Iraq Needs Help Kicking the Oil Addiction
A blessing and a curse

by Stanley A. Weiss

LONDON--Like a neighborhood drug pusher, Washington dangles the promise of billions in untapped petrodollars before the eyes of desperate Iraqis. Vice President Dick Cheney calls Iraq's oil reserves, the world's second largest, one of its "significant advantages." Secretary of State Colin Powell calls it a "marvelous treasure."

Iraqis may see their black gold as a gift from God. But history shows why others have called oil "the devil's excrement." Around the world, oil states that should be economic powerhouses are basket cases.

How can the blessing of oil become a curse?

Like any narcotic, oil lets you forget about tomorrow. The immediate gratification of huge oil revenues may feel good at first, but after the high comes the crash. The irresistible lure of oil profits sucks capital and labor from other sectors like agriculture and manufacturing, afflicting countries with "Dutch Disease," as when the Netherlands' discovery of oil and natural gas in the 1950s wreaked havoc on the rest of the economy.

Indeed, a truism of economic development is that the more a country relies on natural resources, the lower its growth rate.

Bad economics also makes for bad politics. Easy oil money means petro-states can avoid hard choices, like painful economic reforms. And little or no economic progress outside the oil sector means no growing and prosperous middle class to clamor for more political freedom.

It's no surprise that nine of the world's top ten oil exporters - countries like Saudi Arabia, Russia, Iran and Nigeria - are ranked as having little or no political rights and liberties by the nonprofit Freedom House. The one exception? Norway, a democracy long before it discovered oil in the 1960s.

In Iraq's case, however, just saying no to oil won't work. Just as oil profits fueled Saddam Hussein's brutal regime, oil will be indispensable to Iraq's economic recovery. So how to keep Baghdad from getting hooked and becoming another oil junkie?

First, separate the new rulers from the natural resources. Getting a future Iraqi government out of the oil business will help end the corruption that plagues most state-controlled oil economies. Only when open books and rule of law are in place should a new Iraqi government exercise a limited role in the oil industry.

Second, ensure the petroleum benefits the people. From Venezuela to Angola to Indonesia, citizens of resource-rich countries tend to be worse off by every measure - income, jobs, education, health - than people in resource-poor countries. No wonder a former Saudi oil minister once lamented, "I wish we had discovered water."

The new American-run, internationally monitored Development Fund for Iraq is a good start to rebuilding Iraq's devastated infrastructure with oil funds. Washington should also learn from other models. Norway's petroleum fund, now worth more than $100 billion, helps cushion hard economic times. From its oil revenues, Alaska cuts a check to every citizen every year. Revenues from a new pipeline in Chad are designated for health care, electricity and roads.

Iraq's universities, hospitals, farms and entrepreneurial middle class were once the envy of the Arab world. They can be again. Iraq should follow the lead of Japan and the "four little dragons" (South Korea, Taiwan, Hong Kong, and Singapore), countries that achieved high growth by investing in the education and health of its people.

Third, diversify. According to the World Bank, the entire Arab world, with its 300 million people, exports fewer non-oil goods than does Finland, with just five million people. In contrast, countries like Malaysia and Ireland have enjoyed economic growth through robust manufacturing exports. Mexico deliberately reduced its dependence on oil, spurring other industries and non-oil exports.

Industrial parks in Iraq could be the seeds of a future Middle East manufacturing sector and help lay the foundation for regional peace and stability. That's the vision of Israeli entrepreneur Stef Wertheimer, who imagines a "New Marshall Plan" for the region, beginning with industrial parks in oil-free Jordan, Turkey and a future Palestinian state, modeled after his similar ventures in Israel.

"When Arabs and Israelis have to meet delivery times for their orders from Japan" he tells me, "they will have neither the will nor the time to fight each other."

Finally, deploy Iraq's secret weapon of mass construction - the world-wide diaspora of 4 million Iraqis, many of whom are highly-skilled and successful entrepreneurs. With Washington's help, some have already returned to Baghdad to play political roles. But Iraqi exiles I met with here seemed aware of their latent economic potential. These expatriates could serve as the bridge for vital foreign investment in their homeland.

Can Iraq defy history as the only oil state to become a prosperous democracy? It won't be easy.

But if used wisely over the long-term, revenues from Iraq's "marvelous treasure" can foster a more developed and economically diversified economy able to kick the dangerous habit of oil dependence.
The future of the neighborhood will depend on it.