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The Next Steps in Iraqi Economic Reform


by Austin Bay
February 27, 2007

Call it an economic and political victory for "New Iraq" -- and an indication that we may see more in the future.

This past Monday, Prime Minister Nouri al-Maliki's cabinet finally agreed to a reformed "oil law." The cabinet will forward the legislative package to the Iraqi parliament for action later this spring.

The "oil reform" program in Iraq is long overdue, but the Iraqi government also deserves kudos for the effort. Democracy is often a slow, muddled and tedious operation (look at the U.S. Congress).

Until Iraq's democratically elected parliament was seated and the government selected, Iraq lacked "full sovereignty." Any "permanent oil reform" implemented by the Coalition Provisional Authority or an interim Iraqi government would have been portrayed as inherently illegitimate. The new bargain has its flaws (what legislation doesn't?), but illegitimacy isn't among them. The Iraqis have worked through the snarl on their own.

Implementing the new program will strengthen the national government while giving all regions an economic stake in its political success.

Oil is both Iraq's blessing and bane.

The blessing is obvious -- "black gold" is a vital natural resource and an economy-priming commodity. As for the bane, that's the battle for control of oil production and precious oil revenues.

Iraq's biggest-producing oil fields lie in the predominantly Shia Arab south and Kurdish north. In 2007, Iraqi Sunni Arabs fear Shias and Kurds will deny them a fair share of the wealth. Many Shia and Kurds retort that it's time they were compensated. For decades, Sunni Arab elites controlled Iraq's oil industry. Kurds and Shias never received a "fair share" of the income.

Despite the Kurd and Shia resentment, and the Sunnis' fears, Iraqi leaders quickly agreed to an oil revenue sharing formula. The Kurds, however, demanded oil contracting concessions. Remember, the Kurds have enjoyed a degree of autonomy since 1991. The Kurd demand bedeviled negotiations for months, with an interesting collection of Sunni and Shia arguing the demand undermined the central government's authority.

The compromise that emerged permits contracting by region but establishes a Federal Oil and Gas Council. The FOGC has a final say on negotiated contracts. Political sleight of hand? Welcome to democratic government. In a press statement, U.S. Ambassador to Iraq Zalmay Khalilzad praised the entire process: "This is a significant political achievement because leaders representing all of Iraq's communities have demonstrated that they can pull together to resolve difficult issues of vital national importance."

The Iraqi government should consider two other economic reforms.

A logical follow-on is the establishment of an Iraqi "oil trust" program, similar to the one implemented by the state of Alaska where every qualified citizen gets a share of state oil revenues. An oil trust would put several hundred dollars a year into the pockets of every adult Iraqi -- that serves as an instant economic "fire-starter." The oil trust immediately invests everyone in the economic success of Iraq's new democratic government.

Clarifying and affirming individual property rights is another important reform. Peruvian economist Hernando De Soto's "Mystery of Capital" (published in 2000) argued that Egypt's poor have around $240 billion in "dead capital," most of it tied up in property that they cannot properly mortgage. De Soto said that individual property rights and a legal system that protected contracts would instantly energize Egypt's sclerotic economy.

In 2004, while serving in Iraq, I read a short, unclassified study that made the same argument for Iraq. The potential economic payoff is huge.

The Iraqi government needs to hear from De Soto. I know of one economist who thinks a speech by De Soto to the Iraqi parliament and government ministries would not only benefit Iraq, but do wonders for reform advocates throughout the developing world.

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