Truck and Barter

Iraqi Dinar Discussion (June 22 - ... )

As of June 22, 2005 this is the new post discussing the Iraqi Dinar.

Here are the earlier posts:

1) June 16, 2004 - June 27, 2004
2) June 27, 2004 - November 6, 2004
3) November 6, 2004 - April 11, 2005
4) April 11, 2005 - June 22, 2005

If you guys & gals encounter any problems, email me at kevin-at-truckandbarter.com.

Iraqi Dinar - Discussion & Commentary

This post is now closed to new comments. Here is the link to the current forum.

Here are links to the three previous Iraqi Dinar posts on T&B:

1) June 16, 2004 - June 27, 2004
2) June 27, 2004 - November 6, 2004
3) November 6, 2004 - April 11, 2005
4) April 11, 2005 - June 22, 2005
5) June 22, 2005

If you guys & gals encounter any problems, email me at kevin-at-truckandbarter.com.

Iraqi Banks Gaining Ground

This is a couple days behind, but I thought it might be of interest to a few visitors: Iraq's Ailing Banking Industry Is Slowly Reviving.

Still, the fall of the Hussein regime has encouraged the private sector.

At least two new banks have opened since April 2003, and eight others have submitted applications to open. Foreigners have begun venturing in, taking advantage of investment laws that grant non-Iraqis a level of access to the country unprecedented in much of the Middle East. And Iraqi banks, mostly barred by Mr. Hussein from ties to the outside world, have been welcoming foreigners and venturing abroad as well.

It's a largely unresearched position, but I still contend that economic development will preceed physical security on the level we'd like to see (that is, without the need for armed patrols in neighborhoods). People will be far less willing to join or tacitly support armed resistance if they've got something to lose. Which makes this a disturbing statistic:

Indeed, Iraq's tight credit market has gotten worse. According to a study by Citigroup, which has no banking operations in Iraq, nearly 30 percent of the country's banking assets remain uninvested, up from 12 percent in 2001.

Free For All on the Iraqi Dinar

THIS THREAD IS NOW CLOSED.

BUT THE CONVERSATION CONTINUES ON T&B, ON THE NEW POST HERE.

Here are links to the three previous Iraqi Dinar posts on T&B:

1) June 16, 2004 - June 27, 2004

2) June 27, 2004 - November 6, 2004

3) November 6, 2004 - April 11, 2005

Iraqi Macro Update

The IMF has a new report on Iraq:

… Iraq suffered from severe economic mismanagement, and over a decade of international sanctions. GDP per capita is estimated to have dropped from over US$3,000 in the early 1980s to as low as US$200 in the early 1990s. Although GDP per capita recovered somewhat to an estimated US$800 in 2001, it fell again to about US$500 in 2003 as a result of the most recent conflict. Iraq’s human development indicators, which had exceeded the regional average in the early 1980s, are now considered among the lowest in the region. Unemployment is running close to 30 percent and underemployment is pervasive. Furthermore, about 60 percent of the population is thought to depend exclusively on the government’s food distribution system for subsistence.

Brad Setser thinks the report is a gold-mine. He notes two striking facts:

1. In 2004, the amount Iraq will spend importing (yes, importing) refined petroleum ($2.1 billion) will exceed the amount Iraq received in grant aid from the world (transfers are projected at $2.05 billion)

2. Iraq is a country where government spending is more than a 100% of gross domestic product (2004 budget is $22.6 billion, 04 GDP seems to more like $21.2 billion)

No wonder Iraq is such a mess.

Iraq: Subsidies and Deficits

While the US military continues to fight terrorist insurgents in Iraq, the Iraqi planning minister has been readying to fight subsidies:

BAGHDAD, Oct 23 (AFP) - The Iraqi government plans to phase out slowly subsidies on basic products, such as oil and electricity, which comprise 50 percent of public spending, equal to 15 billion dollars, the planning minister said on Saturday.

Unveiling a three year economic plan, compiled by in cooperation with the World Bank and the International Monetary Fund, Madhi al-Hafez pledged "a progressive programme to suppress subsidies... (which) constitute a significant burden on public finances."

Most Iraqis relied on subsidised fuel, electricity and food rations under a United Nations-sponsored oil-for-food programme during the regime of Saddam Hussein.

This could seriously hurt real incomes of many Iraqis if not done in conjunction with a plan to distribute some oil profits to Iraqis.

Also of note are the simple means of creating a budget deficit--i.e. an excuse for international aid--just use an incredibly conservative estimated price of oil:

Iraq itself is predicted to generate revenues (profit?--ed) of 19.4 billion dollars which, coupled with external aid, will bring total revenues to 23.7 billion dollars.

But the budget is seen at 30.4 billion dollars, meaning a deficit of some 6.7 billion dollars, including foreign help, and 11 million (sic) dollars without.

