Bush Officials Devise a Broad Plan For Free-Market Economy in Iraq -- WSJ Article

Bush Officials Devise a Broad Plan For Free-Market Economy in Iraq

WASHINGTON -- The Bush administration has drafted sweeping plans to remake Iraq's economy in the U.S. image.

Hoping to establish a free-market economy in Iraq following the fall of Saddam Hussein, the U.S. is calling for the privatization of state-owned industries such as parts of the oil sector, forming a stock market complete with electronic trading and fundamental tax reform.

Execution of the plan -- which is expected to be complicated and possibly contentious -- will fall largely to private American contractors working alongside a smaller team of U.S. officials. The initial plans are laid out in a confidential 100-page U.S. contracting document titled "Moving The Iraqi Economy From Recovery to Sustainable Growth." The consulting work could be valued at as much as $70 million for the first year.

The U.S. Agency for International Development plans to award part of the work to BearingPoint Inc., a Virginia-based consulting firm known previously as KPMG Consulting, an AID official said. BearingPoint, which received a similar $40 million job to do economic work in Afghanistan, was approached as a sole-source bidder. AID plans to open the larger share of the work, including privatization and small-enterprise development, to a limited pool of competitors likely to include Booz Allen Hamilton Inc., Deloitte Touche Tohmatsu and International Business Machines Corp.'s recently acquired PricewaterhouseCoopers' consulting unit. Unlike some of the construction companies that have won contracts, BearingPoint has made few political contributions to either party in the past two years.

AID has been criticized by some in Congress for the secretive way it has awarded other Iraq reconstruction contracts over the past two months. But AID officials said these contracts will be awarded under the same expedited rules to launch work as quickly as possible.

AMERICAN BLUEPRINT   The Bush administration envisions sweeping reforms of Iraq's economy, based on free-market principles and carried out by private contractors. These include: Privatization of state-owned enterprises, possibly including oil companies Modernizing the Baghdad Stock Exchange by creating a new settlement system and tough oversight Reforming the Central Bank and the commercial-banking system Jump-starting the private sector with fresh credit and training Rewriting the tax code and tariff system Source: White House documents

The document provides the most detailed look to date at the ways U.S. officials contemplate restructuring an economy that had been almost entirely government-run, and long mired in a slump aggravated by wars and international sanctions. It is likely to intensify already-sharp international criticism of Washington's unilateral actions in Iraq.

Treasury Department officials, who helped draft the document, maintain that the plan reflects a broader vision for Iraq's future economy, and that not all the goals will necessarily be followed. "Everything in there is notional," one U.S. official said.

For many conservatives, Iraq is now the test case for whether the U.S. can engender American-style free-market capitalism within the Arab world. In a February address, President Bush spoke of "a new Arab charter that champions internal reform, greater political participation, economic openness and free trade." A new regime in Iraq, he said, "would serve as a dramatic and inspiring example of freedom for other nations in the region."

On the economic side, the AID plan serves as a detailed road map for achieving that end. The proposals for possible mass privatization of Iraqi industry are likely to be the most controversial. The document -- first drafted in February and circulated among financial consultants -- calls for liquidating some insolvent Iraqi companies, while assessing others for possible sale. Some state companies might be sold through "a broad-based Mass Privatization Program," which could distribute ownership vouchers to ordinary Iraqi citizens, similar to a program used in Russia in the mid-1990s.

The document says that the contractors would help support "private sector involvement in strategic sectors, including privatization, asset sales, concessions, leases and management contracts, especially in the oil and supporting industries" that dominate Iraq's business activity.

Any attempt at privatizing Iraq's oil industry, which controls the world's second-largest petroleum reserves after Saudi Arabia, would be a gargantuan business deal. It could be contentious, especially if assets wind up in the hands of foreign oil companies. In the Mideast and Europe, there is a widespread belief -- despite White House denials -- that the U.S. invaded Iraq to get control of its oil.

According to the timetable in the documents, officials would spend a year building a consensus for industry privatization, and then transfer assets over the following three years.

The administration also envisions converting Iraq's rudimentary prewar stock market, within a year, into a "world-class exchange" for trading the shares of newly privatized companies. The work would entail developing a centralized share registry as well as a new clearing and settlement system, the document says. U.S. officials, working with the AID contractors, would write rules for membership in the exchange and would train Iraqi stockbrokers. The plans also call for forming a tough securities commission to prevent abuses.

At the same time, the contractors would be designing by year's end "a comprehensive income tax system consistent with current international practice." They would be preparing regulations to impose a consumption tax. The plan also envisions extending as much as $8 million in loans to small and medium-size Iraqi businesses within the first year.

The AID contractor would help revamp Iraq's battered banking system by working out problem loans. The traditional Islamic money-transfer system would be incorporated into the banking system, the document says.

The Treasury Department has been careful in recent weeks in talking about a possible new Iraqi currency, saying any decisions will be up to the Iraqi people. The AID contract is less shy, stating that the contractor "is to carry out an extremely rapid and thorough exchange of currencies" and to collect and destroy the old bills -- all by July.

Under the consulting division of labor worked out by AID, BearingPoint will be hired to do all of the regulatory and legal reform work with the Central Bank and Iraq's various financial ministries. The contract will also entail BearingPoint's taking over the distribution of cash to Iraqi civil servants, now being handled by the Pentagon. The U.S. has so far shipped $20 million in cash to Iraq.

The other, larger contract will handle privatization, modernizing of the stock market, loans to smaller Iraqi enterprises and international-trade and private sector development.

