each may influence or reinforce the effects of the other, but they also have different and sometimes conflicting dynamics with regard to state autonomy and state-society relations. Strategic rents can also smooth the fluctuations of oil rents as they did for Iraq following the closure by Syria of the Kirkuk-Mediterranean pipeline in 1982, or they can accentuate those fluctuations as was the case following the imposition of sanctions after Iraq's invasion of Kuwait when strategic rents and other external financial flows came to an even more abrupt end than oil income. In either case, these two sources of rents influence state-society relations, and they also do so in what may be considered perverse ways. Acquiring strategic rents may call for greater mass mobilization and may be predicated upon both the militarization of society as well as on a war-related pattern of entitlements. External resources empower the state and enable it to carry out mass mobilization. At the same time, a measure of acquiescence, perhaps gained through economic entitlements may be necessary to strengthen social solidarity and extract strategic rents. Strategic rents are forthcoming as a result of strength where an element of extortion may be at play. Conversely, strategic rents may be gained as a consequence of weakness and where a potential source aims to avert an undesirable collapse.

There is reason to contend that all the above scenarios had been present in Iraq during the 1980s, and that analogous factors may have influenced state capacity and government policy during the 1990-2003 sanctions period. Iraq's conflicts were primarily with other states, although they also involved a large element of civil conflict. Historically, states that survive conflicts with other states may be expected to emerge with an enhanced capacity for extraction and resource mobilization. In the case of Iraq, the rentier nature of the state, the juxtaposition of inter-state and civil conflict and the asymmetric power relationship with its imperial protagonists of the past decade and a half have complicated the outcome. The extractive capacity of the state beyond the acquisition of rents has not been enhanced in the long term. On the other hand, the state's ability to mobilize resources for war, for war-related purposes and for reconstruction was variously and differentially enhanced or weakened, for different purposes and functions, and in different regions of the country. The state's capability to mobilize resources for war was considerable up to the eve of the occupation, and the present military mobilization of the resistance to US occupation is to some extent a reflection of that capability. Similarly, the state's capacity to organize a basic nutritional safety net (8) and to reconstruct war damage was enhanced by the forms of direct intervention, continued central control of key resources (9) and militarization of key production units. (10) However, the state was forced to retrench, first away from direct control of manufacturing, and subsequently through a considerable reduction of a welfarist commitment, and eventually in the decline of the authority of the state in peripheral areas and its total withdrawal from the three Kurdish dominated governorates in 1991. Beyond the provision of a basic food ration, the Iraqi state abandoned its commitment to improve the supply of mass consumer goods at subsidized prices and its policy to provide scarce foreign currency at the official exchange for the supply of household and private transport goods was severely curtailed.

The comprehensive nature of the sanctions imposed in 1990 affected not only the state, but the entire Iraqi society (Simons 1998). The consequences of these sanctions were felt not only on the relationships between state and society and state and business, but they also sharply altered the positions of different groups in society and the relationship of these groups with each other. Of particular interest to us is the relationship of the state with private business, but we also consider the relationships of different sectors of business with each other and the relationship of business with labor and the private sector with the public sector. The war with Iran, the 1991 Gulf war and the sanctions profoundly affected the economy and state-society relations. As Chaudhry (2002) notes, the Iraqi state under war conditions and financial strains, attempted through the privatizations of the late 1980s to switch its strategy in favour of support for a narrow and weak capitalist class. The policy change was in line with the emerging neoliberal orthodoxy, and it failed and was partially reversed. In that process, the state shed a large part of its popular support that had been based on the state's developmental and redistributive roles, forcing a redefinition of that role in terms of its most basic mission of the provision of a ration of staple food, fuel and other essentials, and a lower level of collective services in a time of war and sanctions. As Chaudhry (2002, 261) points out, it was the suffering caused by UN sanctions which enabled the government to redefine its role with respect to society and the local economy, and to pursue the inevitable narrowing of its economic functions. The same experience is repeating itself in the period of occupation where reform of the public sector, the ration system and subsidies is proving very difficult, but this time the government lacks the same power and authority, and it is being dictated to by the US and the International Monetary Fund (IMF) in a manner that weakens an already fragmented state power. In effect, neoliberal policies are being implemented through the destruction of the state's policy-making capability rather than through liberalization.

