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Synthesis/Regeneration 37   (Spring 2005)

World Bank Brings Market Fundamentalism to Iraq

by Kathy Hoang

[Since this article was written, the plan to practice market fundamentalism using the Iraqi economy as a guinea pig hit some snags. Reportedly, there is widespread opposition to privatization by both labor and management, and the Iraqi election results hardly seems a mandate for the free market approach. However, Kathy Hoang’s tale about the forces relentlessly pushing privatization remains on target. –Editor]

The World Bank has forced dozens of countries to put their economies in the hands of the “free market”—achieved by eliminating regulations and taxes and granting maximum flexibility to businesses and investors. Its insistence on limiting the reach of government, and creating new ways to apply free-market principles to economies unaccustomed to unbridled competition, has moved many observers to label it a leading advocate of “market fundamentalism”—the ideological belief that all economic problems can, and should, be solved with free-market solutions.

Now the World Bank is bringing its doctrines to Iraq. The US government has acknowledged its concern that religious fundamentalists might gain power in Iraq, but it has no problem with the introduction of market fundamentalism.

Indeed, the US government has actively encouraged, even pressured, the Bank to enter the fray and enforce its orthodoxy. If the Bank succeeds, it will be reinforcing the unpopular rules established by the Coalition Provisional Authority and its head, Paul Bremer—rules that give the United States extraordinary advantages in the future Iraqi economy.

The World Bank’s plan for Iraq

The Bank’s first significant work on post-war Iraq was the “Joint Iraq Needs Assessment,” carried out jointly with the United Nations. It also helped facilitate a few small-scale development initiatives such as the Emergency Textbook Provision Project and the Capacity-Building Program for Iraqi Civil Servants, and has recently announced plans to begin infrastructure projects focusing on rehabilitation of infrastructure, water and sanitation, and schools .

Despite the Bank rhetoric citing improved Iraqi welfare as the goal of the reconstruction plans, foreign investors, particularly those from the US and other wealthy G8 nations, are set to be the greatest beneficiaries of the Bank’s recommended policies.

The Bank . . . fails to promote Iraqi participation in the economy and Iraqi ownership of capital, while offering incentives to foreign investors.

The World Bank’s recommendations are distinctly in line with US economic interests at the expense of Iraqi citizens. Under the Bank’s recommendations, Iraq is poised to become the most economically neo-liberal (i.e. “free market”) country in the Middle East. The Bank especially prioritizes the development of new markets in Iraq, but fails to promote Iraqi participation in the economy and Iraqi ownership of capital, while offering incentives to foreign investors. Thus far, the opportunities have been going chiefly to US investors, since the US exercised near-total control over the awarding of contracts until the June 28, 2004 handover of sovereignty. It is no exaggeration to say that the segments of the Iraqi economy doled out to US interests represent a potential goldmine.

The undemocratic process by which the Bank operates in Iraq lends context to the imperialistic nature of the policies and the interests they promote.

Throughout World Bank documents detailing economic plans for Iraq, including the Joint Needs Assessment and the Interim Strategy Note of the World Bank for Iraq, it claims to be purely interested in bettering the lives of the Iraqi people and promoting Iraqi economic growth. In practice, however, the Bank’s economic policy blueprints for the sovereign Iraqi government have outlined a framework that only promotes the interests of foreign investors and foreign profit.

The Coalition Provisional Authority (CPA)

The World Bank supports the completely undemocratic decision of the Coalition Provisional Authority (CPA), the occupation force led by the US to govern Iraq until the June 28 handover, to reform legislation on foreign direct investment. According to the UN/WB Joint Needs Assessment, in CPA Order 39:

Iraq announced a foreign direct investment policy that would make the country one of the most open in the world. The law permits full foreign ownership of businesses in all sectors (with the exception of natural resources [e.g., oil]), permits foreign firms to enter Iraq as direct owners of branches or through joint ventures, provides for national treatment of foreign firms and permits the full and immediate repatriation of profits.

