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World Bank Brings Market Fundamentalism to Iraq
by Kathy Hoang
6 November 2004

The World Bank has forced dozens of countries to put their economies in the
hands of the “free market” - achieved by eliminating regulations and taxes
and granting maximum flexibility to businesses and investors. Its insistence
on limiting the reach of government and creating new ways to apply free-
market principles to economies unaccustomed to unbridled competition has
moved many observers to label it a leading advocate of “market
fundamentalism” - the ideological belief that all economic problems can, and
should, be solved with free-market solutions.

Now it is bringing its doctrines to Iraq. The U.S. government has
acknowledged its concern that religious fundamentalists might gain power in
Iraq, but it has no problem with the introduction of market fundamentalism.
Indeed, the U.S. government has actively encouraged, even pressured, the
Bank to enter the fray and enforce its orthodoxy. If the Bank succeeds, it will
be reinforcing the unpopular rules established by the Coalition Provisional
Authority and its head, Paul Bremer - rules which give the United States
extraordinary advantages in the future Iraqi economy.

The Bank’s entry into Iraq has not been smooth. Its top management was
anxious about being caught up in the chaotic and controversial situation in
Iraq, especially since it has to please its largest shareholders, which include
countries very much at odds over the invasion and occupation of Iraq. But the
United States, the most powerful of those countries, asserted itself decisively
and overrode any anxieties the Bank and other G7 countries might have
about its involvement in Iraq.

The World Bank’s early post-war efforts in Iraq were crippled by the attack on
the United Nations headquarters in Baghdad in August 2003, where the Bank
had stationed its first post-war staff. One of its employees was killed, and
several other Bank and IMF employees were injured. The Bank immediately
decides to relocate the Iraq field office to Amman, Jordan, where they remain
until security improves in Iraq. The Bank’s capacity to evaluate projects will
likely be very limited, though Amman has reportedly become a sort of
secondary capital for Iraq - not because of the Bank’s presence, but because
so many others share the Bank’s concerns — with many important meetings
taking place there.

The World Bank’s First Plans for Iraq

The Bank’s first significant work on post-war Iraq was the “Joint Iraq Needs
Assessment
,” carried out jointly with the United Nations. It also helped
facilitate a few small-scale development initiatives such as the Emergency
Textbook Provision Project and the Capacity-Building Program for Iraqi Civil
Servants, and has recently announced plans to begin infrastructure projects
focusing on rehabilitation of infrastructure, water and sanitation, and school
rehabilitation. However, despite the Bank rhetoric citing improved Iraqi
welfare as the goal of the reconstruction plans, foreign investors, particularly
those from the U.S. and other wealthy G8 nations, are set to be the greatest
beneficiaries of the Bank’s recommended policies.

The World Bank’s recommendations are distinctly in line with U.S. economic
interests at the expense of Iraqi citizens. Under the Bank’s recommendations,
Iraq is poised to become the most economically neo-liberal (“free market”)
country in the Middle East region. The Bank especially prioritizes the
development of new markets in Iraq, but fails to promote Iraqi participation in
the economy and Iraqi ownership of capital while offering incentives to foreign
investors. Thus far, the opportunities have been going chiefly to U.S.
investors, since the U.S. exercised near-total control over the awarding of
contracts until the June 28th “handover of sovereignty,” and it is no
exaggeration to say that the segments of the Iraqi economy doled out to U.S.
interests represent a substantial potential goldmine.

The undemocratic process by which the Bank operates in Iraq lends context
to the imperialistic nature of the policies and the interests they promote.
Throughout World Bank documents detailing economic plans for Iraq,
including the Joint Needs Assessment and the Interim Strategy Note of the
World Bank for Iraq, it is clear that while it claims to be purely interested in
bettering the lives of the Iraqi people and promoting Iraqi economic growth, in
practice the Bank’s economic policy blueprints for the “sovereign” Iraqi
government have outlined a framework that only promotes the interests of
foreign investors and foreign profit.

