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It’s the Economy, Stupid! Why Iraq Needed Free Markets Instead of Democracy in 2003

Adam Lowther

Abstract When the United States launched the invasion of

Iraq in March 2003, the Bush administration

expected Iraq to undergo a rapid transition to

democracy. 1 Although recent progress in Iraq is

impressive, reality has not met expectations. This

article challenges the Bush administration’s post-

invasion policy of rapid democratization as the

primary approach to Iraq, instead arguing that

a focus on economic liberalization and the devel-

opment of a free market economy would have

led more quickly to an Iraq that is peaceful and

prospering and a closer ally of the United States.

The great struggles of the twentieth

century between liberty and totalitar-

ianism ended with a decisive victory

for the forces of freedom—and a single

sustainable model for national suc-

cess: freedom, democracy, and free

enterprise.

—George W. Bush, The National

Security Strategy of the United States

of America (2002)

Introduction

In testimony before the House Armed

Services Committee, then Deputy Secretary of

Defense Paul Wolfowitz offered the Bush

administration’s view of the situation in Iraq

in 2004 that emphasized progress toward

democratization. 2 Little, however, was said of

efforts to transform the economy of the former

Baathist regime into a flourishing free market.

Unlike The National Security Strategy of the

United States of America (2002), which placed

strong emphasis on free markets as a method

of bringing peace and prosperity to areas of

the globe where neither exists, progress in Iraq

has been decidedly slow as the Bush adminis-

tration and the democratically elected Iraqi

government focused on rapid democratization. 3

In the six years that have elapsed

since then Deputy Secretary Paul Wolfowitz

testified before Congress, Iraq has experienced

dynamic change. A brief time line of Iraq’s

move toward democracy illustrates events of

that nature.

� July 14, 2003—The Iraqi Interim Council met for the first time.

� March 1, 2004—The Interim Council agreed on an interim

constitution.

� June 28, 2004—Iyad Allawi became prime minister of a sover-

eign Iraq.

� January 30, 2005—Iraqis voted for a transitional National Assembly.

� April 2005—Parliament selected Jalal Talabani as president.

American Foreign Policy Interests, 31: 194–205, 2009

Copyright # 2009 NCAFP

ISSN: 1080-3920 print=1533-2128 online DOI: 10.1080/10803920902966487

� October 15, 2005—Iraqis voted for a new constitution.

� April 22, 2006—Iraqis elected Jalal Talabani as president. Nouri

al-Malaki became prime minister.

Although Iraqi progress toward a free, fair, and

functioning democracy is impressive, Iraq

remains a country that is mired in poverty; its

security is precarious, and warring factions

are simply biding their time, waiting for the

United States to withdraw. Real progress

toward establishing a free market economy,

which respects private property rights, limits

government spending, keeps taxes low, and

returns decision making to producers and con-

sumers, has been slow or nonexistent. The

blame for this failure can be placed squarely

on the shoulders of the United States. By

imposing democracy on Iraq prior to developing

a liberal economy, the United States violated

what theory and experience have taught us.

Unfortunately, presidents of the postcold-war

period were seduced by the promises of the

‘‘democratic peace,’’ which intimate that democ-

racies do not go to war with one another. Thus

it has been the policy of the United States since

the administration of George H. W. Bush to pro-

mote the spread of democracy. What is often

forgotten, however, is that it is not democratic

institutions that act as a deterrent to conflict

but a liberal economy that precedes and under-

girds democracy. A brief look at economic the-

ory explains the role that free markets play in

promoting stability and in making democracy

possible.

Market Intervention

Since Adam Smith formalized classic eco-

nomics in The Wealth of Nations (1776), econo-

mists and some social scientists have viewed

economic liberty as a prerequisite to political

liberty. 4 The Austrian school of economics sug-

gests that markets are most efficient when they

are unfettered by government intervention.

Free markets produce efficient outcomes, which

lead to the highest possible levels of economic

growth. Because the satisfaction of basic needs

such as food, shelter, and clothing is a function

of economic activity, economic liberty must

necessarily precede the satisfaction of higher-

order needs like political liberty. Mazlow’s hier-

archy of needs confirms this proposition and

places political needs (speech, assembly, etc.)

on a higher order. Simply stated, individuals

across cultures will seek to achieve an optimal

economic outcome—the satisfaction of material

needs—prior to seeking the fulfillment of other

(political) needs. 5 For this reason political lib-

erty becomes important when governments

intervene in the affairs of rational self-inter-

ested individuals freely engaging in mutually

beneficial economic activities. As the studies

that follow suggest, the greater the interven-

tion (taxation, regulation, redistribution), the

greater the demand for political liberty by the

individual.

