Bush's Iraq: A Bloodbath Economy

The president's plans to subject Iraq to the most radical forms of capitalism are as responsible as the war itself for the destruction of Iraq.

At Alternet, Joshua Holland writes:
Iraqis have been brutalized not only by bombs and bullets; they've also been the victims of economic violence in the form of the free market "shock therapy" cooked up by a firm in Virginia on a $250 million no-bid contract before the U.S. invasion. Tranforming Iraq's economy overnight was a matter of ideology trumping commonsense, and it's killed thousands of innocent Iraqis and shattered a way of life for hundreds of thousands more.

That the radical restructuring of Iraq's political economy has received so little critical attention -- even as Iraq's nascent government threatens to crash and burn -- is a testament to how deeply indoctrinated we are --especially our media -- in the narrative of what "American-style" capitalism is. It was taken as a given that after knocking off Saddam, we'd rapidly privatize huge swaths of Iraq's national companies, get rid of hundreds of thousands of civil servants, completely restructure the country's tax and finance laws and throw Iraq's economy wide open for foreign multinationals. File it under bringing "democracy and capitalism" to the poor, backward Arabs.

The reality is that the economic policies we imposed on Iraq were not some generic form of "capitalism"; they included the most radical business-state rules imaginable -- policies that developing countries have vehemently resisted for over a decade. What's more, imposing them at the point of a gun appears to have violated both international and U.S. laws. There's nothing "normal" about it.

And while "democratization" and "free markets" supposedly go hand-in-hand, the truth is that Iraq's economic transformation was mutually exclusive with the goal of forming a legitimate government, and the Bush administration knew it well in advance of the occupation.

That's because it's universally accepted -- even among the most vocal proponents of the very model of corporate globalization that inspired Iraq's new economy -- that in the short-term those policies create economic pain, displacement, anger and civil unrest, as well as a lack of faith in government. That's no way to win hearts and minds.

Even the man who implemented the shock therapy, coalition boss L. Paul Bremer, understood this quite well. Before his installation as "the dictator of Iraq" -- in the words of one UN envoy -- Bremer was a risk management consultant. In 2002, he wrote in a report to his corporate clients: "The painful consequences of globalization are felt long before its benefits are clear… Restructuring inefficient state enterprises requires laying off workers. And opening markets to foreign trade puts enormous pressure on traditional retailers and trade monopolies." Bremer noted that corporate globalization is "good for the economy and society in the long run, [but has] immediate negative consequences for many people," and concluded that those consequences cause "political and social tensions."

Pushing those policies in a country like Iraq was a matter of ideological preference and greed, not necessity. A good example is Iraq's new flat-tax, established by Order #37 (now Law #37). As the Washington Post reported: "It took L. Paul Bremer, the U.S. administrator in Baghdad, no more than a stroke of the pen … to accomplish what eluded [Republicans] over the course of a decade and two presidential campaigns."

Former Reagan and Bush 41 official Bruce Bartlett said with no small amount of envy that an occupation government doesn't have to "worry about all the political and transition problems that have made adoption of fundamental tax reform here so difficult," and Grover Norquist, head of Americans for Tax Reform, called the move "extremely good news." Meanwhile, one Middle East expert briefed on the plan told the Post "A piece of social engineering is being done on Iraq, but it has almost no support from other members of the U.S.-appointed Iraqi Governing Council."

Putting "free-markets" before what are recognized as "best practices" in post-conflict reconstruction had an immediate relationship with Iraq's insurgency. Consider the impact of two of Bremer's 100 Orders. Order #1 was the "De-Ba`athification of Iraqi Society." It laid off 120,000 senior civil servants (and a half million Iraqi soldiers and officers), ostensibly to clean out the government of holdovers from Saddam's Ba'ath party. But you had to be a Ba'athist to get those civil service jobs in the first place. Antonia Juhasz, author of The Bush Agenda, told me in a recent interview that "it wasn't an indication that they were a party to Saddam Hussein's crimes ... they were fired because they could have stood in the way of the economic transformation."

When I say "civil servants," don't think about the pasty men and women down at the Social Security office. Think about mostly Sunni civil servants -- men accustomed to influence -- fresh out of a job, with few prospects and facing a new order of Shi'ite rule, and remember that they all had compulsory military training and a collection of automatic weapons.

Now look at Order #1 in relation to Order #39, which made it a violation of Iraqi law fo the government to favor local Iraqi businesses or Iraqi workers for reconstruction work, meaning that all those pissed off, heavily-armed and newly unemployed men could not be put to work rebuilding their country.

