Don't turn Iraq into a welfare state

Glenn Reynolds has, on a few occasions, promoted the idea of creating a trust fund of some sort to distribute Iraqi oil revenue to the Iraqi people (here, here and here, for example).

The proposals put forward by Lou Dolinar, Michael Barone and Fareed Zakaria would take about half of Iraq's oil revenue and provide an annual stipend to each person in Iraq, similar to what Alaska residents get now.

The general assumption seems to be that each Iraqi would get about $1,000 per year (half of Iraq's estimated $100 billion oil revenue distributed in the trust fund), which is a bit less in real dollars than what Alaskans currently get, $1,540.

But Alaska's per capita income is $30,000, while Iraq's is somewhere in the neighborhood, at best, of $2,500.

In other words, an Iraqi oil trust that distributes $1,000 to each Iraqi citizen becomes more like a welfare program than just providing a little extra cash for Ramadan. Rather than spur investment, as Barone contends, it is more likely to breed indolence and sloth or worse.

Consider this, in 1995, before Clinton's welfare reform package, 50.3 percent of single-mother households lived in poverty. Now the figure is down to about 40 percent. In the same time period, employment among never-married mothers has jumped 50 percent. Welfare reform worked because the incentive to stay home and collect easy pay, even if abysmally inadequate pay, was removed.

Wouldn't giving each Iraqi $1,000 per annum, and possibly more, provide a large disincentive against industry? Sure, some people will strive for greater wealth and pursue ambitious career paths regardless of the stipend, but there remains a significant human tendency to stay home and snack on corn chips and cola if given the chance.

If democracy is to succeed in Iraq — and this is a case persuasively made by Zakaria in his book The Future of Freedom — Iraq must develop a strong middle class, a merchant class, a class of people who create jobs, drive the economy and maintain an economic stake in keeping Iraq's economy market driven and its politics free. Iraq needs entrepreneurs, and the entrepreneurial spirit is best fed by a need for money. Giving the Iraqi people too much too soon could undercut the growth of the merchant class.

Too much too soon could also encourage greed among the ambitious and the criminal. Who knows what fraudulent schemes might spring up to separate people from their unearned cash. Or worse, there undoubtedly will remain no small number of rebels and zealots who would welcome the chance to horde as much of this revenue source (though violence, skullduggery or direct appeals) to buy weapons and fund anti-government unrest and terrorism.

Rather than create a trust fund that communistically doles out stipends to the population at large, Iraq's overseers should create a needs-based and initiative-based program.

The Iraqi Oil Trust Fund should take 100 percent of the oil revenue and apportion part of it to run the government, part of it to fund direct rebuilding projects, and part to seed the Iraqi economy through direct grants.

Let's say half of the estimated $100 billion is used to run the government, another $25 billion is used to build schools, hospitals, roads and sewers and such. That leaves $25 billion annual for grants. Grants should be awarded in the spirit of the following:

1. To farmers for improved irrigation and the purchase of farm implements. Iraq's second best resource is agriculture. In order for Iraq to develop a strong, stable economy, agriculture needs to become more productive.
2. To merchants. Iraqis who want to start or expand businesses should be given the opportunity. And just like incubators in American inner cities, Iraqis applying for one of these grants need to present a business plan (incubators would provide help and guidance) and ongoing assistance in getting their business plan implemented.
3. To Students. Iraq's college-age citizens should be encouraged to study abroad, and Iraq's oil wealth should help pay for it. Because some Iraqi students may be lured to life outside Iraq, the students should be required to sign a contract promising to return to Iraq for two to four years, or work in an Iraqi agency overseas for that amount of time, after graduation.
4. To potential homeowners. Home ownership is one of the best ways to ensure social stability. Not all Iraqis are going to want to start businesses, own farms or go to school, but many working Iraqis would welcome the chance to own a better (or even first) home. Current homeowners could even remodel or expand under this program. The added benefit of new construction jobs would help the economy.

This program, I think, would do more to encourage economic growth than simply handing out unrestricted, unearned money.

Oversight of the program would need to remain with some international monitoring agency for some extended period of time (I'm thinking 20 years), and also have a charter that allows for revision and amendments by the eventual Iraqi national bodies (through a checks-and-balances system). The charter and by-laws would need to ensure that the money is distributed in a fair manner, equally to all geographic regions of the nation and proportionately to all races and religions. It would also need provisions to protect against graft and other irregularities. And even though such a program would be harder to implement and create a larger bureaucracy, I think it solves more problems than it creates.

Article Author: Howard Owens

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