One of many important tasks waiting for the newly established governing council for Iraq is to solve many short and long term economic problems. A new direction must be established for the reconstruction and the future economic and social development. Voices will rise to privatize all publicly owned businesses. Some will even demand to privatize the natural resources including Oil. All these and other topics are legitimate subjects for discussion. In this writing I would like to briefly review the history and the role of government involvement in the Iraq economy. Also, I would like to give my opinion and my recommendations for the future role of the public sector.

Background:

1- When the Soviet Union collapsed in 1991, the new post communist regime rushed to sell out the state owned properties. The selling prices were not determined by market forces. It was handed over at wholesale prices, without public auctions or bidding. That led to the wealth of the nation to be transferred to a band of corrupted individuals from the old regime who took advantage of the transitional period. This caused the rise of the so called "Russian Mafia" and the severe inflation that followed. This was the main reason behind the huge income gap among the people which affected the living standards for millions of Russian people.

2- There are many problems with the way totalitarian regimes manage their economy. When the political system changes, people go to extreme measures and turn the economy around overnight without any preparatory steps for these changes. That is what happened in Russia, and earlier in Egypt after the death of the late Abdul Nasser.

3- The creation of the public sector in Iraq has a different beginning than that of the Soviet Union. In the 1920s, the monarchy established civil institutions in Iraq. The government started by expanding the vital infrastructures, like opening up roads, public transportation, electricity, drinking water, health services, school systems, a higher education system, irrigation, and whatever else was needed at the time.

4- Because it was the sole public enterprise in the country, the new monarchy state became involved in establishing the infrastructures and civil institutions. Before oil became a major part of revenue, the main sources came from collecting land and income taxes.

5- Between 1958 and 1975, the republican regimes continued what was established during the monarchy period. They expanded their control and interfered in large and small scale economic and business activities, not only on the macro level but the micro level as well. In mid 1964 Taher Yahya's government nationalized the majority of large and medium scale private manufacturing, trading and financial companies. Those companies were the most successful entrepreneurships experienced in Iraq. By 1972, the oil industry was nationalized. The government had become the largest business institution in Iraq. The government became the manufacturer, wholesaler and retailer of almost all products, from automobiles to table salt. The system became so inefficient that despite the huge revenue from oil, people could not buy a frozen chicken without long, stressful lines.

6- On the civil society, the government enforced its grip on trade unions, religious establishments, influencing the appointment of tribal leaders, rewriting history, influencing cultures, and redistributing the wealth to serve and to strengthen the regime.

7- During the Iraq-Iran war in the 1980s, a new way of manipulating economic activities in Iraq emerged. Gradually, the emphasis shifted from the state being the sole business manipulator to a new breed of shrewd businessmen led by the core of the family regime, their tribes, their allies, and their collaborators. Included in this new business scheme were the immediate family members of Saddam like his wife Sajeda, and their son, Uday. They worked as partners with the old merchants that already existed in the marketplace. New merchants were also created during the so called "explosive plan" which included a massive wave of construction during the seventies and the eighties. Those projects were of no added value to the economy because they were either for military purposes or to establish glory for the elite family governing Iraq through building statues, palaces, and ambitious military projects throughout Iraq. During this period, the public sector almost vanished and family ran businesses associated with the regime were the dominant players in the marketplace. What had happened in this period is very much similar to what happened in the immediate post Soviet era.

8- Kuwait was occupied by Saddam's forces in the summer of 1990. During the spring of 1991 Kuwait was liberated and the brave uprising against Saddam in Iraq was brutally ended. The United Nations Security Council declared military and economic sanctions against Iraq. Iraqi oil stopped pumping to the international market and the huge revenue from oil exports ceased. Iraq entered a new economic era where the middle classes started suffering and lived as unfortunate poor people. A medical doctor and university professor could not live out of their salaries. The majority of them started having second careers as cab drivers or as street sellers.

9- During the eighties, the Iraqi dinar started loosing value gradually. In the nineties Inflation became unbelievable. The 100 Iraqi dinars received by an average state employee used to be equal to at least $300 in the seventies. After the Gulf War 1500 Iraqi dinars equaled one US dollar today. As the Iraqi currency started loosing value, US dollars entered the open market as a second currency.

10- Because of the sanctions, the Iraqi government could not practice international trade through the normal channels or by the normal procedures. Oil started finding itself being exported through black market brokers. Those brokers found their partners represented by Saddam's family and their inner circle. While Saddam and his followers were busy building their own personal wealth, average Iraqi families bore the suffering of the inflation.

11- The Iraqi market moved from being strictly controlled by government procedures and tight regulations to total chaos and full deregulation. This opened the door to cross border trade with Jordan, Turkey, Iran and UAE ports.

The only positive side effect of this was the rebirth of entrepreneurship in Iraq. All the small merchants in the local marketplace learnt to be sophisticated to earn a living. A lot of them changed merchandise lines as needed, or where the profit could be gained.