The Iraqi economy under Saddam Hussein

was an excellent example of the inefficiencies

introduced when high levels of intervention

preclude the development of an effective

market mechanism, which, in a free market,

efficiently determines prices and provides con-

sumers with the information needed to make

rational economic decisions. The heavily con-

trolled economy of Saddam’s Iraq ensured that

average Iraqis could not allocate resources effi-

ciently and that rampant corruption, heavy

regulation, high subsidies, and price controls

made it difficult for the Iraqi economy to

prosper. 6

The ill effects of market distortions are not

limited to economic circumstances alone. As

analyses of political conditions in the countries

of the former Warsaw Pact demonstrate, poor

economic conditions led to unrest, which in

turn led to greater limitations on political lib-

erty. 7

Similar circumstances existed in Iraq

where Saddam’s policies led to a declining econ-

omy. Because Saddam feared a coup, he used

It’s the Economy, Stupid! 195

American Foreign Policy Interests

economic regulation, subsidies, and other

policies to reward loyal groups and create a

system of dependency for all Iraqis. 8

Iraq’s

economy was designed to maximize the

regime’s survival. 9 That left the people of Iraq

among the poorest in the world. 10

In view of those developments, it is

important to understand why democratic peace

theory has been the preferred policy of Republi-

cans (George H. W. Bush and George W. Bush)

and Democrats (William J. Clinton).

The Democratic Peace

In the immediate aftermath of the 9=11

attacks, the question of Iraq rose to prominence

in the White House. Despite a lack of evidence

suggesting a link between 9=11 and the Iraqi

regime, the administration began to develop a

plan for the removal of Saddam Hussein. The

stated reasons for regime change were based

on morality, security, and one of political

science’s most enduring theories, democratic

peace theory. The moral argument was

straightforward. Saddam Hussein is an evil

man guilty of attempted genocide against the

Kurds, the targeted murder of Shiites, and

the oppression of all Iraqis. 11

Equally simple

was the security argument. Saddam refused

to cooperate with weapons inspectors. It was

likely that he still possessed weapons of mass

destruction (WMD). Having used such weap-

onry already, he might turn over some of his

arsenal of WMD to terrorist groups assisted

by the regime. Emblematic of the democratic

peace theory, Iraq was to be a beacon of democ-

racy in the Middle East, which would encour-

age transitions in other Middle Eastern

regimes. By authorizing the invasion of Iraq

in March 2003 the Bush administration and

Congress demonstrated their willingness to

use force to promote democracy in Iraq.

Interest in democratic peace theory did not,

however, begin with the 9=11 attacks. Immedi-

ately after the Soviet Union’s collapse, scholars

sought to offer a useful paradigm for a postcold-

war world. With democracy proving victorious

over Soviet communism, it was only natural

that the spread of democracy should be the

focus of a new era in global politics. In the

two centuries between Immanuel Kant’s initial

conception of the principles that are at the

heart of the democratic peace (1795) and the

collapse of the Soviet Union, scholarly work

on the subject was largely abandoned.

That began to change in the 1990s as a

surge of scholarship focused on the examina-

tion of a number of variables such as conflicts

less than war 12

and the relationship between

democracy and peace. 13

Additional research

examined the impact of economic interdepen-

dence and the level of democracy within

dyads. 14

The debate over the validity of the demo-

cratic peace, often described as the closest thing

that political science has to an empirical law,

concerns the definition of democracy used in

various studies. Some define a democracy as a

state that holds periodic elections, has competi-

tive political parties, and allows at least 10 per-

cent of the population to vote. 15

Others define

democracy as a liberal regime possessing a

market economy; its citizens have acknowl-

edged rights and a representative government;

at least 30 percent of adult males are eligible to

vote. 16

Later studies confirm the tendency to

require increasingly larger percentages of

voting rights among the adult population. 17

More recent research suggests that it is the

lesser democratic state in a dyad that deter-

mines the probability of conflict. 18

Explana-

tions of the democratic peace often focus on

democratic norms and institutions. 19

What

makes this debate relevant is the substantial

influence it had within American foreign policy

circles during the previous two decades. During

the 1990s the pages of prominent Beltway jour-

nals offered a plethora of articles praising

democratic peace theory as a solution to the

problems of authoritarianism. What is often

underappreciated is the continuity of the

196 Adam Lowther

American Foreign Policy Interests

foreign policy approaches of Presidents Clinton

and Bush. The neoconservatives, so maligned

in the aftermath of the invasion of Iraq, are

part of the same philosophical school of

thought—international relations liberalism—

that dominated President Clinton’s approach

to foreign policy.

Even though many scholars disagree with

the invasion of Iraq, it was, in part, premised

on the notion that a democratic Iraq would

further American efforts to spread democracy

throughout the Middle East. As President

George W. Bush said, ‘‘And the reason why

I’m so strong on democracy is democracies don’t

go to war with each other. And the reason why

is the people of most societies don’t like war,

and they understand what war means . . . . I’ve

got great faith in democracies to promote peace.

