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Shock and Awe Meets Market Shock

The dangerous mix of economic and military goals in Iraq

Duncan Kennedy

8 How long will U.S. occupying forces remain in Iraq? U.S. officials, here and in Iraq, provide strikingly different projections. One line is that the we must be prepared to stay for “up to 10 years.” The other is that we are prepared to leave, or at least to reduce our military presence dramatically, as soon as there is a new constitution and elections, which could occur by the end of 2004. The roots of these conflicting estimates lie not simply in the usual uncertainties of politics nor in Iraq’s exceptionally unpredictable military terrain, but in the as yet little-discussed issue of the American strategy for the Iraqi economy. In my view, the sharp contradiction between the announced economic strategy and the political and military requirements of a successful occupation make a quick, ignominious, and, from a humanitarian point of view, disastrous departure more and more likely. The long-term consequences, beyond Iraq itself, are hard to predict but are likely to be quite different from those anticipated at the moment of initial American military success.

From ISI to the Washington Consensus

The Bush administration is committed to a particular right-wing, free-market ideology for Third World developing countries—the so-called “Washington Consensus”—and Viceroy Bremer personally shares that commitment. This approach to development first emerged during the Reagan/Thatcher years as an alternative to an earlier strategy of economic development commonly called “import substitution industrialization” (ISI). The idea of ISI, as the name indicates, was that less-developed economies would grow through government encouragement of domestic manufacturing that would replace imports with local production. With the support of USAID and the World Bank, ISI was adopted all over the Third World from the 1950s through the ’70s.

ISI was an intricate complex of policies based on the notion that development required active and pervasive state involvement in the economy. In the form promoted by the United States, ISI was as hostile to free-market economics as to Communism. The overarching idea of the Washington Consensus was to wipe out every aspect of ISI: the Washington Consensus is both that free markets are good and that ISI was bad. Developing countries were to develop through integration into the world commodity and capital markets, with policies of deregulated private enterprise, foreign investment, and open economic borders.

The anti-ISI prescriptions of the Consensus include the following: removing tariff barriers to imports and foreign exchange controls; cutting off subsidized credit to private enterprises and subsidies to government-owned enterprises; privatizing all but basic government services; downsizing the remaining government ministries; instituting “user fees” for basic government services such as health, utilities (where not privatized), and education; eliminating food subsidies; removing price caps and other forms of government regulation of the private sector; enforcing law through courts (rather than through government administrative agencies); and establishing a legal regime favorable to foreign investment by removing restrictions on foreign ownership and on the repatriation of profits.

In the 1980s and ’90s the Consensus was implemented through “structural adjustment” and “conditionalities”; the IMF and World Bank would require ISI countries facing currency crises or needing debt refinancing to adopt the policy cocktail en bloc, or piecemeal for particular projects. In Eastern and Central Europe after 1989, it took the extreme form of “shock therapy”—the privatization and deregulation of whole economies at top speed and regardless of transition costs.

The result in many countries has been a sharp decline, of indefinite duration, in standards of living for the mass of the market-shocked population—a decline that continues even when growth resumes. The beneficiaries of growth under the Consensus are local elites who take over (or loot) privatized industries or enter small business, multinationals that acquire failing local industries too large for domestic appropriation (typically, these exploit primary products such as oil), and clients recruited by the new entrepreneurial class to serve its interests within the government.

Iraqi Development?

Iraq was a classic ISI regime, and it is likely to be an extreme case of the Washington Consensus in operation. A decade of sanctions has resulted in massive under-investment in Iraqi enterprises of all kinds. With free markets and open borders, ISI enterprises in Iraq will be even less able to compete than were firms in such countries as Russia, Slovakia, and Argentina. The Consensus policies are likely to lead to the failure of even the most potentially efficient and competitive Iraqi enterprises, whether already private or privatized by the coalition, during the period of transition, when they will face a flood of imports from, among others, their closest neighbors.

The Turkish and Iranian economies have already undergone painful transition to the new economic regime and have been growing rapidly in recent years. Both are “semi-peripheral” economies capable of expanding by exporting to their less developed neighbors as they take over the least profitable, lowest-wage industries of the “core” developed countries (textiles, food processing, etc). And both are poised to enter the Iraqi market, undersell local medium-sized businesses, and preempt the growth of new local businesses. As of September, at the Syrian border the Americans were proud that they were imposing a flat payment of $10 per truck crossing into Iraq and remitting the proceeds to Baghdad, seemingly not aware that this amounted to reversing decades of protectionist policy.