The 2005 budget is based on a price of oil of 26 dollars-per-barrel -- a hugely conservative estimate, considering the price of oil, which ended the week at a record 55.50 dollars a barrel.

"We have put very conservative figures on oil prices and if it continues to rise we might be able to cover the deficit," said Hafez.

Real Interest Rates in Iraq

According to a frequent commenter on my Iraqi Dinar post, the private Baghdad based Al-Warka investment bank is offering 15% nominal interest on savings accounts (denominated in Iraqi Dinar). According to Central Bank data (pp. 28-30), the Iraqi government banks were offering 6.3% this June, down from 7% in January. If I'm reading this document right, Iraqi government debt is rediscounted at 6.35%.

The public banks are offering loans for 11%. If the private banks offer 15% on savings, how high are the interest rates on their loans? I'll try and find out.

Even if I can, it's tough to extract the real interest component from the nominal figures , because World Bank price inflation estimates in Iraq vary from 8.5% for consumer prices to 15% for the GDP Deflator. Meanwhile, the Central Bank bulletin (p. 29) shows price indices increasing one month and decreasing the next (however, food prices continually decreased and rent continually increased in 2004).

Overall, it seems that real interest rates vary widely in Iraq, so it's hard to come to any solid conclusions about the cost of capital made available in financial markets.

As an aside, I wonder how much capital is made available by the sometimes maligned Iraqi Dinar speculators who hold their currency in private Iraqi Banks...

More Troops Yesterday -> Lower Readiness Today?

"We never had enough troops on the ground..."

Prior to the war, the Army chief of staff, Gen. Eric K. Shinseki, said publicly that he thought the invasion plan lacked sufficient manpower, and he was slapped down by the Pentagon's civilian leadership for saying so. During the war, concerns about troop strength expressed by retired generals also provoked angry denunciations by Defense Secretary Donald H. Rumsfeld and Gen. Richard B. Myers, the chairman of the Joint Chiefs of Staff.

Countless times, I've read this type of criticism of the Bush/Rumsfeld tactic of sending in fewer troops to Iraq than many generals wanted. Now, I don't want to get into who is "right" or "wrong" on this matter, or on the morality of invading Iraq in the first place; instead, I'm assuming Iraq had to be invaded, and that the long-term goal is to forcibly democratize and liberate Iraq and the rest of the Middle East.

We know that Bush/Rumsfeld paid a large price in Iraqi instability for having fewer troops. But I have not seen addressed the question of whether having sent in more troops initially would have actually cost less in the long run, or would have better met long-term objectives.

Note that I cannot answer this question, but I think it must be asked.

I want to point out a tradeoff that many people seem to be ignoring, as if the counterfactual doesn't matter: higher troop levels at the beginning of the invasion would mean much lower average unit personnel readiness today, and that this would make it difficult to operate effectively now and in the future.

I can argue reasonably that if Bush/Rumsfeld had sent in 100,000 more U.S. troops at the beginning of the Iraq invasion--to patrol the streets, secure the borders, etc.--those extra troops would not be in a top readiness category today.

In reality, the troops not sent in actually did later on refresh and replace those who served out their combat tours and those wounded and killed. With a larger invasion, even more reserves would have had to have been called up to replace the initial cohorts. Note that this is not really an arguable point; if a unit is on the ground, in theater, with great likelihood its personnel readiness decreases, without firing a single shot.

The tradeoff is not just "fewer men, more chaos"; it is also "more men, lower readiness". Which is better? Fewer men at the beginning mean a massive degradation of civil society; more men mean it's quieter earlier, but harder to complete the mission during the critical transition period to elections and self-rule. Hence, the strategy of sending in fewer could be justified on grounds that staggering entry into Iraq keeps personnel readiness higher than it would have been; later objectives are given greater weight. The long run goal is better met with a smaller initial footprint.

Of course, one could argue that sending in fewer troops increased the drain on personnel already in theatre, but I don't think those on the ground would agree that their lives are any easier by having more for a longer time. Instead, I think life is easier for troops if they are more frequently sent home, which is far easier to do if there are fresh troops to replace them.

More on Iraqi Unemployment

I previously linked to an Al-Jazeera report by Ahmed Janabi quoting unnamed economists at Baghdad University who concluded (through means unknown) that unemployment in Iraq was 70%, even though government estimates for the sum of unemployment and underemployment are about 50% (again, these are difficult to pin down concepts, and are used differently in every study or series).

I emailed Mr. Janabi and his editors, requesting the source and/or the authors' names or contact information. After several emails, I received this reply from Mr. Janabi:

Dear Kevin,

Sorry for the late reply. Actually, it was mentioned in the article that the source is a study conducted by College of Economics, Baghdad University. This is my source. The text of the study was published in the Iraqi press. I wish I could get you the text of the study, but sadly Iraqi newspapers have not linked to the internet yet i.e; they do not have websites yet.

