How much will US pay for the future of Iraq?

The Times
April 16, 2003
By Bronwen Maddox

Now the bills come in. We shall see whether the United States is serious about its aim of building a prosperous new democracy in the heart of the Arab world.

The first steps are obvious, because they are inescapable. As things stand, no one can write a single cheque on Iraq’s behalf until the question of its towering debts is sorted out. Not a single barrel of oil can be sold until it is clear who has first claim to the money; no reputable oil company would touch it without clear title.

Iraq’s debts to foreign banks and governments are between $65 billion and $130 billion (£41 billion and £83 billion); including claims for reparations in two wars, the bill could be $380 billion. Never mind British efforts to get policemen to turn up for work in Basra; so far, no one has the authority to pay them until creditors’ claims are settled.

To reschedule this debt will probably involve the Paris Club, the group of countries who have lent money to other governments. Given that the United Nations has been in charge of selling Iraq’s oil under the Oil-for-Food programme, its backing will be needed for any change of plan. Much as Washington may loathe the idea, getting Iraq back on its feet quickly will mean negotiations with both.

But beyond this? In a nation-builder’s dream, the sums it is possible to spend on Iraq in life after war range from $26 billion, on the most meagre estimates, to more than ten times that figure.

At this point few want to hazard a guess; it has been years since foreign businesses have had the chance to take a hard commercial look at much beyond the oil industry. UN teams are planning to go out soon but still lack a remit.

But even on the first estimates nothing about this venture looks cheap.

Peacekeeping
Peacekeeping is the first decision for the United States to make; all the same, it is the hardest item to quantify, with the nature of the peace still so unclear. Of course, American intentions are perfectly clear: as President Bush has put it, forces will stay as long as necessary and not a moment longer. The Pentagon and the independent Congressional Budget Office reckon that each American peacekeeper costs $250,000, based on the Bosnian experience.

But William Nordhaus, an economist who has carried out one of the few estimates of Iraqi reconstruction, points out that if the "dangers resemble... the West Bank more than the Balkans" the cost will be higher. How many of them would there be and how long would they stay? It’s anyone’s guess. But if the US kept 100,000 of the 250,000 in the region there for a year, that would cost $25 billion.

Reconstruction
A very basic model for reconstruction would cost between $20 billion and $25 billion. The same sort of figure emerges out of several different approaches. The World Bank has estimated that reconstruction after a war cost about $1,000 per head in East Timor, Lebanon and Bosnia. For Iraq, a similar level of spending would amount to about $25 billion.

Another way to look at it, Nordhaus suggests, is to aim to give Iraq a national income per head equal to that of Egypt or Iran. Assuming that half the country’s physical assets — roads, buildings and so on — needed reconstruction, this would require spending $800 per Iraqi, or about $20 billion.

This does, however, represent a rudimentary standard of improvement. It would, analysts suggest, repair the damage of this war and the 1991 Gulf War, as well as the impact of UN sanctions, but not that of the Iran-Iraq War.

"Marshall Plan for Iraq"
A more lavish model would be a so-called Marshall Plan for Iraq. The plan itself, to rebuild Western Europe after the Second World War, cost the US $13.3 billion over four years. Translated into today’s money, by considering it as a proportion of gross domestic product, this is equivalent to about $450 billion, or $500 per person per year.

But Western Europe had already had a couple of years to get its own reconstruction under way, and retained much more infrastructure than does Iraq. Nordhaus suggests that rebuilding Iraq might take six years, not four, and that $75 billion is a good first estimate, to be added to the basic reconstruction costs.

That kind of broad-brush, "top-down" estimate does not attempt to spell out Iraq’s particular needs. But there are good estimates of the needs of the oil industry, well studied by the outside world. The Council on Foreign Relations reckons that it might take $30 billion to $40 billion to double production to between six and seven million barrels a day, about the same as Saudi Arabia. It also estimates that it could take $25 billion to upgrade Iraq’s electricity grid.

Humanitarian aid
On Nordhaus’s estimates, between one and five million Iraqis (out of a population of about 24 million) might need aid for between one and four years, giving a bill of between $1 billion and $10 billion. Others argue that the demand could be higher, at least at the start, as about three quarters of Iraqis depended on the UN Oil-for-Food programme.

Civil servant salaries
In evidence to the Senate Foreign Relations Committee, Gordon Adams, a Clinton Administration adviser and academic, suggested that paying the salaries of Iraq’s government employees could cost $5 billion in the first year and $12 billion over the first five years.

The oil won’t pay for it
Iraqi oil is not going to foot much of this bill, at least at first. True, it sits on what may be the world’s second-largest reserves, but its oil exports under sanctions have brought about $14 billion a year, spent on food and necessities.

The bottom line is clear. Even if the huge investment takes place to double or treble Iraqi oil production, the income will take years to pay for the oil industry’s own modernisation, never mind that of the whole country.

Not a rich country
The bitter pill for the US is that almost however much is spent, adult Iraqis will feel that their standard of living is lower than it was 20 years ago.

Anthony Cordesman, of the Centre for Strategic and International Studies in Washington, points out that Iraq’s oil wealth is less than a tenth of its peak in 1980, because of the fall in the oil price and the huge rise in population. There were only 9.1 million Iraqis in 1970, but there were nearly 23 million in 2000 and are projected to be 37 million in 2020.

Its annual oil income is now worth about $700 per Iraqi, compared to $6,000 20 years ago. Saudi Arabia has seen the same precipitous fall, for the same reasons, but its oil income is still worth about $2,500 per person, compared to $24,000 in 1980.

To those Iraqis old enough to remember 1980, Iraq does not feel like a rich country. The US would have to spend more than it appears to intend to shake that perception.

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