THE GREAT RUIN

The True Costs of the Iraq War

By Joseph Stiglitz and Linda Bilmes

[This article published in: Le Monde diplomatique, 5/9/2008 is translated from the German on the World Wide Web, www.monde-diplomatique.de/pm/2008/05/09.mondeText.artikel,a0058.idx,21. Joseph Stiglitz received the Nobel Prize in Economics in 2001. He teaches today at Columbia University in New York. Linda Bilmes teaches financial economics at the Kennedy School of Government in Harvard and writes regularly for the “New York Times” and the “Atlantic Monthly.” ]

The invasion of Iraq has far-reaching consequences. Iraq obviously has to bear the main burden. But reliable numbers are hard to find since the central government has broken down in many areas.

Before the invasion, Iraq was a dictatorship that offered miserable living conditions to many residents. Nevertheless the country survived ten years of severe sanctions. It was shattered but still able to exist. Five years later the US has occupied Iraq with the professed goal of bringing the Iraqi people to democracy. The war has destroyed the economy, society and sovereignty of the country.

Seen globally, the higher price of oil since the beginning of the war has greatly overshadowed all other economic costs. In our realistic scenario, we estimate the share of the Iraq war in the rising price of oil at ten dollars per barrel. With that, the aggregate macro-economic follow-up costs could amount to $1.1 trillion for the world economy. On the human plane, the loss of life and the destruction of Iraqi society are devastating. Meanwhile the costs for the Iraqi people and their economy and for the rest of the world continue to climb.

For most Iraqis, everyday life has become unbearable so that all who could afford it have left their home. By September 2007, 4.6 million – every seventh Iraqi – had abandoned their original residence. This is the greatest migration in the Middle East since Israel’s founding in 1948. [1]

Half of these Iraqis – above all women and children – escaped the country. Millions of people have found temporary asylum in Syria, Jordan and other neighboring countries. The Iraqis represent the largest number of political refugees in Europe.

The war in Iraq was a heavy blow for the economy of the country that had to overcome great difficulties before the invasion of the Americans. For eight long years Iraq waged an unsuccessful war against Iran and had to accept a shameful defeat in the Gulf war of 1991. The embargo on Iraqi oil imposed by the United Nations and the US after the end of the first Gulf war in 1991 also demanded its tribute. In 2001, the Iraqi gross domestic product (adjusted in purchasing power) was 24 percent lower than ten years before. [2] As in many other Middle East countries, the Iraqi economy was largely ruled by oil that amounted to almost two-thirds of the gross domestic product. [3] The land had a healthy middle class; most Iraqis cherished great hopes that the future would be full of promise as soon as their land was free of the burden of the embargo.

As we already pointed out, the real gross domestic product of Iraq is not higher than in 2003 although the price of oil is almost four times higher. At least every fourth Iraqi is unemployed. Only nine hours of daily electricity is available in Baghdad – less than before the war. [4] Life is completely unbearable when temperatures above 122 degrees Fahrenheit oppress Baghdad in the summer – outside the Green zone where the occupying authority rules. Oil exports have fallen below the pre-war level. [5] The economic misery is obviously only an integral element of the general debacle in which Iraq finds itself. This misery is at once the cause and consequence; it has contributed to the unrest and disturbances. The unstable situation has disastrous effects on the economy. In some places, the destruction is advancing faster than the reconstruction. 59 percent of Iraqis described their present situation as “bad” and only 11 percent as “good” or “excellent.” [6] Because the government supported by the US cannot offer any jobs or stable income, it has rightly lost the trifling acceptance it enjoyed. Even worse, the US has created an explosive mixture out of high unemployment among men 18 to 35 years of age and easy access to weapons.

Since no adequate security is guaranteed, the reconstruction of the Iraqi economy proves to be nearly impossible. Its ruin is also the result of a misguided economic policy. The greatest military and political mistakes of the Bush administration, especially during the crucial days at the beginning of the occupation, gained great attention. The defective strategies for rebuilding the Iraqi economy were hardly discussed.

