The Magazine

A Foreign Policy Worth Paying For

From the August 18, 2003 issue: But the Bush administration doesn't have a plan for doing so.

Aug 18, 2003, Vol. 8, No. 46 • By IRWIN M. STELZER
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In short: Revenue from the sale of Iraq's oil cannot begin to finance the reconstruction of the country. Bremer, in what may be his ticket out of Baghdad and into the private sector with Lindsey, knows this: "We are going to have to spend a lot more money than we are going to get revenue, even once we get oil production back to prewar levels." Which means that Wolfowitz is either innumerate (unlikely), or is being economical with the truth when he says, "We're dealing with a country that can really finance its own reconstruction, and relatively soon."

And don't look to private foreign investors for money. The major oil companies have announced that they will not venture into the country until security is assured, which suits the state-owned monopoly oil company just fine. Iraq's State Oil Marketing Organization has announced that it has no interest in foreign investment at this time, and will not be interested until entirely new fields are opened for exploration. No surprise: State-run monopolies are notorious for freezing out private-sector players.

Faced with this grim arithmetic, Bremer floated the idea of securitizing future oil revenues by selling bonds with the future revenues to go to the lenders. This appealed mightily to the investment bankers eager for the fees that would result from the sale of these IOUs, and to hawks such as Caspar Weinberger, who announced in Forbes that we need not worry about whether we have the right to assume debts on behalf of the Iraqi people because "defeated countries that have had their regimes changed have no sovereignty."

Analysts at the Pentagon disagreed, pointing out that the securitization plan smacked of "stealing Iraqi oil." So it was shelved, leaving Bremer to rely on a "donors' conference," scheduled to be held in New York in October, and to include many of the countries that have reneged on their pledges to make funds available to Afghanistan.

Meanwhile, any plans to reorganize the Iraqi oil industry to end the state monopoly are on hold. One Pentagon source says the problem of security is absorbing all the energy the administration can muster. So we are likely to be left with the situation that has stunted the economic and political development of other oil-producing nations: Revenues will flow to the state, for use by its bureaucracy, rather than to the Iraqi people. If you want to know how well that works, you need only look to Saudi Arabia and Iran.

So there you have it: a foreign policy that promises enormous long-run benefits, but requires enormous short-term outlays, for most of which the administration has refused to budget.

Those conservatives who are willing to face this problem fall into two classes. Some opt for a U.N. resolution legitimizing the occupation of Iraq, in the hope that France, India, and other countries would then supply troops and funds in support of the nation-building effort. Indeed, the Financial Times reports that our increasingly war-weary and financially stretched British allies are "for the first time talking openly about backing a new United Nations Security Council resolution."

Others view such an appeal to the Security Council as an ignominious surrender to France and the egregious Kofi Annan. The result, they plausibly fear, would be a victory for Annan's massive bureaucracy, and the death of any dreams of a market-oriented, prosperous, democratic Iraq. To this crowd, go it alone is the route to success.

But if we are to call the tune, we have to pay the piper. The buck that stops in Baghdad will have to come from Washington. That's where the administration's foreign policy collides with its domestic policy. To retain control over the course of events in Iraq without sharing authority, the administration must trust that the American people can be persuaded that the costs of our foreign policy are worth bearing, given the likely benefits. It must then proceed to adopt a short-term program to pay for that policy, and a longer-term plan to finance that policy and its domestic initiatives.

Suppose, for example, that the president were to propose a $5 per barrel tax on imported oil, which might raise gasoline prices by about a dime per gallon. Along with a tax that captured the revenue from the inevitable increase in the price of domestically produced oil, such a tax would yield almost $40 billion a year. Not enough to rebuild Iraq, but a good start. Then, sell bonds with the revenues from this tax as backing, and we might just be able to support the rhetoric of the new nation-building policy with some real resources.