April 30, 2003

Iraq's Economy

How should Iraq's economy be reformed? Should a version of Russian-style "shock (and awe?) therapy" be employed or a more incremental Chinese approach? David Warsh touches on this issue with some perspective from economists who were involved in Eastern European economic reconstruction.

What is crucial to success is adapting any reforms to local rules and customs. Policy makers need to take full advantage of Iraq's unique time-and-place specific knowledge. An understanding of how the economy operated under Saddam and an understanding of the rules and customs of Islam (both Shia and Sunni) are required to build the institutions and laws needed to allow Iraqis to take risks, create jobs, and grow the economy.

A book I'd recommend is Hernando De Soto's The Mystery of Capital. In it, De Soto emphasises that simple, fair rules need to be in place for people to buy and transfer property or to start a business. If government regulation is so onerous then that activity only moves to the black market.

"What Have We Learned?"