Seven ways to fix Iraq's economy.

The best new ideas for rebuilding a nation.
May 7 2003 1:06 PM

An Alan Greenspan for Iraq

… And six other ideas for fixing Iraq's economy.

Fixing Iraq's economy may turn out to be the smoothest part of Iraq's recovery. Compared to replacing a totalitarian dictatorship with a constitutional democracy, transforming Iraq's command economy into a vigorous free market could be—to borrow the word of the month—a cakewalk. Iraq has a well-educated and entrepreneurial population and a sea of oil. What's more, the past few years have witnessed a flourishing of economic innovation, a profusion of ideas about how to spur entrepreneurship, manage an economy, and preserve oil wealth.

Here are seven promising ones that could speed Iraq's recovery:

David Plotz David Plotz

David Plotz is Slate's editor at large. He's the author of The Genius Factory and Good Book.

1. Microcredit. Pioneered in Bangladesh during the '80s, microcredit has become a global cause célèbre in the past five years (see: Hillary Clinton). Microcredit operations—usually subsidized by governments or NGOs—extend tiny loans, sometimes less than $25, to the poor to help them start small businesses, improve their farms, and fund education. (These are loans that regular banks won't make, because the administrative costs are too high.) Microcredit is the most dramatic way to encourage entrepreneurship among the poorest. In the best cases, it has harvested repayment rates of 98 percent and recorded genuine improvements in living standards. (Some microcredit enterprises are even profitable.) Microcredit operations have particularly benefited women, who receive lots of loans.

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Microcredit is a natural for Iraq, a country with a boisterous commercial tradition and a shortage of capital. It could aid ambitious farmers and would-be entrepreneurs who don't have the seed money to start a business.

2. Hernando de Soto. The Peruvian author of The Mystery of Capital is perhaps the world's trendiest economist, a genius of property rights. Bill Clinton and Newt Gingrich love him. He may be the only person ever praised by the editorial pages of both the New York Times and the Wall Street Journal. De Soto's key insight, formulated in the mid-'80s and refined since, is that the failure to acknowledge the property rights of the developing world's poor shuts them out of the economy and cripples capitalism.

Successful nations make it easy to establish property rights. Those property rights, in turn, fuel the mortgage and credit market that is the foundation of small business and economic growth. Poor people, de Soto says, have plenty of capital in the form of houses and unregistered businesses, but they can't "unlock" that capital because the legal system won't acknowledge their property rights. For example, many of the world's poor own houses on land that they can't get formal title to: As a result, they can't borrow against their houses, so they lack the capital to start businesses. De Soto has worked to simplify property rights, making it much easier for people to secure title to things they effectively own and to register businesses legally. In Peru, de Soto and his think tank have pushed to cut paperwork and costs for registering land and businesses. As a result, they claim, 6.3 million poor Peruvians now have title to their land, increasing their income by $3.2 billion. The time it takes to register a business has dropped from 300 days to one; 380,000 businesses have been legalized, and 560,000 legal new jobs have been created.

According to Scott Brown, a policy development adviser at the International Monetary Fund, de Soto's ideas are likely to be useful in the squatter-dominated shantytowns of Baghdad and in the countryside, which has had a strange system of land rights in which small farmers worked fields owned by sheiks.

3. Oil Trusts. Recent research by Jeffrey Sachs, among others, has overturned the classical notion that natural resources aid economic development. In fact, resource-rich developing countries tend to have lousy economies: They don't diversify into manufacturing, and much of their resource wealth is stolen by a corrupt elite or squandered on useless projects (see Nigeria, Congo, Iraq …). Resource-poor countries are forced into the value-added manufacturing, service work, and agriculture that make them prosper.

Iraq is a classic example of a wasteful resource-rich country, earning billions in oil profits annually with practically nothing to show for it. How to put that oil wealth to good use? The most radical new idea is to place the oil revenues, or a significant chunk of them, in trust for the Iraqi people. There are two competing notions about what to do with that trust. One idea, floated first by Steven Clemons of the New America Foundation, is an Alaska-style trust fund that pays annual dividend checks to every Iraqi citizen. This would share the wealth fairly and would harness the entrepreneurial talents of each Iraqi.

The other idea, cited by lots of development economists, is the more recent precedent of Chad. With help from the World Bank, Chad is placing its oil revenues in a national trust that allocates 80 percent to health, education, and rural development, and 10 percent to an account for future generations. An Iraqi trust, insulated from greedy politicians and the daily demands of government, could fund the best long-term investments the nation can make in itself. Either kind of trust would probably benefit Iraq more than an arrangement that gives leaders control of the oil revenues or auctions off the fields to a small elite.