The United States tried to introduce the free market economy in Iraq before the country was stabilized and before concrete progress in reconstruction was realized. In September 2003, Paul Bremer issued laws abolishing heavy import duties and lowering corporate and income taxes to 15 percent. [7] Privatizing state industries was urged repeatedly alt5hough an occupying force according to the Hague Convention of 1902 (“Hague Land War Order” concerning the laws and customs of land war) is prohibited from seizing the economic assets of a country. [8] This privatization plan was a mantra of the Bush administration from the start.

THE PRIVATIZATIONS IN IRAQ VIOLATED INTERNATIONAL LAW

In his book “Imperial Life in the Emerald City,” Rajiv Chandrasekaran from the Washington Post described how the Republican Party donor Thomas Foley charged with directing the development of the private economy in Iraq bragged he would privatize all Iraqi state enterprises within thirty days. To the objection that this violated international law, Foley replied: “I don’t give a damn about international law. To the president, I am committed to privatizing the businesses of Iraq.” [9]

The benefits or advantages of privatizations and free markets in transformation countries are controversial. However Foley and other like-minded ideologues do not see that as long as Iraq is not stabilized every purchaser of Iraqi enterprises and other assets pays the lowest price and then carves up the firms instead of thinking long-term and investing in the enterprises despite the risky situation. When the Iraqi firms needed support, Washington exposed them to free competition without any screening through protective tariffs. The US economy had never accepted anything like that. The predicted consequences appeared immediately. There were few direct foreign investments aside from the oil industry. Many local enterprises could not compete against the flood of imports and closed down which led to even higher unemployment.

The Treasury Department in Washington contributed to this debacle by enforcing a strict monetary policy. A flood of US dollars that inundated the land created bottlenecks in certain areas of the economy. The prices soared. The US Treasury Department reacted in an almost mechanical way by instructing Iraqis to raise interest rates and restrict the awarding of credit.

Iraq by no means suffers under a credit crunch. For a long time, strategists of USAID, the US development authority, sought to find out how the middle class economy could be stimulated to create jobs. They diagnosed a great obstacle was inadequate credit and developed a plan for providing credit to the bourgeois economy that would create jobs. But while one part of the US government attempted to enliven the Iraqi economy by offering credits, another part turned to private entrepreneurs – out of fear of “overheating” the credit pump – even though the unemployment rate was between 25 and 40 percent. Washington’s strategy of relying on private entrepreneurs also unintentionally contributed to the failed reconstruction of Iraq. The US law on awarding public contracts required that American businesses be put in charge. In Iraq, the largest share of American funds for reconstruction flowed to expensive US firms instead of benefiting cheap local workers. California congressman Henry Waxman pointed out that non-Iraqi enterprises were charged $25 million for building twenty police stations – a contract that local firms in Basra could have performed for $5 million. [10] With this allocation policy, funds were wasted and the resentment of Iraqis fomented. However resentment was not the only bitter fruit. It would have been in the interest of the US to create jobs for the many unemployed young Iraqi men (many of whom were in possession of weapons after Saddam Hussein’s army was dissolved – angry young men who could easily be won for a rebellion). At a certain time after the invasion, more than half of Iraqi men were unemployed. They begged for work. However private US firms sought to minimize their labor costs and hired workers from Nepal and other low-wage countries who were cheaper than Iraqis. This is another example how the interests of private entrepreneurs stood in direct contradiction to the national interests of the US in quickly creating jobs and restoring the economic strength of Iraq.

It would have been even worse had the US government been successful with its plans for liberalization and privatization. The American government ran aground with its concepts and execution as in so many other areas of its Iraq policy. The occupation laws blocked the most important area of US privatization plans – the oil branch.

No one – no foreigner and no Iraqi – sees the country as a safe investment location. [11] As long as this uncertainty continues, the prospects for the economic future of Iraq remain bleak. In different imagined scenarios, the Iraqi economy could have experienced a strong growth.

According to our “conservative” calculation, at least 35 of the 90 dollars, which a barrel of oil cost at the end of 2007, can be referred back to the increased demand of China and other countries. The world community could react with a “deal” enabling Iraq to expand its production considerably, pay off its debts with a fraction of the money and assure the food and medical supplies in Iraq with another fraction. In this case, higher oil prices and higher production would have led to a boom in the Iraqi economy instead of today’s disaster.