The World Bank and the Coalition Provisional Authority (CPA)

The World Bank supports the completely undemocratic decision of the
Coalition Provisional Authority (CPA)-the occupation force led by the U.S. to
govern Iraq until the June 28th handover-to reform legislation on foreign
direct investment. According to the UN/WB Joint Needs Assessment, in CPA
Order 39, “Iraq announced a foreign direct investment policy that would make
the country one of the most open in the world. The law permits full foreign
ownership of businesses in all sectors (with the exception of natural
resources [e.g., oil]), permits foreign firms to enter Iraq as direct owners of
branches or through joint ventures, provides for national treatment of foreign
firms and permits the full and immediate reparation of profits.
” These radical
policies provide an extremely lucrative investment environment for foreign
investors, and will, according to the Financial Times, “make Iraq one of the
most liberalised economies in the developing world and go beyond even the
laws in many rich countries
.”

By claiming “national treatment,” which means being treated as any Iraqi
company would, foreign firms will receive a number of benefits typically
reserved for domestic investors. They will most likely pay lower taxes, avoid
tariffs, and avoid paying various fees for conducting business in Iraq. The
decision to eliminate the possibility of protecting domestic investment,
typically accomplished with tariffs on imports, was made unilaterally by the
CPA, while the Iraqi people were powerless and without decision-making
capacity. “It was an order from [U.S. Administrator of the CPA Paul] Bremer.
They didn’t consult anyone about it
,” Ihsan al-Titenchi, Membership Director of
the Iraqi-American Chamber of Commerce and Industry, told al-Jazeera. After
the “hand-over,” the World Bank will now take a leading role in enforcing the
CPA’s binding rules, which are destined to hurt Iraqi domestic investment and
inhibit Iraqi participation in business, while eroding the democratic process in
Iraq.

The radical liberalization policies were announced by the Iraqi Interim
Finance Minister with the support of Bremer at the World Bank/International
Monetary Fund (IMF) 2003 annual meeting in Dubai. This move was likely
intended to lend legitimacy for the Iraqi Governing Council — by having its
Finance Minister speak at a high-profile international meeting — and to
establish the World Bank and IMF as point institutions for guiding Iraq’s
economic future. In fact, the CPA order even states that the policies were
drafted after “having coordinated with the international financial institutions.
Joseph Saba, the World Bank’s Iraq Country Director, lauded the policies as
major steps forward in terms of creating an environment for investment” in the
Washington Post (Sept. 22, 2003).

Even the Iraqi Governing Council had some outspoken dissenters on the
liberalization order; some members said they had heard nothing of it until the
Dubai announcement. The majority of Iraqis are also opposed to the policies.
The measures which have been announced will lead to foreign domination
over economic decision-making and largely sign away the independence [of
Iraq],
” Ridha al-Qureishi, an Iraqi financial and monetary academic, told al-
Jazeera.

MIGA and Foreign Direct Investment

The Bank touts private investment as one of the most important factors for
economic growth and, by extension, improved conditions for Iraqis .
However, the Bank’s focus is on foreign, not domestic, private investment,
with policy prescriptions that relax restrictions on foreign firms in addition to
granting them an extensive range of benefits. The Bank fails to offer
incentives designed specifically to promote domestic private investment and
Iraqi private sector participation. Consequently, foreign investment will
dominate the economy and squeeze out domestic investment by Iraqis, who
do not have the resources to compete with U.S. investors.

In an “Interim Strategy Note” (Jan. 14, 2004), the World Bank recommends
that the Multilateral Investment Guarantee Agency (MIGA), a World Bank
division which supplies political risk insurance (PRI) to businesses skittish
about doing business in developing countries, “could potentially play an
important role in providing investment guarantees for investors and lenders
involved in making direct investments in Iraq, covering the risk of
expropriation, currency transfer restriction and inconvertibility, war and civil
disturbance, and breach of contract.” These PRI guarantees will likely have
detrimental effects on the investment capacity of Iraqi citizens. The PRI
offered by MIGA effectively excludes domestic investors because MIGA policy
restricts coverage to transnational investment rather than domestic
investment. MIGA admits in its own report that this “distinction may limit the
agency’s developmental impact.
” Given the high-risk investment climate in
Iraq, foreign firms with PRI will have an insurmountable advantage over
domestic firms, practically ensuring that they will indeed dominate the most
lucrative Iraqi industries.

