In June 2003, L. Paul Bremer, head of the now dissolved Coalition Provisional Authority (CPA), announced the broad outlines of the Bush administration’s plan to rebuild Iraq along strict free market principles. “The removal of Saddam Hussein,” Bremer helpfully explained, “offers Iraqis hope for a better economic future. For a free Iraq to thrive, its economy must be transformed — and this will require the wholesale reallocation of resources and people from state control to private enterprise, the promotion of free trade, and the mobilization of domestic and foreign capital.” [1] Three months later, the CPA announced Order 39 permitting complete foreign ownership of Iraqi companies and assets (apart from natural resources), total overseas remittance of profits and some of the lowest taxes in the world. Iraq was officially “open for business.”

Fifteen months after the US invasion, little of Bremer’s “transformation” is evident to Iraqis, who continue to endure rampant unemployment, lengthy gas lines, sporadic violence and an uncertain political future. Nevertheless, the occupation has paid some big dividends — to the American companies that won a clean sweep of contracts to rebuild Iraq’s physical infrastructure, health, education, transport and political systems.

Even prior to George W. Bush’s unilateral invasion of Iraq, the US Agency for International Development began contracting the “reconstruction” of Iraq to various American firms, a process in which it was later joined by the Army Corps of Engineers and the State Department. After the fall of Saddam Hussein’s regime, the US appointed American private-sector executives to run the economy and attempt to impose free market policies on Baghdad. This reconstruction process has obstructed effective state and nation building in Iraq, vastly expanded the pool of the unemployed and undermined the already limited authority of the interim government.

It has also created a vacuum of legitimate power that is be- ing filled with armed resistance groups organized around sect, region and mafia-like local protection rackets. The insurgency, fueled by unemployment, threatens to dismember the Iraqi nation and promote regional instability. Despite the June 28 handover of nominal political authority, moreover, Iraq’s financial and political autonomy will be circumscribed for years to come. Through the newly renamed Iraq Projects and Contracting Office (PCO), the US Embassy in Baghdad will continue to administer the bulk of the $18.4 billion allotted by Congress in 2004 for the “reconstruction” of Iraq.

State Building in Reverse

The neo-conservative intellectuals and policymakers who pushed most vigorously for the Iraq war aimed to ensure the continued global dominance of the United States. In particular, they thought, occupation of a bridgehead in the oil-rich Persian Gulf would guard US interests against any potential challenge from the European Union, and, more importantly, China, whose resurgence as an economic and military power they regard as a serious threat. A corollary strategic objective was that, under US tutelage, “the new Iraq” would become a liberal democratic beacon to steer the Arab world away from Islamic fundamentalism, terrorism and authoritarianism. This goal, in turn, rested on the ambitious proposition that Iraq could be transformed into a prosperous, capitalistic state. While the neo-conservatives differ from neo-liberals in terms of geostrategic worldview, they overlap with neo-liberals in the belief that “free markets” contain the key to human wellbeing.

Historically, modern states have been built around centralized power, including a monopoly on military force, under- pinned by the imperatives of tax extraction and administrative capacity. The neo-conservatives have rejected any approximation of this traditional model. In fact, as of yet they have shown little interest in establishing even the most limited prerequisites of successful state building: the establishment of locally generated enforceable property rights and efficient and autonomous legal institutions.

While US officials have suggested that the reconstruction of Iraq should follow the lines pioneered in Japan after World War II, in practice they have followed a markedly different policy. In Japan, US policymakers (inspired by New Deal principles) assigned the Japanese state a major role in setting priorities for the reconstruction of the country. Basic legal and regulatory structures were maintained, a strong labor movement was encouraged (at least in the initial phases of US occupation) and the incursion of foreign business interests were sharply limited. In short, US authorities largely left the business of Japan’s development to the Japanese. In Iraq, by contrast, the US has pursued an agenda of sweeping privatization and awarded lucrative reconstruction contracts to firms close to the Bush administration. As John Dower, the preeminent American historian of the US occupation of Japan, has noted: “Japan was spared the presence of carpetbaggers who might have tried to manipulate occupation policy to serve private interests. In oil-rich Iraq, foreign capital is poised to play a major political as well as economic role.” [2]

