Monday, August 13, 2007

Why you have to have trade 

There is a fascinating article in Reuters this morning interviewing a U.S. Defense official on how we did not grapple with issues of trade in Iraq.
Years of economic policy mistakes after the fall of Saddam Hussein left unemployed young Iraqis easy targets for recruitment by al Qaeda and other insurgents, a U.S. Defense Department official said on Sunday.

Paul Brinkley, deputy under-secretary of defense for business transformation in Iraq, said Iraq's shattered industrial base had to be revitalised to bring down unemployment levels of about 60 percent and help reconciliation.

He said political, social and economic stability would be much easier if factories, many left idle since the 2003 invasion to topple Saddam, could win even a small fraction of the trade the United States conducts every year with economies like China, India, Indonesia and Thailand.

"If we could just get some of that factored into Iraq we'd uplift the lives of every Iraqi and al Qaeda wouldn't have any people to recruit," Brinkley told Reuters in an interview.

Brinkley said early economic planners had made the understandable mistake of assuming that a free market would rapidly emerge to replace what he described as Saddam's "kleptocracy", and create full employment.
Had you asked people like me, who had worked in advising in eastern Europe after the Soviet Union's collapse, we could have predicted this. Under the best of circumstances, a re-orientation of trade under free markets takes years. Djankov and Freund found that trade pointed inward after transition; 60% more trade happened intra-Russian rather than between Russia and the other ex-Soviet republics.

But Estonia and Latvia, two countries that quickly and energetically adopted free market reforms and made joining Europe a national priority, avoided these problems.

One of the most remarkable parts of the Iraqi transition process has been the utter failure of the leaders to learn from the Soviet experience. The Coalition Provisional Authority under Paul Bremer fell under the sway of the same market romanticism as did those in the early days of transition. Whether this is a systemic failure or a particular incompetence of Bremer and the State Department is debatable (some of which was encapsulated by Dan Drezner last year; I'm of the systemic camp, and have read this recent paper by Christopher Coyne with some head-nodding.)

What should be less debated is that we don't know how to create markets very well, in the sense of making big changes in the circle of potential traders one embraces. Trading involves trust as well as institutions; we at best can do something about the latter, and even that not so well.

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