That killed the State Department's own exhaustively prepared plans for post-war Iraq -- plans that the administration had announced they'd follow prior to the invasion. According to a report by the Center for Strategic and International Studies (PDF):

The Administration … announced plans to employ the bulk of Iraq's regular army to rebuild Iraq's critical infrastructure, such as roads and bridges, after a conflict. The United States would pay the salaries of Iraqi soldiers to perform this work, thereby ensuring - at least in the immediate term - against their return to civilian life without any gainful employment.

We'll never know how differently things might have turned out if the administration had listened to its own experts instead of the Chamber of Commerce's lobbyists.

That's not to say these policies caused the insurgency -- it's not that direct -- but they created circumstances in which it could flourish and guaranteed it would have some popular support. This was, after all, an economic order that had led people living in much better circumstances in places like Seattle, Geneva and Montreal to riot. It was predictable that, on the heels of an invasion, they'd be greeted with violent resistance. Michael O'Hanlon of the Brookings Institution was right when he called post-conflict Iraq "a debacle that was foreseeable and indeed foreseen by most experts in the field."

Much of this policy mix also violated international and U.S. law. It's no small irony given that one of the reasons given for the invasion was to confront a "rogue" regime that scoffed at international law.

Article 43 of the Hague Convention says that an occupying power must "take all the measures in his power to restore, and ensure, as far as possible, public order and safety, while respecting, unless absolutely prevented, the laws in force in the country." The only law that the American forces left standing was Saddam Hussein's ban on public-sector unions.

Article 55 says an occupying force can only serve as the "administrator" of "public buildings, real estate, forests, and agricultural estates." As the Guardian pointed out, those rules also "apply to structural changes to a public resource or service." Naomi Klein asked: "what could more substantially alter 'the substance' of a public asset than to turn it into a private one?"

The questionable legality of the policy was also well understood. Just a week after the bombs started falling on Baghdad, Britain's Attorney General Lord Peter Goldsmith sent a memo to Tony Blair (PDF) warning that "the imposition of major structural economic reforms would not be authorized by international law." He added: "the longer the occupation of Iraq continues, and the more the tasks undertaken by an interim administration depart from the main objective, the more difficult it will be to justify the lawfulness of the occupation."

The Bush administration -- dominated by Big Business ideologues -- went ahead with the plan nonetheless, and the consequences have been wholly predictable. After all, we've seen them before, in the former Soviet states after the USSR's collapse.

The adminsitration actually cited Russia's economic transition as a model for Iraq. But the University of North Carolina's Jonathan Weiler, an expert on Russia and author of Human Rights in Russia: A Darker Side of Reform told me that while "the ideology of democracy promotion says that democratic political institutions and free market reforms are two sides of a coin in terms of liberal freedoms. In fact, Russian reformers were always more interested in an economic transformation that would enrich their allies." Russia's transition to a market-based economy was anything but smooth, and Weiler says "it's certainly not a model that's compatible with trying to create a broadly legitimate government in a country that's been torn up by war and years of dictatorship. Essentially, implementing Russia's economic 'reforms' required institutions resolute enough to carry them out despite widespread opposition, and that undermined genuine political accountability. So when you look at Russian human rights since 1991, you see that the victims have changed--to the socially disadvantaged rather than the politically suspect--but the realities of life for many vulnerable Russians have in fact become worse."

None of this is to suggest that Iraq's economy didn't have serious inefficiencies or wasn't in need of deep structural reform. But what economists call "inefficiencies" are most commonly someone's job, or a farmer's subsidy -- people's livelihoods. The reforms could have been phased in over a long period, or, better yet, started after an Iraqi government was established.

Common sense should have dictated that, after the destruction of its infrastructure and the dismantling of its (brutal but stable) government, Iraq didn't need to become a laboratory for neoliberal economics. It needed jobs and basics like electricity, water and sewage systems, and it needed them quickly.

That meant local firms, local workers and small, local projects -- which make less juicy targets for saboteurs -- to rebuild the country's public infrastructure. Development experts call that "local ownership," and consider it crucially important for good outcomes.

But commonsense has always been in short supply in the Bush administration, and they chose to make the country into a trough full of slop for the big multinationals. Make no mistake about it, Iraq's economic transformation is an example of war profiteering by other means, and the disastrous results are plain to see.

The Handover That Wasn't

Before his departure, CPA chief Paul Bremer issued 100 Orders to dramatically restructure Iraq's economy to fit free-market ideals. And no Iraqi, including future elected officials, can undo them

In Foreign Policy in Focus, Antonia Juhasz writes:

The U.S. occupation of Iraq officially ended on June 28, 2004 , in a secret ceremony in Baghdad. Officially, "full sovereignty" was handed from the Americans to the Iraqi Interim Government. But it was clear from the start that this was sovereignty in name, not in deed. First, there is the continued military occupation: 138,000 U.S. soldiers and Marines, plus 20,000 troops from other countries and an estimated 20,000 contractors, all fully under U.S. control and immune to Iraqi laws. Equally debilitating, however significantly less well reported upon, is the continued political and economic occupation by the Bush administration and its corporate allies.

