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.

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.

4. "Publish What You Pay." Another oil idea, this one pushed by George Soros. Karin Lissakers, who advises Soros on Publish What You Pay, says the premise is that oil (and mineral) rich countries suffer huge corruption and waste because no one ever accounts for their wealth. The countries sign secret contracts with foreign oil and mining concerns. The companies don't disclose what they are paying the government; the government does not disclose its mineral revenues. As a result, it's easy for corrupt individuals to steal: Billions of dollars end up in Swiss bank accounts because no one knows how much revenue the government ought to collect. This veil of secrecy not only robs a nation of cash, it trashes government accountability. If citizens can't know what money the government should have, how can they hold the government to account?

The British government is now pushing a voluntary transparency initiative for "extractive industries" that would make public the terms of such oil and mineral contracts. Lissakers and Soros are also lobbying for securities regulations here and in Europe that would force companies like ExxonMobil to report the terms of their contracts. The oil companies, Lissakers says, are surprisingly sympathetic. They are beginning to recognize that corruption is destabilizing for them, bringing terrible publicity, and endangering operations in places like Nigeria.

In Iraq, Publish What You Pay would restore some trust in the corrupt oil business and would help redirect revenue from corrupt officials to the coffers where it belongs. Such transparency would also be essential for the success of any oil trust, since Iraqis couldn't trust a trust if they didn't know how much was supposed to go into it.

5. An Alan Greenspan for Iraq. Hyperinflation used to be a common global malady: Everytime you turned around in the 1970s, some country's currency was falling apart. (Remember those places where it took a thick stack of bills to buy a loaf of bread?) Central banks would print money like crazy; economic chaos ensued. But as Steve Radelet, senior fellow at the Center for Global Development, points out, hyperinflation is disappearing because of the rising competence of central bankers—a Greenspan in every pot.

Better central banking has kneecapped inflation in developing countries and helped stabilize monetary policies. In the past decade, the IMF and other international donor groups have insisted that central bankers run a tight ship if they want to keep getting loans. More important, central bankers in even the most backward places now understand their jobs. This is partly the result of a concerted effort. The IMF and various top universities now offer crash courses for central banking officials. In three weeks to six months, they learn the basic technical skills and economic principles they need to construct a sound monetary policy. The result, says Radelet, is that "the level of competence of central bankers is much, much higher than it used to be."

In Iraq, able central bankers will help establish a single viable currency, rein in the inflation that prevailed in the final months of the Saddam administration, and keep monetary policy disciplined enough to satisfy international aid groups.

6. Democracy by Development. IMF jockeys, World Bankers, USAIDers, and the like will be champing to shove wonderful projects down the throat of the new Iraqi government: schools here, roads there, restore these marshlands, fix that port, that bridge, that power station. Unfortunately, the record of big, top-down foreign development projects is mixed, leaning toward lousy: Corrupt officials steal too much of the cash, the locals don't really want the project and so don't maintain it, too many villages are demolished, etc.

But at the World Bank—still the 800-pound gorilla of development—the past decade has witnessed a tilt toward grass-roots development that might bode well for postwar reconstruction. The most promising idea here for Iraq may be a 5-year-old World Bank experiment in Indonesia called the Kecamatan Development Project, which is pouring nearly $1 billion into thousands of villages. The innovation in KDP is that each village decides—after a community debate and competitive bidding process—what project it wants: Some choose to build roads, others irrigation projects, others schools. Local participation in the decision vastly increases the success (and popularity) of the projects. (Traditionally such grass-roots development has been stifled by governments because it doesn't produce grand results, like dams, and because it undermines central control by granting each village autonomy.)

The second and perhaps more important new idea of the KDP is that it uses development to promote democracy. It is, as a World Bank staffer puts it, a "democracy project disguised as a development project." The bidding process for KDP teaches villagers democratic habits: debate, lobbying, peaceful dissent. These are new, deeply necessary skills in a nation making the transition to democracy from authoritarianism. (The bank is now studying whether these KDP skills are energizing other kinds of democratic activism in the villages.) The bank is pitching a version of the KDP for Afghanistan, and it's expected that it will propose something similar to develop and democratize Iraq.

7. Net Business. The Internet won't revolutionize the Iraqi economy. Its tech infrastructure is ancient. Silicon Desert won't be springing up outside Basra. isn't going to challenge the bazaar. But the Net can give a small kick to would-be entrepreneurs. Eurasia Society President Bill Maynes describes a project that Iraq should imitate. Western NGOs have scattered Internet business centers around the former Soviet Union. These kiosks can advise on how to set up a business, keep your books, pay your taxes (or, in Russia, not pay your taxes). This information was only sparsely available in the pre-Web age. Its accessibility probably increases the rate of business creation. Iraq is wired enough that a similar program could encourage entrepreneurship there.

So far, this series has ignored what may be the greatest obstacle to Iraq's recovery: its vicious ethnic and religious divides. The next installment of Iraq's Progress will examine some of the most promising ideas for minimizing these hatreds, everything from truth commissions to controversial laws against hate speech.


Read the introduction to Iraq's Progress and the new ideas for bringing democracy, law and order, civil society, and religious harmony to Iraqand using virtual world games to reconstruct it.