Pat Lynch
At a conference on economics and social processes that I attended this past weekend, Vernon Smith, raised an issue that has bugged me quite a bit since we began our invasion of Iraq. Why has this administration said so little publicly about the development of capitalism, not merely democracy, in Iraq? Vernon said that it’s probably because we don’t know how to “build” a market, and certainly Hayek and other Austrians would agree.
The U.S. government has given U.S. companies a chance to cash in on the invasion. USAid is coordinating a massive handout to U.S. companies that are trying to rebuild basic Iraqi infrastructure. The Commerce Department has a rather silly sight on how to do business in Iraq. From it’s FAQ section I quote the opening line to the question “What Business Opportunities are in Iraq?”
“There are many business opportunities in Iraq. The leading business opportunities are through (1) U.S. reconstruction contracts and subcontracts, (2) contracts with Iraqi Ministries, (3) private sector opportunities, and (4) contracts with the United Nations (?UN?) and international organizations.”
So basically there’s no interest, at least at Commerce, in doing private business. It looks like the model of capitalism we have in mind is that you can get hand outs from the U.S. government directly, indirectly, or through the UN and NGO’s. Sounds like a great way to maintain the enormous nanny state that Saddam had in place. I can’t wait until we stop sending the money just to see how the Iraqis deal with that.
I recommend this as a starting point – the report from the Copenhagen Consensus Group assembled by Bjorn Lomborg. They provide an interesting plan to handle the major economic, political, and social problems faced in the developing world. Among the economic recommendations are free trade, immigration openness, ending agricultural subsidies and political stability.
I’d say that indirectly the Iraqi regime has probably got one of those things right – free trade. The rest of it is problematic at best. It’s certainly tough to expect a newly formed government to follow a collection of progressive development policies, especially with the pressure from USAid to spend resources with U.S. firms on big projects. But I hope we start to hear a bit more about promoting markets, not merely aid, in Iraq. If we don’t then I’m not sure that establishing democracy is going to change anything in the region or get us out of there in my lifetime.
On the other hand, this is a great way for the US to pump public funds into US companies without causing a lot of fuss either through public outcry or triggering some sort of trade dispute (say in the WTO). There’s not a lot of incentive to go the market route for someone in control of a lot of public funds. Frankly, I think it’s not a matter of whether whoever is managed the “privitization” of Iraq knows how to create a market or not, it is rather whether they care enough to bother trying in the first place.
There seems to be a great deal of difficulty in actually setting up markets via political means. For example, Russia’s privitization efforts in the early 90’s were marked by remarkable corruption and the creation of the oligarchs. Much of that was assisted by developed countries who I gather turned a blind eye to the proceedings. Or we can consider the often discussed California deregulation mess in the electricy market.
I would think that we should have learned by this time that the best thing government can do with regard to the establishment of markets is to stay out of the way and watch what happens.
Governments don’t create markets; they either allow them to develop and flourish or they impede their development in a variety of ways.
Government has demonstrated its inability to establish markets, as well as its inability to “manage” markets, in a variety of different situations.
The California energy “market” is an interesting case in point. A “managed” market was not functioning well. The “managed” market was partially restructured and partially re-regulated, under the banner of “deregulation”. The new “managers” did not understand the concept of a market as well as many of the market participants. The “managers” and their “market” were gamed by market participants; and, they came to understand very late that they were being gamed and reacted ineffectively to the gaming.
I do not see what immigration openness has to do with helping the Third World development. First World immigration openness is brain draining a bunch of countries of the limited number of talented people they have.
The Third World doesn’t need immigration openness because the brains do not want to migrate there.
Immigration openness in Europe is leading to Islamization. This is helping Israel recruit Jews from France. So Israel sorta benefits. But even Israel is receiving a net harm as the Arab populations in Europe pressure the European countries to be more hostile toward Israel.
I really wish economists were more realistic about human nature.
Ed Reid, Governments just have to stay out of the way? Governments are absolutely needed to enforce contracts to allow larger scale markets and longer term investments. But a lack of a belief in rule of law prevents that from happening. Government regulators, prosecutors, and judges serve their masters and not the market. Economists ought to try to come up with solutions to that problem.