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The Bumpy Road to Democracy in Iraq

From the April 5, 2004 issue: It's not easy recovering from generations of despotism.

Apr 5, 2004, Vol. 9, No. 29 • By FRED BARNES
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This summer the Iraqi economy will be on the receiving end of the biggest stimulus in history. Mike Fleischer, an economic adviser and brother of former White House press secretary Ari Fleischer, has made a back-of-the-envelope calculation that money paid to Iraqis annually from the reconstruction budget over the next few years will amount to 6 percent of GDP. That's staggering. A comparable injection of new money in the U.S. economy would be nearly $650 billion a year. The Bush tax cuts pale in comparison.

And the money will enter an Iraqi economy that suddenly is among the freest in the world. Iraq has no tariffs or duties, a flat tax rate of 15 percent, no restrictions on capital investment, few regulations that are being enforced, and a new currency that's actually strengthened since its introduction last December. The only dinars with Saddam's face on them are sold as souvenirs. Of course the economy is still primitive in many ways. All transactions are done in cash. There are no credit cards or ATMs, and no privatization of state-owned companies has taken place.

But a consumer-led surge is underway. Where the money came from nobody knows. The assumption is people hoarded cash instead of depositing it in banks that Saddam might loot. Now they're on a spending spree. Satellite dishes, banned under Saddam, sprout from nearly every roof. A half-million or more used cars have been imported from Jordan, Kuwait, and Turkey. Cell phone use is soaring.

Fleischer likes to take visitors for a tour of the Karrada shopping district across the Tigris River from CPA headquarters in Saddam's Republican Palace. Boxes of refrigerators, TVs, generators, and small appliances are piled in front of stores. Vacant storefronts and bare lots are being turned into retail businesses and new buildings. "Nothing says optimism to me like putting up a new building," says Fleischer. What also says optimism is the return of hundreds, perhaps thousands, of exiles with money and schemes for investing it.

A hot economy could have a significant social and political impact. For one thing, it might ease Iraq's religious and ethnic tensions. For another, it would make the decision to abolish bankrupt nationalized enterprises acceptable because the 500,000 employees could find jobs in the private sector. And growing incomes would allow Iraq's first elected government to begin decontrol of prices. With that last step, Iraq would have a truly modern economy.

At the moment, only half the economy stands to thrive, the Wild West capitalist half. The other half is socialist, not only the so-called SOEs (state-owned enterprises) but the subsidies for food, gas, and electricity. Iraqis pay a pittance for gas and virtually nothing for food and electricity. The economic consequences of this are destructive. It necessitates high taxes, which grabs money that might be put to more productive uses. Bremer, in a rush to lock in reforms before handing sovereignty to Iraqis on June 30, wants to start decontrolling prices this spring.

Block, the Treasury economist, believes the Iraq economy will grow 7 percent to 9 percent a year for the next decade. Were Bremer staying on for the next 10 years as Iraqi viceroy, robust growth could be all but guaranteed. But he will hand over sovereignty to Iraqis on June 30 and be replaced by an American ambassador who won't have his sweeping power and may lack his political skill as well. A massive American presence--100,000 troops and the largest U.S. embassy in the world--will remain, but American influence will begin to dwindle. Before the end of January 2005, a democratically elected government will take office, further eroding U.S. clout.

For the past year, America and its allies have held Iraq together. Bremer's handpicked Iraqi Governing Council was willing to compromise and sacrifice for the common good. The question is whether elected officials will do the same or represent their narrow ethnic, religious, or regional constituencies. I have my doubts. But an American official who's worked closely with Iraqis and whose views I respect differs. "Don't underestimate the sense of Iraqi national pride, despite the strong sectarian identification," he says. "Saddam's equal-opportunity repression has created a sense of community among very disparate factions. Kurds and Shia and even many Sunnis have mass grave and torture chamber victimhood in common....Attend something as seemingly superficial as an Iraqi sports event and you'll see what I mean about national pride."

Should national unity prevail, Iraq's chances of becoming a stable democracy will improve dramatically. I'd like to see one other thing in Iraq, an outbreak of gratitude for the greatest act of benevolence one country has ever done for another. A grateful Iraqi heart would be a sign of a new Iraqi attitude and a signal of sure success.

Fred Barnes is executive editor of The Weekly Standard.