Iraq economy in shambles, but the oil awaits
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Mike Meyers, Star Tribune National Economics Correspondent
Published April 27, 2003
ECON27
Clifford Anderson is eager to invade Iraq.
But he's worried about the cost of the campaign, how many people he would have to muster and whether they could be assured of coming back alive. Anderson wants to be certain he can prevail -- and reap the rewards of triumph.
As chief executive officer of Roseville-based Crown Iron Works Co., Anderson is accustomed to deploying workers to far-away places -- to fight for commerce.
Crown, started 125 years ago as a maker of decorative iron ornaments, today designs and installs equipment to transform soybeans into oil and animal feed. The company, with 70 employees in Minnesota, has worked at more than 500 locations, on all seven continents, practically every place soybeans are used. In the Middle East, it has customers in Egypt, Dubai and Israel.
What happens next in Iraq matters more than a hill of beans, both to the people of that country and to international companies such as Crown. Now that the battle of Baghdad is over, the struggle has begun to transform Iraq's economy, plagued by war, trade sanctions and a quarter century of mismanagement.
"If it were not for the fact that we had problems for the last many years in Iraq, we'd have been doing some business there now," Anderson said. "There's a market there and we've been locked out."
What Anderson needs to fulfill his ambitions for entering Iraq reads like a checklist of what economists say is required for that nation to rebuild its economy, one step at a time.
• Iraq will have to rid its streets of marauders. Few foreign companies will want to send workers to a country that's known to be hazardous.
• It must restore and modernize water, electricity and other public works. Nobody can run a soybean processing plant -- or just about any enterprise -- without water and power.
• It must replace its worthless currency and revive its faltering banks. A 100-dinar note of Iraqi currency is worth pennies. The inflation rate in Iraq was estimated to be in triple digits before the chaos of war, according to the World Bank. A home-grown banking system provides the cash to finance new business ventures.
• It must see an end to United Nations trade sanctions. Companies are less likely to trade with and invest in Iraq until they can be sure that it's legal.
• It must establish laws -- and law enforcement -- to protect private property and ensure that foreign investors can take home profits.
A big job
In the 1970s, Iraq nationalized foreign oil companies, discouraging foreign investment over the decades that followed.
"Who knows what's going to happen there next?" Anderson said. "It's going to have to smooth out there before we go there."
Some of the tasks needed to fashion a healthy Iraqi economy may take weeks or months, while many others could take years.
"It's a big, big job," said Harvard University economist Richard Cooper.
To be sure, Iraq has more going for it than Afghanistan, Bosnia and East Timor, all countries with economies ravaged by recent wars.
Said Anderson: "They've got water. They've got oil. Until Saddam Hussein messed it up, Iraq was one of the most viable economies in the Middle East."
The Tigris and Euphrates rivers run through Iraq, promising a bounty in agriculture since ancient times when the region was called the "fertile crescent." Although three-quarters of Iraq's 24 million people live in cities, food production was a thriving industry until a few years ago, when the nation's economy began to unravel. From 1990 to 2000, the output of Iraq's food chain fell by nearly 50 percent, by the estimate of the World Bank.
Yet Iraq has something that most countries do not. It has oil and lots of it -- the world's second-largest reserve, after Saudi Arabia.
"It's very rich in resources and presumably will want to use those resources for reconstruction," Cooper said.
But oil riches are a mixed blessing.
"They've got a huge asset if they can be persuaded to look on it as being simply money," said Morris Adelman, an economist at the Massachusetts Institute of Technology.
"Unfortunately, oil is not usually seen that way," he said. Oil often is viewed as "the blood of the people, the symbol of a nation's vitality."
Oil politics
Iraq, by the count of the World Bank, has 112 billion barrels in oil reserves. But no oil company would pay the current world rate of $25 for a barrel of crude for rights to drill in Iraq, Adelman said.
Typically, oil rights go for about a third of the world price of oil -- or about $8 for a barrel of oil in the ground, at present values.
"Actually, [in Iraq] it's worth a lot less because there's a lot of risk involved,' Adelman said.
"If they said they were going to get the highest price offered, and if foreign companies really trust Iraqi determination to enforce ownership and property rights, they'll get perhaps half of that $8 and it will go up" over time, he said.
