The Economics of Occupation

The following is an excerpt (links included) from an excellent article by Michael Schwartz at Tom Paine.com:

[T]he question of "what went wrong" in Iraq is now almost universally answered as follows:

The invasion was initially successful, but the plan for the peace was faulty. Bush administration officials misestimated the amount of resistance they would find in the wake of Baghdad's fall. Donald Rumsfeld and his civilian officials in the Pentagon ignored military warnings and did not deploy sufficient soldiers to handle this initial resistance. As a result, the occupation was unable to quell the rebellion when it was small. This first blunder allowed what was at best a modest insurgency to grow to formidable proportions, at which point occupation officials committed a second disastrous blunder, dismantling the Iraqi army which otherwise could have been deployed to smash the rebellion.

Bottom line: General Eric Shinseki was right. If the U.S. had deployed the several hundred thousand troops that he insisted were needed to lock down the country (instead of hustling him into retirement), then the war would have been short and sweet, and the U.S. would now be well on its way both to victory and withdrawal.

[This] is a fair summary of the thinking on Iraq currently dominant in the mainstream media and, because it ignores the fundamental cause of the war-after-the-war -- the American attempt to neo-liberalize Iraq -- it is also profoundly wrong . . .

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[J]ust after Saddam was toppled the American victors announced that a sweeping reform of Iraqi society would take place. The only part of this still much mentioned today -- the now widely regretted dismantling of the Iraqi military -- was but one aspect of a far larger effort to dismantle the entire Baathist state apparatus, most notably the government-owned factories and other enterprises that constituted just about 40% of the Iraqi economy. This process of dismantling included attempts, still ongoing, to remove various food, product, and fuel subsidies that guaranteed low-income Iraqis basic staples, even when they had no gainful employment.

Without going into the tortured details (forcefully described at the time by Naomi Klein in an indispensable Harpers article), this neo-liberal "shock treatment" was adapted from programs undertaken by the International Monetary Fund (IMF) and the World Bank all around the globe in the 1990s, including those that immiserated Russia after the USSR collapsed and that helped to bankrupt Argentina. Because the privatizers of the Bush administration were, however, in control of a largely prostrate and conquered country, the Iraqi reforms were enacted more swiftly and in a far more draconian manner than anywhere else on the planet. Within six months, for example, the American occupation government, the Coalition Provisional Authority (CPA), had promulgated all manner of laws designed to privatize everything in Iraq except established oil reserves. (New oil discoveries, however, were to be privatized.) All restrictions were also taken off foreign corporations intent on buying full control of Iraqi enterprises; nor were demands to be made of those companies to reinvest any of their profits in Iraq.

At the same time, state-owned enterprises were to be demobilized and sidelined. They were to be prevented from participating either in repairing facilities damaged during the invasion (or degraded by the decade of sanctions that preceded it) or in any of the initially ambitious reconstruction projects the U.S. commissioned. This policy was so strict that even state-owned enterprises with specific expertise in Iraqi electrical, sanitation, and water purification systems -- not to speak of Iraq's massive cement industry -- were forbidden from obtaining subcontracts from the multinational corporations placed in charge of rejuvenating the country's infrastructure.

The elimination of all protections for local commerce quickly threw the market wide open to large multinational marketing companies. This resulted in an immediate surge of sales to the Iraqi middle class of previously unobtainable goods like air conditioners, cell phones, and all manner of electronic devices. Though few remember this today, many American journalists reported the influx of such goods as an early sign of coming prosperity -- and of how successful an economy could begin to be once freed from the oppressive binds of state control and state ownership.

As it happened, though, this surge did not last into the winter of 2003-4. The problem, it turned out, was that the CPA-induced economic "opening" to multinational competition administered a series of death blows to locally based enterprises. First of all, shops selling any item that could be imported by foreign companies found themselves in the unenviable position of competing with lower-priced goods that the multinationals could either provide at such prices or afford to sell at a loss to capture the market (i.e., run the local competition out of business). So a depression swept through small business in Iraq, leaving neighborhoods without their normal complement of shops and without the income that they plowed back into communities.

Second, the demobilization of the army and the sidelining of state enterprises resulted in an almost immediate unemployment crisis. Even though many state enterprises continued to pay employees (for doing nothing) and the Coalition Provisional Authority belatedly decided to pay Saddam's former soldiers (also for doing nothing), this money did not regularly reach the targeted groups. The fragmentary administration set up by the occupation was monumentally inefficient at delivering any services, including paychecks, and significant sums were evidently simply gobbled up by increasingly corrupt remnants of the Baathist administrative apparatus. As a result, millions of unemployed workers and soldiers, lacking the money to feed their families, also lacked the money to support local merchants.

These depressed neighborhoods became incubators for ferocious criminal gangs, who sought to redress their own economic hardship by looting public buildings and private dwellings of anything that might yield a return on the black (or export) market. Looting, which began with the fall of the government, became a permanent feature of Iraqi urban life once the occupation dismantled the Iraqi police force. As time passed without the establishment of effective law enforcement, criminality became organized and systematic, targeting professionals and shopkeepers who had substantial assets or retained incomes; while kidnapping for ransom became a regular fact of life for prosperous Iraqis.

As this crisis deepened, multinational corporations found they had sold just about all the appliances the market could bear and were no longer making sufficient profits to continue their marketing efforts in much of Iraq. So they simply withdrew from now-unprofitable local markets, leaving communities already sprinkled with the empty shops of bankrupt local merchants bereft of needed products and services. Those who still had incomes found it increasingly difficult to obtain needed resources. A reverse multiplier effect began to take hold as Iraqis who remained prosperous were forced to shop, work, or live outside their former communities, only depleting and depressing them further. Unemployment rates quickly exceeded 25% in many communities, and today -- as this process reaches its third anniversary -- nationwide unemployment estimates range from a depression-level 30% to a staggering 60%, depending on the source you consult . . .

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By focusing attention only on the lack of U.S. (and Iraqi) military power brought to bear in the early days after the fall of Baghdad, [the mainstream media ignores] some of the deeper reasons why many Iraqis were willing to confront a formidable military machine with only small arms and their own wits. They ignore -- and cause the American public to ignore -- the fact that there was little resistance just after the fall of Baghdad and that it expanded as the economy declined and repression set in. They ignore the eternal verity that the willingness to fight and die is regularly animated by the conviction that otherwise things will only get worse.

Just goes to show that you can't have peace without prosperity. I recommend you read the whole piece, here.