Vernon Smith on Iraq

Our colleague, Vernon Smith writes in today’s Wall Street Journal about privatizing the Iraqi economy, based in part on an idea pioneered in Alaska. See also my earlier post on why oil has been a curse to the discovering countries. Here are some key quotes:

For long-term success, the enormous task of nation rebuilding in Iraq requires attention to more than the creation of a political democracy. No matter how well-intentioned and democratic it might be, the next government will be tempted to corruption, violation of rights and expanded political power if it owns and controls the great economic wealth potential of Iraq. This is the time, and Iraq is the place, to create an economic system embracing the revolutionary principle that public assets belong directly to the public …

In Iraq, the rights in question are to the former government’s producing properties, transportation, terminal facilities, waterways, land and subsurface rights. These assets should first be declared transferred to the account of the citizens, recognizing the birthright of each citizen to a personal, empowering property right in the land and assets of the country of their birth. All citizens should have an equal share in this fund and be issued the same number of share claims to the fund.

Over a period of several decades, all Iraqi assets should be auctioned to the highest bidders in an individual, national and international business competition so that each asset or bundle of complimentary assets is transferred to the bidders who value them most for production, development or exploration. The auction could begin by selling existing producing oil properties, refineries, pipelines, and gathering, separating and terminal facilities over the next several years, then move to mineral, oil and gas exploration leases, and to land surface rights.

The proceeds would be deposited in a giant mutual fund for investment in index securities of the world’s stock markets and monitored — but not managed — by the U.N. Investing in stock indexes would minimize the need for discretionary financial management, and the prospect of the next government exercising or re-establishing any central control over Iraqi assets. The Iraqi Fund should be a closed-end fund whose shares are tradable and listed on world stock exchanges. The proceeds of each new property auction would be deposited to the account for investment in index funds. Redemptions at market value would go to any Iraqi citizen who elects at any time to cash out any portion of his shares.

There is a very important precedent, in part, for this action — the Alaska Permanent Fund. The state of Alaska elected to put a portion of its vast Prudhoe Bay annual royalty revenue into a citizens’ Permanent Fund for investment in securities. Each year a dividend from this fund is paid to every Alaskan citizen. This Fund was the first to recognize the full rights of citizens to share directly in the income from public assets.

This Fund, however, had three important shortcomings that should not be repeated in the proposed Iraqi Fund.

†¢ First, Alaska did not put all of Prudhoe Bay state revenue into the people’s account. A portion of it went to the state government. When oil prices went up, the state succumbed to the temptation to repeal its income tax and spend its oil income like there was no tomorrow. Consequently, today the Alaskan state government has a budget crisis and a deficit gap, but the 600,000 Alaskan citizens still share equally in the dividends from their Fund, now worth $27 billion….

†¢ Second, the Alaska Fund is not a ready source of private investment and venture capital for its individual owners. This is because there are no tradable certificate shares in their mutual fund. This lack of liquidity denies citizens’ access to capital markets: An individual citizen cannot sell some portion of his shares for investment in a private start-up business, or borrow against the shares for such investment. …

The Iraqi People’s Fund would consist of tradable shares; all public property would be held, then sold, for the account of the fund; and the new government would be required to obtain its revenue from taxes levied on the citizens who are willing to elect them and finance their spending programs. The government could not raid the fund to finance its operations. All this could be made explicit in the Iraqi constitution.

There should be room in the proposal for a temporary transition mechanism. For example, sales of citizen shares in the fund might be limited at first, but gradually lifted as citizen registrations and claims were settled, and the auction/sales mechanisms became established. Also, an initial budget set-aside for financing the new government might be in order, but this budget should decline on a fixed planning schedule at 15%-20% per year as the new government gets its tax and spending program together.

This action would launch the new Iraqi state as one based on individual human rights, and the rule of law, and anoint it with rock-hard credibility by giving every citizen a stake in that new regime of political and economic freedom. The objective is to undermine any citizen sense of disenfranchisement in the country’s wealth, economic and political future, and to galvanize citizen support for a democratic regime. Now is the time to act, before post-war business-as-usual creates de facto foreign and domestic spoils-of-war property right claims, leaving out a citizenry brutalized enough by a totalitarian regime, and in sore need of empowerment in their own future.