The plan makes scant mention of any involvement of multilateral organizations such as the World Bank and the International Monetary Fund, both key players in similar reform efforts in Russia and Eastern Europe. Still, Bush administration officials have said they would welcome World Bank and IMF help in Iraq, but how those would be reconciled with projects such as the AID restructuring blueprint remains unclear.

"This will not be credible to the Iraqi people or anyone else if we try to do it ourselves," said Edwin Truman, a former top international finance official at the Federal Reserve who served in the Clinton administration's Treasury Department. "The World Bank and the IMF have a lot more experience and a lot more credibility in this than the U.S. government."

Other experts on post-communist reform efforts say it would be a mistake for the Bush administration to stress swift privatization, a policy that met with mixed success across the former Soviet bloc. In many countries, rapid privatization of state-run enterprises led to sharp disruptions in jobs and services, as well as rampant corruption.

Treasury Department officials caution that whoever is picked to perform the jobs will work under the strict guidance of Bush administration officials -- some of whom are in Baghdad as part of an overall Pentagon-led reconstruction effort -- as well as senior Iraqis.

Write to Neil King Jr. at neil.king@wsj.com¹

Updated May 1, 2003 8:48 a.m.

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	May 6, 2003

COMMENTARY

Politics for Lunch By ROBERT POLLOCK BAGHDAD -- Competitive politics is starting to flower in the heart of this city, the capital, only weeks ago, of a totalitarian state. Where tongues were once cut out for insubordinate speech, a dozen newspapers have sprung up since Saddam's fall. But some American editorialists seem to be wondering whether all this is a good thing. Specifically, they're upset about a "power grab" by Iraqi National Congress leader Ahmed Chalabi and the fact he has "ensconced" himself in the city's Hunting Club. Don't let the name fool you. The club hasn't been redecorated since about 1970, power is intermittent, and bed here is an army cot -- if you're lucky. But it's a roomy and relatively secure facility, to which scores of prominent Iraqis -- clerics, businessmen, community leaders -- flock daily to offer support and seek advice. In between these meetings, Mr. Chalabi sat down for lunch with a few journalists yesterday. * * * The first topic was Iraq's economy, and Mr. Chalabi held forth like a modern-day Ludwig Erhard, the father of the Deutsche Mark -- and of Germany's postwar economic miracle. Mr. Chalabi understands the urgency of replacing the many jobs that have disappeared from Iraq's state-run economy. "It has to be privatized immediately," said the former banker, referring to state-owned industries. As for trade, "we should immediately streamline customs regulations and investment regulations." And if that means Iraqi companies "will be slaughtered" by foreign competition, that "is not a bad thing." "I am advising Iraqi managers to learn from the [postwar] Japanese," about quality control, he adds. Mr. Chalabi rejects the Nasserism (protectionism, "self-sufficiency") that has handicapped Arab economies for decades. Privatization means "we will sell to foreigners." And he hopes that Iraq will be able to draw on the experience of its four million exiles. Rebuilding the country, he concedes, is a "sophisticated process which requires foreign financial expertise." Where Mr. Chalabi echoed Erhard was in saying that "what you must address first is the question of the currency." At the current exchange rate of about 2,000 per dollar, there's an estimated $750 million worth of Saddam-faced dinars in circulation. Mr. Chalabi suggests the "transfer of bank balances from dinars into dollars at a fixed rate." Government banks, he says, have hard currency reserves to cover that. At a later date, those dollars could be redeemed for hard dinars -- Saddam-less, of course. An important step in enabling Iraqi reconstruction will be the end of U.N. sanctions and the oil-for-food program. But even with the country back in control of oil revenues, Mr. Chalabi hints some debt forgiveness will be necessary. He estimates commercial debt to foreign banks (never mind Gulf and Iran-Iraq war reparations) at over $100 billion. But at current oil prices and with Iraq's OPEC quota of about 2.1 million barrels a day, the country can pump only about $18 billion worth of crude a year. And "we cannot just summarily leave OPEC." Why? "Because the U.S. will I think be against it." The U.S. has many oil-producing friends, he notes. Mr. Chalabi also rates de-Baathification high on the list of priorities. "The Baath Party should be eradicated" -- outlawed, assets confiscated, uprooted from civil society. And the party's upper echelons -- about 30,000 people -- "should be excluded from politics." Mr. Chalabi suggests that the State Department and the CIA would prefer to eschew such a radical restructuring in favor of a smoother transition. Their rationale "is the same explanation that Mussolini gave -- the fascists make the trains run." But though the level of support for American involvement is amazingly high here -- the word on the street is "Garner good," referring to administrator Gen. Jay Garner, and "Don't leave too soon" -- a number of Iraqis say the best way to sour opinion toward the U.S. is to allow Baathists back into positions of power. Mr. Chalabi notes that de-Baathification is critical for economic reform too, to prevent the crony privatizations that have hamstrung post-Communist economies. Such words, offered over a few hours on a sweltering Baghdad afternoon, may not impress observers used to the sophisticated debate that is American democracy. But it is clear that much-maligned Mr. Chalabi is perhaps the only Iraqi leader with a clear vision of what comes next, and one of the few with an unquestionable commitment to a secular democracy. Next to the Hunting Club hulks the unfinished, Superdome-sized Saddam Mosque. "It should be a shopping mall," says one of Mr. Chalabi's aides. Mr. Pollock is a senior editorial page writer at the Journal. URL for this article: http://online.wsj.com/article/0,,SB105217902695420000,00.html     Updated May 6, 2003

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