A country in ruin but rich in resources looks to rebirth

The Star-Ledger, April 17th, 2003

The Star-Ledger Archive COPYRIGHT © The Star-Ledger 2003

Date: 2003/04/17 Thursday Page: 001 Section: NEWS Edition: FINAL Size: 2075 words

Series: SHOWDOWN WITH SADDAM | THE POSTWAR

By SAM ALI STAR-LEDGER STAFF

THE REBUILDING

In scarcely three weeks, U.S. and British forces blitzed Iraq, los- ing fewer soldiers than the 243 Marines killed by a single suicide bomber in West Beirut in 1983.

Now, some argue, comes the hard part - putting all the broken pieces back together again.

Three decades of Ba'ath Party rule have transformed Iraq from one of the richest nations on earth - a country blessed with proven reserves of 120 billion barrels of black gold - to a poorhouse where 60 percent of the population is dependent on humanitarian food aid.

Debilitating wars against Iran and Kuwait, 12 years of United Nations sanctions and the devastation of the latest American-led military campaign have left Iraq's economy in shambles and reduced the country's per- capita gross domestic product from more than $9,000 in 1979, according to some estimates, to less than $700 today.

Still, planners and economists say they are optimistic about the long-term prospects for Iraq, suggesting that the country once again will emerge as an oasis of peace and economic prosperity. Iraq is simply too strategically and politically important to fail.

"The destruction of the Saddam Hussein regime is a defining moment in the history of the Middle East," said Matein Khalid, general manager of Dubai International Securities Investment and a frequent contributor to the Khaleej Times, Dubai's only English-speaking newspaper. "Iraq could well prove the catalyst of a new economic dawn in the Arab world."

But the challenges of getting from here to there are enormous, including a battered infrastructure and billions of dollars of debt. The question is, where to begin?

Saddam Hussein's regime was so secretive that official government statistics are largely unavailable. Outside Iraq, the usual repositories of economic data, like the World Bank or the International Monetary Fund, have scant knowledge of what has been going on inside the country since the 1980s.

Adding to the knowledge vacuum: Iraq's Ministry of Planning, a capsule of economic statistics, was bombed and burned in recent weeks.

"There has been very little data we have been able to get out of Iraq for a long time now - 20 years - so it's kind of hard to get a sense of the economy," said Nariman Behravesh, chief economist and executive managing director for Insight, a leading economic research firm based in Washington.

While many private economists liken the job of rebuilding Iraq's economy to piecing a puzzle together in the dark, Behravesh does not believe it's an insurmountable task.

"We're fairly upbeat about the medium- to long-term prospects for Iraq," Behravesh said. "There are plenty of countries that have rebounded after nasty wars."

And many of those economies - South Korea, for one - didn't have the luxury of sitting on a veritable lake of oil, he said.

Within the next few months, the oil sector could easily be up and running and generating revenues of $10 billion to $20 billion a year, he said.

"This is no Afghanistan, which has little in the way of natural resources," he said.

Indeed, months before the first Tomahawk cruise missile attack on Saddam's secret bunker in Baghdad on March 20, the U.S. State Department was busy creating a blueprint for Iraq's economic and political future.

The project, dubbed Future of Iraq, consists of more than 15 working groups and comprises government officials and Iraqi opposition leaders and exiles, who have been huddling for the past 10 months, laying out plans for transforming a post-Saddam Iraq into a Western-style, market-driven economy.

John Sfakianakis, a research fellow at Harvard University's Center for Middle Eastern Studies, likens the Future of Iraq project to a real-life "Sim City," the popular computer simulation game that hands players a virtual wad of cash and asks them to build a complete city from scratch.

A BLANK SLATE It's an apt metaphor because Iraq, noted for the wealth of its oil reserves, agricultural potential, fresh water resources and relatively high skill and literacy rates, has been reduced to a blank slate, said Rubar S. Sandi, a banker and founder of the Washington-based U.S.-Iraq Business Council.

"It doesn't get much better than this," said Sandi, who fled Kurdish Iraq 29 years ago. "Right now, it's a clean sheet, so you have to start the reforms from the beginning."

Ten months ago, Sandi was tapped by the State Department to sit on its Economic and Infrastructure Working Group in charge of revamping Iraq's banking and currency systems, which are both in shambles.

Consider the case of the Iraqi dinar, which has plummeted in value to 3,000 against the American dollar. To put the decline in perspective, the official exchange rate for a single Iraqi dinar was equal to $3.20 as recently as 1982.

Sandi said the only way to attract foreign investment is to put a credible banking and judicial system in place.

While the United States has not laid out its plans for Iraq's economy or currency yet, Sandi has proposed creating a new dinar featuring pictures of Iraqi poets, artists and historic sites and pegging its value to the U.S. dollar. After the war in Afghanistan, the United States urged the new government to use the dollar as an interim currency, but the Afghanis adopted their own.

NEW CURRENCY The dinar that circulates in most of Iraq currently has Saddam's face plastered all over it.

"We can trace all the problems Iraq faced to one man, and he's gone," Sandi said. "Given a chance and some stability, Iraq will come back and it will be a model for the Middle East and the rest of the world."

One thing is clear: It will take years to undo the mess Saddam's regime has created. Iraq's economic death spiral is a poignant and tragic tale of greed, corruption and mismanagement.