Best Regards

Ahmed Janabi
Newsroom Journalist
Aljazeera Online

I replied, thanking him for his time, but asking for the actual source, which I noted I would have translated at my expense. After a week, Mr. Janabi has yet to reply. Reader assistance on tracking down the report is once again requested.

Iraqi Oil & Indonesian Planning

While Alex Tabarrok notes this Foreign Affairs article ($) on how to deal with Iraqi oil, those on the ground are getting exports back online:

Prices fell this week after Iraq restored full crude exports of two million barrels a day from its southern Basra fields and restarted deliveries at 450,000 bpd, half capacity, from its northern Kirkuk fields for the first time since May.

But the high price of oil caught some government planners by surprise. Hence our next Statsmerkwürdigkeiten award goes to the government of Indonesia, which continues its incredibly distorting "buy-high, sell-low" energy subsidy:

The steep oil price hike since May -- to as high as US$50 per barrel now -- has finally forced the Indonesian government to revise upward from $22 to $36 per barrel the average oil price used to estimate oil tax revenues and the cost of fuel for the current fiscal year....

The government... has decided to abandon its sensible, fuel-economic, 2002 policy to float domestic fuel prices on market quotations in Singapore to encourage efficient use, slash subsidies, target price support only to poor consumers (kerosene for household use) and, most importantly, minimize smuggling overseas. Consequently, fuel subsidies for 2004 will balloon to more than Rp 63 trillion ($7.08 billion), much more than total central government spending on its personnel (civil servants, the police and the military).

Since the government maintains domestic fuel prices way below actual production costs -- applying a blanket subsidy on all kinds of fuel -- the bulk of the subsidies may end up benefiting mostly private car owners (middle and top-income consumers). Most devastatingly, fuel smugglers will receive even stronger incentives, as their profit margins will skyrocket.

True, part of the subsidy will go on kerosene, which is widely used by poor people. But corruption will continue to divert quite a significant portion of this cheap fuel to industrial users and smugglers.

I understand the desire to help the (very truly) poor by keeping kerosene prices affordable, and clearly the result of this policy was highly unexpected. But that's the point that has to be noticed; this example demonstrates that inflexible policies that require a static world (or that require prices to remain within an historical corridor), can fail miserably when price-flexible dyamic markets perform their economic function... Simply put, the Indonesian government thought it could spend freely on subsidies, and didn't see this coming:

Until last year (when Indonesia was still a net oil exporter), any increase in international crude oil prices would give the government net additional revenues. However, starting this year, as the country is already a net oil importer of about 36,000 barrels a day, an oil-price hike immediately cuts into central government income as additional revenues are much less than additional spending on subsidies.

Ouch.

Iraqi Airways

Continuing our assessment of the once and future Iraqi economy, we focus on the state of Iraqi airports and the condition of Iraqi Airways, the formerly proud national air carrier. We start by noting that Baghdad International Airport is fully repaired, is being run by Iraqis, and that most other regional airports are ready for domestic flights:

There are approximately 108 airports and airfields throughout Iraq. Baghdad and Basra both have international airports, while Mosul, Kirkuk and Irbil have domestic airports.

Iraq's airports are heavily outdated, having suffered from a lack of maintenance and shortages of parts for a number of years....

Baghdad International Airport (BIA) is open and has successfully processed more than 4,500 non-military passengers since July 2003. BIA's commercial capability continues to be expanded by a number of renovations, while Basra has almost completed its commercial preparations. The evaluation of Mosul Airport's reconstruction requirements was recently concluded.

The airports in Iraq have, as in many of the country's sectors, suffered from a shortage of power, water, sewage and telecommunications, with new plans for the installation of a number of communications systems necessary for safe and effective air traffic control measures, enabling safe air travel.

Iraqis have their own share of Chutzpah; one example is the national carrier declaring in January that it intends to resume international flights, even though it cannot field even a single plane:

Iraq has invited international investors to help revive the country's national carrier by assisting in the operation of the five remaining planes from what was once a large fleet. A local newspaper advertisement said that Iraqi Airways was accepting bids to overhaul three Boeing 727s and two 747s. The planes have been inactive in the Jordanian desert and in Tunisia for more than a decade. "The planes are to be operated on joint basis, taking into consideration the experience and abilities of Iraqi Airways," reads the advert.

Wars and a crippling economic embargo have wiped out most of the Iraqi Airways fleet, except for the five planes, which were moved out of the country to avoid destruction during the 1991 Gulf War. Iraqi Airways has not operated an international flight since. The US-led administration in Iraq had planned to sell off Iraqi Airways. However, the plan was scrapped following objections from the Iraqi Governing Council (IGC).

