1000 - B S. Hrg. 108-220 TRANSFORMING IRAQ'S ECONOMY HEARING before the JOINT ECONOMIC COMMITTEE CONGRESS OF THE UNITED STATES ONE HUNDRED EIGHTH CONGRESS FIRST SESSION June 11, 2003 Printed for the use of the Joint Economic Committee U.S. GOVERNMENT PRINTING OFFICE WASHINGTON: 2003 90-904 PDF For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC area (202) 512-1800 Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001 UNIVERSITY OF MICHIGAN LIBRARIES MAR 0 1 2004 DEPOSITED BY UNITED STATES OF AMERICA Transforming Iraq's Economy Wednesday, June 11, 2003 CONGRESS OF THE UNITED STATES, JOINT ECONOMIC COMMITTEE, WASHINGTON, D.C. The Committee met, pursuant to notice, at 9:30 p.m., in Room 628, Dirksen Senate Office Building, the Honorable Robert F. Bennett, Chairman of the Committee, presiding. Present: Senators Bennett, Sununu; Representatives Stark, Saxton, Maloney, English, Paul, Hill. Staff Present: Donald Marron, Ike Brannon, Jeff Wrase, Chris Frenze, Robert Keleher, Brian Higginbotham, Kurt Schuler, Colleen Healy, Melissa Barnson, Gary Blank, Wendell Primus, Chad Stone, Rachel Klastorin, Nan Gibson. OPENING STATEMENT OF SENATOR ROBERT F. BENNETT, CHAIRMAN Senator Bennett. The Committee will come to order. I have a prepared opening statement which has been distributed, and I don't back away from it. But I am going to deviate from it a little in the actual remarks that I make to kick off the hearing, because I think the best demonstration of the atmosphere in which this hearing is being held comes from this morning's papers. Here is The Washington Post and its cover picture. And it says: “In Holy City, Things Are Going Right. U.S. Forces and Iraqis Work Together In Shiite Stronghold of Karbala.” The New York Times, however, says: “G.I.s In Iraqi City Are Stalked By Faceless Enemies At Night.” And the lead says: “Since the American command quadrupled in military presence here last week, not a day has gone by without troops weathering an ambush, a rocket-propelled grenade attack, an assault with automatic weapons, or a mine blast.” Reminiscent of the war, when we won it on Fox, but lost it on CNN. (Laughter.) There is a constant sense of instant conclusion that goes on in the media. We must know, pre-season, who is going to win the World Series. We must know, pre-season, which two teams are going to go to the Super Bowl and which one is going to win. We have national rankings of college basketball teams before the first dribble is ever bounced on a hardwood floor. 3 1 Now we are in a world where there is only one super-power, but there are a multitude of nonstate powers that would seek to destabilize the world through acts of terror. And how things come out in Iraq can have an incredible impact on whether or not we get on top of that new kind of world. So that's the background against which we meet this morning. Those are the issues that we intend to explore. And we have assembled, I believe, an outstanding panel of experts to help us do that. Now, with that, we're joined by Mr. Stark, the Ranking Member, and I will yield to him for an opening statement. And I would ask consent of the Committee -- our normal pattern is that we have opening statements only from the Chairman, the Ranking Member, and the Vice Chairman. But I would ask that Ms. Maloney be recognized for a brief opening statement because she has to leave us and wants to be part of this, to the degree that she can. So if there is no objection, following Mr. Stark, we'll hear from Mr. Saxton and then Ms. Maloney. [The prepared statement of Senator Bennett appears in the Submissions for the Record on page 41.] OPENING STATEMENT OF REPRESENTATIVE PETE STARK, RANKING MINORITY MEMBER Representative Stark. Thank you, Mr. Chairman. I want to commend you and pay homage to your creativity in holding this hearing at this time. It's an important topic. And it's an important responsibility that the President has put on the shoulders of the American taxpayers or should I say, debt-holders, since this Administration doesn't believe in taxes. As I was pondering my thesis for my doctorate in theology at Bob Jones University, I'm a humanist and therefore, the here-after doesn't mean much to me. I keep looking for heaven on earth. One of the problems of doing that is that I could never find a place for right-wing Democrats or Republicans, either. And came to me as I was reading Hendrik Hertzberg's New Yorker article, which I'd like, Mr. Chairman, to put in the record -- Senator Bennett. Without objection. Representative Stark. that describes Iraq. Why it's a supply- sider's dream. There are no taxes. There are no environmental regulations to get in the way of you free-enterprises. Why, religion is the government. There's no separation of church and state. I have never seen a place where a free-market economy is running amuck. Charlton Heston would love to go there. Everybody's got a gun. He could organize the NRA and be there. Why, the Club for Growth ought to build their national headquarters there. (Laughter.) I just think, Mr. Chairman, that this is the nirvana for the supply- siders and the right-wing Republicans. Now I'm afraid that's not what we're going to hear from our witnesses today. The facts are that Iraq's economy and their civilian society is a mess, and I suspect we have a long and expensive reconstruction ahead of us. I don't think we should be surprised if the Administration put as much time into preparing for the inevitable problems with the reconstruction process, instead of preparing their public relations campaign to get us to invade and preparing the prime-time movie about Private Jessica Lynch. Why, maybe we'd have had some ideas. But