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The Hidden Costs of the Iraq War

by ZVI BAR'EL

Two million liters of water had to be pumped out of the basement of the Iraqi central bank a month ago to make the steel safes stored there accessible. A water pipe that burst during the bombings produced the flooding, and no one knew where the main pipe was to shut it off.

It wasn’t the American civilian administration that pumped the water out, but a special team sent by National Geographic, which was looking for an equally important asset: the treasures of the ancient city of Nimrod, parts of which were actually found in those safes. After days of pumping, the American administration was able to open the safes and remove millions of dollars, which was used to pay the salaries of hundreds of thousands of Iraqi officials. Every official received $30 to $50 as a first monthly payment, a small sum to cover basic food items.

In the absence of written data on the number of officials and the salary each was accustomed to receiving, the American administrators got by, using verbal recommendations from senior Iraqis, paperwork presented by those eligible for salaries and a lot of trust.

The first decision was correct: money had to flow to the citizens in order to calm the situation on the street. Another decision, not to pay the thousands of soldiers of Saddam Hussein, turned out to be dangerous and was changed fairly soon after the large demonstrations they organized on the streets of the big cities. Every soldier and officer received a monthly salary of between $50 to $150 without doing a thing. They are after all Saddam’s men and former members of the Ba’ath party, whom the Americans do not want to employ.

After that, money started flowing into rebuilding of vital infrastructure. The U.S. Congress approved a sum of $3.2 billion over a two-year period to finance the initial rebuilding. Now it turns out that sum is a lot less than what is needed. In an interview with Fortune magazine, American administrator Paul Bremer says his administration in Iraq “burns about a billion dollars a month.” This estimate, of course, does not include the military expenditures that total a billion dollars a week.

To cover the civilian expenses, the U.S. is using Saddam Hussein’s frozen funds in U.S. banks, estimated at around $10 billion. One billion dollars was stolen from Iraqi banks and around $950 million of it has been recovered and is being used by the civilian administration. Only some $350 billion remains in the central bank and that is being used to cover current expenses. According to Bremer’s assessment, Iraq will need around $1.5 billion a year for the next five years just to restore electrical supply to all citizens of the country.

Early in July, Bremer was in Washington to present an overview of the situation in “his country,” saying he intended to transform the country into a market economy within 18 months and to hold free elections and set up an elected Iraqi government. He is striving to obtain additional funding from donor countries whose representatives will convene in October in the U.S. to discuss the rebuilding of Iraq, and he expects Iraq’s oil industry will soon start generating income in less than a year. Not many would agree with these forecasts.

Colonization

A market economy is more a political issue in Iraq at the moment than a purely economic one. The concern in Iraq (and not only there) is that the privatization plan for the oil industry will transfer this national asset to foreign hands, and especially to American hands. Commentators and analysts in Arab countries caution in sharply worded terms against “the colonization of the oil fields,” “the sale of Arab assets to the American infidels” and “the plundering of Iraqi wealth by occupiers” and again portray oil as the real pretext for war.

The big contracts for rebuilding the oil industry that went to American corporations such as Bechtel ($680 million) or consulting firms such as Bering-Point, these commentators say, serve as convincing proof of America’s intentions.

Bering-Point, for example, is, among other things, to prepare Iraq’s government companies for an international public tender, prepare the Iraqi banks for commercial operations and determine guidelines and help formulate the new banking and stock trading laws. However, the sum the company will receive from the American administration (an estimated $60-200 million) does not include the cost of rebuilding the communication infrastructure, which is so vital for the proper management of the economy. The situation today is that American officials must go to their Iraqi colleagues in order to have business meetings. The Americans are not permitted to go outside without a military escort, and so every meeting becomes a carefully planned military operation. Telephones don’t work and the use of satellite phones is permitted only for truly vital matters, and therefore PCs cannot connect to key systems in Iraq or in the U.S. The first meeting of leaders of the central bank and American economic representatives took place on the street because there was nowhere to sit in the offices: all the equipment had been plundered.

The lack of a communications system makes it impossible to estimate the amount of damage and the needs of every municipal or government department throughout Iraq. This week, the administration began distributing cellular phones to mayors and others in important positions. But they too cannot help verify data submitted verbally and therefore the assessment of the sum of money needed is merely a guess.