Now operating as a skeleton company, Iraqi Airways still has status as a public enterprise under the jurisdiction of the Ministry of Transport. It is not yet clear when an Iraqi Airways plane could take off, or whether indeed the fleet is still operable. Baghdad International Airport (BIA) has been closed to regular traffic since last year, although it was repaired following damage from heavy bombing during the US-led invasion.

Indeed, this terrifying photo of an Iraqi Air 727 cockpit reveals the fleet to be almost irreparable. (The tails stored in Tunisa were vandalized and ripped apart for scrap).

I was going to write that there could be a thriving domestic and international aviation industry in Iraq, initially supported by cushy U.S. government contracts, and that the Iraqi authorities have chosen to shackle the industry in a bureaucratic mess. While possible, I don't think that would have been a likely outcome. The real, likely alternative to government ownership might have been a Russian-style oligarchic ownership by crooks and insiders. And I'm not about to argue that a cheap fire sale to corrupt industry neophytes is better than government bureaucrats. As detailed in this report:

Iraq Revenue Watch has obtained a confidential document that reveals plans to privatize Iraq’s air transport industry despite the CPA’s recent pledge to postpone privatization until a sovereign Iraqi government is in place. The powerful Khawwam family, which had close ties to Saddam’s regime, is set to assume control of 75 percent of Iraq’s air transport industry—bypassing any public bidding process. The deal, brokered by a senior official with the Ministry of Transport, would include the assets of Iraqi Airways, the national carrier, which at the same time is seeking to revive its operations. U.S. carriers are reportedly looking to partner with these post-war oligarchs-in-the-making.

As we have seen, there is little left to the actual airline except, perhaps, airport slots and a few marginal aircraft, so how big a threat this sale presented to the future airline industry could easily be overblown.

(Note: Image from this website.)

UPDATE 8-25: Iraq to Jordan test flight completed successfully:

(MENAFN) The Director of Iraqi Airways said that the airline sent a test flight from Jordan to Iraq, the first such flight by the state airline since the 1990 U.N. sanctions on Saddam Hussein's regime, the Associated Press reported.

An official at the airline's Amman office said that this was a test flight and comes as part of our effort to resume regular flights by Iraqi Airways at the end of this month.

In the first stage, Iraqi Airways will fly once a week from the Jordanian capital to Baghdad, while more routes will be added later.

For now, Jordan's flag carrier Royal Jordanian Airlines and the Virginia-based Air Serv are the only two airlines with regular passenger service to Iraq.

Iraqi Economy Update: 70% Unemployment Rate???

The macroeconomic condition of Iraq is impossible to cover thoroughly and objecively without reasonably accurate statistics, which exist for some government-controlled operations, and little else. Hence, data on the decentralized labor markets are nonexistent, except for nonscientific "expert" estimates, which I've already shown to be an inconsistent mish-mash.

One of the most recent estimates was made by unknown experts with unknown agendas at the college of economics at Baghdad University. On Aug. 1, Al-Jazeera reported:

A study by the college of economics at Baghdad University has found that the unemployment rate in Iraq is 70%.

The study says the problem of high unemployment is going from bad to worse, with the security situation deterioriating and the reconstruction process faltering.

No further detail is provided--like the authors' names, when this study was conducted, what methods were used (did they ask 10 men in Baghdad?), which geographical areas were included (probably excluding the Kurdish regions), and who funded the work. Are the sampling and nonsampling error 5% or 30%?

The article does note that scam artists are are rampant (absolutely credible), and the reporter is sticking to the story that most Iraqis believe that working for the US is treason.

The article spread like wildfire on alternative media outlets (Google 70% unemployment in Iraq), and I report it here only because I insist on finding out more. I have emailed the author of the Al-Jazeera article, Ahmed Janabi, asking him for either a copy of the report or its authors' contact information.I will not stop my inquiries until I get a copy of the report.

Note: Any reader who can connect me with the economists at Baghdad U. will be greatly admired and appreciated.

A Little Piracy Goes a Long Way

As I've mentioned before, the developing world might be a perfect place for open-source software to get a foothold. While the benefits of open-source products are numerous, the only one that really matters in the very short-term view of most places that are barely able to scrape together the money for one or two computers is the price. And, in the developed world, price has been one of the things open-source software has been able to compete on.

But what happens when the advantage is taken away? It turns out that, in Iraq at least, a good name will get you pretty far.

Reports from inside [Iraq] say curious citizens are keeping Internet cafes filled to capacity, that eager students are returning to universities to learn how to program and that high-end computer workstations can be bought for as little as $150 in city marketplaces.

