Privatization and the Oil Industry: A Strategy for Postwar Iraqi Reconstruction(1)

January 22, 2003

Privatization and the Oil Industry: A Strategy for Postwar Iraqi Reconstruction(1)

As the Bush Administration and Iraqi opposition groups plan the future of a post-Saddam Hussein Iraq without its menacing arsenal of weapons of mass destruction (WMD), economic issues also loom large on the horizon.

As the Bush Administration and Iraqi opposition groups plan the future of a post-Saddam Hussein Iraq without its menacing arsenal of weapons of mass destruction (WMD), economic issues also loom large on the horizon.

Saddam's grip on oil has dangerous security repercussions for the United States and its allies. According to the U.S. General Accounting Office, oil smuggling and illegal surcharges of 25 cents to 50 cents on a barrel of legal oil are providing the funds to bolster Saddam's regime. Saddam's unaccounted revenues are at least $6.6 billion-revenues available to develop WMD and support terrorism in spite of economic sanctions imposed by the United Nations on Iraq after the Persian Gulf War. (1) (This in spite of the fact that the United Nations intended to lift the sanctions in exchange for Saddam giving up his program to develop WMD.)

Saddam's regime has succeeded in bankrupting the country, even though it boasts the world's second largest oil reserves after Saudi Arabia. The oil sector provides more than 60 percent of the country's gross domestic product (GDP) and 95 percent of its hard currency earnings. Yet GDP for 2001, at the market exchange rate, is estimated to be only about one-third its 1989 level. Iraq also is hobbled by its $140 billion foreign debt. This devastation was wrought by such policies as the nationalization of the country's chief export commodity, oil; extensive central planning of industry and trade; the 1982-1988 war against Iran; and the invasion of Kuwait, which precipitated the 1991 Gulf War. Iraq's economy has been grossly mismanaged. Sound economics are needed to help the Iraqi people rebuild their lives and their country after two decades of wars and four decades of repression under the current regime.

A postwar economic strategy is necessary, which will be beneficial for the industrial world, the countries of the Middle East and the developing world. The full reintegration of Iraq's oil industry into the global marketplace would allow a more abundant and stable energy supply and a greater revenue flow for the Iraqi budget, foster a higher living standard for the Iraqi people, and provide numerous business opportunities for the region and the world.

The way out of the economic morass for the Iraqi economy lies through privatization of its abundant oil assets, not bureaucratic mismanagement, as some have advocated. If successful, Iraq's privatization of its oil sector, refining capacity, and pipeline infrastructure, could serve as a model for privatizations by other OPEC members, thereby weakening the cartel's domination of the energy markets.

The road to economic prosperity in Iraq will not be easily paved, but the Bush Administration can help the future Iraqi government achieve fundamental structural reform with massive, orderly, and transparent privatization of various sectors of the economy, including the oil industry. The United States should offer its guidance on establishing sound economic and trade policies to stimulate growth and recovery. Privatization efforts in other countries demonstrate that privately held infrastructure, oil, and oil service companies attract modern technology and management expertise, produce greater efficiencies, improve production standards, and generate higher revenues than do centrally planned and state-owned industries. The same can be achieved in Iraq, whose oil industry cannot thrive without access to global capital markets.

In particular, the Administration should work with opposition leaders in Iraq to convince them now that a future Iraqi federal government must develop mechanisms for privatizing these industries and taxing oil sales, and for sharing the proceeds equitably with the three major ethnic regions: Kurds in the North, Shi'a Arabs in the South, and Sunni Arabs in the central region. (In our opinion, the best model for postwar Iraq is a federal system that incorporates the various factions and regional leaders.)

Obviously, the immediate priorities of the postwar administration will be the restoration of order and the full dismantling of the Ba'athi dictatorship. However, economic reform cannot be neglected. In the months following the removal of Saddam Hussein from power, the United States and its allies (as well as relevant international organizations) must provide the necessary technical and financial assistance that enables the Iraqis to create modern legal environment that recognizes property rights and is conducive to privatization. A key role here can be played by the large and successful Iraqi expatriate community (as well as other Western-educated Iraqis) to provide the personnel, expertise and entrepreneurial know-how that can ensure a successful privatization reform. Contrary to the advice proffered by some in the international NGO community, prices will need to be deregulated, including in the utilities and the energy sector. Finally, it should be a top priority to liberalize Iraq's trade, with an eye to eventual Iraqi membership in the World Trade Organization. Restoring Iraq quickly to the global economic mainstream is critical to end the damage caused by decades of isolation and to lift the living standard.

Economic growth will be an important contribution to the stabilization of Iraq, allowing the United States and other forces stationed there to depart after assuring that Iraq's WMD threat and repressive regime have ended. Structural reform and comprehensive privatization is a winning strategy for the people of Iraq, its future government, the region, and the United States.

(1) A point tellingly made by Richard Perle. Cf. his remarks to In the National Interest at

Gerald P. O' Driscoll, Jr., Ph.D., is Senior Fellow at the CATO Institute. Ariel Cohen, Ph.D., is Research Fellow in the Kathryn and Shelby Cullom Davis Institute for International Studies.