US reconstruction in Iraq, with its hope of establishing American-style capitalism, has denied any significant role to the state or the public sector. The initial plan, now all but abandoned, was to liquidate insolvent Iraqi companies, and initiate a mass privatization program, which would distribute ownership vouchers to Iraqi citizens. This was the program implemented in Russia in the early 990s, which resulted in large-scale corruption and the rise of monopolistic cartels. [3]

But even in its watered-down form, US reconstruction has effectively led to a pattern of “reverse state building,” weakening bureaucratic capacity and legitimate military authority and, as a consequence, the capacity of the state to generate revenue from the private sector. The iconic acts of state build- ing in reverse were Bremer’s decrees that dissolved the army and information ministry and banned up to 30,000 Baath officials from government jobs, putting 400,000 Iraqis out of work. With unemployment running between 60 to 70 percent, these measures have led to crime and social unrest.

“Economic Warfare”

One of the key problems of US policy in Iraq is that it has shunted aside local labor and business expertise. US sub-contractors are importing cheap migrant labor from South Asia, despite high unemployment and vociferous complaints from Iraqi contractors that they are being overlooked. Bechtel, which is handling a $680 million reconstruction program for USAID, intends to spend upwards of $300 million on Iraqi sub-contracts in many sectors, particularly construction, in which Iraqi firms are by most accounts highly capable of doing the work at competitive prices. One Iraqi construction manager, who routinely lines up for contracts in Baghdad, complained that “US contractors are importing labor and expatriating the benefits — where is the benefit for Iraq?” US officials say they “encourage” firms to employ Iraqis, but do not stipulate a minimum percentage of Iraqi employees. Many Iraqis fear the replication of the labor patterns of Arab Gulf states, whose economies are dependent on Arab and Asian migrants.

US officials cite security as the rationale for importing Asian workers, one of them saying: “From a protection standpoint, Iraqis are more vulnerable to a bad guy influence.” The real reason may be simply that Asian labor is cheap. Kellogg Brown and Root (KBR) sub-contractors pay Asian workers an average salary of $3 a day and grant leaves once every two years. KBR, a subsidiary of Halliburton, which in 2001 won the contract to supply provisions to the military, said they look at Iraqis first but do not track employees by “ethnicity.” Not surprisingly, this state of affairs is clearly linked to the violence in several major cities, including Baghdad, where unemployment and resentment of foreign contractors are most severe. [4] The violence that various militant groups have meted out against foreign contractors in a variety of services and occupations can be understood in the context of competition in a severely constricted labor market.

To make matters worse for many Iraqis, the CPA announced it would enforce a 1987 law banning unions in public enterprises, where most Iraqis are employed. Bremer also added Order 1, banning pronouncements that “incite civil disorder, rioting or damage to property.” The phrase “civil disorder” encompasses organizing strikes. It has resulted in the detention of leaders of the Iraqi Federation of Trade Unions and the Iraqi Union of the Unemployed by US authorities several times. In Basra there have been three general strikes, and in October 2003 conflict over reconstruction work resulted in a wildcat strike at an oil refinery south of Basra where KBR was given a no-bid contract. [5] Not surprisingly, over the last year there have been as many as 67 attacks against oil pipelines throughout the country. Following the June 2004 handover, US officials have been forced to acknowledge that unemployment is an important cause of the violent insurgency in the country. In July, State Department officials began “reviewing” the $18.4 billion set aside by Congress to see if funds could be reshuffled in a bid to create jobs more quickly.