And that is why I’m such a strong believer

that the way forward in the Middle East,

the broader Middle East, is to promote

democracy.’’ 20

Free Markets as a Criterion for Democratic Success

In order to understand the emphasis on eco-

nomic liberty, it is necessary to discuss the role

that free markets play in promoting economic

prosperity. When economists began to examine

the relationship between economic prosperity

and democracy five decades ago, they found

that economic liberty plays an important role

in promoting the sustainability of democracy.

For new democracies such as Iraq, this is parti-

cularly true. As one of the earliest studies sug-

gests, a ‘‘moderate middle class,’’ which is

lacking in Iraq, is key to the success of a new

democracy. 21

Later research found that states with

higher levels of human capital have higher

rates of investment, which lead to higher eco-

nomic growth rates. As expected, states with

lower economic growth rates have higher levels

of political instability. 22

One study presents a comparison between

economic growth and government consumption

as a share of GDP. 23

The study found a negative

correlation. Thus in a country like Iraq where

the Baathist regime dominated the national

economy for more than three decades, the

immediate need in a postinvasion environment

is rapid economic liberalization in order to spur

economic growth.

The positive relationship that exists

between economic liberty and economic growth

is also demonstrated elsewhere. 24

Results show

that most important among growth-promoting

policies are strong private property rights, low

levels of corruption, and an unregulated finan-

cial system. According to one set of findings, it

is economic liberty rather than political liberty

that most influences economic growth. 25

Those studies contradict the Bush adminis-

tration’s belief that democracy, with its empha-

sis on voting and political participation, is the

solution to the problems of Iraq. Because

democracies generally provide their citizens

with higher levels of individual liberty, the

causal relationship between regime type and

economic prosperity is often assumed absent

evidence to warrant such a relationship. 26

As the studies suggest, there appears to be

a positive correlation between economic liberty

and economic prosperity. A brief look at the

2008 Index of Economic Freedom illustrates

this point. Those countries with the highest

levels of economic liberty are also among the

wealthiest. Economic liberty is, however, rela-

tive. Though many Americans consider Sweden

a bastion of democratic socialism, it ranks 27th

of 162 countries in economic liberty. Recent

reforms in many Middle Eastern states have

pushed formerly illliberal economic regimes

into the top tier of the world’s free market

economies although they remain nondemocra-

cies. For example, Bahrain now ranks above

Taiwan in the Index of Economic Freedom

while remaining a nondemocracy.

It’s the Economy, Stupid! 197

American Foreign Policy Interests

The American-Led Invasion of Iraq and Postwar Strategy

From the perspective of democratic peace

theory and economic liberalization, it is difficult

to understand why the Bush administration

failed to comprehend the fundamental impor-

tance of establishing a flourishing liberal econ-

omy (free market) prior to the imposition of

democracy in Iraq. The rationale for tackling

Iraq’s economic difficulties prior to undertaking

a democratization effort is straightforward.

Greater levels of economic prosperity lead to

greater levels of support for the regime. 27

The

fact is that absent a free market economy in

which annual Iraqi gross domestic product

(GDP) per capita (purchasing power parity

[PPP] adjusted) is at least $2,000–3,000, Iraqi

democracy is unlikely to be sustainable for more

than a short time. 28

For democracy to become

permanent, annual GDP per capita must reach

at least $6,000. Currently Iraqi per capita GDP

is estimated at $3,600, which may be a high esti-

mate. 29 It is alsoimportanttonotethatAmerican

investment is largely responsible for Iraq’s cur-

rent numbers. With some influential members

of the Democratic majority in Congress calling

for a 25 percent reduction in Department of

Defense (DoD) spending, President Obama

may very well ask for substantial cuts in mili-

tary spending, which would be certain to affect

the Iraqi economy in a negative way. 30

The

almost six years that have passed since the inva-

sion of Iraq provided ample time to implement

and nurture free market reforms in Iraq while

maintaining a benevolent authoritarianism.

Had economic reform been supported by the

administration, Iraq might have taken a drama-

tically different course during that period.

The American imposition of democracy on

the Iraqi people less than 24 months after the

invasion not only violated the historical pattern

of development but repudiated the U.S. experi-

ence in Germany and Japan. 31

Beginning

immediately after surrender was accepted in

each country, the American occupation author-

ity sought to redevelop immediately what were

already advanced industrialized economies

along free market principles. In Japan, initial

elections were held under the watchful eye of

General MacArthur in April 1946, whereas

elections in Germany were not held until

August 1949. 32

Sovereignty was not, however,

returned to Japan and Germany until 1952

and 1955, respectively. That stemmed in part

from the threat posed by the Soviet Union

and in part from a desire to rebuild the

Japanese and German economies.