Evaluation:

Sooner or later, the governing council and its executive branch must address and answer very important questions about the role and the extension of the private and state run public sectors. There are voices demanding that whatever is left in the public sector run by the government is inefficient and ought to be sold immediately and run by the private sector. This diagnosis may be correct, but the solution would be disastrous for the following reasons:

1- Who has the right to sell the state owned properties? Nobody has the right to do so until a permanent legitimate government is established in Iraq with its own constitution, parliament, and judicial system.

2- Who would be able to buy these properties if they were declared "For Sale" tomorrow? Only the wealthy that can measure the value of these properties would have a chance. Those are the ones who have already established themselves during Saddam's regime. That will be the best farewell gift given by the newcomers to the old regime elements. The Baathists will run the Iraqi economy the way they see fit and maybe they will have the right set up to buy their way back.

3- How and who will determine the selling price for each establishment, land, building, farm, hospital and others. The market forces have not established a beyond crisis economy yet. There is no fair uncorrupted bidding system in charge. Prices will remain unstable for a long time to come.

4- The free market requires many suppliers for each product and service. There are many products and services supplied by only one supplier - that is state owned companies. Privatizing that company will not give the market additional suppliers to compete with.

Let us take the Postal Services and Telecommunications Company in Iraq. Instead of selling it to a private party, the government should encourage, finance and support establishing new telephone companies and new companies for mail and parcels. This will give the market pluralism in supply for that particular service.

5- The future legitimate government in Iraq should decided in step by step procedures the termination of any government involvement in economic and social activities, taking into consideration all results and side effects.

6- In an underdeveloped country like Iraq, economic and social crises are very much tied to each other. The government needs to be the watchdog of economic activities and needs to establish laws and regulations to prevent the creation of a monopoly in any of the vital products or services to the nation, such as establishing a healthy banking system, monetary system, free market conditions, ease import regulations and encourage exports.

7- A few years later, the market will recondition itself from crisis and a bottleneck distribution economy to a free market, where prices are determined by supply and demand. Then and only then, the legitimate government can put unneeded public properties for sale to the public.

8- The reinvention of economic and social interaction cannot be influenced by only one model, like the United States of America. There are many models based on a free market economy with the implementation of social justice, such as the models of UK, France, Sweden, Western Europe and Japan.

Conclusion and recommendations:

The previous regime abused its power and interfered in the daily lives of Iraqi citizens. This has to be ended by a new era of policies to open up the economy that encourages small businesses, manufacturers, private farmers, merchants, traders, and import-export activities. Helping and promoting healthy activities of small businesses will be essential in promoting a free market economy, based on competition, supply and demand, and managing the economy without crisis.

The State will remain in control of major economic revenues, like the oil industry. This will make funds available to spend for the reconstruction of the nation through building the infrastructure, managing the most important and vital civil services (like the education sector, health sector, public transportation, water, irrigation, and major state manufacturing complexes). This public sector will be accountable to the legitimate Iraqi law makers.

The State should investigate all the major state owned properties sold during the last twenty years. It should point out those transactions that were carried out in improper ways with prices under market value at time of sale. The State should have the right to repurchase those properties at the same value as they were sold. These properties include state land, state buildings, state equipments, state firms, state crude oil, and state contracts.

The State may remain a participant in economic activities, not as a sole monopoly for that product or service but as a competitor with the private sector to balance and relieve to prevent crisis.

The private sector should be allowed to compete with the public sector's main activities, such as public transportation, postal services, heath, education and telephone services, etc.

Crude oil business should not be disturbed and remain under state control. Crude oil is considered as valuable as a third river to Iraq and is vital to rebuild it. Oil refinery business and petrochemical industries could be very well opened to the private sector to improve the supply for oil products such as propane, petrol and others.

The theme will be a healthy and aggressive competition between state run enterprises and private businesses managed by small companies. Gradually, this would give way for the private sector to lead the way.

The marketplace will keep the profitable, efficient, socially responsible businesses and will flush out any companies that are public or private with disappointing activities and results.

A lot of incentives have to be offered to the small businesses and a good regulation has to be established to protect the society from any corporate abuse. This requires a balance of regulations and laws to motivate business on one hand, and to prevent corporate abuse on the other.

Coinciding with that, the social security and pension system must be revised so the new market condition will not make life for the elderly, retirees, and state employees harder. Also, unemployment benefits and rehabilitation programs must be expanded to give opportunity to all Iraqis to live with dignity.

Encourage the independence of civil institutions from bureaucracy.

Support the establishment and growth of non profit and non political groups.

Free markets cannot be true tools for social progress and human justice unless they coexist with and within a politically free society, freedom of speech, freedom of assembly, freedom of forming political parties, unions, associations and freedom of press.

Final note: "The sell out of state owned properties must be delayed until permitted by freely elected representatives governing Iraq."