Sharing Amongst Enemies

Cherry PieIn his book Partitioning for Peace, Ivan Eland argues that division offers the best chance for peace in Iraq. He outlines lessons that can be learned from historical examples of partition.

However, he makes little of precisely how oil revenue is to be shared amongst the different peoples. Rather than divide the land and the oil by proxy, it would be much better to centrally process the oil and divide the revenue.

If the land is divided, there may be uncertainty surrounding the profitability of oil reserves. For example, the Sunni portion of Iraq may end up having more oil than currently confirmed. Or certain reserves may prove costlier and less profitable to exploit than expected.

Rather than allow the possible volatility of oil revenue between region create tensions in the future, centrally dividing the revenue of the oil creates certainty. If agreement can be reached on the issue of land and oil by proxy, it should actually prove simpler to divide just the revenue.

But the major practical benefit comes from ethnic tension. As it currently stands, Iraq suffers from a lack of checks and balances on political power. If oil revenue is divided by a federal government composed of Sunnis, Shi’ites and Kurds, they will maintain a check on each other.

In resource-rich developing countries such as Iraq, corruption can often break the political process. Politicians who use their power to benefit cronies are often more likely to get elected than honest candidates. The major opportunity to do this comes from embezzling money spent on public works.

Under the plan suggested here, politicians will have a major incentive to reach an agreement over contracts to exploit the oil, while mutual distrust will ensure that no corruption takes place. These politicians are unlikely to co-operate, even if that means they won’t be able to embezzle money themselves.

So money is no longer lost due to a lack of competitive bidding processes for public funds, ensuring that the Iraqi people get as much revenue as possible.

Once revenue is received into the regional governments, it’s at least slightly more difficult for politicians to steal it, given that they will then have a major incentive to spend the money in their own region responsibly. The only people to receive the benefits then are voters on whom they are reliant for support.

Democracy in Iraq is broken, and will continue to be as long as ethnicity dominates politics and certain regions are not adequately represented. Partition may well provide the solution to these problems, but only if agreement can be reached over oil resources – and the best route is through the division of revenue collected by a federal government.

© The Free Marketeer 2009

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3 Responses to Sharing Amongst Enemies

  1. The problem is that distributing oil profits through the State, to local regional governments, leaves room for a lot of corruption (corruption which already exists, by the way). And, in order for the State to distribute oil profits it must make these profits for itself, which generally means that Iraq must nationalize the local oil market. This would be unacceptable to the United States and other vested powers.

    The problem in Iraq has nothing to do with oil. It has to do with poverty, and the impoverishing effects of religion and power. Although I never thought I would have agreed with Hans-Hermann Hoppe on the topic of monarchy, I have to agree that the only way that Iraq can be stabilized at this point is to introduce some type of strongman into government.

    That said, I have always liked to compare current Iraq to 1930s Spain. The situation was slightly similar, although the violence in Spain was not as developed (although it existed). I am a supporter of the Franco regime which developed after the end of the Spanish Civil War only because it was he who politically stabilized Spain under an iron fist, and later liberalized the market. There were many negatives to his rule, but it was his rule which ultimately allowed Spain to grow economically (and it grew dramatically).

    In any case, back to my original point. Oil is a large market in Iraq, but hardly the only source of profit. What there needs to be is respect for private property; that means, private property must be made easier to get. And, the State much codify in law the rights of the owner of said private property, to given the owner the incentive to invest.

    Otherwise, I would support the territorial division of Iraq, but that would never happen. The only plausible solution, I sense, is a dictatorship which has market liberalization as one of its priorities (along the lines of Francisco Franco and Pinochet).

  2. Brian Ó´Beirne says:

    There are a number of problems with the above analysis. First, if we accept that corruption currently exists in local government then it is only a reason against introducing the above proposal if the corruption will be worsened. There has been no argument to this effect and thus it would seem that, at worst, corruption is a constant in this equation. What is more likely, however, is that the partitioned Iraq will consist of regions which are more politically loyal to their governments and people and hence less likely to siphon off oil profits for themselves.

    Second, whilst I agree that a nationalisation of the local oil market would not be acceptable to vested interests, nationalisation is not necessarily the only means for generating such profits. In fact, no nationalisation was suggested in this proposal- the means of profit generation being left unaddressed. I would suggest that the notion that a segregated Iraq would nationalise oil resources is quite a convoluted one: what nation is nationalising it? It is unilkely that a tripartite of nations which are currently at each others´ throats could co-operate to the extent necessary for it to be a profitable venture.

    Third, to say, somewhat paradoxically, that the problem is not oil but poverty underplays the extent to which oil could play a part in ameliorating poverty. These two concepts are immanently connected. For as long as oil provides profits and condenses profits in the hands of the powerful, Iraq has no need to branch out into other employment-generating industries. Whilst there may be other means to generating employment and money for the people of Iraq, these means will be left unexploited. In fact reducing the profit-making potential for the upper echelons in each of Iraq´s new regions makes it more probable that those with money will branch out into other industries. On a side note I´m not sure what impoverishing effects religion has on people other than highly contingent ones.

    I have other problems with this but I´ve got to run!

  3. thefreemarketeers says:

    Jonathan: I wasn’t suggesting local government, but a partition of Iraq into three regions according to religion. And I provided strong reasons to suggest that there will be considerably less corruption under such a system, which I don’t think you addressed. Unfortunately, the dictator you’re describing doesn’t exist and couldn’t exist – precisely for the reasons that I was discussing above. The best that you can hope for is Saddam Hussein – because no leader in Iraq could have enough popular support for it to be worth his while not to favour a particular ethnic group.

    Corruption requires motive and opportunity:
    – Under a system of centrally distributing oil tax revenue or nationalised profits, there is less opportunity to embezzle government money. Rather than have a government under the control of a particular party (or at best, a ministry) there are checks and balances in the form of other religious groups with responsibility for their own people.
    – These politicians have less of a motive to siphon off funding. Countries which have fewer but larger minorities exhibit less efficient use of public funds, because there is a major motive to isolate the benefits of those funds for a particular group. Politicians with homogenous populations, on each of whom they are reliant for support, are more likely to productively use public money (rather than steal it or let it be managed poorly).

    Brian is right – I wasn’t advocating a particular means of generating oil profits (a generic term which more accurately referred to public funding accrued thereby). If you’re suggesting wide-spread nationalisation is unlikely, you’re probably right. On an aside, the arguments regarding effective management of public funds under a tri-partite Iraq are valid regardless of what you’re talking about, as well.

    Brian: I’m confused. Are you suggesting that Iraq as a nation should make less profit from oil in order to increase the relative attractiveness of other industries which are labour-intensive? I think you’re under-estimating the extent to which global capital markets are integrated. But more generally, Iraq won’t pull itself into other industries as long as there is violence. Oil is just about the only reason anyone would risk heading into the country, it’s a complete kip at the moment – and improving infrastructure through taxes generated from oil revenue is an important step on the road to economic recovery. Too bad international contractors are making so much money off it!

    Finally: I don’t think the absence of market liberalisation as a priority is the reason Iraq is in such a mess. Such moves will happen naturally over time, as the country realises how beneficial foreign direct investment can be and finds opportunities knocking on the door. Right now, nobody wants to invest in Iraq. What they need is for violence to decrease. Unfortunately, the only way to keep a lid on it right now is through force of American arms.

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