Before the American-led invasion, Iraq’s

economy was among the least liberal in the

world. Thus the precondition of a liberal and

developing economy was not present when elec-

tions were held on January 30, 2005. The Iraqi

parliament’s current difficulty in passing a new

‘‘oil law,’’ which will determine how oil revenue

will be distributed, is one example of the new

government’s inability to resolve a fundamental

economic question within the context of competi-

tive politics. 33

In Iraq this problem is exacer-

bated by the fact that a Sunni minority

previously dominated the Shia and Kurd major-

ity who now seek equality, recompense, and retri-

bution. Willingness on the part of newly elected

Shia and Kurdish leaders to accede to Sunni eco-

nomic demands is unlikely, making difficult the

implementation of the needed reform of Iraq’s

economy. The time to overcome the ethnic and

religious difficulties now inhibiting economic

reform was before democratization. A nondemo-

cratic regime is not constrained by the require-

ments of electoral politics, which, in the Iraqi

example, is making critical economic reform next

to impossible. With Prime Minister Nouri al Mal-

iki’s Shia-led government continually responding

to the competing demands of its coalition

partners, evidence from Iraq to date strongly

suggests that reform will come no time soon. 34

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American Foreign Policy Interests

Economic conditions have been made more

difficult by the uncertain security situation,

which itself has been made worse by Iraq’s con-

tinuing high unemployment rate. Young Iraqi

men who could be gainfully employed under bet-

ter economic conditions are enticed into the

insurgency because of the desperately needed

income it provides. Thus insecurity exacerbates

poor economic performance, leading to current

instability and violence. In a country in which

90 percent of GDP takes the form of government

spending and corruption is endemic, a need for

economic liberalization is unquestionable. 35

The dissatisfaction with the status quo that

existed in 2003–2004 was an opportunity for

President Bush, through Ambassador Bremer,

to provide the Iraqi people with unparalleled

opportunities not seen previously in Iraq.

The failure to do so left many Iraqis with

few options. As one study suggests,

Today, there is a ‘‘chicken-and-egg’’

relationship between jobs and secur-

ity. Reductions in crime and violence

would undoubtedly improve the

employment climate, but these

improvements are difficult with a poor

job market. One frustrated job seeker

from Sadr City (a poor, predominantly

Shia area of Baghdad) put it this way:

‘‘I haven’t been working at all the last

two weeks. If I stay like this for

another week my family will starve,

and if someone comes along with $50

and asks me to toss a grenade at

Americans, I’ll do it with pleasure.’’ 36

Where the United States Went Wrong in 2003

In the immediate aftermath of the Ameri-

can-led invasion, Ambassador L. Paul Bremer

was appointed presidential envoy to Iraq on

May 6, 2003. As the administrator of the

Coalition Provisional Authority (CPA),

Ambassador Bremer’s de-Baathification

program and his dismissal of the Iraqi Army

left thousands of Iraqi men unemployed.

Within months some of those men became

members of the numerous insurgent groups. 37

Ambassador Bremer did, however, focus the

CPA’s effort on economic liberalization and the

development of a free market economy. To his

credit, he understood that Iraq’s poor economic

performance was of greater concern than a

quick transition to democracy. In the first year

of occupation, an opportunity to reform the

Iraqi economy existed. With the Iraqi people

still reeling from invasion, the time to imple-

ment drastic change in a corrupt state-run

economy was at hand. Painful economic reform

would blend with security and other concerns.

Implementing changes might have led Iraq’s

economy to grow, employing would-be

insurgents in gainful work and allowing politi-

cal liberalization to take a slower pace.

