In early December 2003, a Pentagon decision outraged a number of American allies. US Deputy Defense Secretary Paul Wolfowitz issued a memo stating that several countries that had opposed America’s war in Iraq, including France, Germany, Canada, Russia and Mexico, would be barred from bidding for $18.6 billion in US-financed Iraqi reconstruction contracts. By January, the Bush administration’s mood had changed. It became clear that the stated rationale for the decision, namely that it would protect “the essential security interests of the United States”, somehow implied that countries historically close to the US, somehow threatened its national security. This was a bit too much even for noteworthy Bush administration unilateralists. At the Summit of the America’s in January, President George W. Bush rescinded the ban on Canadian companies, amid signs from the Defense Department that three or four states in all might be removed from the list of proscribed nations. If that’s the case, then it’s good news, because aside from the fact that the move was no more than petty payback, it undermined one of the key things that Bush and his acolytes claim to be trying to spread in Iraq: the benefits of the free market.
Writing in the New York Times, Nancy Birdsall and Todd Moss of the Center for Global Development in Washington noted: “All the fuss must seem rather strange to the more than four billion people in the developing world. After all, restricting overseas development contracts to domestic bidders – so called ‘tied aid’ – has been standard practice in the aid world for the past 40 years.” However, the authors didn’t defend the habit; they argued it led to one of the main problems in current aid spending practice -and in the Bush administration’s decision to bar non-American competitors: restricting bidders increases costs by limiting competition.
As Birdsall and Moss observed: “Advocates of improving aid effectiveness have long argued to eliminate the practice of tied aid – which, according to one economic study, reduces its value by 15% to 30%. Untying aid would allow poor countries to purchase the most efficient and cost-effective goods and services necessary for their development projects. That makes sense because the real point of aid is to help people escape from poverty. But old habits die hard.”
That may not matter much if American companies, particularly ones financing presidential election campaigns, benefit. However, as the post-war situation in Iraq has dragged on, and as American taxpayers have been compelled to pay tens of billions of dollars for Iraqi reconstruction, the matter of financial transparency has become highly sensitive politically. Very simply, voters are not keen to fatten the accounts of American multinationals like Halliburton, which recently overcharged the Pentagon by $61 million through a competition-free contract, even if the prevailing, and fallacious, wisdom in the administration is that what is good for American companies is good for America.
As writer Matt Welch observed in Beirut’s Daily Star, conflating companies with countries is “a marriage which the trade liberalization project has long been trying to de-couple.” The problem is that “where large companies are so intertwined with the identity of their countries […] their governments won’t allow them to fail.” This means that the pathologies of private firms instead of being filtered out by market forces are enhanced by them, so that mismanaged or corrupt companies survive.
A second problem is that it makes no sense to peddle the advantages of free minds and free markets to the Iraqis, if half of that equation (or indeed all of it) is ignored. From the outset, the American-led reconstruction process in Iraq has been dipped in controversy, some of it unjustified. And in a country like Iraq, where animosity to the U.S. presence is rising and where unemployment may be as high as 50 percent, according to a UN-World Bank report (including an estimated 400,000 soldiers), even the semblance of financial impropriety can be politically disastrous.
It is to avoid this that, for example, George Soros’ Open Society Institute instituted the Iraq Revenue Watch (IRW) project, to “monitor Iraq’s oil industry to ensure that it is managed with the highest standards of transparency and that the benefits of national oil wealth flow to the people of Iraq.” As IRW remarked on its website, implicitly linking transparency and political stability: “In many parts of the world, the lack of proper stewardship over oil resources has resulted in corruption, the continued impoverishment of populations, and abuses of political power… If Iraq is to become an open, democratic society it will need to develop transparent accountable institutions for ensuring honest management of oil revenues.”
Economic policies born of pique are rarely profitable, and the Pentagon’s intervention in limiting participants in Iraqi reconstruction was surely an example. The Bush administration has backtracked, and might console itself by recognizing that there are two beneficiaries: American taxpayers, who will get more aid for their money; and Iraqi citizens, who will get more money for their aid.
Michael Young is a contributing editor at Reason magazine in the US.