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Iraq: Attacks Force Retreat From Wide-Ranging Privatization Plans

by Rajiv ChandrasekaranWashington Post
December 28th, 2003

BAGHDAD - The United States has backed away from several of its more ambitious initiatives to transform Iraq's economy, political system and security forces as attacks on U.S. troops have escalated and the timetable for ending the civil occupation has accelerated.

Plans to privatize state-owned businesses -- a key part of a larger Bush administration goal to replace the socialist economy of deposed president Saddam Hussein with a free-market system -- have been dropped over the past few months. So too has a demand that Iraqis write a constitution before a transfer of sovereignty.

With the administration's plans tempered by time and threat, the U.S. administrator of Iraq, L. Paul Bremer, and his deputies are now focused on forging compromises with Iraqi leaders and combating a persistent insurgency in order to meet a July 1 deadline to transfer sovereignty to a provisional government.

"There's no question that many of the big-picture items have been pushed down the list or erased completely," said a senior U.S. official involved in Iraq's reconstruction, who spoke on the condition of anonymity. "Right now, everyone's attention is focused [on] doing what we need to do to hand over sovereignty by next summer."

The new approach, U.S. diplomats said, calls into question the prospects for initiatives touted by conservative strategists to fashion Iraq into a secular, pluralistic, market-driven nation. While the diplomats maintain those goals are still attainable, the senior official said, "ideology has become subordinate to the schedule."

"The Americans are coming to understand that they cannot change everything they want to change in Iraq," said Adel Abdel-Mehdi, a senior leader of the Supreme Council for the Islamic Revolution in Iraq, a Shiite Muslim political party that is cooperating with the U.S. occupation authority. "They need to let the Iraqi people decide the big issues."

Bremer's plan for Iraqis to write a constitution before he departed had been intended to prevent extremists from dominating the drafting process. U.S. officials acknowledge that risk exists, but said it had been outweighed by the need to end the civil occupation by the summer. The presence of U.S. troops in Iraq will go on longer, military officials have said.

With goodwill toward Americans ebbing fast, Bremer and his lieutenants have also concluded that it does not make sense to cause new social disruptions or antagonize Iraqis allied with the United States. Selling off state-owned factories would lead to thousands of layoffs, which could prompt labor unrest in a country where 60 percent of the population is already unemployed.

Food Rationing System

An unwillingness to assume other risks has also scuttled, at least temporarily, plans to overhaul a national food rationing program that was a cornerstone of Hussein's welfare state. Several senior officials want to replace monthly handouts of flour, cooking oil, beans and other staples -- received by more than 90 percent of Iraqis -- with a cash payment of about $15. Although the proposal has the enthusiastic support of economic conservatives in the occupation authority, concerns about the logistics have put the effort on hold.

"It's a great idea that the academics thought up, but it wasn't in tune with the political realities," said a U.S. official familiar with discussions of the issue. "We have to look at what we gain versus what we risk. Right now, we don't need to be adding any more challenges to those we already have."

A similar philosophy extends to the disarmament of various militias backed by political groups. Although the occupation authority wanted to quickly disband the Kurdish pesh merga militias by moving members into the new army and police force, U.S. officials have not pressed the issue with Kurdish leaders, who remain strong supporters of the American occupation. U.S. officials are also taking a measured approach toward a Shiite militia whose sponsoring party is the Supreme Council for the Islamic Revolution in Iraq.

At the same time, the occupation authority has substantially decreased the number of new recruits it intends to put through a three-month boot camp designed to build an improved, professionally trained army. Instead, the occupation authority is increasing the ranks of police officers and civil defense troops, who can be deployed faster but receive far less training and screening than the soldiers.

Bremer also recently allowed the creation of a new force, comprising former members of five political party militias, to pursue insurgents with American training and support.

"The Americans promised to limit our security forces to a professional army and a professional police," said Ghazi Yawar, a member of Iraq's U.S.-appointed Governing Council. "They should not tolerate these militias. They should be dissolving them."

Yawar and his fellow Sunni Muslims, a minority that had long ruled Iraq, are concerned that Shiites, who make up about 60 percent of the population, and Kurds, who have lived autonomously for 12 years, will have little incentive to demobilize their militias after the occupation.

"The Americans have to deal with this issue," he said. "It would be irresponsible to leave it up to the Iraqis."

Across Iraq, efforts are underway to rebuild after years of war, economic sanctions and gross mismanagement by Hussein's government. Hundreds of schools have been refurbished with funds from the U.S. Agency for International Development. Extensive rehabilitation and expansion of the country's electrical, water and sewage systems are slated to begin next year, paid for by an $18 billion U.S. aid package. "We are going to see a massive reconstruction program that will further demonstrate the depth of American commitment to Iraq," Bremer said in a recent interview.

But there has also been a noticeable dampening of some early ambitions to remake Iraq. In June, as he returned to Baghdad aboard a U.S. military transport plane after speaking at an international economic conference, Bremer discussed the need to privatize government-run factories with such fervor that his voice cut through the din of the cargo hold. "We have to move forward quickly with this effort," he said. "Getting inefficient state enterprises into private hands is essential for Iraq's economic recovery."

