Analysis: Oil Privatization key for Iraq

By ARIEL COHEN, Special to UPI  |  June 17, 2003 at 12:00 PM
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WASHINGTON, June 17 (UPI) -- As the Bush White House and the Temporary Administration in Baghdad headed by L. Paul Bremer are planning the future of post-­Saddam Iraq, economic issues also loom large on the horizon. After security is achieved and remnants of the ancien regime are eradicated, a postwar economic strategy needs to be developed and implemented, which will be beneficial for Iraq, for the countries of the Middle East, and for the developing world, which suffers disproportionally from high oil prices.

The full reintegration of Iraq's oil industry into the global marketplace would allow a more abundant and stable energy supply and a greater revenue flow for the Iraqi budget, foster a higher living standard for the Iraqi people, and provide numerous business opportunities for the region and the world. Private ownership of the oil industry is the key for such reform.

Saddam's regime has succeeded in bankrupting the country, even though it boasts the world's second largest oil reserves after Saudi Arabia. The oil sector provided more than 60 percent of the country's gross domestic product and 95 percent of its hard currency earnings. Yet GDP for 2001, at the market exchange rate, was estimated to be only about one-third its 1989 level. Iraq also is hobbled by its $200 billion foreign debt. This devastation was wrought by such policies as the nationalization of the country's chief export commodity, oil; extensive central planning of industry and trade; the 1982-­1988 war against Iran; and the invasion of Kuwait, which precipitated the 1991 Gulf War. Iraq's economy has been grossly mismanaged. Sound economics are needed to help the Iraqi people rebuild their lives and their country after two decades of wars and four decades of repression under the previous regime.

The way out of the economic morass for the Iraqi economy lies through privatization of its abundant oil assets. If successful, Iraq's privatization of its oil sector, refining capacity, and pipeline infrastructure, could serve as a model for privatization by other OPEC members, thereby weakening the cartel's domination of the energy markets.

Examples of Russia, Great Britain and Norway indicate clearly that private ownership of the oil industry provides higher investment and production growth rates than state management. And the case of Venezuela proves that even relatively well-managed state oil companies are likely to disintegrate if poor political leadership is exercised, as President Hugo Chavez has demonstrated.

The road to economic prosperity in Iraq will not be easily paved, but the Bush Administration can help the future Iraqi government achieve fundamental structural reform with massive, orderly, and transparent privatization of various sectors of the economy, including the oil industry. The United States should offer its guidance on establishing sound economic and trade policies to stimulate growth and recovery.

Privatization efforts in other countries demonstrate that privately held infrastructure, including oil, and oil service companies, attract modern technology and management expertise, produce greater efficiencies, improve production standards, and generate higher revenues than do centrally planned and state-owned industries.

Iraq's oil industry cannot thrive without access to global capital markets. In particular, the Administration should work with the future leadership of Iraq to convince them that the next Iraqi federal government must develop mechanisms for privatizing industries and taxing oil sales. It should develop a taxation or another revenue distribution mechanism, such as a revenue management scheme, which will ensure sharing the energy proceeds equitably among individual Iraqis within the three major ethnic regions: Kurds in the North, Shi'a Arabs in the South, and Sunni Arabs in the central region. Examples of such schemes already exist in Alaska and Singapore, where funds are deposited into individual bank accounts. On the other hand, a Norwegian scheme, in which the nation's windfall oil revenue is managed by the government for the sake of the "society at large" -- not individuals -- is less advisable in the case of Iraq.

Economic reform cannot be neglected for long. In the coming months the United States, its allies, and international financial institutions (IFIs) must provide the necessary technical and financial assistance that enables the Iraqis to create modern legal environment that recognizes property rights and is conducive to privatization.

A key role here can be played by the large and successful Iraqi expatriate community (as well as other Western-educated Iraqis) to provide the personnel, expertise and entrepreneurial know-how that can ensure a successful privatization reform. Contrary to the advice proffered by some in Europe and the United Nations, who advocated continuation of the U.N.-run oil-for-food program, transition to private oil production should be rapid. Prices will need to be deregulated, including in the utilities and the energy sector. Finally, it should be a top priority to liberalize Iraq's trade, with an eye to eventual Iraqi membership in the World Trade Organization. Restoring Iraq quickly to the global economic mainstream is critical to end the damage caused by decades of isolation and to lift living standards.

Economic growth will be an important contribution to the stabilization of Iraq, allowing the United States and other forces stationed there to depart. As the Kingdom of Saudi Arabia looks increasingly shaky as the top global oil supplier due to the mounting concerns about indigenous terrorism, structural reform and comprehensive privatization is a winning strategy for the people of Iraq, its future government, for the region, and for the United States.

Ariel Cohen, Ph.D., is Research Fellow in the Davis Institute for International Studies at the Heritage Foundation. He specializes in international energy security.

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