Teams Prepare to Jump-Start Iraq’s Economy

In the Persian Gulf port of Umm al Qasr, where local dockworkers are now being paid in U.S. dollars instead of “Saddam” dinars, the transformation of Iraq’s economy has already begun.

It won’t stop there. An advance team of 13 Treasury Department specialists is about to enter Iraq to gather intelligence about its cloistered economy. In Washington, the World Bank and International Monetary Fund have assigned task forces to lay the groundwork for a wide range of postwar monetary, fiscal and private sector reforms.

The overarching objective is no less ambitious than the war itself: to restore a once-vibrant economy reduced to Third World status by decades of war, sanctions, graft and blunder. Experts say it will take longer -- and probably cost more -- than the U.S.-led military offensive that ended Hussein’s authoritarian regime and its command-and-control economic policies.

Many experts and officials say the place to start is on the street, where the necessities of life are denominated in dinars, about 3,500 to the dollar at last count.

“One of my colleagues from the State Department was asking, ‘What do we do the first month? How do we pay the salaries?’ “said Salah Al-Shaikhly, who ran Iraq’s central bank in the 1970s.

His advice: Show up with stacks of dollars. Ones and fives, nothing bigger. Use them to pay the estimated 1.5 million Iraqis who work for the government and often hold second and third jobs as well. They do most of their daily business in cash and, if that revenue stream is interrupted, what’s left of Iraq’s economy could implode.

“Many salaries are no higher than $5,” said Al-Shaikhly, who teaches economics at St. John’s College in Oxford, England, and has been advising Bush administration officials on postwar reconstruction. “They’ll go to the market and change it [for] dinars, which is a decent month’s salary.”

That’s what has been happening at Umm al Qasr, one of the first sites secured by U.S. and British troops. Locals have been lining up for temporary jobs and receiving their pay in dollar bills. The practice is expected to spread to other sites as the grunt work of reconstruction begins in earnest.

“They definitely need to keep that money flowing,” said Rubar Sandi, an Iraqi American investment banker in Washington who is being sent to Baghdad to help coordinate reconstruction activities.

Doling out dollars is only the first step on the road to economic recovery. Before it’s over, officials say, Iraq will have a new currency, a restructured central bank and Finance Ministry, a reduced debt load, access to foreign aid and investment capital, and inducements to pursue trade liberalization and privatization of state-run industries.

“It isn’t simply recovering from 25 days of conflict,” said U.S. Treasury Secretary John W. Snow. “The task ahead is recovering from 25 years of economic misrule and mismanagement.”

Optimists see an opportunity to turn Iraq into a showpiece of First World economic policy, a place where oil revenue and foreign capital are deployed wisely to revitalize old industries and germinate new ones, from travel and tourism to telecommunications. For a typical Iraqi -- whose annual income was estimated by the World Bank at less than $1,200 in 2001 -- the payoff could take the form of new jobs, better pay, checking accounts, charge cards, home mortgages, cars, computers, cell phones.

“I think Iraq has the potential of becoming probably the most advanced and the wealthiest country in the region,” said Hasan Alkhatib, a computer engineer who fled the nation in 1976 and later founded IP Dynamics, a software firm in San Jose.

Alkhatib said Iraq could revitalize its agricultural production, revive failed industries and create new products and services. Iraq’s archeological riches make it a potential magnet for tourism, he said. Its location makes it a logical transportation hub, and its antiquated telecommunication and information systems are ripe for technological innovation.

“I would give it maybe 20 years,” said Alkhatib, a member of the State Department’s Future of Iraq project. “I’d bet you that Iraq, if it has a democracy, will match the successful European countries in its economy.”

Other administration advisors say they would settle for something approaching the Iraq they knew before Hussein got his hands on the controls in 1979.

“I would work on electricity, water, sewage systems, hospitals, schools and the oil sector,” said Aiham Alsammarae, an electrical power plant consultant in Chicago and another Future of Iraq participant. “Just the essentials.”

Iraq had 9,800 megawatts of generating capacity before the 1991 Persian Gulf War, Alsammarae said. Desert Storm left it with only 380. Hussein has since restored about 4,800 megawatts, he said, but the country would need as much as 14,000 megawatts to match its 1990 capacity, adjusted for population growth.

It’s a daunting task. Iraq’s 24 million people struggle to subsist in an economy based largely on cash, barter and international handouts. The nation is hobbled by high unemployment, poverty, spiraling inflation and rampant corruption. Its middle class has all but disappeared.

The banking system is shaky. At least three currencies are in circulation. Taxes go uncollected, contracts unpaid. Agriculture has withered and other industries have collapsed. There are no official budgets or economic statistics. The national debt is ruinous, and the government depends almost wholly on exports of a single commodity -- petroleum -- subject to wild price swings on world markets.

“This is a very highly distorted economy,” said Jean-Louis Sarbib, the World Bank’s vice president for the Middle East and North Africa. “For all practical purposes, there is no private sector in Iraq. The last mission that visited Iraq reported they had gone down to a barter economy, with people exchanging furniture, family portraits, silverware.”

One of the key missions of the Treasury Department advance team is to gather fresh data about economic conditions in Iraq so officials in Washington can make intelligent decisions about reconstruction. The 13 team members are part of Treasury’s Office of Technical Assistance, which has helped several transitional governments get their financial houses in order.

“They serve as eyes and ears,” said one official, who requested anonymity. “They provide economic intelligence.”

Eventually, the IMF and World Bank will dispatch their own teams to Iraq to coordinate sweeping economic reforms. The issue will be discussed at this weekend’s meetings of the IMF and World Bank steering committees, so the go-ahead could come soon.

Once the U.S. and the international institutions have people in Iraq, they are expected to move quickly on multiple fronts.

Inside Iraq, the immediate tasks include collecting data, paying government salaries, determining the dinar’s value, and establishing U.S. oversight of Iraq’s central bank, Finance Ministry and other key agencies.

At the same time, officials in Washington and perhaps the United Nations are expected to take initial steps to restore oil production, launch public works projects, mobilize donors, seek debt relief, stabilize the currency, cover balance-of-payment shortfalls, provide investment safeguards and help draft a government budget.

The international community is also expected to encourage the new government of Iraq to pursue ambitious longer-term reforms, such as modernizing commercial banking, reforming the tax system, lowering tariffs and other trade restrictions, soliciting foreign investment, pursuing industrial diversification and privatizing government-run industries.

At the street level, the most visible evidence of Iraq’s economic transformation is likely to be the introduction of a new currency to replace the billions of dinars bearing the likeness of the deposed Hussein -- and to displace the U.S. dollar as well.

“Sentimentally, people do not want to see the dollar being used,” said Alkhatib, the Silicon Valley executive. “It will just aggravate the impression that this is an occupation.”