March 17, 2004: Former World Bank Chief Economist: US Plans for Shock Therapy on Iraq Will End in Disaster

Joseph Stiglitz, Nobel laureate and former chief economist at the World Bank, warns in an op-ed piece that US plans to submit Iraq’s economy to shock therapy—i.e., the rapid implementation of market reforms such as privatization and deregulation—will fail in Iraq. He advises the international community to “direct its money to humanitarian causes, such as hospitals and schools, rather than backing American designs.” He writes: “When the Berlin Wall fell, the countries of Eastern Europe and the former Soviet Union began transitions to a market economy, with heated debates over how this should be accomplished. One choice was shock therapy… while the other was gradual market liberalization to allow for the rule of law to be established at the same time. Today, there is a broad consensus that shock therapy, at least at the level of microeconomic reforms, failed, and that countries (Hungary, Poland, and Slovenia) that took the gradualist approach to privatization and the reconstruction of institutional infrastructure managed their transitions far better than those that tried to leapfrog into a laissez-faire economy…. But the Bush administration, backed by a few handpicked Iraqis, is pushing Iraq towards an even more radical form of shock therapy than was pursued in the former Soviet world. Indeed, shock therapy’s advocates argue that its failures were due not to excessive speed—too much shock and not enough therapy—but to insufficient shock.” But it won’t work, he says, because instability will deter investment and those who do purchase state assets “may then be reluctant to invest in them; instead, as happened elsewhere, their efforts may be directed more at asset stripping than at wealth creation.” He adds that providing Iraq with loans will only exacerbate the country’s difficulties. He concludes: “America’s economic program for reconstructing Iraq is laying the foundations for poverty and chaos.” [ZNet, 3/17/2004]