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Iraq: The economic record

Print edition : Apr 09, 2004 T+T-

There are few signs of a return to normalcy in Iraq a year after the occupation began, no evidence of reconstruction of a devastated economy, and no hope that the rise in the U.S. budget deficit will reverse with an end to the war.

A YEAR after the United States-led occupation of Iraq, few will deny that it has been a humanitarian and political disaster. Nor can there be any doubt left in sensible minds that the effort to justify the occupation on political grounds was completely misplaced. Weapons of mass destruction waiting to be deployed do not disappear into thin air; and a people ostensibly waiting to embrace foreign troops intent on liberating them do not seek out every opportunity to bomb the occupiers and their collaborators. Many lives and much wealth have been destroyed, it is now amply clear, with no purpose served.

But there is a view that such explanations for the war in Iraq are for the faint-hearted. In the era of the new imperialism, it is argued, wars fought in the name of freedom are merely means to advance the economic agenda of the developed world. The U.S. chose to attack Iraq in order to reshape the political geography of West Asia, which is home to a disproportionate share of what is still one of the world's most valuable resources - oil. If nationalist (read recalcitrant) governments there are unwilling to pump out oil into world markets at prices that keep that resource cheap, military intervention on the part of the US is unavoidable to keep inflation down and the dollar up. What is more, the occupation must be financed and economic stability restored, by using resources garnered from the sale of Iraq's own oil supplies.

Paul Wolfowitz, U.S. Deputy Defence Secretary, is reported to have told the House of Representatives Appropriations Committee as far back as end-March last year: "There's a lot of money to pay for this that doesn't have to be U.S. taxpayer money, and it starts with the assets of the Iraqi people. On a rough recollection, the oil revenues of that country could bring between $50 billion and $100 billion over the course of the next two or three years." With the cost of the occupation during the most intense period of the war placed at around $4 billion a month, those sums would have been more than enough to finance the misadventure. The case was clear. While the U.S. government was working overtime to convince the world that the war was about freedom and not oil, calculations were being made to assure the U.S. people that they would not be called upon to pay for the price for freedom elsewhere in the world.

As has been true of all the arguments advanced by the U.S. government to justify its occupation, this one too has proved to be completely wrong. The U.S. today is not only providing more than 80 per cent of the foreign troops in Iraq, it is being forced to put out more than 90 per cent of the money involved, in a desperate bid to legitimise the occupation. The failure to restore damaged oil facilities and the attacks on oil installations by the resistance to the war have meant that production has limped back to just 2.2 million barrels a day, which was the average level it had reached in 2002. Yet, the President's Office of Management and Budget recently reported to the U.S. Congress that oil revenues, which touched $3.9 billion in 2003, would rise to $13 billion this year. The point to note is that even this optimistic estimate, which is more than unlikely to be realised, will not cover the operating costs of the Iraqi government, estimated at $15.6 billion for 2004.

Further, there are two sets of costs that these figures do not include. First, the costs of the American occupation, which has now extended well beyond that of the brief intervention that was expected to oust Saddam Hussein and restore normalcy in Iraq. There are two ways in which the increasingly opaque allocations to the Iraq war reflect themselves. One is through a burgeoning official defence budget, which stood at $375.3 billion in 2003 and is estimated to be $401.7 billion in 2004. A significant part of this increase is due to a rise in the operations and maintenance budget, from $128 billion to $141 billion, principally on account of the Iraq misadventure. The other is through special "supplemental" appropriations for Iraq and Afghanistan, amounting to $84.7 billion last year and expected to be around $50 billion at the minimum this year.

With such huge amounts being set aside for its wars against "terrorism" or for "freedom", it should be clear that little money is available to finance the costs of reconstructing a badly damaged nation and economy. Faced with inadequate oil revenues to finance a reconstruction that would win Iraqi hearts, the U.S. government has set aside a measly $18.6 billion for Iraq's reconstruction. This compares with independent estimates that have placed the maximum required for reconstruction at up to $120 billion over the next several years. Not surprisingly, by all accounts, there has been virtually no reconstruction in the country because of the persistence of hostilities and the delay in handing over power to a legitimate government in Iraq.