Economic development is a dynamic process in which small initial disadvantages often translate into massive permanent inequalities. It is hard to imagine how Iraqi enterprises can hope to regain viability without exactly the kind of aggressive government intervention that the Washington Consensus categorically forbids. And even if a “big government” faction should miraculously appear at the U.S. headquarters in Baghdad, the dismantling of the Iraqi state, looting of its ministries, proscription of the top layers of the Baathist bureaucracy, American inexperience, and ongoing guerilla war would almost certainly undermine efforts to reconstitute the ISI regime under U.S. supervision.

A likely outcome is that the Iraqi economy will never recover to the levels it maintained under Saddam and will remain a depressed outlet for American, European, Turkish, Iranian, and perhaps Israeli exports, with no substantial local industry and continuing very high levels of unemployment. It is no answer that Iraq has oil. So does Saudi Arabia, which has seen a steady impoverishment of its rapidly growing urban-mass population in spite of high nominal GNP per capita.

It seems probable that over the next few years there will be no good economic news at all for the majority of the Iraqi population. Iraq will become economically like Palestine in relation to Israel as the U.S. occupation force comes more and more to resemble an untrained, ineffective version of the Israel Defense Force. Educated Iraqis who were employed under Saddam will soon find themselves competing with educated Palestinians for jobs in the Gulf, Egypt, Western Europe, and the United States. The unskilled Iraqi population has no such prospects, since neither Iran nor Turkey nor Syria can play the role that the Israeli economy plays (when the borders are not sealed) for unskilled Palestinians.

Washington Consensus ideology permits two responses to the dangers that accompany market shock. The first is to do everything possible to stimulate direct foreign investment by companies that will undertake to modernize the failing local industries. Those industries can then compete at least on their own domestic market, if not internationally. The second, embraced only after the right-wing architects of the Consensus realized just how politically destabilizing was the impoverishment of the majority implied by their policy, is a domestic “safety net.” This consists of unemployment insurance and welfare payments along with “transitional” provision of indispensable services like food and medical care.

Neither prescription for softening the transition from ISI to an open-border, privatized, deregulated economy is likely to work under the political and military conditions of the U.S. occupation. With respect to direct foreign investment, the problem is that no rational multinational will touch privatized Iraqi industries (or failing private firms) without guarantees that the pro-foreigner regime will last long enough to get the profits out. For this reason, unless the Americans say they will stay for a long time, there is no hope for a “vibrant” (Bremer’s favorite word) privatized economy.

But if the Americans promise to stay long enough to protect multinational investment, they are declaring themselves to be, de facto if not de jure, colonizers. Every assurance to foreign investors that the Americans will stay is a provocation to the local population and builds the will to resist of Iraqis who have no sympathy whatever for the Baath Party or Iranian theocracy. Thus the necessity of repeatedly asserting that the Iraqi Governing Council will set the timetable for American withdrawal and that the Americans are only waiting for elections.

Direct investment by the Americans and the Iraqi Government in reconstructing the oil and electrical industries and infrastructure destroyed in the war is no answer. It comes up against one of the most basic internal contradictions of the Consensus claim—that open borders make everyone better off. Halliburton and Bechtel, rather than Iraqi companies, have received the contracts. These multinationals are dominant precisely because they use technologically advanced production methods involving large amounts of capital equipment, which must be brought from the United States, and small quantities of highly skilled, very highly paid labor that must also be brought from here (or from France or Germany, in case their companies eventually get a share of the spoils).

The politically and militarily desirable solution of governmentally organized domestic enterprise that deliberately uses less efficient, labor-intensive techniques is precluded by right-wing economic ideology.

The dollar figures reflecting large amounts of aid to Iraq and heavy investment in domestic reconstruction will therefore be utterly misleading: almost all of the money will go to the U.S. manufacturers of capital equipment and to a small number of highly paid foreign workers, rather than to the Iraqi masses. And the profits will be repatriated as quickly as possible to avoid confiscation if the security situation continues to deteriorate and/or if a post-occupation nationalist regime decides to renege on the unequal bargains struck by the Americans.

