The Economic Black Hole That Is Iraq

Hossein Askari

Is Washington worrying about the disastrous economic implications of the situation in Iraq? Or does Washington perhaps believe everything will turn out as when the US liberated Kuwait?

The economic conditions in the earlier Gulf War bear no resemblance to the Iraqi conflict. Kuwait’s citizens numbered less than 1 million, with a GDP per capita around $20,000 and an infrastructure (including oil facilities) that was modern and in excellent condition. The government had net external assets of $120 billion and could afford to contribute cash to get rid of the Iraqis, and its rich neighbors, Saudi Arabia and the United Arab Emirates, feeling equally threatened by the Iraqi menace, stood ready to do their part. The allies did not have to spend a cent, and indeed ended up benefiting from lucrative contracts, all happily paid for by Kuwait and their regional supporters.

Pre-war Iraq, on the other hand, had a population of some 24 million and a per capita GDP that was less than $2,000; an estimated external debt of about $150 billion; foreign exchange reserves of less than $5 billion; and significant reparation obligations to Kuwait, Saudi Arabia and others. It was saddled with an antiquated infrastructure that required repair and expansion, a fact that was widely recognized but which escaped the Bush Administration.

 It should have been evident that after another war in 2003, Iraq would be in no position to feed its people and to provide them with minimal health and other services ($10 billion per year), to service its debt ($15 billion per year), pay for an occupying force ($50 billion per year), finance its own reconstruction ($25 billion per year, with some estimates as high as $100 billion per year), and finance its development and growth ($10 billion per year). Iraq‘s needs of roughly $100 billion per year are not even close to its likely oil revenues of  $10-$25 billion (minus reparations) per year over the next five years. At the same time, it should be acknowledged that there is no way to do build a democratically viable Iraq on the cheap. If the needed resources are not brought to the table, the entire effort will collapse. Iraq desperately needs external resources to get back on its feet quickly.

The U.S. cannot cover Iraqi financial shortfalls. The U.S. has already spent $65 billion on the war effort alone and is paying $3.9 billion per month (or nearly $50 billion a year) to maintain troops in Iraq. It would be difficult, if not impossible, to justify additional annual expenditures of $50 billion in the name of the war on terrorism when no link has been established and we face an era of unprecedented budget deficits.

Our only viable option is to muster support for an effective UN mandate for the management of post-war Iraq and to get the Middle East peace process on track to get Arab and Islamic political and financial support.  While the Bush Administration has not adopted such a compromising approach because of the implied loss of control in Iraq and loss of face, this is the best hope for the US and for Iraq. If the U.S. agrees to share control, it will gain the support of its traditional allies, France and Germany, and other significant global players, such as China, India and Russia. If the U.S. wholeheartedly pushes both parties towards a resolution of the Middle East conflict, Muslim countries would also be in a position to lend support to the peacekeeping and reconstruction effort. Muslim fanatics inside and outside of Iraq, along with other opponents of US occupation, will be snookered, reducing terrorism and sabotage inside Iraq. Militarily, the contribution of peacekeepers from France, Germany, India, Japan, Russia, Pakistan and Turkey would lower the human burden for the US.

On the economic front, the UN mandate would dramatically reduce U.S. financial exposure. The estimated $3.9 billion monthly cost of keeping U.S. forces in Iraq would be reduced because of lower troop needs and the participation of other countries. A new government in Iraq would be recognized by the international community, enabling Iraq to get low cost financing from the World Bank Group, the IMF and the Islamic Development Bank (IDB). More importantly, the US would then be in a position to approach Iraq’s creditors to seek partial debt and reparation forgiveness, freeing up resources for the reconstruction effort. The rich Arab countries would contribute financially to the reconstruction of Iraq, in lieu of providing peacekeepers and with the hope of buying security for their own regimes. It is also possible that the major industrial countries would follow suit, especially if they had equitable access to contracts and to future oil and gas development in Iraq. Without a UN mandate, U.S. pleas (and the assistance that will be sought at the Madrid Conference in October) will fall on deaf years.

The economic arguments for the U.S. to seek a UN mandate for Iraq and to push harder for Middle East peace are so overwhelming that it should be a foregone conclusion. Yet hubris, the announced policy of “unilateral pre-emptive intervention” and domestic political considerations in an election year have made it difficult for Washington to focus on its real goals: the emergence of a democratically viable Iraq, enhanced peace in the Middle East and victory over global terrorism.

Hossein Askari is the Iran Professor of International Business and Professor of International Affairs at the George Washington University.