These radical policies provide an extremely lucrative investment environment for foreign investors and will, according to the Financial Times, “make Iraq one of the most liberalized economies in the developing world and go beyond even the laws in many rich countries.” By claiming “national treatment,” which means being treated as any Iraqi company would, foreign firms will receive a number of benefits typically reserved for domestic investors. They will most likely pay lower taxes, avoid tariffsand avoid paying various fees for conducting business in Iraq.

[F]oreign investment will dominate the economy and squeeze out domestic investment by Iraqis.

The decision to eliminate the possibility of protecting domestic investment, typically accomplished with tariffs on imports, was made unilaterally by the CPA. The Iraqi people were powerless and without decision-making capacity. “It was an order from Bremer. They didn’t consult anyone about it,” Ihsan al-Titenchi, Membership Director of the Iraqi-American Chamber of Commerce and Industry, told al-Jazeera. After the handover, the World Bank will take a leading role in enforcing the CPA’s binding rules—rules that are destined to hurt Iraqi domestic investment and inhibit Iraqi participation in business, while eroding the democratic process in Iraq.

Even the Iraqi Governing Council had some outspoken dissenters on the liberalization order. Some members said they had heard nothing about it until the Dubai announcement. The majority of Iraqis are also opposed to the policies. “The measures which have been announced will lead to foreign domination over economic decision-making and largely sign away the independence [of Iraq],” Ridha al-Qureishi, an Iraqi financial and monetary academic, told al-Jazeera.

MIGA and foreign direct investment

The Bank touts private investment as one of the most important factors for economic growth and, by extension, improved conditions for Iraqis. The Bank’s focus, however, is on foreign, not domestic, private investment, with policy prescriptions that relax restrictions on foreign firms in addition to granting them an extensive range of benefits. The Bank fails to offer incentives designed specifically to promote domestic private investment and Iraqi private sector participation. Consequently, foreign investment will dominate the economy and squeeze out domestic investment by Iraqis, who do not have the resources to compete with US investors.

In an Interim Strategy Note (Jan. 14, 2004), the World Bank recommends that the Multilateral Investment Guarantee Agency (MIGA), a World Bank division which supplies political risk insurance (PRI) to businesses skittish about doing business in developing countries:

could potentially play an important role in providing investment guarantees for investors and lenders involved in making direct investments in Iraq, covering the risk of expropriation, currency transfer restriction and inconvertibility, war and civil disturbance, and breach of contract.

These PRI guarantees will likely have detrimental effects on the investment capacity of Iraqi citizens. The PRI offered by MIGA effectively excludes domestic investors because MIGA policy restricts coverage to transnational investment rather than domestic investment. MIGA admits in its own report that this distinction “may limit the agency’s developmental impact.” Given the high-risk investment climate in Iraq, foreign firms with PRI will have an insurmountable advantage over domestic firms, practically ensuring that they will indeed dominate the most lucrative Iraqi industries.

PRI guarantees also encourage capital flight. Much needed money earned from production in Iraq will be transferred out of the country and invested elsewhere. In the MIGA report cited earlier, the agency maintains that insurance against the possibility that a government will impose currency transfer restrictions, or that a currency will become difficult to convert into a major international currency, whether caused by government or market actions, will “protect against losses arising from an investor’s inability to convert local currency . . . into foreign exchange for transfer abroad.”

This signals that most of the revenue generated by Foreign Direct Investment (FDI)—investment by a firm or individual in actual productive capacity (such as a factory) in another country in return for a share of ownership—is unlikely to remain in Iraq long enough to be re-invested in the community to support local business development and contribute to the welfare of ordinary residents. Foreign investors will almost certainly move the capital generated in Iraqi markets to foreign banks because of either fear of instability in the Iraqi banking system or to benefit from higher interest rates available in other countries.

Given the current state of the Iraqi economy, there is a vital need for capital accumulation—wealth generated in Iraq which stays in the country. The World Bank, however, is promoting just the opposite by facilitating capital liquidity, in which money can be transferred very easily and quickly between bank accounts and across borders.