MIGA’s PRI guarantees also encourage capital flight, meaning that much-
needed money earned from production in Iraq will be transferred out of the
country and invested elsewhere. In the MIGA report cited earlier, the agency
maintains that insurance against the possibility that a government will impose
currency transfer restrictions or that a currency will become difficult to convert
into a major international currency, whether caused by government or market
actions, will “protect against losses arising from an investor’s inability to
convert local currency...into foreign exchange for transfer abroad.
“ This
signals that most of the revenue generated by Foreign Direct Investment
(FDI)-investment by a firm or individual in actual productive capacity (such
as a factory) in another country in return for a share of ownership-is unlikely
to remain in Iraq long enough to be re-invested in the community to support
local business development and contribute to the welfare of ordinary
residents. Foreign investors will almost certainly move the capital generated
in Iraqi markets to foreign banks, most likely because of fear of instability in
the Iraqi banking system or to benefit from higher interest rates available in
other countries.

Given the current state of the Iraqi economy, there is a vital need for capital
accumulation — wealth generated in Iraq which stays in the country.
However, the World Bank is promoting just the opposite by facilitating capital
liquidity, in which money can be transferred very easily and quickly between
bank accounts and across borders.

MIGA’s PRI guarantees are also destructive to the Iraqi economy because
although they have no official governmental authority or political decision-
making power, they have the capacity to manipulate negotiation between
foreign investors and host governments in favor of foreign investors - and to
the detriment of the people in the host countries. MIGA boasts that it is able
to avoid paying out claims to foreign investors due to its negotiating capacity
and ability to prevent claims by foreign investors against host governments.
Using the clout it holds as a subsidiary of the World Bank, MIGA also claims it
is able to dissuade host governments from violating contracts, expropriating
property, or imposing currency transfer restrictions. It thus provides foreign
investors a virtual risk-free investment climate. The MIGA reports states,
“MIGA’s special status also means that it will be in a strong position to recover
its losses from the host government it has to pay out a claim for transfer
restriction, expropriation or breach of contract.” Thus, contrary to its rhetoric
as an insurance provider, the majority of any losses experienced by foreign
investors will be covered by the people of Iraq.

This was illustrated in Indonesia in 1998, when MIGA paid out the only claim
since its founding in 1985. This claim was made by the now-notorious U.S.
energy company Enron. Indonesian authorities initially approved an Enron
project based on projections suggesting a sharp increase in Indonesian
demand for energy. However, after realizing that the projections were
inflated, particularly given the East Asian financial crisis of the late 1990s, the
Indonesian authorities suspended the project. Enron threatened to make a
claim against the Indonesian government with MIGA, and MIGA attempted to
facilitate a “compromise.” In the end, the Indonesian government stood firm,
and MIGA had to pay Enron $15 million in compensation for lost profits.

In retaliation for the Indonesian government’s decision, MIGA suspended its
activities in Indonesia and stopped offering PRI to foreign investors with
interests in Indonesia. In the end, the Indonesian government backed down
and agreed to repay MIGA the $15 million over a three-year period-a
decision made despite an ongoing financial crisis and the sound logic of the
suspension of Enron’s project. Buckling under to MIGA’s pressure reflected
fear that foreign investment would be discouraged by a MIGA boycott.
Following the Indonesian government’s announcement that it would
reimburse MIGA, the agency resumed operations in Indonesia.

The Indonesian case illustrates the vulnerability of the Iraqi people. Whether
or not foreign investors make claims against the Iraqi government, the Iraqi
people lose out, whether through capital flight or through paying off insurance
claims with public funds. The risks and costs of doing business in Iraq are
shifted from the foreign investors to Iraqi taxpayers.

Price Liberalization and Agricultural Subsidies

The World Bank recommends price liberalization, which means higher prices
of basic commodities including food. Prices were previously state-controlled
and kept at artificially low levels; the Bank wants to raise food prices to meet
international levels in an effort to increase productivity in Iraqi agriculture.
However, family incomes are not rising to meet the higher prices, and the
majority of Iraqi families may not be able to afford basic food needs.

The Bank also calls for the reforming the state-subsidized food rationing
system. The food rationing system is comprised of the universal distribution of
food baskets and, according to the UN/WB Joint Needs Assessment, has
been “widely credited with preventing mass starvation and malnutrition.” The
Bank wants to transform the system from a universal subsidy to a targeted
subsidy for the most vulnerable groups in Iraqi society, which will mean that a
large portion of the Iraqi population will stop receiving their food baskets.
However, in the Joint Needs Assessment, the Bank found that “a significant
proportion of the Iraqi population remains dependent on the food ration
system and lacks sufficient purchasing power independent of the food aid.

The Assessment indicates that cutting food subsidies while simultaneously
raising food prices would put more than half of Iraq’s population at risk of
starvation and malnutrition.