But even with all the growth, there is still one aspect of technology that has yet to penetrate the country's borders: open-source software. With software piracy so rampant that a CD copy of almost any program can be bought for just 2,000 dinars, or $1, the demand for free software just isn't there yet, according to Ashraf Tariq and Hasanen Nawfal.

{...}

"Most of them just heard about Linux but are afraid of trying it. For home users things are worse -- for them, a computer equals Windows, and vice versa."

Just how hard do you think Microsoft will push to fight piracy in this case? "Path dependence" as an economic argument for resulting equilibria situationas is often a sort of last resort argument, an admission that for whatever reason, "things happened in such a way as to get us here, and now too many people cosider it too costly to shift to something different." One of the problems with it is that the starting point down a certain road is often hard to identify. Seems to me, though, that we might be able to pick this out as the starting point for the growth of Microsoft in Iraq.

Add to the argument certain biases in trade policy:

Though the United States has eased several restrictions governing the export of goods and technologies to Iraq over the past year, "publicly available" software, like Linux, remains caught in limbo because it implements certain security standards -- namely, strong encryption.

Linux developers say strong encryption is necessary to protect the security of businesses and Internet users. American policy makers believe it's a tool that terrorists may use to hide their communications from law enforcement officials. In light of the current war on terrorism, the latter argument has so far prevailed -- meaning anyone wishing to send a copy of Linux to Iraq must first obtain permission from the Department of Commerce.

Meanwhile, the Department of Commerce has classified Microsoft Windows and Sun Solaris as "mass-market encryption products," meaning that the vendors can ship them to Iraq without a license, according to Don Marti, president of the Silicon Valley Linux User Group and editor of the Linux Journal.

Simply because there are more Windows products available now, it's easier to sell them elsewhere. Economies of scale at its finest. The distinction, you'll no doubt have noticed, is rediculous. "Mass-market" is being defined here by volume rather than by sales outlet. Windows is "mass-market" because it is available more places, whereas Linux -- though sold through the same stores -- is not because of limited availability.

For reference, here is the relevant section of the Code of Federal Regulations for dealing with encrypted/encryption products.

Get the country hooked now, and they'll be more likely to come begging for more later. (You know, the similarities between software and illegal drug industries are so close, I don't understand why someone doesn't attempt to use insight from the latter to help explain the patterns of the former. Why do people shell out such high prices for such bad software? Why do they keep going back to the same provider when they can be hurt so badly by viruses? )

More on the New Iraqi Dinar

THIS THREAD IS NOW CLOSED. FOR POSTING NEW COMMENTS ON T&B, PLEASE USE THE NEW POST HERE.

Here are links to the three previous Iraqi Dinar posts on T&B:

1) June 16, 2004 - June 27, 2004

2) June 27, 2004 - November 6, 2004

3) November 6, 2004 - April 11, 2005

---

My previous post on the Iraqi Dinar exchange rate is perhaps the most popular post ever on T&B.

NOTE: For those who want to continue the conversation about the Iraqi Dinar, I recommend a new board, the Investor's Iraq Forum, or the new Iraqi Dinar Blog .

We continue our analysis by noting the spectacular losses that some speculators have accrued as the dinar has gradually been losing its position against the dollar:

Speculators who stashed away "Bremer dinars" earlier this year in the hope their value would skyrocket are suffering enormous losses as the official Iraqi currency plummets. Hit particularly hard are a high number of Egyptians, who had earlier raced to pick up the currency.

"Many people sold anything they could to buy Iraqi dinars," Mohammed al-Abyad, chairman of the Egyptian Foreign Exchange Association told IPS. "When the dinar went down these people lost a lot of money."

The Iraqi dinar was trading at one Egyptian pound (16 cents) per 50 dinars on the black market before its value dropped sharply earlier this year on news of escalating insurgency in Iraq. The pound is now worth 210 dinars on the black market.

"The black market has narrowed and the currency has no liquidity now," said Shady Sharaf, head of market research at Cairo-based al-Shorouk Brokerage. "The people cannot sell the dinars they bought, which presses on demand."

I highly suggest reading the rest of the article.

In January, Radio Free Europe noted that "Egyptian media reported last week that one in 10 passengers inspected upon entry from Jordan, Kuwait, and the Gulf States were found to be carrying Iraqi dinars."

I have yet to be convinced that the dinar will increase greatly in value, and do not own any dinar myself.

The Iraqi Dinar Exchange Rate

THIS THREAD IS NOW CLOSED. FOR POSTING NEW COMMENTS ON T&B, PLEASE USE THE NEW POST HERE.

Here are links to the three previous Iraqi Dinar posts on T&B:

1) June 16, 2004 - June 27, 2004

2) June 27, 2004 - November 6, 2004

3) November 6, 2004 - April 11, 2005

---

NOTE: For those who want to continue the conversation about the Iraqi Dinar, I can also recommend a new board, the Investor's Iraq Forum or the new Iraqi Dinar Blog.