that's not what happened and we have to pick up the pieces. So we'll hear some creative ideas from our panel. But I hope they won't lull us into thinking that this is going to be easy. I think it's going to be expensive and long-term, and I hope you'll be very honest with us so that we can be honest with the American public for a change, and tell them what the consequences are, because I'm afraid if we don't change our domestic policy soon, that our next hearing will be on restructuring the American economy. Thank you, Mr. Chairman, and I look forward to the testimony of our witnesses. [The prepared statement of Representative Stark appears in the Submissions for the Record on page 43. New Yorker article entitled Building Nations, Hendrik Hertzberg submitted by Representative Stark appears in Submissions for the Record on page 44.] Representative Maloney. Thank you, Mr. Chairman, so very, very much. Senator Bennett. I was going to Mr. Saxton. Representative Saxton. She can go if she wants. That's okay. Senator Bennett. All right. Mr. Saxton yields to you. So go ahead. OPENING STATEMENT OF REPRESENTATIVE CAROLYN B. MALONEY Representative Maloney. Thank you so much, Mr. Chairman, and Mr. Saxton. At this point, I'm supposed to be at Financial Services Committee hearing in which I'm Ranking Member, but I feel that this is a tremendously important hearing and I ask permission to revise and 6 just over $150 million. These institutions have resources to relieve the debt, setting an important precedent for the rest of the world. For this reason, I will be introducing the Iraqi Freedom From Debt Act, legislation to require the U.S. to negotiate in the IMF, World Bank, and other appropriate multi-lateral development institutions for the IMF and World Bank to relieve the debts owed by Iraq to these institutions. Furthermore, this legislation includes a "Sense of Congress” that the President should urge France and Russia and all other public and private creditors to relieve the debts owed to them by Iraq. By taking the lead on debt relief, we have an opportunity to do the right thing for Iraq's economy and to prove to the world that the major reason for war was to benefit the Iraqi people. And I yield back the balance of my time and I thank you for this consideration and I would hope that you would consider looking at this legislation for the Senate. [The prepared statement of Representative Maloney appears in the Submissions for the Record on page 47.] Senator Bennett. Thank you very much. We appreciate your contribution and we will take a look at the legislation when it comes over. Mr. Saxton? OPENING STATEMENT OF REPRESENTATIVE JIM SAXTON, VICE CHAIRMAN Representative Saxton. Thank you. It's a pleasure to join in welcoming the witnesses. Before Ms. Maloney departs the room, I think her position and mine are fairly close on Iraqi debt. In fact, last week I introduced a bill which is H.R. 2338, which sounds very close to what you have just outlined and I'm going to speak a little bit more about that. So I look forward to working with you. Representative Maloney. I wish I could stay, but I must go. Representative Saxton. That's okay. Mr. Chairman, during your opening statement, you referenced the development of a long-range strategy to promote Iraq's economy, which has been sinking for years under the rule of Sadaam Hussein. I'd like to talk about at least one important piece of what could become that long-term strategy. The economy in Iraq has for years been doing very poorly. Extensive ownership control and influence of business by the government, its officials, and political cronies undermined economic growth. Iraq's invasion of Kuwait resulted in economic sanctions and the Oil-For-Food Program. 7 And although the recent war has resulted in some economic damage, Iraq's economic situation today is quite similar in my opinion to the Eastern European countries after the collapse of the Soviet Union. New institutions are needed that are compatible with a market economy and improved prospects for economic growth. The prospects for Iraq's economic recovery are clouded by an unsustainable debt burden that Ms. Maloney was just referring to. One of the major challenges to improve the potential of the Iraqi economy is the heavy burden of foreign debt accumulated under the regime of Sadaam Hussein. The hated regime is gone, but the financial legacy should not continue to oppress the Iraqi people, undermining their economic potential. Forgiving much of Iraq's foreign debt is the right thing to do. But foreign creditors may be hesitant if they anticipate an opportunity for a bail-out indirectly through the IMF or the World Bank. A write-down of at least part of Iraq's debt would greatly improve Iraq's economic outlook. Under legislation that I have recently introduced, Iraq's creditors would be encouraged to forgive much of Iraq's outstanding foreign debt rather than to wait for a potential bail-out from the IMF or the World Bank. This legislation, of which this is a copy, would mandate that safeguards be in place to ensure that lending by these institutions could not be used to repay Iraq's creditors, thus encouraging a more timely write-down of some of Iraq's debt and protecting taxpayer money. As I have pointed out many times before, the IMF should not be used as a bail-out agency, as this practice creates a potential for mis-use of IMF funds. Taxpayer money should not be used to bail-out investors of high- risk ventures. There is a role for the IMF and the World Bank in Iraq, but it should be carefully defined to ensure that past mistakes are not repeated. With adoption of appropriate institutional reforms and market- oriented economic policy, Iraq's people could look forward to a better future. The IMF and the World Bank can be useful in this regard, but not if the money is to be just funneled through to Iraq's creditors. Thank you, Mr. Chairman. [The prepared statement, including H.R. 2338, of Representative Saxton appears in the Submissions for the Record on page 49.] Senator Bennett. Thank you very much. We'll now go to our panel of witnesses, and I'm quite excited about the witnesses that have agreed to appear today. 