Thursday, September 09, 2004

The Gift of Supply-Side Economics, II

A slew of reports on the status of affairs in Iraq from various foreign policy think tanks have been released in the past couple of days. I will try to summarize them all over the next week as I digest them (some are as long as 100 pages so cut me some slack), but there are parts of one report, the International Crisis Group's release, that I wanted to address today. The relevant sections are a list of economic recommendations for improving the situation in Iraq:

- Postpone privatisation of state companies until market conditions and institution-building show considerable improvement.

- Generally consulting with Iraqis, in particular associations, labour unions, and groups representing the unemployed, on the design and implementation of projects.

- Increase Iraqi participation in U.S.-funded reconstruction projects by consulting with Iraqi decision-makers and civil society groups representing a range of interest groups, including women, at early planning stages, granting Iraqi state institutions implementation powers and better communicating reconstruction aims and plans.

- Requiring foreign investors to help Iraqi firms, for example, by mandating contracting to them and hiring of Iraqi labour to the extent possible, as well as on-the-job training programs.

- Emphasise development of the private sector by ensuring that prime contractors subcontract to Iraqi companies to the extent possible and providing support to small and medium sized local companies.

- Require prime contractors and subcontractors to employ Iraqi labour to the extent possible.

These recommendations are salient because they contain an implicit criticism of the grandiose naivete of one component of the neo-con experiment: the extreme attachment to staunchly conservative economics. 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. When the utter inexperience of the people who were tapped to oversee such a grandiose transformation. In pursuing these goals the economic team showed, not surprisingly, a large degree of myopic hubris, including the selection of a group of young and inexperienced partisan devotees to oversee the process. The results have been, predictably, disastrous.

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 New York Times columnist Paul Krugman noted in a piece from late June :
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 future failed to materialize.

The same question can be posed 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 ordinary Iraqis 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.

What are possibly the most valid indictments 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. These workers were in over their heads, and while they were struggling to stay ahead of the curve, "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 Iraqi economy has been faltering with unemployment hovering around 50%, fueling an increasingly determined insurgency? It appears increasingly likely that the many grandiose visions of Iraq, from epicenter of a Middle Eastern domino of democracies, to paragon of conservative economic ideals, will be relegated to the dustbin of history's "what ifs" - fodder for the debate between whether the goals themselves were unrealistic, or just the victim to incompetent implementation and planning.

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