US OCCUPATION AND THE FORECLOSURE OF ECONOMIC POLICY OPTIONS

In this respect, Iraq's experience under US occupation differs from other attempts to implement a neoliberal agenda. While decisions are usually liable to group pressures and to complex administrative and political constraints, the measures taken by the occupation administration in Iraq have been driven by fiat and through a highly centralised, if disembodied executive decision. An alien unaccountable administration with unlimited powers set out to completely restructure the economy after largely destroying the highest decision-making institutions, structures of authority and the organizational arrangements. The Coalition Provisional Authority (CPA) took full executive powers through its own foreign, mainly US, appointed "advisors" who were assigned to ministries and other state institutions. Despite the colossal physical destruction of public facilities and state institutions, and the decapitation of the top tiers of power, the structure of authority within these institutions was quickly re-established, largely from within the institutions and establishments themselves. (11) In many cases, workers and officials protected their establishments and work premises against onslaughts by rampaging mobs, many of whom were armed and had free reign of all public space as occupation forces failed to discharge their responsibility for the protection of life and property. (12)

Despite re-established intra-organizational authority and working arrangements, communications between departments remained disrupted and coordinated decision mechanisms relying upon higher level authority or on joint departmental action was problematic. In part, this was due to the breakdown of the financial system resulting from assaults on banks and counterfeiting currency, but the main problem was the sudden absence of higher level decision-making in a centralized system and the emasculation of administrative and financial authority further down the organizational chain. (13) There were subsequent knock-on effects due to the open-door foreign trade policy instituted by the CPA, the destruction or looting and smuggling of equipment and inventories, the disruption of supplies due to sudden suspension of Oil for Food contracts, the inability to enforce goods or foreign exchange allocations for the public sector and the ration system, the collapse of price and financial regulations and controls, coupled with sharp changes in wage structures brought about by decisions of the CPA administration. In short, the state apparatus and institutions normally charged with formulating or implementing policy were faced with a vague and unfamiliar system of control, dramatic physical destruction, absence of security, interruption of normal power and communications systems, and loss of control over their resources. Failure to re-establish co-ordinated decision-making was also due to the collapse of what has been described as the "shadow state" under the Ba'th regime, where party and power cliques at the heart of the dictatorial regime dominated decision-making outside the formal structures. As these cliques lost their power and cohesion, decision-making was disrupted, with revival being hampered due to the relatively fragmented nature of the pre-war economy and decision processes (Owen 2006), and precluded by the lack of an identifiable and agreed project of reform and rebuilding. Owen appears here to be referring to the real economy as opposed to central financial and political/military power. The centrality of financial and political control in such an economy made it all the more important that policy should recognize the cost and destructive consequences of reform failure, and attempt to regenerate economic activity and rehabilitate production capacities prior to reform. Clearly, no attempt was made to restore the old economic order as it was deemed to have collapsed with the old regime and a new economic order was to be set up. (14)

Iraq, in other words, was to be an ideal model of neoliberal reform. The CPA recognized the interconnectedness of policies and institutional arrangements. In particular, Bremer understood that subsidies at one level, say of fuel or food, permeated the entire economic system, from one sector to the next, and from the business to the household sectors and from the real economy to the monetary and financial system, and from prices to foreign transactions (Bremer 2006, 63-9). However, it appears that the CPA viewed the interconnectedness as a rationale for immediately embarking upon radical restructuring across all aspects of the economy and society. As in the case of Eastern Europe, economic reform was not in essence a question of efficiency, but one of political transformation (Batt 1994). The CPA was not interested in returning the economy to any pre-war condition of presumed normality in preparation for reform and restructuring. The objective was to alter the relationship between politics and the economy at both the domestic and external levels, including a change in the relationship between the private sector and the state, and a long term change in the relationship between Iraq on the one hand, and external powers, foreign business and finance and international institutions. Political legitimization through state provision of services and subsidies was rejected. The purported "reconstruction" process was discharged by US military and civilian administrators, and it was kept separate from the political process established by the occupation itself. For example, the CPAs Program Management Office retained all power to allocate and disburse project expenditure during the period of CPA rule, and it had only nominal Iraqi representation. (15) Unlike Eastern Europe or the other countries of the Middle East, the introduction of economic reform was not intended to be interrupted by the political weakness of the advocates of radical reform and by mass protest or democratised politics. The former Iraqi opposition in exile had signed up to an economic reform agenda during its period of exile and dependence upon host states in Europe and the United States. As that exile stretched in time, it weakened the opposition's ability to connect to daily social and economic issues and to articulate a program of action that met the needs of specific domestic socio-economic constituencies. This failure to offer a detailed program was reflected in the generalizations of the Future of Iraq Project documents. Although ideologically laissez faire, this document was much more cautious about the speed and sequencing of reform than the facts created on the ground by the CPA's lack of interest in rehabilitation of public economic management structures. The exiled opposition's dependence upon the US also meant that it lacked credibility and was ignored by the CPA itself when the latter devised a blueprint of its own for the wholesale dismantlement of regulation in preparation for widespread privatization with virtually no reference to Iraqi opinion and largely ignoring the relative caution of the Future of Iraq Project documents.

