Tuesday, June 29, 2004

The Gift Of Supply-Side Economics

Paul Krugman's column in today's New York Times touches on some aspects of the occupation of Iraq that have gone largely unreported, namely the engrossing preoccupation within the Coalition Provisional Authority and the Bush administration with remaking Iraq into the paragon of conservative supply-side economics, and, relatedly, the utter inexperience of the people who were tapped to oversee such a grandiose transformation.

The policy laboratory that was post-invasion Iraq was not only meant to give credence to the neo-conservative vision of post-Saddam Iraq as a catalyst for democratization in the greater Middle East, and thus, a validation of the doctrine of pre-emptive war, but Iraq was also going to be the shining example of how the unfettered application of conservative, free-market, privatization and supply-side economics would provide a superior economic model to those that are encumbered by public ownership, social welfare programs, government regulation and the influence of labor unions.

The focus on the conservative economic agenda was apparent from the first days of Paul Bremer's tenure as head of the CPA. According to a Washington Post reporter who shared a flight with him last June, "Bremer discussed the need to privatize government-run factories with such fervor that his voice cut through the din of the cargo hold." That was in the context of a nation that had no leadership (the Baathists having been removed from power), had a crumbling infrastructure with vital services such as water, electricity, healthcare and oil production all severely disrupted, the security situation was in shambles with rampant looting and crime, and the inattention to these pressing problems was providing fertile ground for the insurgency which took root in those crucial first months.

Nor does it appear that Bremer and his administration allies have lost sight of their economic priorities, as Krugman noted "as he prepared to leave Iraq, Mr. Bremer listed reduced tax rates, reduced tariffs and the liberalization of foreign-investment laws as among his major accomplishments. Insurgents are blowing up pipelines and police stations, geysers of sewage are erupting from the streets, and the electricity is off most of the time - but we've given Iraq the gift of supply-side economics."

As will be the legacy of the Iraq war, it will be difficult to separate the validity of the goals from the execution. It is increasingly unlikely that democracy will spread across the region from the example in Iraq, and it is also unlikely that the experience in Iraq will prove a decisive blow in the war against radical Islamic terrorism, but it is unclear whether this is the result of flaws in the theory as put forward by the war's proponents, or whether the execution of the war and subsequent occupation was so badly managed that a plausible goal failed to materialize.

The same can be said for the supply-side experiment. Maybe Iraq could have burst forward as an economic powerhouse in the Middle East, owing directly to the vast regime of privatization, low taxes and free market ideals. Unfortunately, it is likely that we will never know because the economic reform initiatives were also so poorly managed that Iraq will probably not be the paradigm of economic strength that was hoped for.

In his comprehensive and balanced appraisal of the successes and failures of the CPA, Rajiv Chandrasekaran of the Washington Post levels some thoughtful critique of Bremer and his associates regarding the economic plans.

He states, "Several current and former CPA officials contended that key decisions by Bremer favored a grandiose vision over Iraqi realities and reflected the perceived prerogatives of a military victor. Critics within the CPA also faulted Bremer for working to advance a conservative economic agenda of tax cuts and free trade instead of focusing on the delivery of basic services."

Another example of how the macro approach was ignoring the needs of ordinary Iraqis is that as we were trying to create a robust economic life in Iraq, we were doing very little to engage the Iraqi populace in the process. As Chandrasekaran points out, "CPA specialists had virtually no resources to fund projects on their own to create much-needed local employment in the months after the war. Instead, they relied on two U.S. firms, Halliburton Co. and Bechtel Corp., which were awarded large contracts to patch Iraq's infrastructure."

We missed a great opportunity to use the rebuilding of Iraq as a mini-Marshall plan spreading good-will throughout Iraq and bringing Iraqi's into the process through gainful employment. Considering the fact that one of Bremer's first moves was to disband the Iraqi army, thus leaving hundreds of thousands of Iraqis unemployed and armed, this was even more imperative. Instead, the political advantage of rewarding campaign contributors was put ahead of practicality. The results were nothing short of disaster.

