WSJ:  September 22, 2003:  New Iraqi Laws Target Economy, Foreign Access

New Iraqi Laws Target Economy, Foreign Access

DUBAI -- The occupation government in Baghdad passed sweeping laws it hopes will transform Iraq into a low-tax economy offering wide access for foreign banks and businesses.

With the support of the U.S.-appointed Governing Council, Iraq administrator L. Paul Bremer signed orders over the weekend implementing the Bush administration's free-market vision for the country. Finance Minister Kamel al Gailani, a U.S. appointee, unveiled the plan Sunday to international bankers in Dubai.

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"Our new foreign investment law will make Iraq one of the most open countries in the world," Mr. Gailani told the Institute of International Finance gathering. "International banks are welcome to enter and do business in Iraq."

Early in the occupation, the Coalition Provisional Authority was reluctant to enact major policy reforms, such as privatization, preferring to wait until an elected Iraqi government was in place. In the intervening months, however, officials have realized that the country's infrastructure is in worse shape than previously thought, and being made worse still by the persistent insurgency directed at the U.S.-led occupation forces and those who assist them. There are still no elections in sight, however, and Mr. Bremer has opted in the interim for bolder steps to get Iraq's economy moving and build more support for the coalition's efforts.

At the same time, American officials are trying to reinforce the legitimacy of the Governing Council, and they were at pains to say that the Iraqis contributed to the economic plan. The Council has been the target of violent attacks by insurgents. One councilwoman, Aquila al Hashimi, was shot and seriously wounded over the weekend.

The new plan "is not a cure-all, but it is part of the picture," said a Baghdad-based U.S. official.

One of the new economic plan's major goals is to attract foreign investors, who will be allowed to own 100% of enterprises in every area of the economy except real estate, oil and other natural resources. Foreigners will be able to lease property for up to 40 years and will otherwise be treated the same as local investors.

The banking law permits foreign banks to set up shop in Iraq, and up to six foreign institutions can purchase 100% of local banks within the next five years. After that point, the limits will be lifted. Foreign-owned banks will have to have $25 million in capital, while banks with majority local ownership must have $5 million in capital within 18 months, and must meet international standards for capital adequacy. In addition, Mr. Bremer's edict established the legal autonomy of the Iraqi Central Bank.

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Iraqi citizens and most companies will continue to enjoy a tax holiday through the end of the year, at which point they will face a top marginal income-tax rate of 15%. American officials said oil revenues, along with taxes, should be sufficient to cover all of the government's operating expenses.

On top of that, President Bush has pledged $20 billion to pay for reconstruction costs next year, and, to help, the government will now impose a 5% reconstruction duty on all imports except such humanitarian items as food, medicine, clothing and books. The U.S. and wartime allies are hosting a donors meeting in Madrid next month to try to get large contributions from other donor nations.

Still, Mr. Gailani tried to keep expectations in check. "All of us want quick results," he said. "But we know from the experience of other countries that economic transitions take time.... We cannot rebuild an economy overnight." Though the economic policy changes don't include Iraq's oil sector, the newly appointed oil minister has championed eventual privatization and foreign investment there as well. Ibrahim Bahr al Uloum has said publicly some oil-sector privatization, especially in so-called downstream businesses such as pipelines and refineries, is a good idea, though decisions about foreign ownership and investment would have to wait until a representative and fully recognized Iraqi government takes over in Baghdad.

Separately, leaders of Germany, France and Britain at a Berlin summit on Saturday sought to project a new European consensus before a U.N. General Assembly meeting on Iraq's future, agreeing broadly on a significant role for the United Nations and a transfer of power to Iraqis. But they were still divided on how quickly that should happen.

There was no sign of movement from French President Jacques Chirac, who insisted again that power should be transferred to the Iraqis within months, despite U.S. insistence, shared by British Prime Minister Tony Blair, that it is too early to establish a timetable.

In Russia on Saturday, President Vladimir Putin said Moscow wouldn't oppose a U.S.-commanded international force in Iraq, but emphasized the terms and timeline of its involvement must be laid out by the U.N. Security Council. Moscow isn't ruling out sending military personnel, but the Russian leader said it currently wasn't on the agenda.

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Write to Michael M. Phillips at michael.phillips@wsj.com³

Updated September 22, 2003

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Baghdad's Laffer Curve

Here's one more reason for Howard Dean and the French to deplore the liberation of Iraq: The new Iraqi Finance Minister, Kamel al-Gailani, has just announced that the country's highest marginal tax rates will be 15% -- on both individual and corporate income.

Mr. al-Gailani disclosed this and other pro-growth economic policies yesterday at the IMF-World Bank meetings in Dubai. Iraq will impose a uniform import tariff at the sensibly low rate of 5%, except on clothing, medicine, food and books, on which the rate will be zero. "Free trade will be a critical element to Iraq's future economic growth," according to the Finance Ministry's summary of the proposals.

A new investment code will also make Iraq wide open to foreign capital. Foreign ownership will be allowed up to 100% in all areas except natural resources. The exception is intended to exclude Iraq's oil wealth and as an economic matter is undesirable. But no doubt the new Iraqi Governing Council, which approved these proposals, was sensitive to propaganda in parts of the Arab world that the U.S. invasion was all about oil. We hope the government now finds a way to turn over some oil revenue to individual Iraqis.

As for the tax code, the talking points for Mr. al-Gailani's announcement explain that Iraq wants a tax regime with "low tax rates that will help create strong incentives for future investment, employment, and limit the size of the public sector, simplicity in order to minimize the administrative costs of tax collection, transparency to minimize room for tax evasion and corruption, and fairness to ensure that all sectors pay reasonable shares of future taxes."

Sounds good to us, and we'd add one request: Once the U.S. occupation is done in Baghdad, would Mr. al-Gailani and his fellow reformers consider invading and occupying the U.S. Congress?

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Updated September 22, 2003