While Saddam lavished money on his generals and secret police and squandered billions on palaces and arms-shopping sprees, every social and economic institution in Iraq has been systematically degraded, if not destroyed.

In 1979, GDP peaked at $54 billion. Today, that figure has declined by more than half to $25 billion, according to Behravesh of the Insight research firm.

The precipitous drop in economic output and growth tells just part of the story. That's because the GDP in 1979 had to support only 12.6 million people; in 2003, it has to support a population that has nearly doubled to 24.6 million, according to U.S. Census data.

According to the Kuwaiti-based Arab Fund for Economic Development, Saddam's rule since 1979 has cost Iraq no less than $500 billion.

"While Iraqis starved and their children died under U.N. sanctions, Saddam has built almost 50 lavish palaces since Desert Storm, an example of the most callous private extravagance amid public misery by a dictator since the Roman emperor Nero," said Khalid, of Dubai International Securities Investment.

Economists at the IMF in Washington estimate that Saddam spent no less than 50 percent of all Iraqi oil revenues on himself and his henchmen.

The daunting task of rebuilding Iraq from the ground up - fixing roads, communications, electricity and water supplies and other essential infrastructure - will cost billions of dollars. Estimates range from $20 billion a year, according to the Council on Foreign Relations, to $605 billion over a decade, according to Yale University economist William Nordhaus.

Compounding the problem: Iraq is saddled with a crushing debt load that could top $400 billion, according to the Council on Foreign Relations report titled "Iraq: The Day After."

FORGIVING DEBT How much of that figure might be forgiven, including foreign debt and war reparations, is still up in the air. But private economists and planners say the United States is pressuring some of its allies, including Germany, France and Russia, to move in that direction.

"It is in the interest of the world to have a prosperous and stable Iraq," Sandi said.

In any case, the involvement of international financial organizations is expected to play an important role. A U.N. endorsement of the United States' reconstruction plan would pave the way for the World Bank and the International Monetary Fund to start programs to aid Iraq's economy - including new loans and debt forgiveness.

At the moment, however, the role of the United Nations is still murky - and, as a result, the IMF and World Bank are sitting on the sidelines. As Horst Kohler, the IMF's managing director, said at a news conference in Washington on Saturday, it is still "premature" to discuss Iraq's debt burden or its long-term financial needs.

BLACK GOLD The White House is counting on oil - which at one time comprised 95 percent of Iraq's foreign exchange earnings - to fund much of the reconstruction. So far, the oil fields have been largely unhurt by the war, unlike the 1991 Persian Gulf conflict

Iraq's proven reserves of 120 billion barrels of crude oil are the largest in the world outside Saudi Arabia. Iraq contains oil that is accessible and easy to extract, hence very marketable and attractive. At current production levels - nearly 3 million barrels a day - Iraq's oil reserves would last some 128 years, according to 2001 data from British Petroleum.

"You can't overestimate the importance of oil to this economy," Behravesh said. "It will play a big role in Iraq's reconstruction."

But Iraq also has a number of other aces up its sleeve, he said.

For example, it is rich in agricultural resources, thanks to fertile lowlands in the river basins of the Euphrates and Tigris.

"Remember the Hanging Gardens of Babylon," said Behravesh. "One of the things Iraq has that none of it neighboring gulf states has is fresh water." Behravesh estimates Iraq can generate $2 billion to $3 billion a year in agricultural exports.

Although the sector has been decimated, and food and agricultural production has declined by 40 percent since 1990, the potential is clearly there, experts said. For example, during the 1970s, Iraq was the largest supplier of dates, supplying 80 percent of the international market's needs, according to Harvard's Sfakianakis.

Tourism presents another potential revenue stream, despite the destruction of Iraq's archeological museum and artifacts in the current conflict.

Iraq is home to two of the holiest shrines for the world's nearly 120 million Muslim Shi'as, located in Najaf and Karbala.

Najaf, whose name in Arabic means "a high land," is the burial place of Imam Ali Ibn Abu Talib, the Prophet Muhammad's cousin and son-in-law and the Shi'as' most revered saint. And Karbala is the burial place of Imam Hussein, Ali's son, whose death is memorialized by Shi'as every year.

"These two sites could very well become the Mecca of the Shi'a community, and Iraq could see a significant flow of pilgrims, and they will bring a fair amount of money with them," Behravesh said.

GREAT POSSIBILITIES For many Iraqi exiles, the possibilities for Iraq's economic renaissance seem endless.

Ahmed al-Hayderi, founder of Canadian-based Iraqi Forum for Democracy, who fled Iraq in 1980, said he was recently struck by images on television of Iraqi civilians standing alongside coalition forces to defend Baghdad from looters.

"For 35 years, these people were not allowed to speak for themselves," said al-Hayderi, who is also a member of the State Department's Economy and Infrastructure working group. "And today, the community is rising up and, for the first time in my recollection, there is a suggestion, a belief, that our fate is in our hands, folks, and we have to work with each other and think for ourselves."

"Oil is such a significant part of Iraq's wealth," he added. "But first and foremost, Iraq is extremely rich in terms of its people and their resiliency. The world will be impressed."

Sam Ali can be reached at sa li@starledger.com or (973) 392-4188.

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