Although the CPA and Ambassador Bremer

enjoyed immense authority, their inability to

reform a number of aspects constrained the Iraqi

economy. Article 64 of the Geneva Convention

(1949) required the American-led multinational

force to provide ‘‘orderly government’’ and secur-

ity. Further, the CPA was slow to act because

there was a concern that a democratically elected

Iraqi government might reverse economic liberal-

ization. Thus Ambassador Bremer and the CPA

sought to work with potential Iraqi leaders to

garner their support for reform. The Iraqis did

not, however, view the implementation of market

oriented reforms as an immediate concern. Shia

and Kurdish leaders were long denied economic

prosperity, which made them reluctant to create

a free market economy when power was finally

in their hands. Last, implementing economic

reform was a difficult logistical task given the

poor security situation that developed by the fall

of 2003. As Foote notes,

Almost every workday, advisors

donned their helmets and flak jackets

It’s the Economy, Stupid! 199

American Foreign Policy Interests

for trips to the Central Bank or the

Ministry of Finance, riding through

Baghdad’s crowded streets escorted

by Army humvees. But advisors could

not take unescorted trips outside the

heavily protected Green Zone to talk

with shopkeepers about regulation,

with workers of state-owned enter-

prises about potential privatization

schemes, or with consumers about

potential reforms to the food distribu-

tion system. Combined with a lack of

data from Iraq’s official statistical

agencies, advisors often felt they

were navigating the Iraqi economy

virtually blind. 38

When violence began to escalate dramatically

in late 2003–2004, American policy shifted, focus-

ing on turning over sovereignty rapidly to the

Iraqis. Some believed that violence would dissi-

pate when Iraq was governed by Iraq. That

meant that the economic liberalization and

reform plan of the CPA and Ambassador Bremer

became a casualty of an early transition to

democracy. 39

With the insurgency remaining a

destabilizing force across Iraq and democratiza-

tion seen as the preferred solution, limited eco-

nomic liberalization and reform left Iraqis with

an economy that was and is very similar to the

economy of Saddam Hussein. Even today subsi-

dies continue to consume a majority of the

national government’s budget as elected leaders

in the new government view largess as the spoils

of war. Within Iraq and across the Arab world,

privatization of state-owned enterprises and

other policies promoting economic liberalization

are seen as attempts by the West to impose for-

eign values on Iraq and an underhanded effort

by Western oil companies to steal Iraqi oil. Lim-

ited reform and an honest but large bureaucracy

constitute the appropriate course of action

suggested by some Arab analysts. 40

Given the American focus on democratiza-

tion, economic liberalization and reform con-

tinue to be secondary or tertiary concerns.

When the Iraq Study Group conducted its eval-

uation of the American effort in Iraq and

released its report on December 6, 2006, the

focus remained on improving the military and

political approach. Of the 79 recommendations

made, precious few dealt with improving the

Iraqi economy. The opportunity to reshape a

faltering economy in a fundamental way may

have come and gone. Without strong encour-

agement from the United States, there is little

incentive for the current Iraqi government to

take anything but small steps toward reform.

There is a perception held by Iraqi officials that

once Iraq’s oil industry becomes fully func-

tional, oil revenue will fill Iraqi coffers and

make free market reforms unnecessary. That

perception gives Iraqi officials a false sense of

stability as they use oil revenue to satisfy con-

stituent demands.

It is worth noting that the rise of the mod-

ern jihadist movement is in part a response to

the failure of many oil-rich states to provide

economic opportunity for their citizenry. Those

regimes have failed to provide expected bene-

fits and are now experiencing a backlash in

the form of violent Islamic fundamentalism. 41

There are signs of hope. Mohammed bin Rashid

Al Maktoum, ruler of Dubai, is at the forefront

of recent economic reform efforts in some Mid-

dle Eastern states where forward-looking

rulers are seeking to ameliorate the threat

posed by violent Islamic fundamentalists and

at the same time prepare for life after oil. 42

Diversification of Dubai’s economy through free

market reforms and the use of oil revenue for

infrastructure development and education are

positioning Dubai to become the financial capi-

tal of the Middle East. Iraq would be wise to fol-

low a similar path. The promotion of free

market policies in Iraq is particularly impor-

tant because Iraq’s oil revenue cannot provide

the same economic benefits to the more than

27,000,000 Iraqis that Dubai’s oil revenue can

provide for its 240,000 citizens. Thus American

efforts to assist Iraq in developing a free

market economy would benefit average Iraqis.

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American Foreign Policy Interests

Limited American Success

Perhaps the greatest success that the

United States is having is with its Civilian-

Military Provincial Reconstruction Teams

(PRT), which are working to develop Iraqi civil

society, education, and economic opportunities.

Currently the 25 PRTs operating across Iraq

are engaged in such activities as training local

and provincial officials in ‘‘good government’’

practices, providing microloans to Iraqi entre-

preneurs, strengthening the rule of law through

legal training, and promoting ethnic and sec-

tarian reconciliation. Given the failure of the

United States and the Iraqi government to

implement structural reforms, focusing on local

development is the right approach. After dec-

ades of watching the World Bank, the Interna-

tional Monetary Fund, and other international

lending agencies provide loans to national gov-

ernments for wasteful and unneeded large-

scale projects, the U.S. State Department and

the U.S. Agency for International Development

(USAID) are now focusing their aid efforts

locally where they work. PRTs have established

five small business development centers where

Iraqis can apply for small business loans that

usually range from $1,000 to $5,000. Some

were repaid within 24 months. More than

50,000 microloans have been made to approxi-

mately 19,000 Iraqis. 43

In addition to small

business loans, PRTs have established commu-

nity stabilization programs (CSP), which have

trained 54,000 Iraqis in construction and other

trades. From a strategic perspective, providing

training and employment to unskilled Iraqi

men is a positive step toward reducing the

recruiting base for the insurgency. The brutal-

ity with which insurgents exercised control

over cities like Ramadi and Fallujah also

helped turn Iraqis against America’s adver-

saries. The bottom-up approach to reform of

the PRTs stands in stark contrast to the

top-down approach of the model. Whereas

the imposition of economic liberalization can

accomplish dramatic reform in a relatively

short period, the current approach in Iraq will

take much longer.

The United States must be careful,

however, not to reinforce the culture of depen-

dency that already exists in Iraq by replacing

Saddam as the benefactor of the Iraqi people.

Although American microlending and job-

training programs constitute a positive solu-

tion in the short term, promoting free market

reform of Iraq’s economy is the most viable

long-term solution. Absent major reform, the

efforts of American PRTs may be in vain.