What is more, there are two kinds of leakages from the relatively smaller-than-required sums set aside for reconstruction. The first are the leakages on account of security considerations. Admiral David Nash, administrator of the U.S.' $18.6 billion reconstruction fund in Iraq, admitted recently that security risks had led to higher insurance and security costs, and were eroding the $18.6 billion that the U.S. Congress had appropriated for reconstruction. Insurance costs for companies choosing to benefit from the lucrative contracts being handed out in Iraq are placed at as much as 25 per cent of total costs. That will hardly make the little money allocated for reconstruction go a long way.

The second kind of leakage is, of course, straightforward corruption. The Halliburton scandal, involving the company earlier headed by U.S. Vice-President Dick Cheney, gets murkier by the day. Over the last year, the company was awarded a series of contracts without competition to service the occupation and reconstruct the Iraqi oil industry. In December last year, Pentagon auditors argued that Kellogg Brown & Root (KBR), a subsidiary of the company, had overcharged the government by about $61 million for fuel imports till September. Quickly, however, the Army Corps of Engineers that manages the contract exonerated the firm, claiming that it had supplied fuel from Kuwait at a "fair and reasonable price", and blaming the higher fuel import prices on Kuwaiti Petroleum - saying it had forced KBR to buy from a sole supplier, Altanmia Commercial Marketing.

While the Pentagon's auditors are still pressing their demand for an inquiry by the department's Inspector General, other instances of actual or possible malpractice have surfaced. In mid-January, Halliburton informed the Pentagon Inspector General that the same KBR subsidiary overcharged the U.S. government by $6 million on a contract to supply U.S. troops. It attributed this to the following fact: "Perhaps two former KBR employees may have accepted improper payments from a Kuwaiti subcontractor as part of the potential $6 million overcharge." Claiming that it was reporting the matter on discovery of the irregularity, the company returned $6.3 million to the government (a 10th of the excess profit it earned on the oil import deal investigated by the Pentagon auditors), and dismissed the employees concerned. What is shocking, however, is that a day after the second irregularity was reported, the Army Corps of Engineers awarded the company another contract worth $1.2 billion to rebuild southern Iraq's oil industry.

In sum, while there are few signs of a return to normalcy in Iraq a year after the occupation began, no evidence of reconstruction of a devastated economy, and no hope that the rise in the U.S. budget deficit will reverse with an end to the war, there are many signs that a few companies that function virtually out of the White House are making large profits.

In a desperate bid to shift attention away from the corruption of the U.S. administration and its allies, attempts are once again being made to focus on Saddam's wrongdoings and the support he received from those who refused to be U.S. allies. In early February, Iraq's Governing Council launched an investigation into allegations in the Iraqi press that senior officials and organisations from around the world had received crude oil in return for political support for Saddam Hussein's regime at the time of the oil-for-food programme. Leading the charge is Ahmad Chalabi, who was responsible for fuelling the faulty and baseless intelligence reports on weapons of mass destruction in Iraq.

Since the United Nations was charged with managing the food-for-work programme which, according to the allegations, yielded illegitimate benefits for 270 persons from more than 40 countries, U.N. Secretary-General Kofi Annan has been forced to demand the evidence on the basis of which the allegations are being made. Little is likely to come out of this controversy, which includes a whitewashing of the growing evidence of corrupt collaboration between U.S. industry and sections of the U.S. administration.

THERE is a larger story behind these developments. One of the puzzles of U.S. economic growth in recent times is a combination of a robust recovery with no jobs. While gross domestic product (GDP) growth has been in excess of 4 per cent, unemployment still stands at an uncomfortable 5.6 per cent. On an annualised basis, the 21,000 jobs created in February 2004 amounted to less than 10 per cent of the 2.6 million jobs the Bush administration has promised to generate in this year. The cause for the recovery is quite clear: a massive rise in government spending fuelled by the occupation of Iraq, which has taken the U.S. budget deficit to 5.1 per cent of GDP. However, the direct relationship between deficit spending, growth and employment seems to have been broken. The reasons are not difficult to find. It is not just that increased U.S. domestic demand results in larger imports than greater domestic production, resulting in a more-than $550 billion annual trade deficit. Since a significant chunk of the deficit spending of the U.S. government goes out to finance wars, the demand generated by such spending results in sales for and employment in the operations of U.S. firms abroad, often at inflated prices. While this may boost corporate profits and national income at home, it does not create jobs domestically. The U.S. government has lost not only the battle to alter the political geography of world oil supplies, and failed to keep oil prices down, but also the ability to retain the benefits of its own spending. Bad news, that, in an election year.