Moving Iraq Toward a Market Economy

“From an intellectual point of view, this experience was exhilarating: bright people around the table, challenging issues, lots of decisions to be made—made quickly, and made right.”

As deputy general counsel of the Coalition Provisional Authority for Commercial Law Reform, Derek Gilman ’79 mobilized and directed a team of attorneys in developing a body of law, 39 statutes, to undergird a new Iraqi economy. He and his team worked closely with policy makers and economists in undertaking this project. The vision entrusted to him and his team was to set the framework for transitioning Iraq from a managed economy to a market economy.

With a staff of 19 attorneys set in Baghdad, and with the help of several professionals in the U.K., Australia and the United States, Derek coordinated simultaneous efforts to write “Orders” concerning issues such as the national budget, the operation of banks, a system of taxation, a securities exchange, the registration of companies, trademarks, patents, foreign investment and insurance.

An army reservist on active duty at that time, Derek was initially assigned to the Department of Defense, Office of General Counsel, International Affairs Division. He had been in Iraq working with the Iraqis on the legal documents that would become the foundation for the special tribunal trying Saddam Hussein and other senior Ba’athists, when “It was decided,” he said, “that I would stay on to work on the Commercial Law Reform Project.”

To create “the conditions for sustainable development” (the directive from U.N. Security Council Resolution 1483), and to implement a transition, Iraq needed a broad-based body of law. One of the first elements in a complex process, in fact, became identifying and prioritizing the legal needs. Members of the Iraqi ministries working with the Coalition Provisional Authority (CPA)—such as the ministries of finance, trade and planning—in addition to private developers and Iraqi businessmen, all contributed to delineating what needed to be done; the mission-critical issues were numerous and diverse. According to Derek, the ministries, at that point, were staffed with Iraqis who had not been Ba’athists. The new minister of finance, for instance (Kamil al Gailani), came to the post from private industry: “His advisors were long term professionals in the Hussein administration, but were not Ba’athists,” Derek said. “We also dealt with a number of professionals who were trained in the U.K., in Wales, who were capable and knowledgeable about Iraqi law.”

Ambassador Bremer in response to requests from Iraqis and coalition advisors outlined 39 legal initiatives and Derek committed the working group to developing drafts of those 39; these Orders would at least be ready for the thorough “coordination” process that would occur before Ambassador Bremer signed the Orders into law.

Lawyers from the project researched each of the issues at hand for relevant Iraqi law, trying to build upon it when possible, while remaining consistent with international law. With regard to the public debt, for instance, international law prohibits an occupier from increasing the sovereign debt of a nation. The Law Reform Project’s resolution with respect to that restriction was to write that while “Iraq would not increase its debt during the period of occupation, it might substitute existing instruments with other instruments.” Iraq, therefore, could reschedule its debt, once offers to forgive that debt were reconciled.

The project routinely sought both help from advisors and subject-area expertise from specialists. Three Iraqi attorneys with master’s of law degrees, along with an Iraqi law professor, provided regular assistance to the project group. Lawyers from the project met twice weekly with the Iraqi Governing Council, and frequently with Iraqi bankers and businessmen. Various U.S. agencies provided support: the Treasury, the Federal Reserve, the Comptroller of the Currency, the Patent and Trademark Office, and the Department of Commerce. The assistant director of the U.S. Securities and Exchange Commis-sion (SEC) was the principal drafter of securities law, but he worked in close consultation with securities lawyers working for the coalition in Iraq, who amended the draft to take into account Iraq’s practical realities. Other support came from U.K. and Australian government agencies, the International Monetary Fund (IMF) and the World Bank. In many cases lawyers were drafting orders in Washington, Canberra or London, which would then be amended in Baghdad.