MIGA’s PRI guarantees are also destructive to the Iraqi economy because, although MIGA has no official governmental authority or political decision- making power, it has the capacity to manipulate negotiation between foreign investors and host governments in favor of foreign investors—and to the detriment of the people in the host countries. MIGA boasts that it is able to avoid paying out claims to foreign investors due to its negotiating capacity and ability to prevent claims by foreign investors against host governments.

Using the clout it holds as a subsidiary of the World Bank, MIGA also claims it is able to dissuade host governments from violating contracts, expropriating property, or imposing currency transfer restrictions. It thus provides foreign investors a virtual risk-free investment climate. The MIGA report states, “MIGA’s special status also means that it will be in a strong position to recover its losses from the host government if it has to pay out a claim for transfer restriction, expropriation or breach of contract.” Thus, contrary to its rhetoric as an insurance provider, the majority of any losses experienced by foreign investors will be covered by the people of Iraq.

The case of Indonesia

This was illustrated in Indonesia in 1998, when MIGA paid out the only claim since its founding in 1985. This claim was made by the now-notorious US energy company Enron. Indonesian authorities initially approved an Enron project based on projections suggesting a sharp increase in Indonesian demand for energy. After realizing that the projections were inflated, particularly given the East Asian financial crisis of the late 1990s, the Indonesian authorities suspended the project. Enron threatened to make a claim against the Indonesian government with MIGA, and MIGA attempted to facilitate a compromise. In the end, the Indonesian government stood firm and MIGA had to pay Enron $15 million in compensation for lost profits.

In retaliation for the Indonesian government’s decision, MIGA suspended its activities in Indonesia and stopped offering PRI to foreign investors with interests in Indonesia. In the end, the Indonesian government backed down and agreed to repay MIGA the $15 million over a three-year period—a decision made despite an ongoing financial crisis and the sound logic of the suspension of Enron’s project. Buckling under to MIGA’s pressure reflected fear that foreign investment would be discouraged by a MIGA boycott. Following the Indonesian government’s announcement that it would reimburse MIGA, the agency resumed operations in Indonesia.

The Indonesian case illustrates the vulnerability of the Iraqi people. Whether or not foreign investors make claims against the Iraqi government, the Iraqi people lose out, whether through capital flight or through paying off insurance claims with public funds. The risks and costs of doing business in Iraq are shifted from the foreign investors to Iraqi taxpayers.

Price liberalization and agricultural subsidies

The World Bank recommends price liberalization, which means higher prices of basic commodities, including food. Prices were previously state-controlled and kept at artificially low levels. The Bank wants to raise food prices to meet international levels in an effort to increase productivity in Iraqi agriculture. Family incomes, however, are not rising to meet the higher prices, and the majority of Iraqi families may not be able to afford basic food needs.

[T]he Bank is supporting the laying off of high numbers of workers.

The Bank also calls for the reformation of the state-subsidized food rationing system. The food rationing system is comprised of the universal distribution of food baskets and, according to the UN/WB Joint Needs Assessment, has been “widely credited with preventing mass starvation and malnutrition.” The Bank wants to transform the system from a universal subsidy to a targeted subsidy for the most vulnerable groups in Iraqi society, which will mean that a large portion of the Iraqi population will stop receiving their food baskets.

In the Joint Needs Assessment, the Bank found that “a significant proportion of the Iraqi population remains dependent on the food ration system and lacks sufficient purchasing power independent of the food aid.” The Assessment indicates that cutting food subsidies while simultaneously raising food prices would put more than half of Iraq’s population at risk of starvation and malnutrition.