As for the hope that donor countries will help with the costs of rebuilding Iraq, needless to say many of the countries invited to Washington opposed the war, and it is doubtful they will want to contribute to the cause without ensuring a cut of future output for themselves.

Saddam’s Iraq owes some of them more than $300 billion and that includes war compensation; even if they forgive part of the debt, that will not necessarily mean income for Iraq. The Americans are hoping to get $7 billion from the donor countries, a sum which even if obtained will barely cover civilian administration expenses through the middle of next year. Anyway, donor countries pledged $5 billion to Afghanistan, and only half that sum has actually been transferred. And there was no disagreement about that war.

Unemployment at 60 percent

Thus, the only thing left to do is rely on the oil industry to bring in the remaining amount. But here, too, a lot of spending will first be needed before one will see income. Iraq produced more than 2.5 million barrels a day before the first Gulf War in 1991. With the sanctions and oil-for-food-and-medicine programs, production dropped. On the eve of the latest Gulf War, it was around 800 barrels a day. To reach pre-war 1991 levels and perhaps to even increase production to 3.5 million barrels a day, Iraq will need around $50 billion spread out over several years. The income expected from this investment, in the best-case scenario, should reach $20 billion for the same period.

Optimistic assessments speak of a rapid rebuilding within two years and long-term development over the next five years.

The less optimistic assessments speak of 10 years being needed to restore Iraq’s situation to its previous condition. All of this is based on several assumptions: the price of oil remains around $30 per barrel and does not drop due to the entry of large quantities of oil that will come from Iraq; that Kuwait does not open its northern oil fields quickly; and that Saudi Arabia accepts the ceiling determined by the OPEC member countries.

The free market Bremer dreams of will also require an end to subsidies for basic staples and that will make it necessary to increase Iraqis’ sources of income. At the moment, in the absence of precise data, unemployment in Iraq is estimated at 60 percent. Most Iraqis, if not all, need food portions and medicines paid for by the United Nations with money accumulated in the special Iraq fund as part of the oil-for-medicine program. However, these funds are running out, and the entire program is scheduled to end in November.

Experts sent by the Pentagon to check the situation in Iraq proposes, for example, opening a bank account for every citizen, in which their relative share of oil income can be directly deposited; that way the U.S. shows it is not exploiting Iraq, and the money is going directly to Iraqis. These sums, however, will not replace jobs or uproot the culture of unemployment that may take hold in the country. The American administration plans to provide numerous jobs by privatizing Iraqi industry and some 190 government companies, but privatization requires investment, and this week several leaders of banks and international corporations explained that they did not plan to invest in Iraq while the security situation is unstable. Now the circle has been closed.

Without security there will be no investment and without investment it is doubtful whether it will be possible to stabilize the country.

Amid the macro considerations and long-term planning, a parallel economy is developing in Iraq. It is an “economy” of dozens of money changers, who determine, in the absence of a central policy, the Iraqi dinar-dollar exchange rate. The daily fluctuations can go as high as 20-40 percent.

Gang leaders trade in stolen goods and have open lots where they sell stolen cars and parts; burglaries and kidnappings for ransom continue as does the arms trade. Foreign correspondents traveling around Iraq tell of an active arms market where pistols sell for $400-500 and grenades for a few dollars. The grace period the Americans granted to anyone who turned in his weapon ended on June 15 and yielded only 1,000 weapons or so.

There are also positive developments such as Internet cafes where customers send email inside and outside Iraq via satellite phones, which have become an alternative to standard to telephone lines.

Post-war Iraq offers another option to those seeking opportunities: real estate. Apparently Arab businessmen are buying up properties across Iraq in anticipation of a rise in prices, taking advantage of the poverty and willingness of Iraqis to sell just about anything for any price, with no government supervision.

“In another year, when we all wake up, we’ll suddenly see that Iraq no longer belongs to us,” wrote an Iraqi journalist. “It will have gone to Saudi, Kuwaiti, Egyptian and American millionaires. We will be transformed into foreign laborers in our own country.”

Former Iraqi army officers waiting in Baghad this month for their first salary. Not paying them was seen as too dangerous an option.

 

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