10 rigid allocations that no longer apply. The downstream sector is also very important. But that also will require additional capital. The downstream sector is valuable not only in job creation, but also in improving the revenue-added value of exports. The whole issue of privatization has to be explored. There are dangers and advantages to privatization. But this is the way to get what amounts to the majority of the productive assets of the country back into private hands. There are many challenges, as to how do you value assets fairly at this time? How do you attract foreign investors? How do you achieve broad distribution? How do you avoid the problems that befell eastern Europe when people started out with a voucher and ended up with a bottle of vodka, and that was the extent of their participation in the economy. Debt forgiveness and rescheduling, as I said, is critical. We see the three categories. Commercial debt has to be renegotiated. Government debt has to be forgiven because it was extended to the old regime -- as Mrs. Maloney called it, the odious debt. And war reparations have to be recognized because somebody did actually suffer at the end of this adventurism by Sadaam Hussein. The plan proposes trading some of this debt for a point system that can be then used for concessions, licenses, contracts. The point system itself would start having a market value and be traded between people who want to buy those points for use in Iraq on their own. Therefore, you don't eliminate the value of those points, but you shift them to the free market. Attracting foreign direct investment, an aspect of the plan, is critical. And there are very many issues on this. One of the important issues is to avoid economic pillage of the country by foreign investment, which will definitely happen if we are not careful. Restitution of private property has to be a part of that plan. And that has resulted from the 1963 nationalization and just continued through various waves of government. Currency stabilization is critical. A new Iraqi dinar pegged to the dollar and the Euro has to be introduced. The banking sector is very rudimentary. The banking sector is made up of two banks, two government-owned large banks and 18 small private banks. This must be modernized, upgraded. Joint venture banks have to be attracted to help rebuild the banking sector, which is a critical part of any economy. Finally, the component of the plan that we can look at is the 14 People sometimes forget what state Japan was in during the '30s and the '40s. For us Peruvians, of course, it's relatively easy because we had a president of Japanese origin from the year 1990 to the year 2000, President Fujimori, who was a member of one of the 1-1/2 million Japanese families who migrated to South America in the '30s and the '40s, especially to Peru and Brazil, which were open to Asian migration. The reason the Fujimoris migrated to Peru, and the reason why the de Sotos did not migrate to Japan, was because our GNP per capita was higher than Japan's -- 20 percent higher in the case of Peru, 40 percent higher in the case of Brazil. Now that President Fujimori has returned to Japan, he has found a Japan which is now ten times richer than any other Latin American country. What did Japan do between 1945 and today to become ten times richer than us Latin Americans, who used to receive their migrants because they were poor? The reply is that they created a capitalist system, but where everybody could participate. That required a plan. And that plan w was originally set up by Americans working since 1942 in Honolulu to make sure that the feudal class did not recuperate all its privileges and that property rights were widespread. As a matter of fact, they were already widespread, but at an extra legal level. But the legal reforms that took place in Japan between 1946 and 1950 made sure that capitalism was a popular enterprise, the way it is today in the United States, instead of being an oligarchic enterprise, the way it is in most developing countries, and therefore, falters. The ideas and virtues of your economy and political system have been around for more than 200 years and we've tried to imitate them. One of the first things I think that should be done is to get the facts. What do you have to do to popularize a capitalist economy to make it democratic? As you know, some of the work that we're doing in different countries, our think tank which you have so generously supported in the U.S. Congress, includes countries like Egypt, where we've been contracted by the government and the government has made public the numbers I'm going to give, therefore, I'm not breaking anybody's confidence. Though I know that Egypt is not Iraq, Egypt is not very different from the other Asian and Latin American countries that we've been working in. We have found that in places like Egypt, the extra legal enterprises, small and medium enterprises, run by what are generally 18 that should not be even contemplated in the future. There should be a large emphasis on restarting the enterprises that people see in everyday life, which is the small and medium-sized businesses, the retail