Privatization of state-owned enterprises and national banks

Another potentially damaging aspect of the World Bank’s economic plans is the privatization of state-owned enterprises (SOEs) and the National Banks. The Needs Assessment calls for the privatization of functioning SOEs and closing those SOEs that are inefficient or destroyed as a result of recent conflict. “Iraq’s transition to greater openness to international markets and exposure to international competition will inevitably result in important adjustment costs in the non-oil sectors,” reads the Joint Needs Assessment. “SOEs are expected to bear the brunt of that adjustment since many will be unable to compete.” This implies that a large number of SOEs will probably be shut down.

Given the head start provided by the CPA’s preferential treatment of US firms such as Halliburton and Bechtel, the remaining SOEs may be transformed into a US-dominated sector of the Iraqi economy. The Bank’s recommended FDI incentives privilege foreign firms with advantages over Iraqi firms including access to capital and risk insurance, while failing to offer any incentives that promote participation of the domestic private sector. With foreign direct investment in these sectors, foreign firms will control large portions of the Iraqi economy. Capital flight will ensue with the new FDI incentives and Iraqis will lose valuable capital that could have been reinvested in the community.

Privatizing the SOEs and closing a number of them inevitably means that Iraqis will lose jobs. The Joint Needs Assessment points out that, as public enterprises, the SOEs previously had “no incentives to lower their very high costs of production”—a phrase that usually refers to the cost of paying employees.

Therefore, by encouraging privatization as a means to lower SOEs’ costs and improve efficiency, the Bank is supporting the laying off of high numbers of workers. Foreign firms investing in SOEs will likely cut costs by reducing the number of employees, thus perpetuating unemployment in Iraq.

The Bank admits in the Joint Needs Assessment that privatizing the SOEs may be extremely damaging to Iraqi society: “The social impact of closing SOEs, which are over-staffed but currently employ approximately 10 percent of the workforce, needs to be a key consideration.” Therefore the Bank insists that it is “focused on preserving employment,” and will require “appropriate severance packages for workers.” There is little concrete indication, however, of a plan for creating sustainable longer-term employment for these workers.

In the pursuit of privatization, the Bank is ignoring the devastating effects of unemployment in Iraq, which now stands at more than 70%. The war-torn Iraqi economy is unable to absorb the former SOE employees. In addition, the US has failed to fulfill its promise to employ 250,000 Iraqis, increasing job insecurity in Iraq. The Bank’s recommendations to privatize the SOEs and increase unemployment will severely inhibit Iraqi social welfare and economic security.

The World Bank also endorses the privatization of the national banks and reform of the banking system. Iraq has two national banks, the Rafidain and Rasheed Banks. Acting on World Bank advice (according to the Joint Needs Assessment), the CPA enacted banking laws that aspired to “fully opening investment in Iraq to international banks and raising requirements on local banks for higher capital requirements with an intention to reach international standards.”

Iraq will [be] the next link in a chain of countries that have been destroyed by conflict, and then further ravaged by expert economists and the practitioners of market fundamentalism.

The CPA’s order Number 40 allows for 50% foreign ownership of Iraqi banks, which means that foreign investors may be able to dominate the key banking sector in Iraq. Also, with higher capital requirements, which could imply a wide range of restrictions such as maintaining a minimum level of reserves on site or a minimum amount in shareholder equity, local banks will most likely fail to meet the requirements and be bought up by foreign investors. Capital flight will also result from foreign ownership of Iraqi banks, and the much-needed capital will probably not be available to Iraqi citizens. In the end, the privatization of SOEs and banks reinforces foreign control of the Iraqi economy.

The World Bank has provided the framework for the US, and other favored countries such as the U.K., to effectively dominate the Iraqi economy and impede Iraqi economic development, democracy, and local investment. The World Bank’s powerful position in Iraq will make it the next link in a chain of countries that have been destroyed by conflict, and then further ravaged by expert economists and the practitioners of market fundamentalism. The Bank’s legacy of empty and broken promises virtually ensures that vulnerable Iraqis will endure more privation and poverty, just as their counterparts in other post-conflict countries like Sri Lanka and in transition economies like Moldova and Russia have experienced.

Kathy Hoang is with the 50 Years Is Enough Network.

[27 mar 05]

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