What is possibly the most valid indictment of the CPA's efforts in all areas of management, including and especially in the realm of instituting the grand economic vision, was the shocking level of inexperience of those who were entrusted to carry off such a delicate and intricate maneuver, and the great extent to which the Bush administration and the CPA put cronyism and ideological conformity ahead of ability.

Aside from the fact that the overall architects of the invasion and subsequent occupation were woefully ignorant of the region they were exerting influence over, Chandrasekaran reported, "The CPA also lacked experienced staff. A few development specialists were recruited from the State Department and nongovernmental organizations. But most CPA hiring was done by the White House and Pentagon personnel offices, with posts going to people with connections to the Bush administration or the Republican Party. The job of reorganizing Baghdad's stock exchange, which has not reopened, was given in September to a 24-year-old who had sought a job at the White House. 'It was loyalty over experience,' a senior CPA official said." [emphasis added]

Paul Krugman makes the following observation, "Still, given Mr. Bremer's economic focus, you might at least have expected his top aide for private-sector development to be an expert on privatization and liberalization in such countries as Russia or Argentina. But the job initially went to Thomas Foley, a Connecticut businessman and Republican fund-raiser with no obviously relevant expertise."

And how is this for irony: "In March, Michael Fleischer, a New Jersey businessman, took over. Yes, he's Ari Fleischer's brother. Mr. Fleischer told The Chicago Tribune that part of his job was educating Iraqi businessmen: 'The only paradigm they know is cronyism. We are teaching them that there is an alternative system with built-in checks and built-in review.'" [emphasis added]

Another article in the Washington Post, by Ariana Eunjung Cha, highlights some of the more bizarre hiring practices carried out by the White House, the Pentagon and the CPA.

Ariana Cha followed the travails of a group of young twenty and thirty something hires of the CPA in Iraq, a group whose utter lack of credentials was made up for only by their political connections and ideological beliefs. Included in this group was "Simone Ledeen, whose father, Michael Ledeen, a prominent neoconservative, told a forum that 'the level of casualties is secondary' because 'we are a warlike people' and 'we love war.'" Interesting pedigree for a reconstruction project. But consider the pool of applicants that the White House was selecting from. Cha noted that this group, though having "no foreign service experience," specific qualifications, or specialized skills soon realized what they had in common: "They had all posted their resumes at the Heritage Foundation, a conservative-leaning think tank."

This might partially explain this gripe by "retired U.S. Army Col. Charles Krohn [who] said many in the CPA regard the occupation 'as a political event,' always looking for a way to make the president look good."

As many top officials noted, "they represented everything that was wrong with the CPA: They were young, inexperienced, and regarded as ideologues." Given these facts, it is that much more surprising that, due to a combination of events, "six of the new young hires found themselves managing the country's $13 billion budget, making decisions affecting millions of Iraqis."

Although they lacked business backgrounds, these novices were the people put in charge of deciding which Iraqi's got paid, how much, when, and overseeing the logistics of an extremely complex operation and making sure the process worked.

Given the fact that these workers were in over their heads, it is no surprise that "the budget office had become a bottleneck."

Consider these criticisms from "Brad Jackson, a lieutenant colonel in the Army Reserve who worked with the CPA." He said "the budget team regularly asked other ministries at the last minute to produce information that would take hundreds of people half a year to gather.

'There were a lot of people who, being political science majors, didn't know what an income statement was, who were asking the impossible. . . . That was giving us ulcers, quite frankly,' he said."

If these kids were giving members of the CPA ulcers, imagine the effect they were having on the Iraqi population and the economy they were relying on for sustenance. Is it any wonder that the insurgency has proved so determined? So, the many grandiose visions of Iraq, from beacon of democracy to paragon of conservative economic ideals, will be relegated to the dustbin of history's "what ifs."

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