In the meantime, US military commanders in zones where the insurgency is strong have resorted to what they call “economic warfare” — doling out cash to Iraqi men for minor “local rehabilitation and emergency welfare projects” through the Commanders Emergency Response Program. The stated goal of the payments is less to “rehabilitate” the countryside than to dissuade the locals from taking someone else’s money to mount attacks on US troops. “Nobody is going to ever be waving an American flag,” said one civil affairs officer. “But I just want them to be neutral, to stop planting explosives.” [6]

The Spoils of War

Ironically, and in contrast to the Wild West image conveyed by the Commanders Emergency Response Program, Iraq has the best chance of any country in the Arab world to develop a vibrant economy. It not only has vast oil wealth and a skilled labor force, but also many talented technocrats and scientists and (despite Saddam’s best efforts) a significant manufacturing and agricultural base. Following the 1991 Gulf war, as is frequently rehearsed, the Iraqi government managed to re- store services and infrastructure at an impressive pace. Key roads, bridges and telecommunications networks were rebuilt in a matter of months; electricity and water services were also partly repaired. US officials sound tired of hearing this refrain. Secretary of State Colin Powell told Iraqi leaders in during his July 2004 visit to Baghdad: “We want to rebuild the infrastructure. We want to create jobs. We want to show the people the Iraqi people that this money is being used for their benefit and do it as quickly as we can. The terrorists will be defeated.” [7]

But the credibility problems of the US-led “reconstruction” do not stem merely from its conspicuous lack of achievements to date. In direct contrast to neo-liberal nostrums about the virtues of market competition, Iraqi reconstruction has been a decidedly political, and non-competitive, affair. Although the range of reconstruction projects is diverse, the winning bidders are not. Whether in the initial round held by USAID before the war, or in the March 2004 round held by the PCO, the large contracts have exclusively gone to US-based corporations (some of which then sub-contract to local firms). The deals aimed at rebuilding Iraq’s oil, water and electricity infrastructure were given to American firms — such as Parsons, Fluor, Bechtel and Halliburton — not to Iraqi businessmen with firsthand experience rebuilding the country after the 1991 Gulf war. For US contractors, “reconstruction” has been a bonanza. In April 2004, the most notorious of the Iraq war profiteers, the oil services corporation Halliburton, announced that its Iraq contracts made up $2.1 billion of the company’s first- quarter revenues of $5.5 billion. These contracts helped to offset the company’s losses in its other operations.

US companies are also still contracted for work that, in the view of many Iraqis, properly belongs in the purview of the Iraqi interim authorities. In March 2003, the Research Triangle Institute of North Carolina was the sole bidder for a one-year, $167.9 deal to set up 108 local and provincial town councils. It retained this contract in 2004. Creative Associates International is another USAID contractor that, after the handover of “sovereignty,” will still earn millions to increase the enrollment and “quality” of primary and secondary schools.

Privatization is everywhere a political process guided by domestic state elites and fraught with social conflict. But the present state of affairs in Iraq, characterized by the selective distribution of private contracts, lacks even the pretense of the legitimacy of a national government supported by the majority of Iraqis. The corruption reported in the US reconstruction process is therefore more politically explosive than the homegrown corruption associated with privatization elsewhere in the Arab world. In addition to the overcharging and accounting irregularities attributed to Halliburton, the CPA itself misallocated Iraqi money. An audit compiled by the CPA’s own inspector general found that the occupation authority paid as much as $1.9 billion to US contractors from the Iraqi oil funds placed under its stewardship by UN Security Council Resolution 1483, when those contractors should have been paid with US taxpayer dollars as allocated by Congress. [8] Prior to its dissolution, the CPA allocated billions more dollars of Iraqi oil revenues to cover expenses and investments that are seemingly already covered by the $18.4 supplemental passed by Congress. [9] The interim government, under regulations passed by the CPA, will likely be unable to cancel these outlays. Naturally, such abuses of power have exacerbated contempt for an occupation that also failed to provide job opportunities or security. In the void of legitimate government, militia groups have emerged to reclaim portions of Iraq from US occupation, and to defeat domestic rivals, as they fight to build states within the state.