The most important tools being used by the Bush administration to maintain varying degrees of economic and political control in Iraq are the 100 Orders enacted by L. Paul Bremer, III, head of the now defunct Coalition Provisional Authority (CPA) before his departure. It was thought that the "end" of the occupation would also mean the end of the Orders. Instead, in his final Order enacted on his last day in the country, Bremer simply transferred authority for the Orders over to the new Prime Minister, Iyad Allawi. For his part, Allawi – a thirty-year exile of Iraq with close ties to both the CIA and British Intelligence Services – is considered America 's new man in charge of Iraq .

Bremer also ensured the implementation of the Orders by stacking every Ministry with U.S.-appointed authorities with five-year terms – well into the period of the new, elected government, which is to take office by the end of this year.

The Orders are exercised pursuant to the Iraqi interim constitution, the Transitional Administration Law (TAL). The Annex to the TAL states that the Orders can only be overturned with the approval of the president, the two vice presidents and a majority of the ministers.

But the Annex also denies the interim government from taking "any actions affecting Iraq 's destiny" beyond the election of an Iraqi government. The identical sentence appears in UN Security Council Resolution 1546, which outlines Iraq's transition to "sovereignty." Thus, while Allawi may succeed in overturning a few less far-reaching Orders if for no other reason than to demonstrate his independence from the Americans, it is beyond his authority to change any fundamental laws.

And, as Bremer said about the Orders, "You set up these things and they begin to develop a certain life and momentum on their own – and it's harder to reverse course."

It is difficult to over-state how far-reaching the Orders are. As described in Order #39 on Foreign Investment, the Orders are intended to do no less than "transition [ Iraq ] from a ... centrally planned economy to a market economy." This goal is explained in greater detail by BearingPoint, Inc., the Virginia based corporation that received the $250 million contract to facilitate this transition. The contract states:

"It should be clearly understood that the efforts undertaken will be designed to establish the basic legal framework for a functioning market economy; taking appropriate advantage of the unique opportunity for rapid progress in this area presented by the current configuration of political circumstances... Reforms are envisioned in the areas of fiscal reform, financial sector reform, trade, legal and regulatory, and privatization."

The (New and Improved) Bremer Orders

A sampling of the most important Orders demonstrates the economic imprint left behind by Bremer:

Order #39 allows for the following: (1) privatization of Iraq's 200 state-owned enterprises; (2) 100 percent foreign ownership of Iraqi businesses; (3) "national treatment" of foreign firms; (4) unrestricted, tax-free remittance of all profits and other funds; and (5) 40-year ownership licenses. Thus, it allows the U.S. corporations operating in Iraq to own every business, do all of the work, and send all of their money home. Nothing needs to be reinvested locally to service the Iraqi economy, no Iraqi need be hired, no public services need be guaranteed, and workers' rights can easily be ignored. And corporations can take out their investments at any time.

Order #40 turns the banking sector from a state-run to a market-driven system overnight by allowing foreign banks to enter the Iraqi market and to purchase up to 50 percent of Iraqi banks.

Order #49 drops the tax rate on corporations from a high of 40 percent to a flat rate of 15 percent. The income tax rate is also capped at 15 percent.

Order #12 enacted on June 7, 2003 and renewed on February 24, 2004, suspends "all tariffs, customs duties, import taxes, licensing fees and similar surcharges for goods entering or leaving Iraq, and all other trade restrictions that may apply to such goods." This led to an immediate and dramatic inflow of cheap consumer products, which has essentially wiped out all local providers of the same products. This could have significant long-term implications for domestic production as well.

Order #17 grants foreign contractors, including private security firms, full immunity from Iraq 's laws. Even if they do injure a third party by killing someone or causing environmental damage such as dumping toxic chemicals or poisoning drinking water, the injured third party can not turn to the Iraqi legal system, rather, the charges must be brought to U.S. courts under U.S. laws.

Order #77 established the Board of Supreme Audit and named its president and his two deputies. The Board oversees inspectors in every Ministry with wide-ranging authority to review government contracts, audit classified programs, and prescribe regulations and procedures.

Order #57 created and appointed an inspector within every Iraqi Ministry with five-year terms who can perform audits, write policies, and have full access to all offices, materials, and employees of the Ministries.

Then there are the approximately 200 mostly U.S. and other international advisers who will remain embedded as consultants in every Iraqi Ministry well after the official occupation has ended.

