Economic Questions Raised in Iraq’s Draft Constitution Robert Looney Professor, National Security Affairs Naval Postgraduate School Briefing on Iraq’s Draft Constitution Stimson Center, Dirksen Senate Office Building Washington, DC, October 4, 2005

Economic Evaluation of the Draft Constitution In Examining the Draft Constitution from an Economic Perspective, Several Questions Appear Critical: Will it Assist in Stabilizing and Reviving the Economy? Or Will it Undermine the Economy Through Creating Internal Conflicts over Resources and Tensions Between the Country’s Main Regions? Will it Lay the Economic Foundation for a Stable Federation? Will it’s Main Economic Provisions Contribute to Long- Run Stability and Expansion of the Oil Sector? The Private Sector? Or, Will it Create More Uncertainty for Both?

Overview Key Economic Areas of Draft Constitution: The Type of Economic System Iraq Will Have: Continuation of Neoliberal Policies Initiated by the Coalition Provisional Authority – Ineffective Under Iraqi Conditions – Basic Premise Not Valid – No Investment -- No Winners. May Lead to Competing Economic Systems in Three Main Regions – Relatively Free Market Kurdish, State Control Sunni, and Islamic in the Shiite Areas. Oil Policy: Much uncertainty over revenue sharing and management. Potentially Leaves new fields and fields not now in production under Discretion of Kurds and Sunni – mainly in Sunni areas. To Much Uncertainty for Investors. Makes Stabilization of the Economy Very Difficult.

Possible Solutions: Avoidance of a Classic Rentier State Critical Variable in Analysis of Economy is the Rentier State – Draft Constitution May Create Incentives for Bad Aspects to Prevail – Regional Competition Over Rents, Broadly Perceived Inequities in Allocation, Revenue Instability, Corruption. Alternative – Direct Distribution Fund—Immediate Distribution of 25 % Oil Revenues to All Citizens -- Rapidly Creates A Middle Class With State in Success of Federation. Transparency Clauses Help Control and Reduce Corruption. Gives Sunnis An Alternative to Improve their Situation Rather Than Trying to Wrest Control Over Resources. Allows Central Government to Phase out Corruption Plagued Subsidy Programs—Many of Which Have Assisted the Funding of the Insurgents Through Smuggling and Shadow Economy. Since Dividend a Function of Oil Production, Pressure on Insurgents to Cease Attacks on Oil Production and Distribution System – May Greatly Reduce Popular Support for Insurgency.

Summary -- Iraq: Key Constitutional – Economic Linkages

Summary: Likely Outcomes In Assessing the Draft Constitution, One is Immediately Struck By the Realization that We Know Very Little About the Forces that Will be Unleashed if it is Passed. As it Stands, a Vicious Circle of Violence and Decline is Likely. However, There are Modifications That Conceivably Could Produce a Virtuous Circle of Growth and Prosperity While The Constitution Leaves Much To Be Decided By Future National Assemblies, In Terms of the Questions Posed Earlier, Will the Draft Constitution: 1. Assist in Stabilizing and Reviving the Economy? – Unlikely. 2. Create Tensions Between Main Regions? – Probably. 3. Contribute to Growth and Stability of Oil Sector? – Unlikely. 4. Encourage Regional Competition over Resources? – Likely. 5. Reduce Uncertainty for Private Investors? – No. 6. Lay a Foundation for a Stable Federation – Unlikely.