Liberalization Then and Now

Perhaps a grimmer irony is that the Bush administration is replicating — at least in economic policy — the failed liberalization reforms implemented by Saddam Hussein in the late 1980s. Like other oil exporters, the Iraqi state suffered a fiscal crisis that coincided with the recession in the Gulf in that de- cade. As oil prices fell from $28 per barrel in December 1985 to $9 in July 1986, Iraq’s external debt (see sidebar) rose to $50 billion dollars. [10] Huge expenditures on military hardware and military industries for the 1980-1988 war with Iran further strained the public sector and signaled the demise of the state- controlled society. [11]

As a result of these internal and external pressures, Saddam Hussein announced plans to liberalize large chunks of the domestic economy on February 11, 1987. Though strategic oil and military industries always remained in state hands, the regime sold off state land, farms and factories to private investors, and dramatically altered the bureaucratic system. Government administrators were dismissed and encouraged to enter the industrial labor force. At the same time, deregulation of the labor market, including the abolition of the General Federation of Trade Unions, greatly affected individuals accustomed to decades of employment guarantees. The wage-earning classes in the formal economy experienced growing shortages and rising prices, as price controls were removed from most consumer goods. On the eve of the 1991 Gulf war, inflation was estimated at 45 percent. The combination of the diminished economic role of the state and the tripling of commodity prices had forced millions of families to seek refuge in informal economic activity linked to rural-based clan and sectarian networks. [12]

Economic liberalization under Saddam’s rule did not pro- mote political liberalization or rebuild the state institutions. In great part, this was because it was designed to strengthen an already powerful and brutal regime. For example, those groups engaged in the burgeoning informal economy and currency speculation and who posed an economic threat to the regime were brutally murdered. The commitment to profit (and profiteering) was defined clearly by Saddam Hussein in June 1987: “From now on, the state should not embark on uneconomic activity. Any activity, in any field, which is sup- posed to have an economic return and does not make such a return, must be ignored…. It is a more sound economic view to lose the factory and ignore it, than to continue with a loss- making economic activity if it remains in action.” [13] Hussein privatized the sectors of the economy that were losing money, namely agricultural and small industry. At the same time that these firms were auctioned off to private investors, the state was expanding the public sector in areas that seemed the most profitable and security-related, including the military and the oil industry. [14] In a pattern similar to the present state of affairs, those industries and factories that were privatized were given to individuals with connections to the regime overseeing the “reforms,” altering the sectarian, ethnic and social power balances in the country. [15]

The rapid shift from Baathist populism to state capitalism and neo-liberal reforms failed to rescue Iraq from financial crisis. In 1991, Saddam Hussein invaded Kuwait, in part to extract much needed revenue.

The similarities between Saddam’s Iraq and the current situation are difficult to ignore. Under Saddam Hussein’s regime, the failure of economic liberalization to promote economic growth and political liberalization was due to the imbalance of power between the regime and civil society and the lack of credible institutions to regulate the transition. Under the present US occupation, American contractors operating in a regulatory vacuum have similarly earned windfall profits by making use of their connections to the Bush administration. In both cases, private entrepreneurs and contractors emerged as “winners” while the bulk of the population was forced to make their living in an increasingly informalized economy. Just as the last decade of Saddam’s regime saw the emergence of black market profiteers, smugglers and speculators who reaped great profits from the increasingly deregulated Iraqi economy, today Iraqis continue to rely on informal work.

The Market Logic of Iraqi Violence

The neo-liberal reconstruction of Iraq, with its wholesale attack on the “state,” is the unexamined factor determining the organized violence in Iraq. The US invasion and occupation has given rise to a “state-building” process that is the reverse of the process by which modern states were built. In particular, the present pattern of corruption, clientelism and rent seeking has led to a simultaneous erosion of the tax revenue base and political legitimacy. The Iraqi state’s incapacity to collect taxes on private economic activity will continue the cycle of dependence on “external” sources through rents accruing from aid, oil exports and illicit, and largely informal, economic activities.