businesses, the things that affect people's ordinary lives so that they get some sense that they're returning back to a state of normalcy. And the overall mentality here, we're often told by the Russians that you treat us as if we were a conquered people. And the Iraqi people are in that position. So I think that we have to be doubly careful in the whole projection of the American intervention there that they are not treated as the objects of benevolence, the objects of charity. In some sense, the way to put this is to say that we should not give them aid in the sense of trying to do things for them, that we should try to put the tools in their hands and then let them rebuild their own country as much on their own, than us to give out contracts and the like, which would, as it were, do it for them in a great show of American benevolence, which would only preserve them in this position of being powerless and humiliated. And then one practical point I just wanted to raise which I think is very difficult to judge right now. But the Middle East is the only region of the world that doesn't have a regional development bank. There are development banks for all the other regions of the world. For obvious political reasons, it's been hard to do that. But if in fact in the future we're looking for some means of extrication, then to have a regional bank that's a cooperative effort of the nations in the region, might as well be something to look at. And finally, I want to just try to get you to look at the psychology of how this is viewed from the Iraqi people because I think they are in a very ambiguous position right now in their own psychology Do they want to make this occupation a success? Or do they not? They all want to rebuild their own country. But they're put in a position where if they cooperate with the occupying power, as in Germany and as in Japan, well, that was 55 years ago and we still have bases in Japan. We still have bases in Germany. And they didn't have oil. So if you're an Iraqi looking at this situation and say, do I really want this to be a success and still 50 years from now have American bases in the country or not? And so, the fundamental point has to be to somehow make that political switch so that they're not working to make the American occupation a success, they're working to rebuild their own country for themselves. 25 Germany. These populations were so much more homogenous compared to what we have in Iraq. So this tends to make me less pessimistic. I'm just wondering if any of you have given any consideration to the restoration of private property rights on the original owners and the developers of the oil wells because, in Cuba, we're concerned about that all the time, even though it's been 40 or 50 years. There are still people who have claims about property ownership in Cuba. And I'm just wondering -- I don't hear much talk about that and it seems like maybe we should give that some consideration. Also, on the debt elimination, I think it's an academic question. They're not going to pay the debt. And it's always interested me that when we talk about debt repudiation, we always have to talk about an appropriation. So if they owe us money and we can't pay it, why don't we just write it off the books? It makes me suspect that somebody is going to get paid off that probably really doesn't deserve it, or they should get in line. So I'm always concerned about appropriating money for debt forgiveness. But if we did have the restoration or the implementation of private property markets, I think the idea of capital is irrelevant. The money will go there. That's all there is to it. We don't need huge appropriations. So it is more important that we have the right rules set up, of course, by those who are there. But my question is a political question in many ways because it seems like it's going to be so difficult. To me it seems like we have three countries over there. Iraq was an artificial country. It was designed by Europeans. It was designed after World War I. And is it conceivable that even with our occupation and our 150,000 troops, more troops now than we needed to liberate Baghdad. We need more troops and all these billions of dollars. My question is, how long do you think we can do this? How long will the American people tolerate it? And is it achievable? Maybe, in reality, if we knew right now it was unachievable because, already, we've had Rumsfeld say that, oh, well, we can't have an outright election because if it goes the wrong way -- and the majority would not vote what we want. So it may well be that the only solution is going to be probably three different countries there. And maybe we're fighting a losing battle. And I just wonder if you have some comments, especially how long do you think we can go without having success? I think Mr. de 26 Soto said, we'd better have success and we need to have success. So I'd like to hear your comments. Dr. Bronson. Mr. Paul, thank you. In terms of answering your constituency on nation-building, there's a counter-intuitive aspect to it that makes understandable why everyone is so confused. The more committed and more present you are up front, the faster we can pull our men and women home. And the reason for that is Iraqis are looking to go back to work. They're looking to go on the streets. They need an authority there and a heavy American presence. As long as chaos reigns, everything takes longer. Everything is more expensive. The Administration's recognition that more military police, and more soldiers, where needed is actually a good sign. It bodes well that we may actually be able to pull out earlier because if you allow the sort of