Costs of reconstructing Iraq

Operation Iraqi Freedom was not easy, but if history serves as a guide, the reconstruction of the country will be difficult and expensive. Questions regarding Iraq’s political structures still remain unanswered. It seems that the coalition will probably administer Iraq in the short-term and then transfer authority to an Iraqi interim government, once a new constitution for Iraq is drafted. The interim government will be assisted by a number of U.S. civilian administrations, until Iraqis can elect a permanent government.

Some important questions remain unanswered: Should the United Nations play a central role in post-war efforts? More important and in light of ongoing economic pressures the United States faces and Capitol Hill’s concerns with the growing budget deficit: Who will administer and finance Iraq’s reconstruction in the long-term, especially if Washington is not willing to permit the U.N. to play a leading role?

For at least six months after the cessation of hostilities, U.S. civil administrators will assume control of Iraq’s ministries. Senior positions will be given to leaders of opposition parties and to Iraqi experts, living abroad that have been hired by the U.S. government to provide assistance during this phase of reconstruction. Most Iraqi civil servants will be allowed to retain their jobs and their salaries will be paid by the United States, using funds in Iraqi bank accounts frozen after Iraq’s invasion of Kuwait in 1990.

Emergency humanitarian relief efforts have been already bought and the United States will use the U.S. Agency for International Development’s budget for emergency disaster assistance to finance the activities of intergovernmental and non-governmental organizations operating in Iraq. Long-term humanitarian assistance will probably be financed by the U.N.’s Oil-for-Food program, which has around $10 billion at its disposal.

U.S. taxpayers will pay for the peacekeeping force, though the Bush administration has been quick to point out that oil revenues can offset some of the costs. The most conservative estimates show that a force between 75,000 and 200,000 troops will cost around $1.5 billion a month. Not surprisingly, the United States has said that they want other countries to send troops so they can share the financial burden.

Finally, Iraqi oil revenues and international donors, including the European Union and the World Bank, will finance the reconstruction of Iraq’s infrastructure. William Nordhaus, an economist at Yale University, estimates that these efforts could cost $75 billion in the next six years, which would amount to $15 billion a year.

Is this a sound plan? Will oil revenues be able to finance these efforts? The current state of Iraq’s oil industry will allow it to produce around 2.8 million barrels per day, generating around $14-16 billion a year in oil revenues. Once the state is functioning, tax collection can generate more money that can be used to finance reconstruction efforts, to provide Iraqis basic social services, to pay civil servants and other public workers’ salaries, and to train, equip, and to run a new military and a police force. So, it seems that Iraq, if managed properly could generate enough revenues to fund these efforts.

But, upon closer inspection, these figures are affected by Iraq’s financial obligations, which includes its debts, war reparations, and pending contracts with many private firms. Frederick Barton and Bathsheba Crocker of the Post-Conflict Reconstruction Project in Washington find that Iraq owes $383 billion to the international community. So, a huge portion of these oil and tax revenues will be used to finance this debt, putting a lot of pressure on future Iraqi budgets.

Given this reality, the United States will have to help a new Iraqi government renegotiate with these countries and creditors the terms of the loans. However, it is important to remember that these monies are owed to Russia, Kuwait, and Saudi Arabia and the Gulf states. Most of these pending contracts were finalized with Russian, Chinese and French firms. War reparations, which totaled $320 billion after the first Persian Gulf War, have not been completely paid out to neighboring countries, international firms and Kuwaiti citizens. Thus, the current plan seems to ignore this reality. To convince these countries and firms to accept new repayment schedules or refinancing of these loans, the United States will have to allow these parties to re-shape post-war efforts. This is unlikely.

Washington has said that it plans to lead these efforts. It assumes that oil and tax revenues can pay for most of these efforts and that the international community will fund them, without challenging America’s control over the strategy. This is wishful thinking. This plan’s costs are not only economic, but also political. Failure to give the international community more say on post-conflict efforts will compromise Iraq’s economic development and democratization.

If the administration remains inflexible, it must face financing Iraq’s entire reconstruction. The United States managed this in Japan and Germany many years ago. Today’s economy is quite different. The expense of a unilateral approach and the attendant weight on an already flailing economy will not be lost on voters in 2004.

Carlos L. Yordan is a visiting instructor of government at Hamilton College in Clinton, N.Y. He taught in the Department of Political Science at the University of Maine from 2000-2001 and was a visiting lecturer at Husson College from 1999-2000.