We have not yet faced the ambitious challenge of calculating the damages fro the Iraqi economy. This calculation depends on counter-factual considerations – what would have happened if no war had erupted? A situation more desolate than today’s appalling situation can hardly be imagined.

FOOTNOTES
(1) UN-Flüchtlingskommissariat, "UNHCR Doubles Budget for Iraq Operations", Pressemitteilung vom 12. Juli 2007, www.unhcr.org/cgi-bin/texis/vtx/media.
(2) Gesamtbericht des Sonderberaters an den Direktor der CIA über Iraks Massenvernichtungswaffen vom 30. September 2004, S. 207, www.cia.gov/library/reports/general-reports-1/iraq_wmd_2004/index.html>;.
(3) O'Hanlon und Campbell, Iraq Index, 3.Dezember 2007, S. 40.
(4) Landesweit sieht die Lage etwas besser aus; vor dem Krieg gab es nur 4 bis 8 Stunden Strom, im November 2007 dagegen bis zu 12,9 Stunden (nach Iraq Index, S. 36). Die aktuellsten Zahlen zur Arbeitslosigkeit stammen aus dem Iraq Index (Anmerkung 3), der weiterhin eine Arbeitslosenquote von 25 bis 40 Prozent ausweist. Auf Basis von Daten der "Economist Intelligence Unit" schätzen wir den Rückgang von 2002 bis 2006 auf 13 Prozent; der IWF schätzt den Rückgang nur auf 8,3 Prozent.
(5) Iraq Index, S. 34.
(6) Iraq Index, S. 53.
(7) Alan Beattie und Charles Clover, "Surprise Revamp for Iraq's Economy", in: "The Financial Times, 22.September 2003, S. 1. Die plötzliche Privatisierung und Liberalisierung einer Volkswirtschaft wird auch als "Schocktherapie" bezeichnet.
(8) Die irakische Verfassung sah etwa vor, dass gewisse Teile der irakischen Wirtschaft nur eingeschränkt in ausländischen Besitz gelangen durften und wichtige Dienstleistungsbereiche gar nicht privatisierbar seien. Bremers neues Gesetz erlaubte jedoch die vollständige Übernahme staatseigener irakischer Firmen und Wirtschaftsgüter durch ausländische Eigentümer.
(9) Rajiv Chandrasekaran, "Imperial Life in the Emerald City: Inside Iraq's Green Zone", New York (Knopf) 2006, S. 126.
(10) Linda Bilmes, "Civil Service Has Morphed into U. S. Inc.", in: "The Los Angeles Times, 18. Juli 2004, S. M 1.
(11) Angesichts des hohen Ölpreises besteht natürlich großes Interesse, in irakische Ölfelder zu investieren, andererseits sind die Ölkonzerne offensichtlich bereit, fast überall auf der Welt Produktionsstätten zu errichten, solange sie das Öl billig genug einkaufen können. Das Risiko gehen sie bereitwillig ein. Dies sollte nicht als Anzeichen wirtschaftlichen Erfolgs angesehen werden. Gekürztes Kapitel aus: Joseph Stiglitz und Linda Bilmes, "Die wahren Kosten des Krieges. Wirtschaftliche und politische Folgen des Irak-Konflikts", Aus dem Amerikanischen von Thorsten Schmidt, München (Pantheon Verlag) 2008. Das Buch erscheint am 26. Mai. Wir danken dem Verlag für die Abdruckrechte. Joseph E. Stiglitz, Professor für Volkswirtschaft, erhielt 2001 den Nobelpreis für Wirtschaft. Er lehrt heute an der Columbia University in New York. Linda Bilmes lehrt Finanzwirtschaft an der Kennedy School of Government in Harvard und schreibt regelmäßig für die "New York Times und den "Atlantic Monthly.
© Pantheon Verlag, München und "Le Monde diplomatique, Berlin
Le Monde diplomatique Nr. 8575 vom 9.5.2008, 319 Zeilen, Joseph Stiglitz / Linda Bilmes