chaos because we don't have enough people and commitment there, it makes everything much harder. Will Iraq break down into three distinct territories? If we don't stay committed, there is the possibility of it. But I think if you look back to original meetings that the opposition was having in the early 1990s, there was a preference, for instance, in the Kurdish community, their first preference was to have their own independent state. They also recognized that that was unlikely to happen. The second best alternative is participation in a full and free Iraq. We need to keep them focused on that, that their first preference is unattainable, but their second preference is truly attainable. And that gets back to some of these economic and political issues we're talking about. We need to think through how the oil from the north and the south and then resources go back to the provinces. As long as you can get that kind of system going where the money goes in and goes back out, you will keep Iraq whole. But if there is no organization committed to that reality, people will start fighting over keeping that oil in the north and the south and that will be a problem for Iraq. Representative Paul. You assume that it is crucial that it be kept whole. Is that correct? Dr. Bronson. That's right, I do. If it is not kept whole, all of the fears of the critics of this war will come to pass. And that is because if it starts fracturing, you will certainly see Turkey moving in because they will be worried about an independent Kurdistan on its border. 30 eastern Europe do you feel has most successfully undertaken that approach? Dr. Ellerman. Well, all the countries use very mixed programs. You've got to almost go program by program. But in Poland, for example, what they call privatization by liquidation program was a type of lease buy-out. And ESOP is like a lease buy-out, where the ownership goes to the management and the workers in it, but they have to pay it off over time. So it's like a lease purchase arrangement where the company itself pays it off. Something like that also happened in Hungary which was very successful. The country that I used to live in and worked in was Slovenia, and it was certainly very successful in Slovenia. So something like that is a way of empowering people, a way of giving them a stake fairly quickly. And for your question and for the previous question, this idea of us getting into nation-building, what I keep trying to say is we have to get the reconstruction effort conceptualized as their building their own nation, not as us doing nation-building to them. And something like the ESOP, something like these programs where people can formalize their property rights and feel that they can then know what they can do, they're empowered to do it, and they can go further, that's the key thing to make it their effort and not ours. Representative English. Thank you. And I need to head to the House floor, so I thank you, Mr. Chairman. Senator Bennett. Thank you, sir. Senator Sununu? Senator Sununu. Thank you, Mr. Chairman. Mr. Al-Rahim, you mentioned an organization established in the '50s or '60s you mentioned as a good model, a good structure for coordinating and maybe identifying prospective investment. What is it about that model or that structure that works from an economic perspective or a cultural perspective? Mr. Al-Rahim. Mr. Sununu, that was a development board set up in the '50s, independent of the government, staffed by technocrats, where, at the time, this was prior to the revolution, the government decided to allocate 70 percent of oil revenues to this board. And the board also had the benefit of a number of prominent international economists invited to it. The attraction of that is that the revenues that came to this board were kept out of government budgets, so that people couldn't spill over and start using that money. And that money was really earmarked just purely for development work. 33 percent of the people who work in the private sector because they work outside your system, that you really don't know who is living where in 90 percent of your land, you have every political interest for that to change. I have not found resistance for change coming from somebody saying, well, it's all right. 90 percent can live outside the law. I don't really care if they have property rights or not, because the consequences of not having property rights are not only the fact that you don't get development because credit, investment, is all based on property rights. But it's also that you can't even police these places. You don't know where Osama bin Laden is hiding because you don't have a system of addresses. You cannot participate in the global economy. Where the danger comes from, sir, is the following one. It has a lot to do with ideology and with cultural myths. So let me tell you a little bit just how we work there in two minutes and why we're optimistic about the fact that these changes will be adopted. For example, Egypt has been trying to pass a mortgage law for many years now and has been unable to because the forces of resistance say, how are you going to have a system whereby people are able to use their homes or their chattel, their goods, their animals, their equipment, to guarantee to secure a credit? Because credit only functions where people have something to lose. That's what basically creates the trusts and that's what allows you also to enforce noncompliance. And therefore, the idea is you can't impose this on poor people. Therefore, you will not be able to pass a mortgage system. That has been stopping them for years and years now, if not decades. What we do is try and look at