Some needed economic reforms include

strengthening private property rights, simpli-

fying investment law, reducing regulation,

reducing corruption, and overhauling current

labor laws, and other areas that constitute a

hindrance to economic growth. 44

Moving Toward the December 31, 2011, Withdrawal

As of December 2008 more than 145,000

American troops were deployed in Iraq. That

number is likely to decline well in advance of

the December 31, 2011, withdrawal date estab-

lished in the recently signed Status of Forces

Agreement (SOFA). 45

The time and opportunity

to encourage Prime Minister Nouri al-Maliki to

focus on economic liberalization, which will

lead to greater prosperity for average Iraqis,

are fading.

What is uncertain is the prospect of devel-

oping a liberal economy within the context of

a broader counterinsurgency effort and Iraqi

domestic politics. American Ambassador Ryan

Crocker and the U.S. Department of State are

playing major roles in attempting to influence

the political process in Iraq. Unfortunately,

with SOFA in place, the Iraqi government

may have little incentive to pay attention to

It’s the Economy, Stupid! 201

American Foreign Policy Interests

the Americans. If the failure to bring competing

political factions together on the passage of a

new ‘‘oil law’’ is an effective measure, General

Ray Odierno (Multinational Force-Iraq) and

Ambassador Crocker may find it exceedingly

difficult to succeed in encouraging economic

liberalization.

Immediate economic and political condi-

tions in Iraq are good but may soon decline

as the global recession spreads. A recent sur-

vey of Iraqi business owners showed a dis-

tinctly optimistic attitude toward Iraq’s

future. Respondents expressed reservations

about the competence of the current govern-

ment but had a positive view of the future eco-

nomic outlook for the country. 46

Security gains

resulting from the surge and the goodwill of

the Iraqi people are providing a window of

opportunity for the United States to press for

further market reforms. 47

It is an opportunity

that Ambassador Crocker should not miss.

Iraqi opposition to free market reform is to

be expected. Iraq has no experience with a lib-

eral economy. With American troops departing

over the next three years, it should come as no

surprise that many Iraqis will oppose reforms

because of the uncertainty that economic

liberalization brings.

The positive economic conditions that Iraq

is experiencing may be undermined in the

coming years by two factors. First, the United

States has allocated $48 billion for stability

and reconstruction efforts since 2003. Of that,

$42 billion has been spent. It is uncertain if

the remaining $6 billion will be spent given

the undesirable conditions reported to be

in the SOFA agreement and the declining

U.S. economy. 48

More important, the Iraqi

infrastructure will still need more than $390

billion in improvements and reconstruction

if the country is to develop a modern competi-

tive economy. 49

Although the Iraqis have allo-

cated $15 billion for internal development,

the funds may not materialize because of

the second factor working against the Iraqi

economy.

As the global economy sinks into recession,

the demand for crude oil is continuing to

decline. At the time of this writing, crude oil

is trading near $50 per barrel and heading

lower. According to recent Government

Accountability Office (GAO) projections, a

growing Iraqi economy needs crude oil prices

to fluctuate between $97 and $125 per barrel. 50

Prices will not reach those levels until the glo-

bal economy emerges from the current reces-

sion. For a fragile Iraqi economy, which is

dependent on American aid and oil exports, a

serious decline in both may prove disastrous.

American and Iraqi policymakers could not

have predicted the current economic meltdown

when they began developing their current

strategy of relying on federalism to assuage

ethnic and sectarian tensions. Shifting control

over welfare, education, and other policy areas

to provincial governments may satisfy the

Kurds and Shia in the short term but may pro-

vide a bone of contention in the years ahead.

That would undoubtedly materialize if one

region is perceived to be more prosperous than

another. The fact is that Kurd and Shia regions

will likely be required to subsidize Sunni

provinces over the long term if the national

government desires Sunni support for the

regime. 51

A prosperous free market economy

that links success to individual effort rather

than tribal, ethnic, or sectarian influence will

prove to be the key to Iraqi success if only

Prime Minister al-Maliki takes up the mantel

of economic reformer.

About the Author

Dr. Adam Lowther is research professor and

defense analyst at the Air Force Research Insti-

tute, Maxwell Air Force Base. He is the author

of Americans and Asymmetric Conflict: Leba-

non, Somalia, and Afghanistan. The views

expressed in this article are those of the author

and do not necessarily represent those of the

Department of Defense or the U.S. Air Force.

202 Adam Lowther

American Foreign Policy Interests

Notes

1. See Jeffrey Record, ‘‘Why the Bush

Administration Invaded Iraq: Making Strategy

after 9=11,’’ Strategic Studies Quarterly, vol. 2,

no. 2 (2008): 63–92.

2. Paul Wolfowitz, House Armed Services

Committee (June 22, 2004).

3. Donald Rumsfeld, Remarks to the

International Institute for Strategic Studies,

Singapore (June 5, 2004), at http://www.

defenselink.mil/speeches/speech.aspx?speechid=

128.