Opposition forces were increasingly interested in achieving power rather than in reforming the state and economy, and their acquiescence in economic policies imposed from outside should be seen as part of their power objectives and external alliances. Iraq which in many respects had an advantage over some East European countries in the sense that an indigenous capitalist class remained active and had extensive regional and international networks, was unable to benefit from this advantage through a gradual and managed process of reform. The United States opted to attempt to lock-in market reforms through International Monetary Fund dictates, through constitutional devices and through the Development Fund for Iraq, a mild successor to the United Nations sanctions regime of control. As we argued above, none of these measures offer coherent programs for an oil economy that has suffered decades of conflict.

CONCLUDING REMARKS

The economic role of the Iraqi state has undergone considerable transformations over past decades, an observation that sits uncomfortably with propositions for a radical purging of the economic role for the state. The peak period of strict etatist policies in the 1970s has long been surpassed. High public investment expenditure coupled with wage repression in the public sector, restrictions on labor mobility, and rationing of consumer goods were the norm during the boom years of the 1970s. Foreign trade was almost entirely within the public sector and the state had a monopoly over banking and a growing role in agriculture, services and construction. Policy towards manufacturing was ambiguous, but leaning on the side of restraint. The boom in private sector activity was primarily related to state sector activity and severely constrained by strict legal stipulations and an avowedly "socialist" ideology. The economy was run using a myriad of administrative controls, price controls, labor restrictions and many other forms of intervention. Over time, many of the restrictions were reduced or even lifted, but bureaucratic obstacles remained. Land management restraints originating in the agrarian reform laws of previous decades were relaxed, and directives in agricultural policy were replaced by incentives. From 1983 onwards, foreign exchange and foreign trade policies were relaxed. Although a large part of the labor force was conscripted into the armed forces, an open market for labor sprang up as a result of the open door policy towards migrant labor from Arab countries. By 1987, labor rights in the workplace were being curtailed in the public sector and managerial prerogative was being expanded at a time of greater commercialization. The privatizations of the late 1980s were followed by further shedding of public sector assets after 1995. Other measures included the return of the private sector to higher education and the establishment of private banks and the opening of the Baghdad Stock Exchange. There was also a limited opening to Arab private investment and eventually, acceptance of a longer term role for foreign oil companies in this previously nationalized sector.

These changes in economic policy were part of a general and gradual redefinition of the role of the state that was not simply a response to financial constraints, but also to the broadening of the ranks of the middle classes from the 1960s to the 1980s, and the changed social position of the governing elite. Some of the liberalization measures began to be aired at the height of the 1970s oil boom, and the financial power of an oil state did not preclude such a change in direction. Subsequent financial constraints in the time of the Iran-Iraq war forced foreign exchange liberalization and also a measure of price liberalization. Under sanctions in the 1990s, the state resorted to exceptional measures of monetary financing of a large budget deficit, accentuated by the needs of postwar reconstruction. The private sector was severely damaged by the sanctions and the ensuing inflation, but the state sector suffered even greater decline. The private sector's more flexible responses and the reliance of the state and economy on smuggling and migrant remittances put a greater premium on private activity. However, the restrictions imposed by the United Nations in implementing the Oil-for-Food program banned the use of funds for the purchase of domestically produced goods and prevented the revival of economic activity, particularly of the private sector. The collapse of the currency, the bureaucratic restrictions under UN sanctions, the prolonged period of degradation of public administration and the price distortions under sanctions and war, as well as the spread of corruption in conjunction with official circumvention of sanctions, have all been major contributors to public sector inefficiency and policy paralysis.