the dark side of the economy because it actually provides the answers in an unideological form. So we start asking, for example, how do people in this large extra-legal sector of Egypt, but we could also be talking about Mexico, survive on a day-to-day basis within their small enterprises? Do they get credit? And the reply is they do. And the question then is, how is it guaranteed? And it's guaranteed by an instrument which, as a matter of fact, the Arabic culture created 700 years ago, which is the check system. I think it even comes from an Arabic word. There were Arab checks circulating all the way up to Shanghai 700 years ago. 36 This is, after all, the Joint Economic Committee. We want to talk about the impact economically on the United States. And let me just philosophize for a minute and then get your reactions, any of you. Dr. Ellerman, you're in this field as well. Looking back at the examples that have been talked about here, Japan and Germany at the end of the Second World War, those were enormously expensive operations on the part of the United States of America. Japan at least dealt with a very, very different culture. The Germans were used to a western style of entrepreneurial activity, the kind that would be compatible with their neighbors. The Japanese were a feudal empire. Dr. Ellerman, MacArthur kept a bridge on the other side of the chasm. He did not eliminate the emperor. Indeed, when Japan was being bombed, they did not bomb the Imperial palace. I remember as a businessman driving through the streets of Tokyo with my manager when I owned a business in Japan and looking at all of the buildings, some of which were modem skyscrapers and some of which looked much more traditional. And I asked, how many of these buildings were built since the Second World War? And the answer was all of them, because every building in Tokyo, with the exception of the Imperial Palace and the Diechi Insurance Company was destroyed by the American bombs. So MacArthur very wisely kept at least one toe on the old bridge by keeping the emperor in place, but eliminated the system of slavery. We don't realize that the Japanese had slaves in the 20th century, in the feudal system that they had. The woman who managed my business in Japan was part of the team -- she was a translator for the American occupation forces and was part of the team that went into those areas and told these people, you're now going to have property rights. Told these people, you are no longer slaves. How long did it take MacArthur to make that transition? Seven years? Five years? Something along that line. How much did it cost us? I don't know. But it was huge. Dr. Bronson, it was obviously worth it. Japan, even with its deflation and problems now, is still the second largest national economy in the world, a major trading partner. Most Americans love Japanese cars, if nothing else. We have created an island of stability and prosperity in a part of the world that desperately needed it. And we have the opportunity to do the same thing here -- create an island of stability and prosperity, property rights, proper kinds of capitalism -- I remember the Russian ambassador saying to me when we were talking about some of their 37 problems, we've had plenty of shock, but damn little therapy. And you're right. We did not do the Russian thing right, and we need to learn from that and do the Iraqi thing properly. Am I just a rosy-ġlasses idealist here who's looking at the best thing? Or is this in fact an enormously valuable opportunity, how difficult and dangerous and expensive and timely it may be? Is Dr. Bronson really right, everybody, that this is overwhelmingly worth all of the challenge that we need to put into it, and the advantages -- being very selfish -- the advantages to America, to our children, in terms of what could happen out of this, could be as great as the advantages that came to us because our parents did what they did in Japan and Germany at the end of the Second World War? That's a philosophical question, but I think that's what we really want to deal with in this hearing as a whole. Responses? Mr. de Soto? Mr. de Soto. Well, one reply to your question is, regardless of whether that's the way it should have taken place or not taken place, your occupation of Iraq, the fact is that it's done and you're there. (Laughter.) And now that you're there, it is an opportunity, not only because, Senator Bennett, it's an island of stability, but it's because these islands of stability are very contagious. Senator Bennett. Yes. Mr. de Soto. In the case of China, you didn't get it at the first throw with Chung Kai Chek. But by leaving behind the Brits two ports, with market economies and freedom, at least economic freedom, Singapore and Hong Kong, by allowing widespread property in all of these places, including Japan, what is today South Korea and what is today Taiwan, after 40 years, now the larger continent is also following. It's very contagious. If it fails, that's also contagious as well. When, for example, you've done similar things in Latin America, but only for the purposes of just occupation, then withdrawing, that has not been contagious at all. So I do believe, Senator Bennett, that what happens in Iraq since the eyes of the world are upon you, is going to very much determine the future of the whole Middle East, and will bolster the arguments that markets and freedom are something that transcends cultures or, on the contrary, will strengthen the hands of all of those people who say, we're not all built for those kinds of systems. Senator Bennett. Dr. Bronson? Dr. Bronson. For the record, let me say that I think that Dr. Bronson is right. (Laughter.) 