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« Finding logical center for grand strategy | Main | What reviving Cold War will end up costing us »
Sunday
Aug312008

Develop Iraq to cut deals with world

With American combat troops now slated to depart Iraq by 2011, our intervention moves into its final phase, with the crucial goal being the expansion of economic opportunity for ordinary citizens.

Our - and Iraq's - success here will determine the likelihood of our military's return down the road under less favorable circumstances.

Much is made of Iraq's seeming unwillingness to spend its oil profits on infrastructure, the assumption being that Baghdad is milking American taxpayers. Let me offer another explanation: Iraq lacks sufficient "counterparty" capacity to negotiate, conclude and manage the necessary deals with the outside world.

Any market for services or goods requires counterparties of roughly equal capacity: Player A wants to sell and B wants to buy, and both possess all the necessary skills to pull off that transaction. It takes two to tango - and sign a contract.

When international business looks at oil-rich Iraq, it sees plenty of opportunity. What it doesn't see in many instances, despite rising security, are sufficient local counterparties - both private and public - to make the necessary deals happen.

Such skills were hoarded under Saddam Hussein by the top political leadership to maintain state control of the economy.

Iraq is hardly unique in this deficit. It characterizes a lot of poor economies struggling to connect to the global economic grid.

They just don't have sufficient personnel, venues and associated rule sets for striking deals and then executing them. It generally takes a generation to grow such "soft" infrastructure because it's a people-driven process in which experience is accumulated and best practices are identified.

Americans take this capacity for granted, because it's so woven into our communities: the chamber of commerce, the local land titling office, and the realtors and lawyers eager to deal.

Drop a businessperson armed with ambition and vision into your average American community, and he or she will soon be approached by a small network of locals ready to facilitate the identification of appropriate counterparties.

All economically vibrant communities possess this informal network.

When a country lacks such deal-making infrastructure, it's essentially a low-trust environment, meaning most deals are managed by family or clan-defined businesses.

These networks are inherently limited in size: Blood ties define the known, trusted universe.

These traditional networks may suffice when economic activity is modest or within a classic sustenance economy in which everybody's just getting by, but they're insufficient when globalization knocks on the door.

Globalization is knocking down a lot of doors right now, as the rising East's seemingly unquenchable thirst for energy and commodities propels all manner of infrastructure investment in emerging and underdeveloped economies alike.

That push, however, reveals just how many immature economies out there lack those institutional and informal counterparty capacities.

When the fictional Jed Clampett, a "poor mountaineer," struck "black gold" and suddenly amassed a fortune, he instinctively recognized his own lack of deal-making skills and quickly outsourced that function to his new, Beverly Hills banker, Mr. Drysdale, who in turn represented the Clampett family as its competent counterparty in deals with outside entities seeking advantage.

When a state does that, like the House of Saud did almost eight decades ago by creating the Arabian American Oil Co., or ARAMCO, it's essentially buying time to develop its own counterparty capability.

Once that capacity emerged, the Saudis progressively bought out their foreign partners, taking complete control of the company.

As globalization knits together high-trust economies with low-trust ones, a market emerges in what can be described as the "sovereignty services space," wherein private entities temporarily provide an emerging market with sufficient counterparty capacity to jump-start desired connectivity with the global economy.

Iraq's Kurds are further along in this process than the rest of country.

As America moves on, we must leverage that example to lock in our hard-fought security gains with follow-on economic progress in connecting Iraq to globalization's juggernaut.

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