While the Iraqi economy was in a desperate state in 2003 with effectively no net investment beyond war damage repairs for almost two decades, the question of the relative efficiency of private versus public sectors in particular areas of the economy is unlikely to be of major significance in an outcome that had seen a dramatic and persistent decline in per capita GNP for a generation. The lack of net investment has been a direct consequence of wars that have diverted resources and disrupted production, and of sanctions which destroyed incomes and cut off state funds and foreign currency. Those sanctions, more than any government policy measure, also precluded the possibility of foreign investment, technology transfer and the financing of domestic investment. Indeed, the damage of wars and the prolonged sanctions has led to a dramatic deterioration of Iraq's infrastructure leading to a decline in the capacities of oil output, electricity generation, and industrial and other production. It was those same capacities that had been rapidly built up by public sector investment and as a matter of public policy. A policy of reconstruction has to begin with the resources available. The promise of the neoliberal agenda is a claim to be able to mobilize foreign resources, but this comes at the cost of abandoning domestic resources. The experience of Iraq shows us that wholesale liberalization is impossible and misconceived as a policy under conflict conditions, and that it is not an appropriate strategy for an oil economy. The development of policy capability is required for economic rehabilitation and reconstruction, and the pursuit of a reform agenda may depend on regulation in greater or smaller measures.

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ENDNOTES

(1.) For example, US Undersecretary of the Treasury for International Affairs John B. Taylor fails to mention the effects of sanctions in a major Testimony before Congress (see Taylor, John B. Reconstruction in Iraq: Economic and Financial Issues. Testimony before the Senate Foreign Relations Committee. June 4, 2003); CPA Administrator Paul Bremer emphasises decades of "mismanagement, neglect and a Stalinist industrial structure", and underplays the effects of sanctions and war destruction (see Bremer, L. Paul. Operation Iraqi Prosperity. Wall Street Journal. June 20, 2003).

(2.) The Working Group report states: "government ability to maintain its high levels of current and investment expenditures with low taxes generated from individual income and private sector activities have been a major factor in the development of (sic) present political crisis and the diminishing of democracy." (See United States Department of State, The Future of Iraq Project: Economy and Infrastructure Working Group, unclassified Date/Case ID: 22 June 2005 200304121, p. 23. Accessed via the web in: http://www.thememoryhole.org/state/future_of_iraqi/

(3.) See for example, FitzGerald (2000) on private sector responses to wartime conditions.

(4.) See Moosa (2003), and also Khafaji, Isam. Excluding Iraqis? BBC, Hardtalk interview, 11 February 2004. http://news.bbc.co.uk/2/hi/programs/ hardtalk/3479825.stm

(5.) While IFIs and the US government were advocating privatization and liberalization, and demanding economic reform and structural adjustment, the US government was funding the Egyptian armed forces, including the military's considerable engagement in civilian production that serviced the military sector (Mitchell 2002, 240-3).

(6.) See for example Ross (2001), Smith (2004).

(7.) Parasiliti ignores the role of outside forces as elements in the regional balance of power that is his main explanatory factor for the causes and timing of wars.

(8.) For the operation of the food ration system, see Dreze and Gazdar (1991), and Gazdar and Hussain (2002).

(9.) For this, see Chaudhry (2002).

(10.) Teams of engineers and technicians were switched from military industrial activities to civilian engineering and the reconstruction of war damage. See Gafar (2003).

(11.) Officials and employees of ministries and public organisations initially nominated senior professionals from their own ranks to lead their institutions and represent them before the CPA imposed others in their place, mainly members of the former exile opposition allied to the US occupation.

(12.) For the attitude of (British) occupation forces to the question of security, see Moosa (2003). For the dangers faced by public hospital staff and their dedication to maintain their services, see Bremer (2006, 33), and similarly for the management and staff of the Dora oil refinery in Baghdad, (Ibid. 61). In the case of the oil facilities in the south of the country, attacks by mobs were quickly followed by an attempt to install foreign employees of Halliburton, the US company contracted to the US Department of Defence and charged with among other things, oil sector repair and management. Staff organised themselves and was able to retain their jobs and Iraqi control of the industry. See Chatterjee (2004, 16-7).

(13.) This contrasts with the reconstruction effort following the 1991 war when the loss of bureaucratic authority and the destruction of communications systems were countered with devolved financial powers and the empowerment of technocrats. See Sabir-Ali, Ghazi. 2003 Let Iraqis Rebuild their Own Country. The Guardian. August 1. Comment and Analysis section. London. See also Gafar 2003: 33-8.

(14.) Bremer (2006: 63) remarked to Mcpherson, his economic advisor, that their task was to teach Iraqis how to live in a market economy, which the CPA proceeded to put into practice by means of weekly evening seminars for Iraqi officials and business people.

(15.) Minutes of the PMO which reveal not only the dominance of the occupation, but also the frequent non-attendance of the designated Iraqi representative, the Minister of Finance of the Governing Council.

Kamil Mahdi is a Lecturer in the economics of the Middle East at the Institute of Arab and Islamic Studies, University of Exeter, U.K. and a Fellow of the Transnational Institute, Amsterdam, the Netherlands.