1 46 institutions, having been largely emptied of their contents, no longer have much use for public subsidies. Gun control is being kept within reasonable limits. (Although the occupying authorities are trying to discourage possession of heavy munitions, AK-47s and other assault weapons-guns of the type whose manufacture Tom DeLay and most of the House Republicans plan to re-legalize back home have been given a pass.) And, in the absence of welfare programs and other free-lunch giveaways, faith-based initiatives are flourishing. The faith in question may be Iranian-style militant Shiism, but at least it's fundamentalist. The Bush Administration no longer flaunts its contempt for nation- building abroad, but it remains resolutely hostile to nation-building at home. Its domestic policy consists almost solely of a never-ending campaign to reduce the taxes of the very rich. Not all of this largesse will be paid for by loading debt onto future generations. Some of it is being paid for right now, by cuts in public services-cuts that outweigh the spare-change breaks for less affluent families which the Administration, in selling its successive tax elixirs, has had to include in order to suppress the electorate's gag reflex. The pain is especially acute at the state level, where net federal help is in decline. States are cancelling school construction, truncating the academic year, increasing class sizes, and eliminating preschool and after-school programs. Health benefits are being slashed, and a million people will likely lose coverage altogether. In many states, even cops are getting laid off. As it happens, these are the very kinds of public services that America's proconsuls are promising to bring to Iraq. Of course, being nice to Iraq does not necessarily require the United States to be nice to itself. Nor does denying medicine to kids in Texas require denying it to kids in Baghdad. The connection is more karmic than causal. But it's also political. Whatever one may think of the global democratic-imperial ambitions of the present Administration, they cannot long coexist with the combination of narrow greed and public neglect it thinks sufficient for what it is pleased to call the homeland. At some point-the sooner the better-a critical mass of Americans will notice. LOAD-DATE: June 9, 2003 PREPARED STATEMENT OF REPRESENTATIVE CAROLYN B. MALONEY 57 the failure of both the Egyptian effort over the past six years and the more recent failure of the Saudi gas initiative. Given the above factors fair valuation means that today ‘auctions' will not do the job! Better to develop a programme that values assets progressively over the next few years using a set of pre-agreed benchmarks; e.g. EBITDA, Gross Sales or market share etc. This would give the buyer the assurance of the acquisition through an executed purchase and Sale Agreement, while giving the seller (the government) part of the cash price today and part at a later date when the full value of the asset is more properly measurable. Such Agreements can also incorporate Put and Call options between the parties that further ensure a “fairness” to both sides. Second, as regards the broad distribution of the assets it is important to learn the lessons of Eastern Europe to avoid the economic disenfranchisement of the lower economic classes (essentially the overwhelming majority of the population in Iraq today) and prevent the emergence of a handful of oligarchs. This can be accomplished both through an extensive system of ESOPs and Trusts. For example, at every privatisation full vesting of any ESOP shares would be gradual, for example start paying dividend but delay conveying ownership (and thus the ability to sell) until full value was better reflected by actual performance and understood by the stakeholder. Alternatively, shares to be distributed to the population may be held by a specially created fund e.g. in the case of capital-intensive industries with small employee numbers. The Fund can then administer the assets until such time as value is realisable and it can find an equitable or attractive distribution strategy not only to the direct employees but also perhaps to a wider base of beneficiaries (e.g. regional or geographic within certain proscribed guidelines). A. Debt Forgiveness & Re-Scheduling An important feature of the economic plan is clear and final resolution of the debt issue as it impacts almost all aspects of the program. New lenders need to know what other creditors are owed before extending new facilities. Investors need to understand the solvency status of the country, the local government must properly budget to meet its obligations and individuals must achieve a level of confidence before they start investing or saving. Bona-fide commercial debt should be re-scheduled in conjunction with the Paris Club. Government debt extended by the old supporters of the Saddam regime must be totally forgiven for obvious reasons. 