4. The understanding of liberty applied

here is consistent with that of Thomas

Jefferson who said, ‘‘Liberty consists in the

freedom to do everything which injures no

one else; hence the exercise of the natural

rights of each man has no limits except those

which assure to the other members of the

society the enjoyment of the same rights.

These limits can only be determined by law.’’

Thomas Jefferson and Marquis de Lafayette,

Declaration of the Rights of Man and Citizen

(1789), at https://www.college.columbia.edu/

core/students/cc/settexts/nafman89.pdf

5. F. A. Hayek, The Road to Serfdom

(Chicago, 1960), 11–21.

6. The weaknesses seen in the Iraqi

economy are predicated on the flaws of socialist

economics described in Ludwig von Mises,

‘‘Die Wirtschaftsrechnung im Sozialistischen

Gemeinwesen,’’ Archiv fur Sozialwissenschaften

47, translated in F. A. Hayek, ed., Collectivist

Economic Planning (London, 1935), 87–130.

7. Hayek, The Road to Serfdom, 32–40.

8. Christopher Foote et al., ‘‘Economic

Policy and Prospects in Iraq,’’ Public Policy

Discussion Papers (Boston, 2004).

9. Georges Sada, Saddam’s Secrets

(Brentwood, Tenn., 2006), 290.

10. James Gwartney and Robert Lawson,

Economic Freedom of the World (Vancouver,

2002); World Development Indicators

(Washington, D.C., 2003); Doing Business in

2004 (Washington, D.C.: World Bank, 2004);

Human Development Report (New York, 2003).

11. George W. Bush, President Bush Out-

lines Iraq Threat (Cincinnati, 2002).

12. The Correlates of War Project defines

war as a conflict with 1,000 or more combat

deaths. See Zeev Maoz and Nasrin Abdolali,

‘‘Regime Types and International Conflict,

1816–1976,’’ Journal of Conflict Resolution,

vol. 33, no. 1 (1989): 3–35.

13. Stuart Bremer, ‘‘Dangerous Dyads:

Conditions Affecting the Likelihood of Inter-

state War, 1816–1965,’’ The Journal of Conflict

Resolution, vol. 36, no. 2 (1992): 309–341, and

Zeev Maoz and Bruce Russett, ‘‘Normative

and Structural Causes of Democratic Peace,’’

The American Political Science Review, vol.

87, no. 3 (1993): 624–638.

14. John Oneal and James Lee Ray, ‘‘New

Tests of the Democratic Peace: Controlling for

Economic Interdependence, 1950–1985,’’ Politi-

cal Research Quarterly, vol. 50, no. 4 (1997):

751–775.

15. Melvin Small and David J. Singer, ‘‘The

War Proneness of Democratic Regimes, 1816–

1965,’’ Jerusalem Journal of International

Relations, vol. 1 (1976): 50–69.

16. Michael Doyle, ‘‘Kant, Liberal Legacies,

and Foreign Affairs,’’ Philosophy and Public

Affairs, vol. 12, no. 3 (1983): 205–235.

17. James Lee Ray, Democracy and Inter-

national Conflict (Columbia, S.C., 1995), and

Rudolph Rummel, Power Kills: Democracy as

a Method of Non-violence (New York, 1997).

18. James Lee Ray, ‘‘A Lakatosian View of

the Democratic Peace Research Program,’’ in

Colin and Miriam Elman, eds., Progress in

International Relations Theory (Boston,

2003).

19. Spencer Weart, Never at War (New

Haven, Conn., 1998), and Christopher Gelpi

and Michael Griesdorf, ‘‘Winners or Losers?

Democracies in International Crises, 1918–

1994,’’ American Political Science Review,

vol. 95, no. 3 (2001): 633–647.

It’s the Economy, Stupid! 203

American Foreign Policy Interests

20. George W. Bush, ‘‘President and Prime

Minister Blair Discussed Iraq, Middle East’’

(November 12, 2004), at http://www.whitehouse.

gov/news/releases/2004/11/20041112-5.html

21. Seymour Martin Lipset, ‘‘Some Social

Requisites of Democracy: Economic and Politi-

cal Legitimacy,’’ American Political Science

Review, vol. 53, no. 1 (1959): 69–105. See also

Robert Barro, ‘‘Economic Growth in a Cross-

Section of Countries,’’ Quarterly Journal of

Economics, vol. 106, no. 2 (1991): 407–443.

22. William Anderson, ‘‘Manipulating the

Market,’’ The Free Market, vol. 20, no. 4

(2002): 1–3.

23. James Gwartney et al., ‘‘The Scope of

Government and the Wealth of Nations,’’ The

CATO Journal, vol. 18, no. 3 (1998): 163–190.

24. Stephen Easton and Michael Walker,

‘‘Income, Growth and Economic Freedom,’’

American Economic Review, vol. 87, no. 2

(1997): 328–332.

