Amid political instability and violence, Iraq's economic problems have been viewed as secondary and unrelated. They are not. U.S. and Iraqi institutions have systematically lost and the insurgency gained momentum as living conditions failed to improve. Economic hardship and violence (political and criminal) feed on each other: heightened popular dissatisfaction and unemployment swell insurgent ranks and the growing insurgency further hampers development. Without genuine reconstruction and a sustained recovery plan, any political success will be short-lived. Coalition Provisional Authority (CPA) performance fell far short of expectations and needs and offers a fragile, dysfunctional legacy on which to build. The Interim Iraqi Government, its still-to-come elected successor, and the international community can ill afford to repeat its mistakes.

Lack of security has been important and will continue to hinder economic activity. Kidnappings, assassinations and travel restrictions discouraged reconstruction and investment and led many non-Iraqis to withdraw. Attacks on oil facilities further disrupted the economy. Assessments of what went wrong also must recognise the difficulties of rebuilding an economy ravaged by Baathist misrule, war, and sanctions.

But obstacles have not been of a security nature alone or wholly due to the Baathist legacy. The CPA made a hard job harder. For the most part, the occupation forces came without a plan. What strategy they had benefited from little if any Iraqi input, was heavily shaped by ideology and repeatedly subject to Washington's political deadlines. CPA plans for complete economic overhaul quickly encountered stiff opposition by Iraqis intent on their own long-term strategy; shifting course, the CPA took ad hoc decisions, leaving unresolved crucial policy questions for fear of triggering even greater discontent. Thus, it was originally fixated on large-scale privatisation but, facing Iraqi hostility, neither privatised nor relinquished the objective. As a result, it failed to devise an alternative approach that might have revived ailing state companies so they could be used to find temporary jobs for the unemployed.

The 15 November 2003 turnaround accelerating the transfer of sovereignty led officials to readjust plans abruptly and emphasise projects they could complete, without regard to how they fitted an overall reconstruction strategy or whether they addressed Iraqis' immediate needs. U.S. bureaucratic infighting and high staff turnover and inexperience added to the obstacles. Inadequate transparency and accountability in the contracting process combined with real or alleged corruption has fed distrust of both occupation authorities and Iraqi institutions.

The point of listing failings is to learn from them. A sovereign Interim Government and eventually an elected one may be better positioned to correct missteps; more legitimate institutions may be better able to address everyday needs. But even if the process is smooth and viewed as credible by Iraqis -- a considerable "if" -- this will be a partial answer. Many issues that vexed the CPA remain. The Interim Government, for example, will be reluctant to make broad economic changes lest it be accused of usurping an elected government's prerogatives. As Lebanon's precedent shows, allocating power and positions along ethnic/sectarian lines risks encouraging a parallel apportionment of public jobs and resources, with corruption and malfeasance as by-products. Nor have the occupation authorities truly disappeared: the U.S. remains powerful and, importantly, controls most reconstruction funds.

The Interim Government's fundamental challenge will be to devise a coherent reconstruction strategy that focuses on immediate material improvement and sets the stage for longer-term sound rebuilding while avoiding a socio-economic crisis and its attendant political implications. This means protecting and creating jobs; far greater involvement by Iraqis -- including civil society, local councils, trade unions and associations -- at the local level; and structural steps (such as decentralisation, and a strengthened, independent media and judiciary) to curtail corruption.

The international community's full and swift help is needed. Increased assistance will not suffice; aid institutions, particularly those carrying out reconstruction projects on behalf of the U.S. government, should reconsider their approach. Project-driven, externally designed aid is not the answer. Instead, the international community should work with Iraqi institutions to design a comprehensive economic development plan that seeks citizen input, emphasises decentralisation, job creation and alleviation of socio-economic distress, and includes a powerful transparency and anti-corruption component.

Giving Iraq a real chance to recover also requires a clean break with the financial legacy of the Baathist regime -- not full and total repudiation, but a significant write-off of debt and war reparations obligations through a smart combination of moratoriums, debt reduction, and preferential treatment of creditors in reconstruction projects.

Amman/Baghdad/Brussels, 2 September 2004