66 good if the records they contain do not reflect real possessory rights on the ground. And even if Iraq's legal system could be jump-started tomorrow, it is doomed to failure because its laws will not connect to the reality of how most people do business when freed from authoritarianism and will thus be unenforceable. Throughout the developing and post-communist world, from Russia to Brazil —and now in Iraq— the real challenge of creating a property system is to design it in such a way that the poor and middle class citizens holding extralegal assets will voluntarily register those assets and transactions and bring them under the rule of law of a market economy --not because they are forced to but because they recognize that it is easier and more profitable to comply with the law than to work outside it. Law will have to be redesigned and adapted to the changing needs and expectations of common people no longer controlled by a dictatorship. That is the only way a property system can work in a non-authoritarian country. Why Property is so Important for Creating the Rule of Law in Iraq Creating a property system is more than just building a system to record ownership; it is the cornerstone of the rule of law and the market economy. We believe that a property system has to be designed so that it can integrate all of a nation's assets and provides the framework of rules that organize the market, the titles and records that identify economic agents, and the contractual mechanisms that allow people to exchange goods and services in the expanded market. It is property law that provides the means to enforce rules and contracts along with the procedures that allow citizens to transform their assets into leverageable capital. Therefore, if the property system is not designed to enable owners to enter into the market economy, property will be reduced to its ownership protection function and the poor, even with titles in hand, will be excluded from the market economy. That is also why the ILD program to create an inclusive property system is more than just about land. We want everything that people use and possess to come under the rule of law so that everyone is not partly “legal” and partly in the shadows but fully governed by the rule of law. A property system should be able to represent all kinds of assets --not only land, but also businesses, chattel, and whatever other things people own— in standardized and universally accepted records that allow owners to use their belongings and track records to guarantee credit and contracts. We make sure that beneficiaries of property programs are also in a position to access the instruments that store and transfer the value of their assets, such as shares of corporate 67 stock, patent rights, promissory notes, bills of exchange, and bonds. We design the property system so that addresses can be systematically verified, so that assets can be described according to standard business practices, so that people can be made to pay their debts, and so that authors of fraud and losses can be easily identified in a expanded market. That is how the rule of law begins with property law that protects what poor people cherish the most and leads them quickly to understand the value of a system of rules that applies to everyone. What needs to be done before implementing an Inclusive Property System for Iraq The ILD program rests on a strategy whose objective is not just to consolidate the legal rights of those who had property under the Baath regime or its predecessor but to give all Iraqis the right to have property rights. Bestowing such “meta rights,” emancipating people from bad law, and creating an inclusive property system is not about drafting elegant statutes, interconnecting shiny computers, or printing multicolored maps. Iraqis know all about that. What Iraqis need is a property program supported by a well-thought-out political strategy that motivates Iraqi leaders to be deeply committed to putting property and capital in the hands of the whole nation, thus giving citizens the incentives to create the institutions of a democratic and free society which they can use to safeguard and advance their objective interests. That is exactly what the Western nations did – create legal property systems supported by well-thought-out political strategies. That is, for example, what Thomas Jefferson did in Virginia at the end of the eighteenth century, when he increased the fungibility of property by abolishing, among other things, the practice of entail. Similarly, when Stein and Hardenberg set the stage for universal property rights in Germany at the beginning of the nineteenth century, when Eugen Huber in Switzerland at the beginning of the twentieth century and the Japanese reformers after World War II began to integrating the dispersed property systems of their countries, they too employed carefully planned strategies to storm the barricades of the status quo. They also made sure they were armed with astutely aimed legislation that permitted government to create popularly supported, bloodless revolutions that could not be halted. That is why the program we propose for Iraq takes the form of a transformation strategy that is based not only on our experience in the field but on the lessons that the ILD has learned from the successful transitions to market systems in the USA, Europe, and Japan during the 70 trusted by everyone. One can then proceed to design and help enact a legal property system that consolidates the meaningful aspects of the disparate and dispersed extralegal arrangements (including procedural regulations for refugees and displaced persons) into one modern, codified system that Iraqis will freely choose to abide by and that will meet with a minimum of resistance from official bureaucracies and the formal sector. In this way, the new government can begin to catch the wave of rising expectations instead of being engulfed by it. Lawlessness is terrible, but the whole notion of security is far more complex than what would be achieved by putting a cop on every corner. The rule of law is not the iron fist imposed from above, it is a consensus about people's respect for one another's person and property. It is a social contract that people agree to keep because it protects the sources of their lively hood, their assets, and the customs that they respect and obey. PREPARED STATEMENT OF -