Addressing the downside of shock therapy with a safety net is no less fraught with difficulties. The Americans have already reversed their initial decision not to pay the disbanded Iraqi Army (an initial decision that violated the deal in which the officer corps abandoned Saddam and sent the men home). They are also paying pensioners and government employees who arent working. Every month of open borders, privatization, and the streamlining of non-privatized government bureaucracy will create new unemployment.

The Americans will certainly have to pay the unemployed. But they will never pay enough to make an idle work force love them. The bill is billions of dollars each month for military operations and more billions for reconstruction. Even supposing the sabotage problem is resolved, estimated oil revenue for 2004 is $10 billion. $300 a year for 10 million people is $3 billion. From a political/military point of view, the beneficiaries of the safety net will be the equivalent of a refugee population in camps, available for every kind of violent secular and religious mobilization against an occupier that has degraded them.

Armed resistance to occupation and intra-ethnic conflict, combining guerilla and terrorist tactics, and with many different sources, will likely spread and become steadily more deadly over the months leading up to the U.S. presidential campaign, which begins in earnest next March. During this period the Iraqi economy is likely to be a continuing disaster—getting electricity and water supplies back to their Saddam levels is the least of the problems if the analysis above is correct. Elections in Iraq before the U.S. election seem inconceivable, both because of the security situation and because newly returned exiles and locals friendly to the United States would lose to some combination of Shiite and Sunni anti-American Islamists, anti-American secular nationalists, and leftover Baathists.

In this situation the contradictory statements of U.S. officials about the length of occupation have a certain logic. “Quick exit” statements respond to the danger that the United States will be revealed as a colonial power. “We will be there for 10 years” statements correspond to the need to entice foreign investment, and to retain Iraqi political and economic allies reasonably worried that they will be killed if the occupying forces leave quickly.


The swing voters who determine American elections supported the Bush invasion policy mainly because they wanted to punish “them” (Muslims in general) for 9/11. It is their children who are being killed and, just as important, wounded, often badly, at a rate of more than 100 for every combat fatality. They are likely to turn against the occupation while continuing to believe that the war was a good idea and that Bush handled the military aspect extremely well. The business base for the occupation will quickly lose interest as it appears that the occupiers cannot guarantee security and that there will have to be a civil war before there can be a stable local regime. The war will become politically untenable in the United States, whether or not the various Iraqi guerilla groups attain majority support, so long as the guerillas inflict significant casualties and the overall situation remains dangerous for Americans. The American economic policy, combined with alternately heavy-handed and panicked military reactions, makes it likely that hostility to the Americans will grow steadily.

The Republicans therefore need an exit strategy for the increasingly likely worst case. The Democrats can pretend to have such a strategy—“internationalizing” the occupation. But it is absurd to imagine that “the international community” will take over the fight against secular and Islamist Iraqi guerillas and absorb the costs and casualties the Americans have brought on themselves. The Democratic line is just a sugarcoating for the inevitable withdrawal if they win the election.

The Republicans will have a very hard time even pretending to internationalize before the election. Their base won’t allow them to grovel enough, and give up enough control, to persuade the “old Europeans” to join such a pretense. The solution of a Korean-style U.N. army, under U.S. command, occupying (mainly) Arab Iraq with Turkish, Indian, and Pakistani forces fighting the various resistances seems simply outlandish.

So if remaining in Iraq appears politically dangerous at home, the Republican alternative is to promise to hand the country over to the Iraqis as soon as they have adopted a constitution and held an election. And if the Republicans win the 2004 election, they may well arrange a constitution and an election and then withdraw the main occupying forces. They can argue to their electoral supporters that they effectively punished the people who “hate America,” that Iraq is free of Saddam’s monstrous oppression, and that the threat of future development of weapons of mass destruction has been eliminated (even though none were found). If the Iraqis are ungrateful and ungovernable despite all our help, then why should we spend money and lives on them?

The analogy here is to the Nixon/Kissinger Vietnam exit strategy. Everyone understood that the South Vietnamese client state would collapse as soon as the United States withdrew, but all the rhetoric was about “Vietnamization,” about how we had reached the stage at which they could handle the situation themselves. The big difference is that the North Vietnamese took over quickly and decisively. In Iraq we can expect a more-or-less prolonged civil war. The stakes will be very high (the winners rich as Croesus, the losers dead), and many parties will have military capability of one kind or another.