25. Gwatney et al., op. cit., 163–190.

26. L. Sirowy and A. Inkeles, ‘‘The Effects

of Democracy on Economic Growth and

Inequality: A Review,’’ Studies in Comparative

International Development, vol. 25, no. 1

(1990): 126–157.

27. Neil Munro, ‘‘Post-Communist Regime

Support in Space and Time Context,’’ Journal

of Communist Studies and Transition Politics,

vol. 18, no. 2 (2002): 103–125.

28. Minxin Pei, ‘‘Economic Institutions,

Democracy, and Development,’’ World Bank

Conference on Democracy, Market Economy, and

Development (February 1999), at http://www.

carnegieendowment.org/publications/index.cfm?

fa=view&id=66&prog=zgp&proj=zdrl

29. ‘‘Field Listing—GDP—Per Capita—

(PPP),’’ CIA World Fact Book (2008), at

https://www.cia.gov/library/publications/the-

world-factbook/fields/2004.html

30. Daniel W. Reilly, ‘‘Frank Defends Call

for Cut in Military Spending,’’ Politico.com

(October 27, 2008), at http://www.politico.com/

blogs/thecrypt/1008/Frank_defends_call_for_cut_

in_military_spending.html

31. Adam Przeworski and Fernando

Limongi, ‘‘Modernization: Theories and

Facts,’’ World Politics, vol. 49, no. 2 (1997):

155–183.

32. Giles MacDonogh, After the Reich (New

York, 2007).

33. Erwin Seba, ‘‘Iraqi MP says Oil Law

Could Pass by Year End,’’ Reuters News Service

(November 5, 2008), at http://www.reuters.com/

article/marketsNews/idUSN0528989520081105

34. Reidar Visser, ‘‘US Backing the Wrong

Shi’ite Horse,’’ Asia Times (September 21,

2007), at http://www.atimes.com/atimes/

Middle_East_II21Ak01.html

35. Kim Holmes et al., 2008 Index of

Economic Freedom (Washington, D.C., 2008).

36. Ibid., 14–15.

37. Sultan Barakat, ‘‘Post-Saddam Iraq:

Deconstructing a Regime, Reconstructing a

Nation,’’ Third World Quarterly, vol. 26, no. 4

(2005): 571–591.

38. Christopher Foote et al., ‘‘Economic

Policy and Prospects in Iraq,’’ Public Policy

Discussion Papers—Federal Reserve Bank of

Boston (Boston, 2004), 14–15.

39. Paul Bremer, My Year in Iraq: The

Struggle to Build a Future Hope (New York,

2006), chapter 14.

40. Sabri Al-Saadi, ‘‘Iraq’s National Vision,

Strategy, and Policies,’’ Strategic Insights,

vol. 5, no. 3 (March 2006).

41. See Ivar Kolstad et al., ‘‘Tackling

Corruption in Oil Rich Countries: The Role

of Transparency,’’ Chr. Michelsen Institute

(Bergen, 2008).

42. H. H. Sheikh Hamdan Bin Rashid Al

Maktoum, ‘‘Remarks to the Board of Governors:

World Bank,’’ International Monetary Fund

Press Release no. 4 (Dubai, UAE, September

23–24, 2003).

43. Iraq: PRTs (Washington, D.C.: U.S.

Agency for International Development, 2008),

8–13.

44. ‘‘2007 Investment Climate Statement—

Iraq,’’ U.S. Department of State, at http://

www.state.gov/e/eeb/ifd/2007/80708.htm

204 Adam Lowther

American Foreign Policy Interests

45. Salt Lake Tribune, ‘‘Status of Forces:

US-Iraq Deal Looks Good’’ (November 20,

2008), at http://www.sltrib.com/ci_11035043

46. ‘‘Business Attitudes Towards Politi-

cal and Economic Reconstruction in Iraq,’’

Center for International Private Enterprise

(2008).

47. ‘‘Joint Chiefs Chairman says Security

Gains from ‘Surge’ of US Troops Appear to

Be Holding,’’ Associated Press (July 7, 2008),

at http://www.iht.com/bin/printfriendly.php?

id=14299803

48. Los Angeles Times, ‘‘The New SOFA

Has Been Delivered’’ (November 19, 2008), at

http://latimesblogs.latimes.com/babylonbeyond/

2008/11/iraq-the-new-so.html

49. Bushra Juhi, ‘‘Iraq Sets Aside $15 Bil-

lion for Reconstruction,’’ The Washington Times

(November 2, 2008), at http://www.washington

times.com/news/2008/nov/02/iraq-sets-aside-15-

billion-for-reconstruction/

50. Government Accountability Office, Stabi-

lizing and Rebuilding Iraq: Iraqi Revenues Exp-

enditures and Surplus (Washington, D.C.: 2008).

51. ‘‘Federal Spending in Each State per

Federal Dollar in Taxes,’’ Tax Foundation

(October 9, 2007), at http://www.taxfoundation.

org/research/show/266.htm

It’s the Economy, Stupid! 205

American Foreign Policy Interests