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James Flanigan

Hussein's Legacy Still Mars Iraq's Economy

February 06, 2005|James Flanigan

A week ago, millions of Iraqi citizens braved threats of violence to cast ballots in their nation's first multiparty elections in half a century. Rightly, many around the world cheered.

And yet for all the jubilation, there is a sobering reality that continues to hang over the war-ravaged country: Iraq is going to have a hard time sustaining its fledgling democracy unless millions of its citizens also get to do things beyond the ballot box, like land decent jobs and invest their money with confidence.

Unfortunately, that's not going to happen anytime soon.

Everyone knows that Iraq has the potential to be rich. In 2003, as the bombs began to fall over Baghdad, Bush administration officials blithely explained how the country's oil would finance its postwar rebuilding. They have since thought better of such statements.

Iraq has enormous oil reserves -- at least 120 billion barrels, or 11% of the world's total -- and probably much more remaining, to be proved through exploration and development. But the country won't soon be able to produce as much oil as it did in the 1990s.

Security is a huge problem, of course; sabotage to a pipeline in the north is currently cutting into Iraq's oil exports.

But the real trouble transcends any one or two terrorist incidents. Saddam Hussein, it turns out, was a lousy oil field manager.

The basic problem, says Vera de Ladoucette, an expert on Middle East oil for Cambridge Energy Research Associates, is that the greedy dictator overproduced.

Hussein wanted to pump up oil production to generate a gusher of money, with little thought about husbanding resources for the future. So his minions used water-flooding techniques and other means to maximize production from petroleum deposits in southern Iraq.

The result: Those reservoirs may be severely damaged, shortening their productive life.

The Iraqi oil ministry evidently senses the danger. It has given contracts to BP and Royal Dutch/Shell Group to study data from the fields over the next 11 months. The intent is to see what needs to be done to repair the oil reservoirs.

Meanwhile, Iraq's petroleum output looks as if it'll be stuck at about 2 million barrels a day for the next couple of years -- a 43% reduction from the country's former capabilities. "And that's the absolute maximum," De Ladoucette notes.

At current prices, Iraq's oil production should generate more than $30 billion a year in income, pushing the nation's gross domestic product to more than $35 billion. But Iraq needs to generate far more economic activity to meet the needs of its population, now at 24.8 million and growing by 5% a year.

There are, fortunately, some signs of progress.

The International Monetary Fund is extending more than $450 million to Iraq to help it stabilize its financial system. And U.S. government funds for the reconstruction of Iraq have begun to flow -- $3 billion so far, with $9 billion more set to be put to work soon in various infrastructure projects.

An incipient recovery is also visible in Iraq's agricultural sector, centered in the Tigris and Euphrates valleys -- the biblical Garden of Eden. The nation's farms suffered from neglect and a dearth of investment under Hussein. But now irrigation is flowing over more acres, and more crops are blooming.

The Iraq Stock Exchange, which opened in June to replace the corrupt Baghdad exchange of Hussein's time, is stirring to life as well. More than 60 companies are listed and $1 billion-plus in bonds were traded last year, according to Amman, Jordan-based Atlas Investment Co.

Through the exchange, an enterprise such as Al Mansur Co. can raise capital for building 1 million housing units in three cities.

"Getting financing and building materials for reconstruction is not difficult," analyst Lubna Bashiti of Atlas Investment says.

"The only obstacle may be logistics in transporting the materials from Jordan, the Emirates or Saudi Arabia," Bashiti says, referring to continued violence along Iraqi roads.

But, in truth, zealots with car bombs may be the least of Iraq's economic problems.

Most of the exchange's listings are state-owned firms, the legacy of a regime under which even companies making such workaday products as batteries, fertilizer, milk and cheese were government-controlled. Now these ventures present opportunities for private investors who can transform them into real businesses. But privatization also carries great risks -- especially in a place where the notion of a free economy is so strange and new.

The roots of Hussein's patronage economy -- in which contracts were let solely to reward friends and punish enemies -- run deep. Iraq remains beset by "corruption and resentment and false values," says Timur Kuran, professor of economics and law at USC and an Islamic scholar.

To succeed in this new day, Kuran says, Iraq must create an independent business sector and a civil structure of laws and checks and balances.

That won't happen overnight. Instead, U.S. investment managers hear reports that the streets of Iraq are awash with American currency, probably left over from years of looting by Hussein's lieutenants and "oil-for-food" scams. Buildings are being bought for cold cash, according to the reports.

Some saw the Iraqi election as nothing short of a miracle. The lifting of the Iraqi economy will require far more than that.


James Flanigan can be reached at jim.flanigan

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