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Last Updated: Thursday, 7 April, 2005, 09:53 GMT 10:53 UK
US legal legacy for Iraqi economy
By Becky Branford
BBC News

Iraqi worker in a glass factory
Iraq's economy is now one of the most open in the world
Scenes of bloody struggle in Iraq have dominated headlines in the two years since Saddam Hussein was overthrown.

The steps taken at the same time to lay the foundation of the new Iraqi state, and its economy, have generally attracted less attention.

But it is likely that their effects will be felt for many years to come, whether or not the violence continues.

Most of Iraq's legal apparatus was dismantled in the aftermath of the invasion that began in March 2003, and replaced by new decrees enacted by the US-led Coalition Provisional Authority (CPA).

Many of these new laws were welcomed but some, critics argue, have set Iraq on an ideological course which its people will find hard to reverse, should they wish to.

This debate may come to the fore as Iraq's new lawmakers, following weeks of wrangling over the leadership of the new Iraqi transitional government, turn to the task of drafting a permanent Iraqi constitution.

'Capitalist's dream'

Many of the 100 "orders" decreed by Paul Bremer, the top US representative in Iraq and head of the CPA for 14 months until the handover of sovereignty in June 2003, are uncontroversial.

For example, they ban children younger than 15 from working, impose traffic safety regulations, outlaw torture and discrimination on grounds of sex, political opinion or ethnic origin, and allow freedom of association.

Unemployed construction workers in Baghdad

Some of the other orders are almost universally viewed - in retrospect at least - as counter-productive.

Most analysts agree that the dissolution of the Iraqi army decreed in Order 2 may have sent thousands of disillusioned, unemployed young men into the arms of the Iraqi insurgency.

But it is the new rules governing Iraq's economy which have pitched observers into opposing ideological camps.

The rules have been welcomed by some observers - including London's Economist magazine, which hailed them as a "capitalist's dream" - but others have dubbed them a "corporate invasion".

This is hyperliberal policy, but it's very good policy
Yahia Said
Economist, LSE
Orders 37 and 49 slash top tax rates from 45% to 15% - one of the lowest rates in the world. Order 54 abolishes all duties on imports to Iraq, apart from a 5% reconstruction levy. Order 39 allows 100% foreign ownership of Iraqi companies except in the oil, gas and banking sectors.

Put together, such laws have remodelled the Iraqi economy, making it one of the most open in the world.

Yahia Said, an Iraqi expert in transitional economies and post-conflict Iraq at the London School of Economics, is a supporter.

He agrees that these are all "ideological laws" meant to have an irreversible effect.

"This is part of this whole neoconservative ideology... [designed to] create a beacon of free-market and liberal democracy in the Middle East," he says.

'Living standards improved'

But he insists that many of Mr Bremer's decrees have had a very positive impact on the Iraqi economy.

Paul Bremer, right, receives the US's highest civil honour, the Presidential Medal of Freedom, from President George Bush in December 2004
Paul Bremer, right, enacted most of Iraq's current legal code
"For example, when he completely abolished all import duties, apart from the 5% reconstruction levy. In a country that has been starved under sanctions and embargoes, that improved living standards in Iraq," Mr Said told the BBC News website, arguing that it gave Iraqis access to cheaper imports.

"Iraq [now] has absolutely no customs duties - as opposed to most other countries in the region where governments live off import duties and where import duties are a huge opportunity for corruption.

"Without them, you remove corruption, friction and bureaucracy, and you improve living standards."

Free trade has really meant free imports and the removal of any kind of protection from Iraq's industry
Dr Kamil Mahdi
Economist, Exeter University
Mr Said says Iraq's ultra-low rates of income tax are also beneficial, creating an incentive for Iraqis to pay taxes, unlike in Russia, he says, where high tax rates after the Soviet collapse simply encouraged tax evasion on a huge scale.

But this view is challenged by Dr Kamil Mahdi, an Iraqi lecturer in Middle Eastern economics at Exeter University.

He charges the occupying powers in Iraq with failing to create conditions in which domestic industry - public and private - can regenerate.

"What's happened now is that free trade has really meant free imports and the removal of any kind of protection for Iraq's industry and agriculture... The potential revenue of the state outside the oil sector has been severely cut," he told the BBC News website.

"Consequently, the potential for economic programmes including investment and social programmes by the government has been cut quite drastically."

Little foreign aid pledged to reconstruction has been disbursed, and few reconstruction contracts are going to Iraqi businesses who employ Iraqi workers, he adds.

Reversible rules?

Some observers have questioned whether Mr Bremer in fact violated international law - which requires occupying powers to respect existing laws in the occupied country "unless absolutely prevented".

Mr Bremer's defenders point out that Iraq's interim constitution allows the transitional parliament, elected in January, to rescind any of the decrees passed by Mr Bremer with a simple majority - not the three-quarters majority needed to alter the Transitional Administrative Law.

"None of these laws are irreversible," said Mr Said. "Any elected Iraqi government will have the right to reverse them - even this [transitional] government."

Mr Said comments that if the laws had been harder to reverse, foreign firms might actually have made a bigger contribution to the Iraqi economy than they have.

But Mr Mahdi argues the laws have helped create a society based largely on speculation and profiteering - and a number of interest groups associated with that.

"The parliament may be influenced by these pressure groups. It is now going to be a problem for the future Iraqi government to deal with the groups which now have an interest in the present institutional structure."

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