Asked recently about privatization, he said it was an issue "for a sovereign Iraqi government to address."

The administration's decision to shift privatization and the drafting of a constitution to the provisional government has been generally well received by Iraqi political leaders, who want to deal with those subjects themselves. But a small, quiet minority of political figures, including a few members of the Governing Council, contend that aggressive market-oriented policies must be enacted by the occupation authority. The provisional government, they fear, will not be willing to assume the risk of revamping the ration system or shutting down a factory with thousands of workers.

"The Americans are the only ones who can implement these changes," one of the council's 25 members said. "If they leave it up to Iraqis, it will never get done."

Bremer and his aides voiced similar concerns until Nov. 15, when he agreed to abandon his insistence that a constitution be written before a transfer of sovereignty. A few weeks before the new arrangement was announced, a top American official here stated that requiring the drafting of a "constitution before sovereignty is the only way to guarantee we'll get a constitution."

By handing over sovereignty first, the administration has ceded veto power over the final document and is forcing Iraqis to confront a raft of contentious issues, from Kurdish demands for autonomy to Shiite demands for Islamic law, without a referee. In September, Bremer warned that electing a government without a constitution "invites confusion and eventual abuse."

Under the Nov. 15 agreement, Iraqi political leaders are to draft a "basic law" that will serve as an interim constitution until a permanent one is written. Bremer has said that the basic law will include a bill of rights, recognition of an independent judiciary and other "guarantees that were not in Saddam's constitution." His aides contend that discussions about federalism and the relationship between religion and government that will occur during the writing of the basic law will ease the process of drafting a permanent constitution, but other American officials are more skeptical.

"We're requiring a country that lacks a democratic tradition and the institutions of civil society, but has plenty of ethnic and religious tension, to sort out a lot of very challenging things," the senior American official said. "It's not ideal, but what choice do we have? Nobody wants us to extend our stay here."

Privatization, the official said, illustrates the dilemma well: It is a step that needs to be taken -- and that Bremer wanted to take -- but it has been deemed too difficult and dangerous to accomplish now. Reversal on Oil Factory

With a bloated workforce, decrepit factories and goods that cannot compete with imports, the State Company for Vegetable Oils is the sort of government-run business that economists working for the occupation authority had wanted to shove into the private sector as soon as possible.

One of 48 companies owned by the Ministry of Industry, the enterprise was a flagship of Hussein's socialist economy. Its six factories produced consumer goods -- from partially hydrogenated cooking oil to shampoo and detergent -- that filled the domestic market and were cheaper than imported products.

Although the company posted impressive profits, they were illusory. The government subsidized imports of raw materials, charging the company only $1 for each $6,000 worth of materials brought in.

American experts who examined the company over the summer believed it would be foolish for Iraq's new government to continue the subsidies. What was needed, they concluded, was a private owner who would buy raw materials and sell finished products at market prices. In exchange for investing in new manufacturing equipment and modernizing the product line to better compete with imports, they decided the new owner should have the right to shut down older factories and reduce the number of employees to bring costs under control.

In late June, Bremer outlined his vision for a free-market Iraq before hundreds of business executives attending a meeting of the World Economic Forum in Jordan.

"Markets allocate resources much more efficiently than politicians," Bremer said. "So our strategic goal in the months ahead is to set in motion policies which will have the effect of reallocating people and resources from state enterprises to more productive private firms."

The vegetable oil company's director at the time, Faez Ghani Aziz, agreed with Bremer. "We need outside investors," he said shortly after the speech. "We cannot continue like this."

Bremer's chief economic adviser over the summer, Peter McPherson, advocated a speedy move toward privatization, citing studies of the economic transformations in Eastern Europe in the 1990s. "This needs to be done quickly," McPherson, president of Michigan State University, said in July. "Experience shows us that the faster you do it, the more beneficial it is for the economy."

But as resistance attacks grew more intense, security worries quickly trumped economic ambitions in Bremer's office. No one wanted to do anything that would increase the number of jobless Iraqis who might be recruited to fight the occupation. Practical concerns also surfaced: The closure of Baghdad's airport to commercial flights meant few investors could travel to Iraq.

Iraqi officials expressed further doubts about fast privatization. They argued that waiting for a year or two for Iraq to stabilize would increase the prices at which the government could sell factories. They also raised fears that former Baathists would use ill-gotten money to buy up state firms.

In late July, the debate took a grim turn. After refusing to rehire dozens of workers who had been dismissed before the war, Aziz, the director of the vegetable oil company, was gunned down on his way to work. His killing sent a wave of panic through the Ministry of Industry. All of a sudden, no one wanted to talk about privatization.

Faced with growing reluctance among officials at the ministry and on the Governing Council, Bremer and his advisers stopped advocating a fast sell-off of state firms. "It's just disappeared from the agenda," an official with the occupation authority said. "It was just too risky."

The Ministry of Industry recently decided to lease 35 factories to Iraqi and foreign investors on the condition that they not fire a single employee. "The Americans first thought with the easy change of regime in Iraq there should be parallel drastic decisions on the economic front," said Mehdi Hafedh, Iraq's interim minister of planning. "But now they realize they cannot be too aggressive."






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