Thursday, November 25, 2004

Iraq's Economy

By odd happenstance, I ended up with "The Milken Institute Review," whose Fourth Quarter 2004 issue is quite good. Most interestingly, it has an article by Robert Looney on "Iraq as a Transition Economy." We often forget when reading day to day accounts of military struggle in Iraq, that people's lives go on and thus, their economic activities. What's interesting to figure out is how reconstruction has been going, how those day-to-day activities outside the excitement of armed conflict have been repairing or changing themselves. The answer, in brief, is not well.
In sum, Iraq's current economic malaise has its origins in a series of miscalculations by the Coalition Provisional Authority. Too many decisions were made without examining the economic dimension. Once unemployment got out of control, violence and insurgency increased, the economy suffered, and aid flows dried up due to the lack of safety, creating a vicious cycle that the belated reforms could not correct.
The most striking error is that of inflexibility and the incoherence of actions. The CPA instituted low across the board tariffs with the generally correct belief that openness is good for an economy. The CPA also doubled the salaries in many state-owned firms -- to buy try to buy political support. You have sudden competition from foreign imports as you double the cost of the main input. This is not a recipe to make these firms successful; they probably weren't that efficient to begin with, and now they have an additional expense. It is not surprising that the factories are running far less than at full capacity. I'm not a huge fan of protection, but this is a clear-cut case where either the CPA should not have tried to buy off workers, or it should have protected the industries. But the simple fix is so attractive; and the non-ideological answer takes too much thought.

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