Iraq's next shock will be shock therapy
Just read a good article by Joseph Stiglitz, Iraq's next shock will be shock therapy.
"When the Berlin Wall fell, the countries of Eastern Europe and the former
Soviet Union began transitions to a market economy, with heated debates over
how this should be accomplished. One choice was shock therapy - quick
privatization of state-owned assets and abrupt liberalization of trade,
prices, and capital flows - while the other was gradual market
liberalization to allow for the rule of law to be established at the same
time.
For Iraq this was no choice - these polices were forced on Iraq by US viceroy Paul Bremer in his infamous executive Order 39 (19/9/03).
Today, there is a broad consensus that shock therapy, at least at the level
of microeconomic reforms, failed, and that countries (Hungary, Poland, and
Slovenia) that took the gradualist approach to privatization and the
reconstruction of institutional infrastructure managed their transitions far
better than those that tried to leapfrog into a laissez-faire economy.
Shock-therapy countries saw incomes plunge and poverty soar. Social
indicators, such as life expectancy, mirrored the dismal GDP numbers. More
than a decade after the beginning of the transition, many postcommunist
countries have not even returned to pre-transition income levels. Worse, the
prognosis for establishing a stable democracy and the rule of law in most
shock-therapy countries looks bleak.
This record suggests that one should think twice before trying shock therapy
again. But the Bush administration, backed by a few handpicked Iraqis, is
pushing Iraq towards an even more radical form of shock therapy than was
pursued in the former Soviet world. Indeed, shock therapy's advocates argue
that its failures were due not to excessive speed - too much shock and not
enough therapy - but to insufficient shock. So Iraqis better prepare for an
even more brutal dose.
Stiglitz makes some worthwhile comparisons between Iraq and Russia - natural resources are a key component of the economies of both countries, and that both economies were in a weakened state prior to the imposition of 'shock therapy'. However I think Stiglitz is wrong when he characterises Russia's highly educated labour force as the key difference. While Iraq is a 'developing country', prior to the devastating effects of the first Gulf War and cruel economic sanctions, Iraq was also a highly educated country - especially in the context of the Middle East.
This is one reason I question New Zealand's benevolence in sending a team of army engineers to Iraq to 'help with the reconstruction' - the fact is that Iraq already has its own engineers but Iraqis are finding few jobs as reconstruction contracts are outsourced to foreigners. Iraqi doctors, teachers, engineers and other highly skilled workers in the Iraqi state sector are still waiting for their pay, if they have not been made redundant. Many have had to take second jobs such as driving taxis, where tips in US dollars help them feed their families.
"When the Berlin Wall fell, the countries of Eastern Europe and the former
Soviet Union began transitions to a market economy, with heated debates over
how this should be accomplished. One choice was shock therapy - quick
privatization of state-owned assets and abrupt liberalization of trade,
prices, and capital flows - while the other was gradual market
liberalization to allow for the rule of law to be established at the same
time.
For Iraq this was no choice - these polices were forced on Iraq by US viceroy Paul Bremer in his infamous executive Order 39 (19/9/03).
Today, there is a broad consensus that shock therapy, at least at the level
of microeconomic reforms, failed, and that countries (Hungary, Poland, and
Slovenia) that took the gradualist approach to privatization and the
reconstruction of institutional infrastructure managed their transitions far
better than those that tried to leapfrog into a laissez-faire economy.
Shock-therapy countries saw incomes plunge and poverty soar. Social
indicators, such as life expectancy, mirrored the dismal GDP numbers. More
than a decade after the beginning of the transition, many postcommunist
countries have not even returned to pre-transition income levels. Worse, the
prognosis for establishing a stable democracy and the rule of law in most
shock-therapy countries looks bleak.
This record suggests that one should think twice before trying shock therapy
again. But the Bush administration, backed by a few handpicked Iraqis, is
pushing Iraq towards an even more radical form of shock therapy than was
pursued in the former Soviet world. Indeed, shock therapy's advocates argue
that its failures were due not to excessive speed - too much shock and not
enough therapy - but to insufficient shock. So Iraqis better prepare for an
even more brutal dose.
Stiglitz makes some worthwhile comparisons between Iraq and Russia - natural resources are a key component of the economies of both countries, and that both economies were in a weakened state prior to the imposition of 'shock therapy'. However I think Stiglitz is wrong when he characterises Russia's highly educated labour force as the key difference. While Iraq is a 'developing country', prior to the devastating effects of the first Gulf War and cruel economic sanctions, Iraq was also a highly educated country - especially in the context of the Middle East.
This is one reason I question New Zealand's benevolence in sending a team of army engineers to Iraq to 'help with the reconstruction' - the fact is that Iraq already has its own engineers but Iraqis are finding few jobs as reconstruction contracts are outsourced to foreigners. Iraqi doctors, teachers, engineers and other highly skilled workers in the Iraqi state sector are still waiting for their pay, if they have not been made redundant. Many have had to take second jobs such as driving taxis, where tips in US dollars help them feed their families.