Redstate

If so, how much is that dinar in the window?

By AcademicElephant Posted in War — Comments (11) / Email this page » / Leave a comment »

As violence continues to stalk Baghdad, many now accept the failure of American intervention as a self-evident truth. With torture and execution rife in the capital--and in the media--is it any wonder that most Americans disapprove of the project? You might have missed it in the pre-Christmas rush, but last week the Pentagon released the "Measuring Stability and Security in Iraq" report for mid-August-mid November of this year. It appears at first glance to be a bad-new buffet, and the usual suspects gathered round to feast. Just check out the headlines from The New York Times. Or ABC. Or the UPI. Or The Washington Post (make sure to read the first two paragraphs). Based on this coverage, how can you avoid assuming that--based on the assessment of our own military--life in Iraq is descending into a state that makes some wax nostalgic for Saddam Hussein? After all, at least he seemed to have some sort of control and the country functioned. He certainly seemed to have enough cash to spend on lavish palaces and bribes for the United Nations. But all that money apparently has been siphoned off by the rampant violence. It seems clear that the disaster we've created is economic as well as social. Weren't the Iraqis supposed to pay for the invasion? And yet we find ourselves with Defense appropriation bill after Defense appropriation bill. This report details not only violence, but ongoing troubles with electricity and water supply, as well as the oil industry. Who could possibly want to do business in such a God-forsaken place? You have to figure that Iraqis are living more or less hand to mouth as they wait for the next explosion.

Given this meme, I was surprised as any by the recent Newsweek article suggesting that despite the violence, Iraq is enjoying something of an economic renaissance (for more discussion, go here). New businesses are growing. Consumers are ready and willing to, well, consume. Sounds odd for a society that is theoretically hiding under its collective bed in terror, doesn't it? And then yesterday a second article appeared by Amir Taheri in The New York Post on the "Boom outside Baghdad." As Taheri points out, the entire country is not awash in violence and there are areas where there has been a marked improvement in the post-Saddam era.

Taheri also notes the "steady increase" of the Iraqi dinar against the dollar, the Iranian rial and the Kuwaiti dinar over the past year. This really caught my eye, because additional research suggests that recently this contrary indicator is more than a "steady increase." Check out this graph (.pdf file here; all currency information courtesy of Bloomberg.com, subscription required). Despite the "horrors and setbacks" that are now taken as read in Iraq by the American press, the dinar is doing remarkably well. The currency has gained almost 10% against the dollar in the last six weeks. 10%. Against the dollar. Given the relative inflation and unemployment rates between the two countries, that's pretty impressive. But, you argue, the dollar is softening worldwide. How does the dinar stack up against the euro? The yen? Turns out it stacks up very nicely, thank you very much (additional .pdf file here). And its progress against the rial is food for thought as well. Isn't Iran supposed to be the ascendant power in the region, while Iraq (thanks to our tender ministrations) is an imploding disaster? Yet investors are choosing to put their money in Iraq, not Iran. In fact, rather than expanding, Iran is facing some pretty serious internal economic issues that make it a less than desirable country in which to invest. Hence the strength of the Iraqi dinar.

So what can we make of this apparent oxymoron?

Read on...

In my opinion, which I know differs markedly from many editorial opinions in our country, there is only one logical conclusion to draw here, and it's a simple one. Someone (or rather a sizable number of someones) thinks that violence or no violence, there is money to be made in Iraq. I suppose the cynical view of this trend would be that the terrorists are winning and so after they defeat us and take over the Iraq--and the United States--dollars will become worthless. But as counter-intuitive as it may seem to those who believe Iraq is lost, it seems a little more likely that those who are buying dinars think that the currency is undervalued against the dollar, and that it will be worth more in the future than it is now because of the potential for growth in the Iraqi economy. This assessment has little to do with exalted ideals of spreading freedom (although it seems pretty self-evident to me that free peoples tend to begat economic prosperity more frequently than their brothers and sisters under the yoke of tyranny)--it has to do with the hard cold realities of Iraq's resources, and the ability of its population to harvest them and spend the profits.

When we look a little closer, that same "Measuring Stability and Security in Iraq" report includes some interesting data besides that which made for such lurid headlines last week that supports such a conclusion. Turns out that according to the DoD, despite the violence, "[t]he period covered in this report saw incremental progress in the government of Iraq’s willingness and ability to take over responsibility, to build institutions, and to deliver essential services." And while the movement of the Iraqi government on many issues has been excruciatingly slow, there are points of progress, such as the crafting of the Investment Law, which "[d]uring the reading and debate process...became progressively less protectionist, and its passage establishes a legal regime friendly to foreign direct investment." In addition, on October 31st, "members of the International Compact group met to finalize the compact, anticipating approval by the end of 2006. Over the next five years, the International Compact has the potential to bring together the international community and multilateral organizations to help Iraq in attainment of sustainable economic growth and reintegration of its economy into the region and the world." Developments of this nature do not exactly scream from the headlines, but smooth the way to prosperity. We also find legislation such as the "Fuel Import Liberalization Law," which, "if properly implemented, would break the government's monopoly on fuel importation. This legislation should allow the refined fuel market to grow, relieve the cost of the subsidy on the Government of Iraq, and ease the frequent shortages of refined fuels." That's a big "if," of course, but still, the trend is towards legislation that will encourage investment and reduce government interferance in the enonomy. Combine such developments in the period covered by this report with the progress on a hydrocarbon law that has taken place in December, and you wind up with an economy with the increasing potential to produce substantial and sustained returns. Yes, it is potential, not a sure thing and serious challenges remain--and perhaps the most imperative need is for a reliable banking system. But given human nature, such potential will always be a lure for investors. It looks to me as if increasing numbers are willing to place a bet on Iraq overcoming its troubles--not because they want to contribute to the spread of democracy, but because they think they can make money on its success. And I call that a positive indicator.

We might also find it constructive to consider Iraq in a regional context, rather than directly comparing conditions there to the United States. While things may be tough in Iraq now, they're hardly a walk in the park in the greater middle east, so if you're going to invest in the region, Iraq doesn't look half bad. As I mentioned above, Iran is no haven for free enterprise. Nor are Saudi Arabia and its repressive, heavily controlled ilk, for that matter. And so, despite terrorist attacks, the free markets emerging in Iraq may turn out to be the country's most powerful weapon against instability. General Mattis said this week that "violence and progress can and do coexist." The General admitted that Iraq is unlikely to emerge as a sort of middle-eastern version of Switzerland, but that economic progress would eventually reduce the violence--perhaps even more effectively than an additional 30,000 American troops. Of course, this process takes time, and time is at a premium these days. Pictures of exploding humvees sell more copies of The New York Times than blurry graphs of the dinar's progress. But if those with money to invest keep looking at those boring old charts rather than the sensational photos, the Iraqis have a real shot at demonstrating that even in the middle east, a country with substantial resources and the free people and free markets to exploit them can achieve sustained prosperity for itself.

The question for the United States then becomes, "So, buddy, do you want to make a dinar?" Judging from our entrepreneurial history as a nation, you might hope that the answer to that question will be a resounding "Yes." A situation where you can do well by doing good should be a quintessentially American opportunity, regardless of political party. I just hope that our limited understanding of the full picture in Iraq doesn't lead us us to miss the boat on this one.