The United States will try, during and after withdrawal of the main force, to influence the outcome through the combination of conventional and special forces, money, and diplomacy. The goal will be a successor regime dependent enough on the United States to guarantee the administration’s interests in oil and Israel. After the death of Ayatollah Hakim, it is extremely unlikely that any Islamist Shiite group will be able to persuade the administration that it is reliable—meaning moderate on Israel and in relation to the Sunnis, willing to tolerate some separation of mosque and state, independent of the Iranians—and at the same time able to command mass support.

It follows that there is likely, eventually, to be at least one armed Shia resistance to the U.S. occupation, as the successors of Hakim (and the Badr Brigade) lose hope in Bremer and the Sadr faction sees its chance at power. Supposing that the Americans can avert an Islamist Shia takeover, an acceptable secular successor regime is likely to fall somewhere between Assad and Mubarak in terms of democracy and human rights.

The war’s long-term effects remain uncertain. Saddam turned out to have killed and tortured many more people than even his exiled enemies realized. On the other hand, the guerilla war and civil war to come could involve hundreds of thousands of casualties, endless misery, and far more rapes than were committed by Saddam’s security forces during their reign of terror. And even if the successor regime is not pathologically cruel, it certainly won’t be anything like the prewar right-wing American fantasy.

It seems possible, though not yet certain, that the second Iraq war will turn out to be the greatest U.S. ethical catastrophe since Vietnam. It is striking that there is little the U.S. government can do to prevent that outcome. Long-term occupation under a neoliberal economic policy is simply not politically feasible for either Republicans or Democrats, given the scale and developing support of the guerilla resistances, secular and Islamic. The apparent inevitability of U.S. withdrawal within a year or two places the Iraqi people in the hands of a fate that has not been kind to them in the past.

There will of course be many other consequences, some likely good, linked indirectly and over the long term to suffering and death and to peace and happiness. But if it turns out that we sow, over the course of the guerilla war and the civil war, more unbearable physical and moral suffering and death than we have prevented, then the death and suffering will be on the consciences of those who ordered it.

If the occupation proves a failure, the power of the American Empire—contrary to what appeared on the day of victory in the first campaign—will likely be set back (but of course not eliminated) and the cause of multilateralism strengthened. It will likely be years before the United States tries anything like Iraq again without very deep support. Paradoxically, if the United States had bullied and bribed the Middle Powers into going along, the U.N. would have been discredited over the long run as an imperial puppet. The strengthening of multilateralism may have bad as well as good consequences, leading to the deaths of innocents in cases like Rwanda, Cambodia, and Kosovo (and now Liberia) if the “international community” fails to act.

There may be some good consequences in the long run for the Palestinians (in the short run Israel has a free hand). Israel will be even more isolated than it was before, and a much weakened United States will be less willing to sacrifice its national interests to the Likkud view of the Israeli national interest because the United States will be more dependent on pro-Palestinian Europeans to help it out of its Mideast catastrophe.

Aside from the immediate deaths, the war will likely reinforce, with tragic effects, the different enchantments of the modern era, the “reaction formations” against the ethical irrationality of the world. My list would be Communism, nationalism, fascism, tribalism, religious communalism, religious fundamentalism, and just-doing-my-job bureaucratic professionalism. The war and failed occupation seem likely to strengthen each one except Communism. In their various names, more meaningless deaths will likely occur than would have occurred had the Americans taken the risk of Saddam’s continued possible possession of WMD, treating him like Khadaffi, or been willing and able to assemble a world coalition rather than acting unilaterally.

In future conflicts dominated by the enchantments, the U.S. government will be less able to do good in moments when someone has to decide according to the calculus of effects whether violence (including the deaths of innocents) is morally required or morally forbidden. But the United States will also be less able to persuade others to go along with doing evil. I would gamble on this as a good thing, something like the waning of Western European colonial power after World War II. What emerges may be even worse than our brutal, self-interested bungling, but hope springs eternal. <

Duncan Kennedy teaches law at Harvard Law School.

Originally published in the October/November 2003 issue of Boston Review

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