EVENTS

Date:	Tuesday, April 15, 2003
Time:	5:00 PM -- 6:30 PM
Location:	Wohlstetter Conference Center, Twelfth Floor, AEI 1150 Seventeenth Street, N.W., Washington, D.C. 20036

April 2003
Economic Shock Therapy--A Prescription for the Middle East?

Leszek Balcerowicz, president of Poland's Central Bank

Along with far-reaching political reforms, the countries of the Middle East need to restructure their economies. Peace and security in the region will largely depend on whether they succeed. Europe’s new democracies went through a similar experience more than a decade ago during the transition from communism to democratic capitalism. On April 15, Leszek Balcerowicz, twice Poland’s deputy prime minister, the architect of its successful economic shock therapy, and a patron of the New Atlantic Initiative, delivered a speech about what those transformations can teach us about the Middle East.

The communist bloc was not an economic monolith. East Germany, for example, was considered much more successful than more eastern parts of the Soviet Union. When communism crumbled and the post-communist states began economic reform, they did not start on equal footing. Significant differences were present in the levels of inflation, share of agriculture in GDP, foreign debt, and dependency on trade with Russia. After more than twelve years of transition, these differences have increased even further. The most successful post-communist countries--such as the Czech Republic, Hungary, and Poland--are those that took the greatest risks and introduced the most radical market-oriented reforms in the shortest time possible. The reform process has a more detrimental impact on the general population when carried out slowly without sufficient determination. In general, people living in countries that chose gradual reform are not only worse off, but are more dissatisfied with their situation.

Iraq’s present condition is no more difficult than that of the Central European countries twelve years ago. Iraq has high inflation, variable rates of exchange (official versus unofficial), one dominant economic sector, rationing of foodstuffs, and a large percentage of young people. All of this is similar to what the first post-communist Polish government inherited in 1989. Central European and Baltic countries could share these experiences with the Iraqis, especially with regard to the privatization of small and medium-sized enterprises.

The reform process in Iraq will undoubtedly cause discontent among the Iraqis. Radical reforms will alter the social hierarchy and hit those who took advantage of a corrupt regime. These people will protest the most, and they will do so loudly. Those who will profit from the reforms will be busy getting on with their lives and will not have the time to stage any counterdemonstrations. Since free media did not exist in Saddam’s days, the new media will use and misuse the freedom of the press. The media will look for sensational news and focus on the negative results of economic reforms, rather than benefits. The development of professional journalism is crucial for how the Iraqis will view their economic transformation in a few years’ time.

It is important not to underestimate the influence of the past. In free Iraq, former Ba’athists might still win elections. As in Central Europe, these forces have the networks, organization, and money to achieve political victories. Establishing a very limited state is the best way to avoid a revival of Saddam’s cronies. Such a state would be less likely to fall victim to powerful interest groups. The Iraqis need to devise their plan of action and use the upcoming months of postliberation euphoria for economic shock therapy. They should start by launching a dollar-based currency board and should avoid direct taxation. They should also introduce management contracts for the oil industry while it remains in public hands.