After the 1991 Gulf war, Iraq witnessed a notable struggle over the parallel economy, resulting in political and clan conflicts. At the time, the main contenders for control of trade and currency dealing were Uday Hussein, Saddam’s son, and his half-brother Barzan al-Tikriti. By 1994, after the dinar had sunk to 265 to the dollar, the government reversed policy and permitted Iraqis to deal legally in foreign exchange and to open foreign cash accounts in domestic banks — effectively institutionalizing the informal financial market. The cumulative effect of these developments was the further deterioration of the extractive and regulatory capacity of the state and further deterioration of the formal economy. The decision to allow foreign currency dealing in 1994 was followed by a wave of arrests and executions of currency dealers, which was apparently part of a bid by Uday to gain control of this lucrative sphere of economic activity.

This period laid part of the foundation for present patterns of violence. On the one hand, clan and family networks around the ruling group played a key role in monopolizing both “official” economic activity (construction, trade and transport) and the “parallel” economy (based on currency dealing, trade and smuggling on a regional scale) that developed in response to liberalization policies and sanctions-induced shortages. On the other hand, a growing informal economy associated with increased inequalities, unemployment and rural-urban migration continues to set the pattern for “privatized forms of violence” — organized crime and the substitution of “protection” for taxation, vigilantes, private security guards protecting oil facilities and the interests of international companies, and a variety of paramilitary groups associated with particular factions.

This is the real context for the current pattern of violence in Iraq. Absent formal bureaucratic and military institutions, in Iraq, as in other failed and collapsed states, violence substitutes for formal political mobilization. Under US occupation, however, violence is mainly directed against civil authorities and civilians and not the occupying army. The aim is similar to violence associated with state-building efforts elsewhere — to capture territory through political control rather than military success and to eliminate or expel foreign as well as domestic political rivals. That this violence is increasingly based on regional or religious identities is primarily because this offers a sense of security in a context where formal ideologies are absent, and unregulated markets require social regulation. The changing pattern of violence in Iraq is thus best understood as a manifestation of the erosion of the autonomy of the nation-state and the expansion of the contemporary informal economy under the impact of the Bush administration’s hard-core “free market” ideology.


[1] Wall Street Journal, June 20, 2003.
[2] John Dower, “Why Iraq Is Not Japan,” San Jose Mercury News, April 27, 2003.
[3] Wall Street Journal, May 1, 2003.
[4] Financial Times, October 14, 2003. The recourse to an Urdu and Bengali-speaking workforce has historical echoes for Iraqis, who recall the South Asian workers the India Office imported to maintain their invasion of Iraq during World War I.
[5] David Bacon, Iraq’s Labor Upsurge Wins Support from US Unions (Silver City, NM and Washington, DC: Foreign Policy In Focus, July 28, 2004).
[6] Washington Post, July 26, 2004.
[7] New York Times, July 30, 2004.
[8] Washington Post, August 4, 2004.
[9] Iraq Revenue Watch, “Iraqi Fire Sale: CPA Giving Away Oil Revenue Billions Before Transition,” Briefing Paper 7, June 2004.
[10] Tim Niblock, “International and Domestic Factors in the Economic Liberalization Process in Arab Countries,” in Niblock and Emma Murphy, eds. Economic and Political Liberalisation in the Middle East (London: British Academic Press, 1993), p. 78.
[11] Isam al-Khafaji, “War as a Vehicle for the Rise and Demise of a State-Controlled Society: The Case of Baathist Iraq,” in Steven Heydemann, ed. War, Institutions and Social Change in the Middle East (Berkeley, CA: University of California Press, 2000).
[12] Middle East International, June 25, 1993.
[13] Quoted in Niblock, p. 82.
[14] Ibid.
[15] Isam al-Khafaji, “State Incubation of Iraqi Capitalism,” Middle East Report 142 (September- October 1986). The vast scale of capital accumulation in this period facilitated the rise of a new and influential class of contractors increasingly drawn from the clan of Albu Nasir in Tikrit, and more generally, from the Sunni Arab northwest. See Hanna Batatu, “State and Capitalism in Iraq: A Comment,” Middle East Report 142 (September-October 1986).


How to cite this article:

Khalid Mustafa Medani "State Rebuilding in Reverse," Middle East Report 232 (Fall 2004).

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