We are being bogged down in Iraq by adhering to the socialist/monarchist economy we inherited from the Hussein government.  The rising heights of the economy were owned by the government and/or the Hussein clique.

The  transitional solution to rebuilding the Iraqi economy is to allow the socialist economy to whither over three years while a free enterprise system grows to replace the socialist sector.

 

Under Hussein there was no economic incentive to expand the refineries, hospitals and power stations.  The people expected subsidized prices for bread, power and water.  They didn't complain when there were the inevitable shortages.

 

A large portion of the gasoline produced by the Basra refinery was systematically smuggled out of the country for Hussein revenue.  It still is being smuggled, but the intermediates now get the revenue.  The people suffer the shortages -- but now they complain.

 

Here is the solution:

1.  Continue with a portion of the output of necessities (gasoline, power, bread, etc.) going at subsidized prices.  This will serve the poor.  They will have to wait in long lines, that is what happens when prices are subsidized.

2.  Allow an increasing portion of the output to go at market prices.  The rich and the middle class will prefer not to wait in lines and will pay the premium prices. 

    If the gasoline and electric power and bread goes at market prices the output will not be smuggled out of the country.  Market prices will match the demand for smuggled goods but will not require transportation costs so will the output stay home.

3.  Take the excess profits and invest in repairing the refineries, the power plants and the bakeries, etc.

4.  As the infrastructure comes on stream the supply will push down market prices and more output can be shifted to the free market.

 

The Russian experience shows that a sudden shift to a complete free market causes chaos.  A gradual shift to a free market might take 18 months to 36 months.  Meanwhile the Iraqis pay for the replacement and updating of infrastructure and the power elites don't feel shortages and blame the US.

There is plenty of money in Iraq.  People are buying TV dishes.  There are cars driving everywhere.  There is an economy in Iraq.  Businesses and individuals can be taxed to pay for infrastructure and police.  

 

Clifford Lazar
Lazar Developments

8/29/03