You all have made about 1700 comments to this post, which I've archived in order to keep bandwidth down. To keep history preserved, all previous comments are downloadable in this HTML file.

You can also find useful comments on the other thread More on the Iraqi Dinar Exchange Rate, but that thread is now closed, also.

---

The CPA insists that the Iraqi dinar is very stable. However, I'm uncertain how to interpret the short-term volatility. (Check out the pictures in the link).

UPDATE: The best collection of images and links on the New Dinar can be found at globalsecurity.org. A whole bunch of people are speculating on the New Dinar:

Steve Foran headed to Iraq in January for risky but lucrative work as a truck driver, running a fuel tanker on dangerous highways with a soldier riding shotgun and hopes of banking $60,000 or more for the year.

But now he thinks he has found an Iraqi payday that could dwarf his Halliburton contract.

Like thousands of other U.S. contractors and troops -- and stateside Americans drawn by Web pitches from newborn businesses with names like BetOnIraq.com -- Foran is taking a chance on the new Iraqi dinar.

Today, the colorful currency that replaced banknotes bearing the portrait of Saddam Hussein isn't worth much. A dollar will buy about 1,000 dinars -- more if you're in Iraq, fewer if you're sitting safely in the United States.

But next month? Next year? Once Iraq is a stable democracy pumping oil like nobody's business? Who can say what the payoff might be?

If you want to buy Dinar, many companies are selling internationally; see for example buydinar.com, and their FAQ on how to avoid scams.

Yahoo has an up-to-date history of the US Dollar - Iraqi Dinar exchange rate on the international markets.

For some recent history, here is the CPA's explanation of the currency exchange. At the runup to the end of the conversion in January, exchange merchants were discounting old dinars.

Unemployment in Iraq

At Kikuchiyo News, Simon notes the apparent economic malaise in Iraq by summing up Colin Powell's response to Tim Russert:

In other words, don't count on your fuel prices to drop, but count on Iraqis soon getting even more screwed at the pump than you. Also at the grocer and at the power meter. Before all the Iraqis had to suffer through getting cheap gas and free food an electricity, paid for by oil revenues. Now, they will fortunately have the subsidies drop and the prices rocket up.

Note that the unemployment rate in Iraq exceeds 50%. Note also that Powell said nothing about rising wages. (My economic training is limited, but I generally understand that they tend to rise slower than the market basket. And that that condition is generally best avoided.... Finally, note that 60% of Iraqis depend on food aid to survive.

It's impossible to say concisely what unemployment means now in Iraq, or what it meant before the invasion, and before the UN sanctions.

Unemployment at 50% seems to be a popular misconception. Actually, 25% seems more likely, although some neighborhoods can have rates of 50% to 60%. (See this February CPA brief). Also, this 25%--"28% late last year"--figure does not include the Kurdish areas, which have been better off for quite some time now.

I don't know what the unemployment rate was before the fall of Saddam; but one non-poll estimate put it at... take a guess... 50% , so you make up your own minds. We know the economy was a quasi-socialist basketcase before, and it is by no means clear that the Iraqi unemployment picture is worse now than in 2000 or 2002.

Although unemployment rates may be improving, and appear to be at or below pre-war levels (do you trust the data?), I'd argue that the unemployment picture should be seen as a part of a severe short-term adjustment to a long-term crisis.

Immediate employment by the American/Iraqi central government--in the form of a jobs program--is unlikely to generate a dynamic growing economy outside of the oil industry, which is the only long-term solution. A jobs program will retard short-term adjustment (although ease short-term pain), and could cause difficulty later on, as the Iraqi government fires people it cannot afford to employ indefinitely.

Sources agree that many of the current unemployed are former military and government officials, who could have better references (to put it mildly).

Such a high rate of unemployment as 50% is also extremely inconsistent with the building boom in major cities, and the enormous purchase of automobiles and the like. Why are unemployed people spending so damn much?

It's also unclear how those in outlying areas are affected economically by the collapse of the regime, and the new spending on reconstruction.

I can't estimate real wages very well, because many nominal wages are rapidly increasing, while prices and the consumer basket composition are rapidly changing. Price rises of some necessities must be balanced against the flooding of markets for previously widely unavailable goods (like cars and laptops) which I gather has driven down their prices immensely...

UPDATE: One myth is that a World Bank-UN survey pegged unemployment at 50% last October. "An October survey released by the United Nations and the World Bank put unemployment at around 50 percent."

It turns out that 50% was just a guess (see report here), "Exact unemployment is not known, but estimates are that 50 percent of the labor force is either unemployed or underemployed."

Presumably that 50% is half unemployment, half underemployment, which seems to imply that the 25% unemployment rate is the only data point we have. We should use it when things look bad, and when things look good.

