Oil and Iraqi Federalism - Where Hillary Clinton and I agree:

In this recent interview, Hillary Clinton (a figure with whom I rarely agree on much else) endorses an idea that I have argued for myself (see here, here, and here): a federalist system for Iraq under which each individual Iraqi citizen gets to have a share of the nation's oil wealth:

I recommended in '03 — and this went all the way up to [Vice President] Cheney, who shot it down — I recommended, while we were in charge, to create an oil trust, where you would basically say to every Iraqi, "You know what, you have a stake in this. And you can get some payment out of the oil revenue."

I thought it would be something that could demonstrate clearly that we were not on the side of the oil companies, we were not on the side of the ruling elites — we were on the side of the Iraqi people.

Nothing like that has been done. The Sunnis will not quit fighting until they are assured they're going to get some share of the oil revenue. Otherwise, the South goes to Shiites, the North goes to Kurds, and these people who have dominated not just Iraq, but the region historically, will be shamed and will be rendered second-class citizens.

As I argued in my previous writings on the subject (linked above), an oil fund that gives shares to all Iraqi citizens is a good way to ensure that decentralized federalism - a necessary part of any effective political settlement in Iraq - can be reconciled with the need to ensure that majority Sunni regions have access to the nation's oil wealth; there are few if any oil deposits in the "Sunni triangle" region where most Iraqi insurgents are based.

Clinton's comments, however, point to another advantage of this approach: the possibility that it would give ordinary Iraqis a greater stake in the new political system and therefore a new reason to oppose Baathist and radical Islamists who would seek to overthrow it (and thereby take away the new oil rights).

As to whether Sen. Clinton really did urge the Bush Administration to adopt this approach back in 2003, I have no way of knowing. However, a number of people did try to persuade the Administration to embrace it at the time, including my colleague and Nobel Prize-winning economist Vernon Smith. Unfortunately, their advice was not followed.

Now that Iraqi politicians in the new government have gotten control of the oil, it will be more difficult to get them to give it up than it would have been to create an oil trust back in 2003 when the US-led Coalition Provisional Authority still ruled Iraq. However, the United States might still be able to force the adoption of this crucial reform by using the leverage created by its massive aid payments to Iraq. If Iraqi politicians want to continue to benefit from large-scale US assistance, it is perfectly reasonable for us to require them to adopt a reform that enables their people to own a share of the nation's wealth and gives Iraqis of all ethnic and religious backgrounds an important incentive to oppose the insurgency.

Related Posts (on one page):

  1. Iraqi Oil Trusts - Answering Some Objections:
  2. Oil and Iraqi Federalism - Where Hillary Clinton and I agree:
I am not sure how, in tribal and corrupt Iraq, the "ruling elites" would be any less empowered than they would be otherwise.

The advantage, I suppose, is that the tribal leaders people of Iraq tribal leaders, or depending on the area people of Iraq, imams in charge, or militia leaders, would all be assured of getting money, whether Kurd, Sunni, or Shia. That might be sufficiently satisfactory for all to allow an actual country to get started through a government actually doing governmental things.

I guess the model would be Alaska.
10.13.2006 1:26am
jvarisco (www):
The problem is that there are a lot more Shias than Sunnis and Kurds. Which means they will get most of the oil. Which means the insurgents (the Sunnis) will oppose it, and you won't fix the problem. And the Kurds, who want Kirkuk for themselves (and look likely to get it) are not going to be all that enthusiastic.

It's also not at all clear that it would work given the actual situation in Iraq. The Dawes Act comes to mind.
10.13.2006 3:11am
If "the problem" is that the Sunnis expect the Kurd and Shiites won't cough up any oil dough because the Sunni areas don't have any oil, then the scheme would be a way of addressing that problem.
10.13.2006 4:12am
Bruce Hayden (mail) (www):
I think that Lev has a good point. The Kurds really do want a lot of autonomy, and part of that is that a lot of oil is up there under traditional Kurdish lands. Maybe not as much as under the traditional Shiite lands, but probably more per capita.