Once orders were drafted, they began to wind their way through an extensive coordination process, beginning with consultation with Iraqi government officials and private citizens, and seeking comments from the U.S., U.K. and Australian governments, the IMF and the World Bank. Lawyers would revise the draft and translate it into Arabic. Paul Bremer would review the revised draft Order and approve its presentation to the Govern-ing Council. Discussions with the Govern-ing Council led to further revisions, until a final draft reached Ambassador Bremer’s desk for signature. The CPA Web site posted the signed orders, in English and Arabic, and published them in Iraq’s Official Gazette. “The coordination process was logistically difficult,” says Derek, moving six separate groups through reading, commenting, collecting, responding, rewriting; ultimately they all had to sing from the same sheet of music.”

As has been the case in other countries, moving a nation from a planned economy to a market economy opens opportunities for many, but threatens the stakeholders of the old system. Many expatriates returning to Iraq were excited about the economic opportunities and were ready to make more radical changes. However, those who had grown up in a planned economy wanted to keep their authority and their dominance. Some in the Ministry of Planning, for instance, wanted control over foreign investment and were reticent to make the changes in budget law recommended by the IMF.

Derek points to other challenges posed by cultural differences. “It was crucial for us and those working with us to ensure transparency in our process,” Derek says, “but operating with transparency was not an Iraqi experience.”

“Under Saddam corruption was rampant; bribes were commonplace. In response and at the suggestion of Iraqis, many Orders reduced the discretion of public officials. For instance, regulations were adopted so that if a company met clear regulatory criteria, then it could be registered: no bribes, no red tape. We tried to make it easy for people to transform tangible wealth into intangible businesses—registered companies that would create greater wealth.

“People who had had experience working in Eastern European countries advised us,” Derek says, “one who had written bankruptcy law for Bosnia, and a securities lawyer with experience in the Balkans. They and others who had seen what happened in Russia were concerned that we avoid allowing the riches of the country to go into a few pockets, that we avoid yielding the economic terrain to oligarchs.

“We often had to move from thinking about broad strategic goals to considering the mundane and particular,” Derek explains. That was true with respect to developing a tax program. The IMF considered the availability of a non-oil source of revenue to be crucial if the Iraqis were to renegotiate their sovereign debt. The existing tax codes were vastly unfair: those working for the government or in state-owned businesses did not pay taxes. Taxes paid by individuals working in private enterprise exceeded 40 percent, while private enterprises were subject to a total tax rate of 78 percent. Therefore many taxpayers would negotiate to reduce their taxes. Furthermore, a 25 percent “social welfare” tax paid by private enterprises didn’t go to social welfare at all. The reform initiative, therefore, needed to address those differences in citizens’ experiences and provide a tax that was relatively low (to promote compliance) but still high enough to generate sufficient non-oil revenue. A 15 percent flat tax was the strategy that prevailed.

What’s the status of the implementation? What progress has been made? “At times we ran into significant internal Iraqi political differences, but at the end of the day, every one of the economic Orders was approved by the Governing Council,” Derek says. “On the whole, the legal principles underlying a new economy have been accepted.” For the system to operate effectively, more reorganizing and retraining of officials lie ahead.

Derek points to the positive tracks thus far: More companies have registered in Iraq since February 2004 than in the entire 60-year history of the Company Registry; numerous companies are trading on the Iraq Stock Exchange; three foreign banks have received licenses to do business in Iraq, and propose making millions of dollars available to Iraqi banks to lend to Iraqi businesses; and we’re seeing many joint ventures between Iraqi companies and foreign companies.

Across the country, however, getting the word out about changes, reorganizing and retraining is going slower than anyone would have wanted, because resources have been diverted to cope with security issues and the election. “But economic development is occurring in some territories, and, in general, progress is being made,” Derek asserts.

Derek is hopeful and grateful for the opportunity to make such a difference in the destiny of a country. “I was able to combine two aspects of my life, my legal experience and my experience in military service as a JAG officer, to work with extraordinary people, and to make a personal commitment to begin the rebuilding of an entire economy. I had Hernando deSoto’s Mystery of Capital at my bedside. That book examines the question of why capitalism succeeds in the West, but fails everywhere else. DeSoto’s conclusion is that the key cause is a lack of legal framework to support capitalism. That legal framework is what we tried to develop.

Cathleen Everett

 

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