Also, in this context underemployment may (likely) mean overqualified for the job, even if that job earns more than the alternative occupation one is trained for. Such is life in a transition economy...

Thamir Ghadbhan & Iraqi Oil

"We are totally now in control, there are no more advisers," Ghadbhan said. "We are running the show, the oil policies will be implemented 100 percent by Iraqis."

I have no idea whether a bulk of ordinary Iraqis actually care who runs the industry, as long as profits go back to themselves. It seems, however, that unlike the Saudi oil industry run by foreigners, not only will top decisions be made by Iraqis, but the day-to-day operations are run by Iraqis:

In March, al-Obaydi, who has spent 34 years with North Oil, traveled to Bahrain for his first oil industry seminar outside Iraq since 1990. The trip was part of a broader effort that has sent almost 500 Iraqi oil experts abroad for technical exchanges with specialists with companies such as ChevronTexaco, ExxonMobil and Shell.

Under Saddam, Iraq was isolated from technological advances in the oil industry. Vital practices such as three-dimensional seismic surveys, directional drilling and gas injection remain unfamiliar here.

The new head of the Iraqi Oil ministry, Thamir Ghadbhan (pictured above), will have to centrally direct the entire national oil industry. I wish the technocrat the best of luck.

Mr. Ghadbjan briefly oversaw oil operations in Iraq, after the initial liberation, although he was replaced during most of the occupation:

The new oil minister is Thamir Ghadbhan, a British-trained former Iraqi official, who has effectively presided over the oil industry since he was installed last year as the ministry’s “chief executive” by the US-led Office of Reconstruction and Humanitarian Assistance. Ghadbhan has worked closely with Phillip Carroll, former US chief executive of Royal Dutch/Shell, who oversaw the ministry on behalf of the Bush administration.

A more traditional biography:

Oil Minister Thamir Abbas Ghadban: born 1945 in Babylon; earned bachelor's degree in geology from University College in London, master's degree in petroleum reservoir engineering from the Imperial College at the London University. Has written and co-written more than 50 studies on Iraqi oil fields. Was detained and demoted from his position in the former regime's oil ministry for supporting democratic reforms.[Emphasis Added].

The more recent history of oil as a political weapon was catalogued by Reuters.

The experienced former head of planning at Iraq's oil ministry became "chief executive" of the ministry after a U.S.-led invasion toppled Saddam Hussein in April 2003.

He took on the challenge of raising spirits in an oil industry that survived years of crippling United Nations sanctions but continues to face uncertainty over crude production vital to reviving Iraq's ravaged economy.

Ghadhban lost his position when Ibrahim Bahr al-Uloum, from Iraq's Shi'ite majority, became oil minister in what industry insiders say was a move that reflected party politics.

"They wanted to cater to the parties. He is a very capable technocrat who knows the Iraqi oil industry. He started as a reservoir engineer and was eventually moved to the ministry," said Fadhil Othman, an Iraqi exile with 20 years' experience in the top ranks of Iraq's State Oil Marketing Organization.

Bill Jamiseon on the Iraqi Economy

If I were to ask you, "Just how badly is the Iraqi economy doing?" you'd rightly condemn the inherent bias in my question.

Similarly if Bill Jamiseon of the Scotsman asks us , "How will Iraq’s economy be run after June 30? And does it stand a fighting chance?" we know we're in for a rough ride.

After recounting the nominal change in central government control, the attacks on, and the defense and rebuilding of Iraq's oil industry, the enactment of the central bank law, the attempt ease the foreign debt burden racked up by Saddam, the massive amount of private and government funds creating new jobs rebuilding after more than a decade of infrastructure neglect, and noting that the Economist predicts that GDP will grow 60% this year and 25% the next, he still insists that the road to recovery is "invisible to many".

If he wants a few micro level anecdotes--from Iraqis and visible to Iraqis--, he should read Omar, who questions his media's insistence that unemployment is rife, and talks about the amazing increase in real total compensation for some.

We are told by Mr. Jamiseon:

Even assuming that the formidable security and political problems can be overcome, rebuilding Iraq’s economy will not be easy.

Question: Why should the basic rules of Iraqi economic expansion, progress, and prosperity be any different than those that apply to the US, India, Chile, or Afghanistan? Remember, Mr. Jamiseon already controlled for security and political problems affecting the economy, and he still thinks there's a huge problem that needs to be understood and solved by someone. Does this imply that specific cultural factors or economic rules make ordinary Iraqis less likely to succeed economically?

I can't say that living under a brutal fascist dictatorship leaves entrepreneurial energies intact--as such a government winds up torturing, maiming, wearing down, killing, or exiling the best and brightest--but it sure seems like a good assumption that the vast mass of Iraqis want themselves to succeed economically, and don't have extraordinary cultural barriers.

