Reality check leaves Iraq dreams in tatters

Ask anybody who experienced the downfall of communism in the late 1980s about the reality of the transformation to a market economy and you will get a very different view of what a market economy actually means.

Some Russian citizens found themselves without food on the table. Old people saw inflation destroy their pensions and savings. Millions lost their jobs. West Europeans bought up property cheaply and later sold it on for a profit, or lost a fortune when prices collapsed.

So this brings us to Iraq where it is also time for a reality check. Liberation or conquest, depending on which side you belong, is no more an instant panacea for the good life in Iraq than it was in Eastern Europe.

In many instances the problems are the same. The economic infrastructure of Iraq, primarily oil production, is in a worse condition than previously thought. In Eastern Europe vast industries were shutdown, sometimes after sale to hapless Western buyers.

Now we hear from the Iraqi Oil Ministry that restoring pre-war production levels will take at least 18 months and billions of investment. Add a few more delays for the still unresolved security issues, such as the whereabouts of former dictator Saddam Hussein, and this is not the quick return to pre-war oil output that looked obtainable in the over-optimistic aftermath of victory.

Indeed, cash flow from oil will be around $3.5 billion this year, not enough to meet the cost of feeding the Iraqi nation, let alone investment in reconstruction. This starts to sound more like hungry Russians than the business opportunity of the decade.

Eastern Europe did prove successful for some companies, but particularly in East Germany the first wave of investors fared badly. Even the largest German construction company Philipp Holzmann eventually went bankrupt largely as a result of ill-considered investments in East Germany.

One lesson that should be drawn from Eastern Europe about Iraq is that it is the trading groups that do well. But investment in countries undergoing a transformation to a new economic system is fraught with hazard.

Again we hear that property titles are not clear in Iraq. Returning exiles often find that their former homes have been sold to another family, and who owns the property now will clearly be a matter for legal resolution. But this process could take many years.

Similarly, equity investments at this time should be handled with great caution. West German companies that bought out their East German counterparts in the early 1990s often found that they had acquired nothing more than obsolete equipment, huge labour commitments and doubtful market share. Investors in Iraqi companies should be careful that they are buying assets and not liabilities.

So far the main impact of the downfall of Saddam Hussein has been the strengthening of oil prices due to the elimination of production capacity. That will benefit the oil producing states of the Middle East but is no benefit to Iraq whatsoever.

If the pattern of Eastern Europe is followed in Iraq then things will get worse before they get better, and traders have better opportunities than investors. However, the current security position is a bit reminiscent of the Mafia problem in Russia in the 1990s, and that delayed economic recovery for almost a decade.