Why are we inflicting this discredited market fundamentalism on Iraq?

The most important reason for the failure of the occupation has been the coalition's economic strategy

So Tony Blair finally made it to Baghdad. None of us who supported the war imagined it would happen like this: a year-and-a-half after the fall of Saddam, the Prime Minister flew in secret to Baghdad's tiny and imperilled "safe zone". In his press conference, he talked about his feelings of "humility", and admitted: "You can feel the sense of danger people live with every day".

How did a prime minister used to being fêted after military action - remember the cheering crowds in Kosovo, Sierra Leone and Kabul? - end up scrambling around Iraq in fear?

A great deal has been written about the failure of military strategy in Iraq, but an even more important reason for the failure of the occupation has barely been discussed: the coalition's economic strategy. Following the Second World War, the Allied forces understood that fascism arose in conditions of unemployment, poverty and desperation. That's why there was a massive effort to reflate the German economy; by early 1947, unemployment was down to 10 per cent. In Iraq today, unemployment stands at an incredible 60 per cent. For young Sunni men - the main recruiting pool for the insurgency - it has soared to 80 per cent. This is a recipe for rage and rebellion.

It would be bad enough if the coalition had simply done nothing to reflate and re-energise the Iraqi economy. Incredibly, the truth is even worse: they have imposed on Iraq a programme of ultra-neoliberal reforms that have brought economic collapse to every country they have been inflicted upon. Joseph Stiglitz, the Nobel prize-winning economist and dissident former chief economist at the World Bank, describes the economic policies of the coalition as "a proven and predictable catastrophe". They imposed a form of capitalism more extreme than anything tried in a democratic country: immediate privatisation of almost all services (without any debate), non-competitive contracts, and a 15 per cent flat tax. This is not democracy. It is market fundamentalism.

Nobody should be surprised this has created chaos. It has all been tried before. In post-communist Russia, the "shock therapy" now being forced on Iraqis was such a catastrophe that life expectancy actually fell below the dismal levels of late Soviet communism. The resulting economic anarchy and corporate looting made the Russian people lose faith in democracy and turn to the incipient fascism of Vladimir Putin.

The same policies - often formulated by the same economists - have created vast Iraqi slums stuffed with disaffected young men with nothing to do. Tony Blair spoke yesterday about how important it is for Iraqi democracy to succeed - "for the security not just of the region but of Britain and the world". He's right. A democracy at the heart of the Arab world would be a massive blow against both Islamic fundamentalism and secular tyranny. But the economic model spread by the US and British governments - and their proxy, the IMF - cannot bring democracy. Indeed, it has been proven repeatedly to spread unemployment, disaffection and the hollowing out of meaningful self-government.

When Blair talks movingly about Iraq's brave election monitors, risking their lives to set up polling booths, he cannot simply leave out economic issues. Meaningful democracy means the freedom to set economic policy - and Iraq's capacity to do this has just been locked in a dark and undemocratic cage. Last month, the rich nations of the world - including Britain - agreed to cancel 80 per cent of the blood-soaked debt racked up by Saddam Hussein. Sounds like good news? Ah, but there was a condition. The next Iraqi government - whatever the Iraqi people say at the polls - will have to agree to allow the Iraqi economy to be run by the IMF for the next decade. That's right - the same IMF that, to quote Stiglitz again, "brought disaster to Russia and Argentina and leaves a trail of devastated developing economies in its wake".

Some readers might remember I supported the invasion of Iraq, despite my terrible fears about the Bush administration. This was because - after visiting Iraq and studying the limited surveys of Iraqi opinion available before the invasion - I knew a majority of Iraqis would rather take their chances with an Anglo-American occupation than with the rule of Saddam and his sons forever. That turned out to be true: just look at the Iraqi opinion polls.

But that creates a massive obligation to keep siding with the Iraqi people afterwards. If you support an invasion - and the slaughter of 100,000 people - because you believe you are siding with Iraqis, then you had damn well better keep supporting them. I think left-wing people should try to find out what the Iraqi majority wants and stick with them: against Saddam and against the Sunni insurgency, as Blair argues. But also - crucially - against the IMF-ing of their economy, and for real democracy. Blair won't go there.

You can only understand why the IMF belongs in this triumvirate if you look at the human stories behind the economic jargon. Stiglitz - after working with the IMF for nearly a decade - explained that the fund consists of remote bankers "almost entirely ignorant of the countries they are creating policy for. They do not ask themselves, in meetings, what a country's democratically elected politicians say, much less ordinary people. They simply impose whatever policies best serve the interests of large multinational corporations". This usually means the sacking of tens of thousands of desperately needed nurses and teachers and racking up unemployment. They aren't sadists; they are blinded by neoliberal economics, which sees no difference between what massive businesses require and the needs of real, flesh-and-blood people.

The IMF agenda being imposed on Iraq over the next decade - irrespective of what Iraqis say at the polls - will have a warping effect on the country's politics. Iraqi politicians will not be able to argue about schools, hospitals or taxation, the bread-and-butter of politics in every successful democracy. No; those decisions will be taken by the IMF in Washington. So what will happen? The political vacuum will almost certainly be filled by tribal resentment and religious disputes - it's all that is left. This pattern has been established in Kosovo, where IMF economic rule over the past five years had led to a resurgence of sectarian disputes and far-right tribalism.

So when Tony Blair spoke yesterday about this being a simple fight between "democrats and terrorists", I feel stirred but manipulated. He's right that the Sunni fundamentalists blowing up election offices and Shia children must be defeated if there is to be any hope of a decent Iraq. But the IMF-dominated Allawi-land he is offering Iraqis - while somewhat better - is not democracy and it is not freedom.

Given a choice between Saddam and Blair-Bush, I think I supported the better side. But it's become clear over the past 18 months what a lousy choice that was. It's up to all of us now to slowly, carefully, try to create a world where there can be far better options and the possibility of real democracy. There's only one super-power that can create that: it's called global public opinion. It's only when we understand the world we live in - without illusions - that we can build real alternatives. I can feel a new year's resolution coming on ...

j.hari@independent.co.uk