How about the rules of economic order? The day is fast approaching when Iraq will be a relatively free country politically and economically. This political-economic order is precisely what a lot of Americans now mean by the term "democracy". The rules of the economic order are favorable in a democratic Iraq, although not all the requirements for economic expansion are in place.

Adam Smith once wrote:

Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things

. Under the CPA, Iraq has had easy taxes and tolerable justice, but little peace; it looks like this 2/3 solution will continue under the new government. And to that extent, I agree that Iraq's economy will have difficulties.

But I for one do not want to have the CPA or any other organization be in charge of "rebuilding" the Iraqi economy, when political leaders should be doing their best to secure a long-term peace (which might mean short-term urban warfare).

An economy is best run when command and control of resources is in the hands of a diverse group of people with specific knowledge of effective consumer demand and low-cost supply conditions. This is true regardless of whether an economy is being "rebuilt" or "built from scratch". Having a previously existing infrastructure presents more challenges and options, but it is not a categorically different kind of economic development.

We are also told:

The picture painted in the Iraq investor road show section of the CPA website is almost laughable in its optimism, with headings such as "Iraq’s economy should recover quickly" and "Iraq’s economy has already started to rebound".

Unless Mr. Jamiseon is accusing the CPA of blatantly lying, and has sources to back up his pessimism, wouldn't you think the CPA members--being in Iraq and dealing with Iraqis all day long--would actually know better?

Besides, are incomes in Iraq visibly higher today than under Saddam? Yes, they are. I won't refer to anecdotes and pictures showing refurbishing and construction. Instead I refer you to question 24 of this poll of Iraqis conducted by the Pan Arab Research Center--"Has there been an increase or a decrease in the family income compared to that of before the war?". The results: 5% of Iraqis have had their income increase a lot, and 36% somewhat, while 43% say it's the same and 12% say it has decreased somewhat and 4% say it has decreased a lot.

Looks to me like the Iraqi economy has already improved. Hope dawned a long time ago...

UPDATE: Here aresome results of an Oxford Research International of Oxford poll of 2700 Iraqis conducted in March.

Under "Ratings of Specific Living Conditions", we find out that 40%+ of people think schools, household basics, crime protection, medical care, clean water, security, electricity, and jobs (39%) have improved since before the war, while less than ~20% think they've gotten worse (25% for jobs and 26% for security). In every category, we find that ~70%+ of people expect all of these to improve over the next year.

The Iraqi Central Bank Law

David DeRosa praises the new Iraqi Central Bank Law:

One part of the Iraq story that gets little attention is what the ruling Coalition Provisional Authority has accomplished in re-building the country, including its financial sector.

The financial architecture for Iraq centers on establishing an independent central bank. What's remarkable is the scope and detail the coalition brought to the task of establishing that institution. In March, the CPA published the Central Bank of Iraq Law, which is far more than a law -- it's a primer on central banking.

The law's 74 articles and 42 densely written pages cover every topic imaginable on how to run a central bank, including: the bank's capital stock, its board of directors, its relationship with the rest of the government, management of its foreign reserves, monetary policy and open market operations, reserve requirements, issuance of currency, supervision of the banking system, the national payments system, compilation of official statistics, audits, criminal offenses and the establishment of a financial services tribunal.

The coalition maintains the "goals of the new law are to achieve long-term growth and prosperity through measures designed to maintain domestic price stability and foster a stable and competitive market-based financial system.'"

Under the official rules, the CBI's first task is to maintain "domestic price stability". However, since "price stability" is not defined in the document, it is left to "international standards", meaning a slow and steady inflation will probably result. Only under a regime of price stability is the CBI permitted to pursue policies to promote "sustainable economic growth, employment, and prosperity."

At least they're making it harder to game the system than before. Still, actively managing a fiat currency is not an easy task; unlike the rather mundane accounting, minting, and servicing tasks of a government currency based on a set number of certificates tied to gold, fiat money is easy to print, and profitable to manipulate.

But an independent central bank presents advantages to professional economists and the general public, as such experts are required to assume positions of importance and power in the polity. We may think Greenspan has way too much influence on the stock market and other areas, and his position may be a net cost to our economy, but it's hard to deny that the public statements of a powerful secular Iraqi central banker might be the only source of finance and economics education for a vast majority of the rural population, and might be a huge stabilizng force.

Anyway, the Law and the extended and detailed Annex makes for fine reading on a Monday evening after your child and wife have gone to bed.

Meanwhile, note that the CBI is authorized to create balance of payments, monetary, and other financial statistics, but not macroeconomic statistics. How are they to manage the economy when they don't have the data?

Note: Also see my earlier posts on Iraqi Economic Statistics and the head of the CBI, Sinan Shabibi.