Charles Levinson / SF Chronicle Foreign Service – 2006-01-24 23:22:12

http://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2006/01/23/MNGBNGRIF81.DTL

BAGHDAD (January 23, 2006) — At his teetering vegetable stand in Baghdad’s Amil district, Haidar Gassem bashfully reminded Iraqi housewives that a kilogram of tomatoes no longer costs 350 dinars (23 cents).

They grumbled and reached for the extra 150 dinars, feeling one more ripple effect from the recent threefold spike in gas prices that followed the government’s decision to slash fuel subsidies.

Since 2003, the United States has been pushing for rapid free-market reforms in Iraq. Such policies, US officials say, are necessary to spur development and revive Iraq’s moribund economy, which is still suffering from sanctions and decades of Baath Party mismanagement.

But rapid economic liberalization here is taking a toll on ordinary Iraqis. They’ve seen prices skyrocket for everything from shampoo to vegetables to heating oil. Food rations meant to help the estimated 8 million Iraqis who live on less than $1 a day have been cut by 25 percent.

Many changes implemented by the US occupation in 2003, after Saddam Hussein’s government fell, are still in effect as Iraqi politicians await election results that will lead to the formation of a permanent government. Tariffs on imports have been cut across the board, allowing cheap goods to pour in from China and driving Iraqi manufacturers out of business. A 2003 foreign investment law continues to anger Iraqi businessmen who say it is squeezing them out of the reconstruction boom.

When the privatization drive kicks into full gear, probably within months, thousands of employees in the bloated public sector are likely to be dismissed. The Iraqi government already has approved the sale of two cement plants.

For now, privatization of the lucrative oil industry is not being contemplated, although the International Monetary Fund has said that it would like to see privately owned gas stations and fuel importers in Iraq.

U.S. officials say they expect the new Iraqi government to continue on the free market path the United States has laid out. But that route requires painful economic reforms that are unlikely to generate the support and trust of ordinary Iraqi people.

“If Iraq’s new leadership is going to be viable, they’re going to have to tend to the needs of communities by meeting their basic economic needs,” said David Phillips, a former senior adviser to the State Department and author of “Losing Iraq: Inside the Post-War Reconstruction Fiasco.”

“Iraqis won’t have confidence in their leadership or stand in defense of their institutions if they don’t feel they’re credible in serving their interests,” he said.

U.S. officials say their policies are working. Per-capita gross domestic product is up from $800 three years ago, to well over $1,000 today. The consumption of consumer goods such as cell phones, air conditioners and automobiles has shot through the roof.

But on the streets of Baghdad, skepticism about the government’s economic policies is easy to come by. At a gas station on Damascus Street, Ahmed Mohammed, called “Tiger” by the U.S. Army colonel for whom he translates, huddled, bleary-eyed, inside his battered ’86 Volkswagen. He had been waiting in line for gas since 3:30 a.m., and now it was going on noon. After eight hours in line, he was facing a gas tab three times higher than he’d been accustomed to.

Last month, Mohammed, like all Iraqis, was enjoying the cheapest fuel in the world — just 13 cents a gallon, thanks to the government’s $7.3 billion annual expenditure on fuel subsidies. But shortly after the Dec. 15 elections, as part of an agreement with the IMF intended to reduce Iraq’s crushing $129 billion debt, the government slashed those subsidies.

Prices for gas, and just about everything else zoomed. Iraqis now pay 40 cents a gallon, and that should continue to rise over the course of the next year.

“We’re glad Saddam is gone because he killed many people, and we want to live free, but why these prices?” Mohammed asked. “We are rich with oil, and all the people are poor. I can’t afford this.”

The subsidy cuts, U.S. officials argue, will benefit all Iraqis. The savings in government revenue, they say, will go toward improving vital government services such as health, education and security.

“We believe the Iraqi population doesn’t understand the true cost of subsidies,” said Thomas Delare, economic counselor at the U.S. Embassy in Baghdad.

The gas price hikes are only the latest in a series of free-market reforms, dating back to 2003, that continue to rankle Iraqis.

At the Agras clothing factory, 600 seamstresses have lost their jobs since the U.S. occupation slashed tariffs in 2003. Unable to compete with the flood of cheap clothes from Asia, Agras turned to importing ready-made clothes from China and whittled its workforce down to a dozen accountants.

“I’ve adapted, I’ve changed my ways,” Agras owner Thamer al-Ameri said. “Now I design the clothes, send the designs to China, and import the finished product.”

It’s a fine example of a successful entrepreneur adapting to the global free-market environment. Al-Ameri is doing well under his new arrangement. The nearly 600 workers he had to dismiss, however, are not.

“Many of those workers were supporting whole families,” he said.

Raghib Bleibel, owner of a large construction company, heads the Iraqi Businessmen’s Union. He said neither he nor many of the organization’s 4,400 members have yet to win a single reconstruction contract, thanks largely to a U.S.-enacted investment law that gave foreign companies free reign in Iraq.

“The Iraqi companies don’t have the ability to compete,” Bleibel said. “We want foreign companies to be required to partner with Iraqi companies, so that Iraqi companies can benefit, too.”

Many of the foreign firms working on reconstruction projects rely on cheap labor from impoverished countries such as Pakistan, the Philippines and even Sierra Leone. The unemployment rate is 28 percent. That figure is down from post-war levels, but high enough to be worrisome, especially among young men who may be attracted to the insurgency.

Cheap fuel, cheap commodities and public-sector jobs have long been a pillar of the social contract in Iraq. Hussein may not have given Iraqis a vote, but he did give loyalists government jobs. Such populist economic policies, in addition to the brutal repression of dissent, allowed him to cling to power. But those policies stymied economic growth and created a large, inefficient public sector.

Experts such as Joseph Stiglitz, a former World Bank vice president, have compared the rapid free market reforms in Iraq to the shock therapy many Eastern European countries endured after the collapse of the Soviet Union. Stiglitz and many others now argue that the quick privatization of state-owned assets and abrupt liberalization of trade, prices and capital badly hurt those countries’ economic recoveries. They also produced rampant corruption, another problem in Iraq today.

The new economic rules are starting to galvanize Iraqis. After the fuel price increases in December, thousands took to the streets across the country in protest. With the insurgency raging on, many Iraqis say that this is not the time to risk further unrest with such measures.

“These economic reforms are important for Iraq in principle,” said Humam al-Shamaa, an economics professor at Baghdad University. “But not now, when Iraq is so unstable. These reforms now could have real consequences on the security situation.”

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