Iraq could prove a model of economic success

Unlike Saudi Arabia, Iraq can feed itself - the 'fertile cresecent' of the Tigris and Euphrates was the cradle of our own civilisation.
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And now Iraq has to be put back together. Most of the commentary about the reconstruction has focused on three areas: the need for humanitarian relief, who gets the reconstruction contracts, and who controls the oil. These matter enormously, of course, but beyond these there is the greater prize: the creation of a stable and prosperous economy for the Iraqi people.

And now Iraq has to be put back together. Most of the commentary about the reconstruction has focused on three areas: the need for humanitarian relief, who gets the reconstruction contracts, and who controls the oil. These matter enormously, of course, but beyond these there is the greater prize: the creation of a stable and prosperous economy for the Iraqi people.

This is certainly attainable. Iraq currently has an income per head estimated at $3,600 (£2,300) a year, similar to that of Egypt or Morocco. But there is no reason why its 23 million people should not have an income three or four times that level. This is not at all a basket case – it should become one of the richest countries of the Middle East. The question is: how to get there from here?

The first stage must of course be to get basic public services working again. Here there is the need both for immediate humanitarian relief and for investment to repair damage from the war. But overlaying these is the need for a civic administration to oversee law and order. The sooner order returns, the sooner the condition of Iraqi citizens can be improved.

In practical terms – and given public safety – this is the easiest bit. It is at least very clear what needs to be done, and the world has huge experience, sadly necessary, of providing humanitarian relief.

The second stage is more difficult because it involves re-establishing the apparatus of a modern state. There has to be a functioning and acceptable currency, there has to be a tax-collecting system, there has to be a budget, there has to be a civil police force – and so on. There is now quite a lot of experience of that too. We have learnt a lot from the experience in Bosnia and Kosovo. But there is no single model and Iraq will of necessity be different from previous exercises.

In one sense it should be easier, for the new governing authority will quite quickly have access to revenues from oil. It has been much harder, for example, in Kosovo, where there was no single source of revenue. And until the governing body has its own funds it will not be able to exert its own authority.

In another sense it will be harder. To be effective the new interim government has to be seen to be competent in economic terms and legitimate in political terms. The first is hard enough. Given the history of the Middle East, an imposed administration may find it harder to achieve the second.

Then comes the third stage, the building of a self-sustaining, prosperous modern economy. This cannot be imposed from the top down. All the experience of economic development is that success comes when societies control their own affairs, make their own decisions, determine their own fate.

There is a practical reason for this. One of the key common features of successful economic development, at least over the past 20 or 30 years, is the need for foreign commercial investment. Such investment does not only bring in money. It brings in know-how and it gives access to international markets. But the companies only invest in countries that are politically stable. They don't have to be Western democracies – look at the surge of investment into mainland China – but they do need to be able to give credible assurances to foreign investors. To give credible assurances they need to be credible themselves. A puppet state would not have that credibility.

This is not just about oil. In a sense, oil is easy. The oil companies have enormous experience in dealing with regimes that are not notably stable, nor indeed strong on human rights. Oil happens to be found in tricky places. They also have huge experience of Iraq, which was, after all, the first place in the Middle East where large quantities of oil were discovered.

In financial terms, oil revenues will be tremendously helpful. Iraq has 10 per cent of the world's proven reserves and probably more, putting it second only to Saudi Arabia. But at 2.6 million barrels a day in 2001 it has been producing only about 3 per cent of world supplies. That puts it on a par with the UK but the cost of getting it out is a fraction of that of the North Sea. With investment, output could be doubled within five years.

We do not know what the oil price will be in five months' time, let alone five years. You can, however, see the potential impact of oil revenues on living standards by looking at Saudi Arabia. It has a similar population to Iraq – 21 million – produces about 9 million barrels a day and it has at present a GDP per head of $12,000 (£8,000). So it would be quite plausible for Iraq's income per head to double just on the strength of oil exports.

It should do much better. Unlike Saudi Arabia, it can feed itself – the "fertile crescent" of the Tigris and the Euphrates was the cradle of our own civilisation. It has a sophisticated and well-educated population. It has the resource of some two million exiles in Europe and North America who are maybe even better educated. And it has the great historical sites of Babylon, Nineveh, Ur, Nimrud and so on. Given stability, this could be the greatest place for cultural tourism on the planet.

If a country has oil and not much else, it can become a curse. It becomes a single product economy, with oil pricing other potential exports out of world markets. Not only does that mean near total dependence on one source of revenue and employment. It also means that much of the wealth accrues, though oil royalties, to the government, which then becomes a "lady bountiful", distributing largesse to the populace – and crowding out other self-generated economic activity.

Iraq, unlike most other Middle Eastern oil producers, has a much more broadly-based economy. It has been hobbled by UN sanctions and by appalling governance. But these will now be swept away. It does not need to follow optimal policies to do much better. If it can establish a broadly-based market economy it would become a beacon to the whole Arab world.

The Arab world needs success. A new report on its competitiveness, produced by the World Economic Forum and published by Oxford University Press, points out that the region's GDP per head in 2000 was lower than 1980. Some countries improved a bit but others just went backwards. That is a catastrophe in human terms – an entire generation denied the rise in living standards that most of the rest of the world enjoyed.

The way out is to connect the Arab world with the rest of the global economy, with direct investment being a key.

In 2000 Arab countries received only 0.4 per cent of world direct investment, less than half the level between 1985 and 1995. Much of the investment that does take place is government funded and much is wasted – if anything, it seems to reduce productivity rather than increase it. A combination of war, incompetent government, poor education and a lack of access to modern information technology combine to hold it back.

It may seem strange to say it now, with the bombs and bullets still flying, but potentially Iraq is, in economic terms, the Arab world's best chance. It has the economic breadth of a country such as Morocco or Egypt, but it has the oil wealth of the Gulf states and Saudi Arabia. It could become a huge economic success story. It is massively in the interest of the world that it should be so.