Market Economy Is Best Hope for Prosperity in Iraq

Property rights are vital in rebuilding

Two key conditions fostered terrorism out of Iraq. A shattered, centralized economy deprived Iraqis of any hope of bettering their lives and gave them little hope of even holding on to what little they had. And in control of that economy was a ruthless tyrant who fomented hatred among Iraqis, working day and night to convince them that it wasn’t his control of the economy and his grand palaces that were to blame for their poor prospects, but the rather the evil United States working to snatch even the crust of bread from their children’s hands.

Military operations have solved the second problem. But the first problem, the problem of creating an economy that provides real prospects for Iraqis so that desperation does not make them patsies for tyrants, is one that will require more patience, more finesse, and is even more vulnerable to political ploys than were military options.

From creating a functioning money and banking system to passing budgets for the new government that live within realistic means, the economic challenges of building a new Iraq that is reasonably democratic and with a market based economy is a daunting task, and one that in many ways we are just beginning to examine as the Treasury Department experts grapple with what to do about currency in Iraq.

But markets and a market economy, the real source of prosperity and hope for the Iraqis, rely on some basic institutions. On the political side, we are going to have to help Iraq establish a meaningful rule of law that can control abuses of power and enforce contracts, and also help them to establish a system of property rights so that people can meaningfully use what they own and use what they earn. But in the aftermath of Hussein’s rule ownership of much of the assets in Iraq is unclear and U.S. officials and anyone expected to be part of the new Iraqi government are already being pressed with claims from those seeking to regain property taken from them over recent decades.

Hernando De Soto, in The Mystery of Capital, brilliantly exposed how someone who owns something as simple as a small house or old car has capital he can use to borrow against to start a business, send a kid to school, or in some way improve his families prospect. That is, if there are property rights such that his ownership of the property is clear and someone will lend him money with the property as collateral. If he only owns it because he is there and no one has taken it from him yet, he is not likely to be able to borrow against it. But such simple micro loans are a key engine of entrepreneurship and economic growth.

Creating property rights is no simple task. Some reasonable and fair process of assigning or allocating rights has to be established. No such process will be perfect, but rather will be contentious and painful, but it has to be done, there is no substitute. Nor does it have to be perfect. Nobel-prize winning economist Ronald Coase taught us long ago that most of the battle is just getting property rights in place, that is where most of the economic benefit is achieved. The trades people undertake once rights are in place takes care of finding the best allocations, and working hard to make the process fair is worthwhile but only incrementally adds to the overall economic benefits of property rights.

Fixing Iraq’s property rights is a big task for the coalition, but one that they must undertake if the military steps we have taken are to be meaningful. A fundamental economic lesson of the last 50 years is that an economy can get a lot of things right, but if property rights are not real, the whole things collapses like a house of cards.

The first, boldest, and most important step for the coalition is to create three teams or task forces: one to sort out and establish ownership title for homes and farms, one to sort out ownership of businesses and commercial property, and a third to manage the shift of Iraq’s oil fields from the government to people.

In doing so, the coalition will need to tap the wealth of experience in agrarian land reform and mass share privatizations, experiences with both success and failure. Homes and farms cannot be handed out on a political basis-history and local knowledge and norms have to be the basis. Every Iraqi should have shares in the nation’s oil resources, and while they have to be transferable, efforts must be made to help people understand the long-term value of the shares as well as their short-term cash potential. The best results in each of these areas from similar efforts in Eastern Europe and Latin America must be the guide. Iraq is one case where getting property rights straight is vital, or it may well fall back into a breeding ground for terrorism.

Adrian Moore is Vice President of Reason Foundation.