Clearly, the Bremer Orders fundamentally altered Iraq's existing laws. For this reason, the Bremer Orders are also illegal. Transformation of an occupied country's laws violates the Hague regulations of 1907 (the companion to the 1949 Geneva conventions, both ratified by the United States), and the U.S. Army's Law of Land Warfare. Indeed, in a leaked memo, British attorney general, Lord Goldsmith, warned Tony Blair that "the imposition of major structural economic reforms would not be authorized by international law."

Following the Money

The U.S. will also exert significant control over Iraq by holding the strings to the largest purse in the country for the foreseeable future.

In June 2004, the U.S. General Accounting Office reported that the CPA had spent virtually all of Iraq's money but relatively little of its own since the end of "active engagement."

There are two primary pots of money earmarked for Iraq's reconstruction. The largest is the approximately $24 billion of U.S. taxpayer money appropriated by Congress last year. The second is known as the Development Fund for Iraq (DFI) worth about $18 billion. This is primarily money from Iraq's oil revenues and was controlled by the CPA until authority for the fund was handed over to the new Interim Government on June 28.

While the CPA controlled the DFI, it spent approximately $13 billion from the fund. On the other hand, it only spent about $8.2 billion of the U.S. appropriation. Thus, the DFI is almost out of money, while the U.S. appropriation has hardly been touched. Control of this money now shifts to John Negroponte, the new U.S. Ambassador to Iraq . In addition to the largest pot of money in Iraq , Negroponte will exercise control over one of the largest embassies in the entire world with some 1,500 employees with offices throughout Iraq .

Pay for the Reconstruction

Reconstruction is the one thing that the U.S. is obligated under international law to do in Iraq . U.S. taxpayers have pledged billions of dollars toward this effort. However, the New York Times reported on June 30, 2004 , that fewer than 140 of 2,300 promised construction projects are even under way in Iraq and there have been widespread reports about waste, fraud, and abuse in the projects that have started.

Supplies of electricity and water are no better for most Iraqis, and in some cases are far worse than they were before the invasion. In fact, UN special envoy Brahimi said upon leaving Iraq that after security, the lack of reliable electricity is the number one problem facing Iraq today. Drinking water throughout the country is in a crisis state, with some villages having no access to water while larger cities receive water approximately 50 percent of the time – leading to vast outbreaks of cholera, diarrhea, nausea, kidney stones, and death. Destroyed bridges continue to create monstrous bottlenecks in many parts of the country. Iraq 's horribly overburdened hospitals need electricity, water, and sewage to function. Hospitals also need the medicines and medical supplies that are in woefully inadequate supply.

With few reconstruction projects underway, and with Bremer's rules favoring U.S. corporations, there has been little opportunity for Iraqis to go back to work, leaving nearly two million unemployed one and a half years after the invasion. Attempts by the Bush administration to reverse this have been minimal, at best. Only three months after Bremer pledged that 50,000 Iraqis would find jobs at construction sites before the formal transfer of sovereignty, fewer than 20,000 local workers are employed.

Compounding these problems is the ongoing security situation, which has slowed reconstruction and vastly increased the costs. Even Iraqis who may have initially welcomed the ouster of Hussein have become enemies of an occupation that increasingly reveals its true objectives: U.S. political and economic exploitation and dominance. This is one reason why U.S. contractors report that as much as one out of every three reconstruction dollars is going toward security costs rather than rebuilding.

End the Occupation

The Bremer Orders are both immoral and illegal and must be repealed to allow Iraqis to govern their own economic and political future. Given the Bush administration's failure to quickly, fairly, or transparently allocate U.S. reconstruction funds, and the complete lack of oversight of the CPA's depletion of nearly all of the DFI, the remainder of U.S. reconstruction funds should be turned over to full UN authority until free and democratic elections are held in Iraq, at which time the money should be turned over to the Iraqis themselves.

Reconstruction of Iraq should be based on rebuilding the economy to maximize fulfilling the long-term needs of Iraqis. All contract processes should be completely transparent and accessible to Iraqis. The awarding of contracts should be done with preference given first to Iraqi companies, experts, and workers. If no Iraqi company is capable of performing necessary work, preference should be given to international humanitarian organizations. If non-Iraqi companies are necessary, contracts must be open to global competition and profit margins held as low as possible by using fixed fees. Oversight must be immediate, independent, transparent, and thorough.

The U.S. needs to extricate itself from Iraq in every way other than the provision of money to pay for the reconstruction – done by and for Iraqis – and to pay for a truly multinational (non-U.S.) peacekeeping force to bring the stability required both for reconstruction and for truly free and democratic elections. The occupation must end.