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Rebuilding Iraq


Reforms needed to rebuild Iraqi economy

By Stephen J. Glain, Globe Staff, 4/10/2003


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Middle East
Reforms needed to rebuild Iraq


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WASHINGTON -- The rebuilding of Iraq could invigorate the Arab world's stagnant economies -- considered fertile ground for political instability and fundamentalism -- but without wholesale reform, any new wealth will probably find its way into the region's vast black markets.

Countries such as Egypt, Jordan, Lebanon, Syria, and even oil-rich Saudi Arabia count Iraq as a major trading partner, and removing Saddam Hussein is the first step in a Pentagon-inspired plan to help rebuild Iraq's economy, which was traditionally the heart of the Arab economy.

A retired US Army general, Jay Garner, who heads the rebuilding team, was expected to arrive in Baghdad yesterday, US officials said.

''He'll almost certainly be a signal that we are providing goods and services to those areas that are lacking it,'' Deputy Secretary of State Richard Armitage told reporters.

In the Middle East, economic growth averaged less than a quarter of population growth in the last decade, and radical Islamic groups offer many of the goods and services that states can no longer afford to provide.

During the 1970s and 1980s, when Iraq by some estimates boasted a per-capita income of more than $8,000, the Arab world's fortunes were bright. Some of the region's most capable white-collar workers emigrated to the country and found jobs as engineers and doctors. The wages they wired home became a crucial source of foreign exchange for countries like resource-starved Jordan. More recently, Iraq's per-capita income has fallen to between $500 and $1,000.

While the rehabilitation of Iraq will no doubt energize the region, it alone is unlikely to have a lasting impact. That's because the Arab Middle East has neglected the kinds of financial systems needed to harness the wealth created by economic growth, when it comes.

Among the handful of stock markets in the region, only Egypt's has regular trading. Banks in Egypt, Jordan, and Lebanon are tightly regulated; interest rates are kept chronically high to preempt inflation; and long-term retail loans, such as home mortgages, do not exist. Syria has no private banks at all.

Partly as a result, economists and diplomats say, Arab industry has eroded because of low rates of investment, and its products are generally inferior to rival goods made in Asia and Latin America.

''We failed to tool up,'' said Halim F. Abu-Rahmeh, managing director of the Jordan Trade Association.

Without credible banks to attract savings and capital markets to list and trade equity, economists say, profits earned from the business of reviving Iraq will either be invested outside of the region or used to pay for luxury imports. Economic growth in the Arab Middle East is sustained largely by a black market stoked by a vast smuggling trade, with embargoed Iraq at its core, businessmen in the region say.

''We can say a country like Lebanon grew by 3 percent last year,'' said a World Bank official. ''But it's not for the normal reasons. Construction and tourism sectors may be flat, but the gray economy is large enough to compensate.''

Smuggling has long blighted a regional economy inhibited by tariff and nontariff trade barriers. The value of trade among the world's 22 Arab economies, about 8 percent of its total gross domestic product, is the lowest of any economic bloc in the world.

''Countries in the region trade less with one another than do African countries,'' said Charlene Barshefsky, US trade representative from 1997 to 2001. ''The Middle East has more trade barriers than any other part of the world.''

The UN embargo against Iraq, imposed in response to Hussein's 1990 invasion of Kuwait, accelerated smuggling, which financed luxurious villas and imported vehicles -- despite duties that can run up to half a car's purchase price. Smuggling also fostered a new class of entrepreneurs, called Intiha'ah al Hasar (the ''embargo cats'') in Arabic. Hussein alone is thought to have made an estimated $2 billion from smuggling each year.

Judging by the UN oil-for-food program, under which Baghdad was allowed to sell petroleum for humanitarian goods, there is no shortage of interest among foreign investors in a country with the world's second-largest crude oil reserves and 3 trillion cubic meters of natural gas. The UN program generated billions of dollars each year and, on its own, represented one of the most dynamic of Arab economies.

''Their needs are so vast,'' said a Turkish diplomat in Baghdad. ''They buy cars from Malaysia, and we're selling them pipelines and water systems. We just got edged out by China and Pakistan in a bid to provide housing projects.''

Having neglected their industrial base -- exports account for a relatively small share of Middle East economies, excluding Israel's -- Arab businessmen have little to offer in the rebuilding of Iraq beyond their traditional role as traders and brokers of larger transactions. The result, economists say, could be a rise in the byproducts of underground deals -- like big villas and flashy cars -- and economies still struggling to keep up with population growth.

''It's not fair,'' said George A. Youssef, chairman and managing director of an Egyptian conglomerate called Luna Group. ''Cheap goods flood our market from abroad. There is a lot of construction, but not with foreign capital. It's not the kind of long-term investment we need.''

Stephen J. Glain can be reached at

This story ran on page C5 of the Boston Globe on 4/10/2003.
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