"Mother of all Surprises"

A good friend of mine has become quite a fan of the Globe and Mail's Neil Reynolds. Unfortunately his columns don't come for free online. He references Newsweek and its recent article on Iraq as an interesting case study:

Civil war or not, Iraq has an economy, and—mother of all surprises—it's doing remarkably well. Real estate is booming. Construction, retail and wholesale trade sectors are healthy, too, according to a report by Global Insight in London. The U.S. Chamber of Commerce reports 34,000 registered companies in Iraq, up from 8,000 three years ago. Sales of secondhand cars, televisions and mobile phones have all risen sharply. Estimates vary, but one from Global Insight puts GDP growth at 17 percent last year and projects 13 percent for 2006. The World Bank has it lower: at 4 percent this year. But, given all the attention paid to deteriorating security, the startling fact is that Iraq is growing at all. [...]

Roadside bombs account for fewer backups than the sheer number of secondhand cars that have crowded onto the nation's roads—five times as many in Baghdad as before the war. Cheap Chinese goods overflow from shop shelves, and store owners report quick turnover. Real-estate prices have risen several hundred percent, suggesting that Iraqis are more optimistic about the future than most Americans are.

Of course Reynolds doesn't attribute the same causes as Newsweek does, according to Newsweek:

Iraq is a crippled nation growing on the financial equivalent of steroids, with money pouring in from abroad. National oil revenues and foreign grants look set to total $41 billion this year, according to the IMF. With security improving in one key spot—the southern oilfields—that figure could go up.

I'm skeptical that if you pour money into an economy, people necessarily get wealthier or that economic growth is pervasive. Instead, Reynolds points to and credits in part former US administrator Bremmer who implemented a flat tax. From a Washington Post article from 2003:

Iraq has a flat tax, and the 15 percent rate is even lower than Forbes (17 percent) and Gramm (16 percent) favored for the United States. And, unless a future Iraqi government rescinds it, the flat tax will remain long after the Americans have left. [...] Bremer's new economic policy for Iraq will slash Saddam Hussein's top tax rate for individuals and businesses from 45 to 15 percent.

Some still point to the massive unemployment as is the case for Newsweek:

Yes, Iraq's problems are daunting, to say the least. Unemployment runs between 30 and 50 percent. Many former state industries have all but ceased to function. As for all that money flowing in, much of it has gone to things that do little to advance the country's future. Security, for instance, gobbles up as much as a third of most companies' operating budgets, whereas what Iraq really needs are hospitals, highways and power-generating plants.

But Reynolds also debunks the myth of unemployment being as high. Again, his article isn't available but hopefully this is a decent substitute. I'm glad at least someone's noticing. I would have to say that I agree with the arguments for a flat tax. It is a bit odd though that the economy is doing as well as it is given one of the basic requirements for efficient commerce is rule of law and commerce. But perhaps that's only part of the story since as Bush, noted "eighty percent of Iraq's sectarian violence occurs within 30 miles of the capital." It would also be notable that Israel's eocnomy has thrived despite being under constant threat.