Another thing the Hillary plan would do would be to give everyone an incentive to keep the pipelines, etc., safe from sabatoge. There wouldn't be a lot of sympathy for blowing up pipelines if everyone in the country would take a dividend cut as a result. Rather, the perps would likely be strung up on the spot. Not that I condone such behavior, of course, but doing that once or twice would likely make the pipelines quite safe.

The downside may be that giving everyone some money like that may work as a disincentive to taking chances in business, etc., and slow up the modernization of the Iraqi economy. Someone awhile back pointed out that national resources often seem to work to disadvantage countries, with those with the least often working the hardest to get ahead - think Japan. Indeed, you could put many of the faster growing economies, esp. in Asia, in that category.
10.13.2006 6:02am
Huggy (mail):
Is the US an empire that can force vasal states to implement what is politically popular in the US? I thought the war was to increase US security. Forcing a US approved brand of socialism won't do that.
10.13.2006 8:35am
I guess any time you bring up Hillary a reference to socialism is sure to follow. Alaska sure would be surprised to learn that they're a socialist state.

This proposal would actually accomplish the polar opposite of socialism in that it would give all the people of Iraq some "skin in the game." The alternative is not some sort of free-market distribution of oil revenues; the alternative would involve some combination of colonial practices and 'might makes right.'
10.13.2006 11:36am
What does Hugo Chavez think of the idea?
10.13.2006 1:36pm
Carl Shulman:
Bruce Hayden: the oil is THERE, and the money will go to someone. The theory behind the 'resource curse' is that it reduces the incentive for government to liberalize the economy (it is easier to pay off supporters with easily-concealed skimming of oil profits than through taxation). The 'citizen's dividend' proposal is a way to create a constituency that will work to prevent the usual effect.

I also wouldn't worry so much about the disincentive to work or risk-taking: since the dividend is unconditional, it doesn't directly affect marginal tax rates in the way a welfare payment would, and the levying of substitute income or consumption taxes is precisely what we would want from a political economy perspective since it gives the government a reason to get the economy growing. If anything, a dividend may provide a social safety net that reduces the utility costs of financially risky ventures in the same way that American bankruptcy laws do.

Now, in a place like Norway or Alberta I might advise using the oil money to reduce taxes on capital investment or pay off debts, but in Iraq it's more important to create some basic incentives towards a more free-market economy and reduced violence.
10.13.2006 7:14pm
"Huggy" has a good point. While this may be a good idea, Cheney, Hillary, Bush, or any other American has no right to simply do it. Creating a functioning democracy is the most important goal in Iraq now, which means we can't force them to do it; we can only try and persuade them to do it. Maybe they will, maybe they won't - but simply taking the oil out of the government's hands and creating the trust is a laudable strategy implemented by a fatally flawed tactic. Unfortunately, one of the downsides of autonomy is that sometimes people make bad choices.
10.13.2006 8:09pm
Ilya Somin:
While this may be a good idea, Cheney, Hillary, Bush, or any other American has no right to simply do it.

I am not suggesting that the US "simply do it." Rather, the US can make it a condition of continuing US economic aid. Very extensive conditions were also placed on US support for newly democratizing regimes in Germany, Japan, Italy, Panama, Grenada, etc., and in many cases those conditions left the countries in place far better off than they were before. However, if the Iraqi government is willing to do without US aid, I do not propose to use military force to make them implement this plan.
10.13.2006 9:05pm
Lenny Glynn (mail):
Folks --

I am delighted to see fresh interest in this idea -- which is my idea -- first posted on Instapundit in early 2003 through my good friend, Lou Dolinar -- and since revised, re-iterated many times -- at Tech Central Station, New Partisan, NRO and Strategy Page...among others.

Many, many others -- including Vernon Smith -- have since proposed variants of the idea...and we have seen a host of technical and idosyncratic objections, issues of implementation etc. etc. -- from a host of folks who say, basically -- "can't be done...won't work" etc...

As opposed to the status quo? GMAB.

The absolutely essential point on this is that ANY system that would give all Iraqis an explicit ownership share in future oil revenues -- would be much superior to having state-owned companies be the winner-take-all target of every crooked, rent-seeking political faction in the country.

For more details on why I believe we could turn oil into a war-winning weapon -- and fuel of democracy -- not tyranny -- just google my name: Lenny Glynn...

10.14.2006 10:18am