Much of that potential revenue already is claimed, however.
Iraq owes huge amounts of money to other countries, including France, Germany, Russia and the United States, for exports made to that country as long ago as the 1970s. In addition, Iraq owes war reparations to Iran and Kuwait for past wars.
Exactly how much money is owed is in dispute. Estimates range from $60 billion to as much as $400 billion. Much of that debt, almost certainly, will be repaid far more slowly than originally anticipated, but economists say Iraq will be forced to repay much of the debt. The reason: It must convince foreigners that their future investments in Iraq will be safe.
"One strategy is to get foreign capital, to bring in money and managerial know-how," Cooper said. "But, of course, it's politically sensitive."
With Iraq's colonial history -- the country was in the hands of the British for much of the first half of the 20th century -- many in Iraq will see foreigners as potential threats, as well as potential saviors, Cooper said.
But any country with major oil reserves has another problem -- the threat of the "Dutch disease." It's a story of the few prospering at the expense of the many.
After valuable natural gas deposits were discovered in the Netherlands a half century ago, energy became the dominant industry in that country. No other enterprise, from agriculture to manufacturing, could keep pace. The outcome was a period of inflation, job stagnation and economic setbacks for anyone without links to the energy industry.
Unhappy history
In 2000, revenues from oil exports represented 83 percent of the value of all goods and services produced in Iraq, by the estimate of the World Bank.
"Most countries that have oil revenues do not have a happy history of using those assets for the benefits of all of the people," said Steve Davis, a University of Chicago economist. "Over the longer term, the political and economic success of the Iraqi people will depend on how those oil sources are treated."
International economists have written many a treatise on the same phenomenon in energy-rich countries such as Mexico, Venezuela, Nigeria and Indonesia.
"To avoid such a situation to occur in the middle of a resource boom, the country must make some tough decisions on consumption, savings and investment," economist Moazzem Hossain wrote in one such study at Griffith University in Brisbane, Australia.
"If the country has not been preparing itself properly before the boom takes place, this will at the end bring unprecedented political chaos and even disintegration and civil unrest," he said.
Economists agree that Iraq will have to rely on advice from institutions such as the World Bank and International Monetary Fund to keep its economy from reeling.
"Saddam expropriated much of the wealth for himself, his family and his cronies,' said Davis, at the University of Chicago. "You could end up with another regime doing the same or a regime where the oil revenues are squandered in an inappropriate way.
"There's no panacea to ensure this won't happen. But transparency and international oversight would be a useful institution to put in place for several years," he said.
Davis said he's concerned the U.S. government may not be willing to stay to see the job done, however.
"I'm a bit concerned that many Americans, including many who supported the invasion, have the view that we should get out of there as soon as they've established some semblance of a democracy," Davis said.
As for Crown, Anderson said he's not likely to look for business in Iraq soon. But he can't speak for his British affiliate, where globe-trotting dealmakers seem to have a different assessment of risk.
"The English office is pretty aggressive," Anderson said. "I may get a call tomorrow saying, 'I just got back from Baghdad and everything is cool.' "
Mike Meyers is at meyers@startribune.com.
Mexico claims ChoicePoint stepped across the line
[ The Atlanta Journal-Constitution: 4/27/03 ]
By PÉRALTE C. PAUL in Atlanta and SUSAN FERRISS in Mexico City
Uncle Sam is watching more of you, which may come as no surprise, given the post-terrorist reality of Sept. 11.
What may be surprising is that even before the attacks, the United States was quietly purchasing dossiers on millions of citizens in 10 Latin American countries from an Alpharetta-based firm. The reason: to help verify the identities of Latin American nationals accused of committing crimes in the United States and help in the larger effort to find potential terrorists.
Now, ChoicePoint, the firm that collected the data, finds itself the target of growing criticism abroad and investigations in Nicaragua, Costa Rica and Mexico over whether privacy laws were violated. Latin American media have decried the company's actions, including what Mexico claims was the illegal sale of confidential voter registration records of more than 65 million of its citizens.
At the heart of the controversy is the question of what constitutes a confidential record.
Mexican authorities say voter registration rolls there are not public, and only political parties and election officials are permitted access to them. ChoicePoint executives maintain they have not broken any laws because the information gathered is public.