Privatization of State-Owned Enterprises and National Banks

Another potentially damaging aspect of the World Bank’s economic plans is
the privatization of state-owned enterprises (SOEs) and the National Banks.
The Needs Assessment calls for the privatization of functioning SOEs and
closing those SOEs that are inefficient or destroyed as a result of recent
conflict. “Iraq’s transition to greater openness to international markets and
exposure to international competition will inevitably result in important
adjustment costs in the non-oil sectors,
” says the Joint Needs Assessment.
SOEs are expected to bear the brunt of that adjustment since many will be
unable to compete.
” This implies that a large number of SOEs will probably
be shut down.

Given the head start provided by the CPA’s preferential treatment of U.S. firms
such as Halliburton and Bechtel, the remaining SOEs may be transformed
into a U.S.-dominated sector of the Iraqi economy. The Bank’s recommended
FDI incentives privilege foreign firms with advantages over Iraqi firms
including access to capital and risk insurance, while failing to offer any
incentives that promote participation of the domestic private sector. With
foreign direct investment in these sectors, foreign firms will control large
portions of the Iraqi economy. Capital flight will ensue with the new FDI
incentives and Iraqis will lose valuable capital that could have been
reinvested in the community.

Privatizing the SOEs and closing a number of them inevitably means that
Iraqis will lose jobs. The Joint Needs Assessment points out that, as public
enterprises, the SOEs previously had “no incentives to lower their very high
costs of production.
” - a phrase that usually refers to the cost of paying
employees; therefore, by encouraging privatization as a means to lower
SOEs’ costs and improve efficiency, the Bank is supporting the laying off of
high numbers of workers. Foreign firms investing in SOEs will likely cut costs
by reducing the number of employees, thus perpetuating unemployment in
Iraq.

The Bank admits in the Joint Needs Assessment that privatizing the SOEs
may be extremely damaging to Iraqi society: “The social impact of closing
SOEs, which are over-staffed but currently employ approximately 10 percent
of the workforce, needs to be a key consideration.” Therefore the Bank insists
that it is “focused on preserving employment,” and will require “appropriate
severance packages for workers.
” There is little concrete indication, however,
of a plan for creating sustainable longer-term employment for these workers.

In the pursuit of privatization, the Bank is ignoring the devastating effects of
unemployment in Iraq, which now stands at more than 70 percent. The war-
torn Iraqi economy is unable to absorb the former SOE employees. In
addition, the U.S. has failed to fulfill its promise to employ 250,000 Iraqis,
increasing job insecurity in Iraq. The Bank’s recommendations to privatize
the SOEs and increase unemployment will severely inhibit Iraqi social welfare
and economic security.

The World Bank also endorses the privatization of the national banks and
reform of the banking system. Iraq has two national banks, the Rafidain and
Rasheed Banks. Acting on World Bank advice (according to the Joint Needs
Assessment), the CPA enacted banking laws that aspired to “fully opening
investment in Iraq to international banks and raising requirements on local
banks for higher capital requirements with an intention to reach international
standards.

The CPA’s order Number 40 allows for of 50 percent foreign ownership of
Iraqi banks, which means that foreign investors may be able to dominate the
key banking sector in Iraq. Also, with higher capital requirements, which
could imply a wide range of restrictions such as maintaining a minimum level
of reserves on site or a minimum amount in shareholder equity, local banks
will most likely fail to meet the requirements and be bought up by foreign
investors. Capital flight will also result from foreign ownership of Iraqi banks,
and the much-needed capital will probably not be available to Iraqi citizens. In
the end, the privatization of SOEs and banks reinforces foreign control of the
Iraqi economy.

The World Bank has provided the framework for the U.S., and other favored
countries such as the U.K., to effectively dominate the Iraqi economy and
impede Iraqi economic development, democracy, and local investment. The
World Bank’s powerful position in Iraq will make it the next link in a chain of
countries that have been have been first destroyed by conflict, and then
further ravaged by ”expert” economists and the practitioners of market
fundamentalism. The Bank’s legacy of empty and broken promises virtually
ensures that vulnerable Iraqis will endure more privation and poverty, just as
their counterparts in other post-conflict countries like Sri Lanka and in
“transition” economies like Moldova and Russia have experienced.


Source: 50 years is enough (http://www.50years.org/), September, 2004.

Kathy Hoang