On Friday, Nicaraguan police raided the offices of two businesses suspected of selling information to ChoicePoint, The Associated Press reported. One of the businesses had a database containing federal voting records, AP reported, citing police.
"This is very delicate," said Gonzalo Altamirano Dimas, the chief of the governance unit of Mexico's interior ministry, which is responsible for security matters. "The identification and the whereabouts of citizens cannot be in the hands of unauthorized persons, much less in the hands of foreign governments."
The affair also has reignited concerns in the United States about parallel regulations. Consumer privacy advocates say American confidentiality laws are much weaker than those of other countries.
"The U.S. is to privacy what Caribbean islands are to money laundering," said Chris Jay Hoofnagle, deputy counsel with the Electronic Privacy Information Center in Washington. "If you want to store personal information in a jurisdiction where there are almost no legal protections, the U.S. is the place to do it."
Besides contracts with the U.S. government, including a five-year, $67 million deal with the Department of Justice, ChoicePoint sells information about consumers to 60 percent of the Fortune 500.
Those files include names, addresses, property ownership and other information that ChoicePoint says can be found in public records.
Many nations involved
ChoicePoint purchased the voter registration data of 65 million Mexican voters and 6 million Mexico City licensed drivers in 2001. It also bought databases containing the names, ages and, in some cases, the physical descriptions of citizens of Brazil, Colombia, Argentina, Honduras, Guatemala, El Salvador, Venezuela, Nicaragua and Costa Rica.
All the data were bought from third-party vendors, said James E. Lee, a ChoicePoint vice president and the company's chief marketing officer.
The sellers certified the information was public and legally acquired, Lee said. ChoicePoint's in-house attorneys cleared the transaction, he said.
"We had a very rigorous due diligence," Lee said. "The contracts that we have with the vendors stipulate that they comply with laws in Mexico."
The U.S. government is interested in the data so it can trace foreigners on U.S. soil and investigate alleged crimes, Lee said. If a foreign national were arrested in the United States, Border Patrol or immigrations officials could use the ChoicePoint database to verify that person's identity, he said.
What Mexico and its citizens would like to verify is how ChoicePoint got the information. The anger in Mexico has been played out in newspapers and on radio programs.
"Legal action must be initiated against those who transferred and sold information, so they must be forced to disclose who gave it to them and for how much," said Ranulfo Marquez, who represents Mexico's Institutional Revolutionary Party at Mexico's Federal Electoral Institute, or IFE.
The IFE is in charge of registering voters and supervising elections.
Wide range of data
In the United States, ChoicePoint gleans personal information from state and federal databases, court records and credit reports.
With that data, ChoicePoint can put together an individual profile that includes a Social Security number, driver's license number, property and car ownership information, date of birth, addresses, telephone numbers and even private club memberships.
An individual's file also contains the same information about relatives and neighbors.
"We don't believe we have too much data," said ChoicePoint's Lee.
Following the sniper shootings in the Washington area last year, law enforcement officials accessed ChoicePoint records to build a list of area residents who owned a white van. At the time, police believed the sniper had escaped each time in a white van.
"These reports are a powerful opportunity to reduce risk," Lee said.
But privacy advocates say public records don't exist to be collected and resold.
That federal law enforcement officials say they have greater security concerns because of the Sept. 11 terrorist attacks isn't enough to ignore the privacy issue, experts say.
"You can't just say more information makes us safer," said Ellen Alderman, an attorney and co-author of "The Right to Privacy."
"How is the information safeguarded? Who makes sure the rules are not abused? What kind of punitive measures are there to prevent abuse, and how are those records destroyed when the information is no longer useful?"
ChoicePoint says it does extensive research on prospective clients, limits employee access to consumer files and conducts audits to ensure that its data are used properly. Clients who misuse information risk contract termination, ChoicePoint's Lee said.
Americans have said repeatedly in national surveys that they favor stronger privacy laws, especially with the rise of identity theft. But privacy advocates say the United States tends to be reactive rather than proactive.
That, coupled with strong business and marketing groups who lobby against changes in privacy laws, keeps information open and available, they say.
"Public records were created to ensure that the government is acting fairly," Hoofnagle said.
"The problem is since there aren't restrictions on the use of these files, private companies can go in and suck up as much information as they can and resell them for any purpose they please."