World aid for Iraq falling short

If all goes according to plan, the international donors' conference for Iraq that begins in Madrid Thursday should end with roughly $30 billion pledged to rebuild a country devastated by war and mismanagement. The US-led coalition expects another $11.1 billion will come from Iraq's oil revenue over the next three years.

Big numbers, to be sure. But they remain $15 billion short of the $56 billion the UN and the United States have estimated Iraq needs to get its economy, infrastructure, and defense forces on a solid footing for growth.

"I know it's unrealistic to expect the full $50-60 billion we need in Madrid, but it's important that we get as much of this money as possible,'' says Mahmoud Othman, a member of the US-appointed Iraqi Governing Council. "The longer it takes for our economy to recover, the more dangerous and unstable the transition to sovereignty will be."

Unless further contributions by international donors bridge the gap, the United States will eventually have to put more money into Iraq, despite the unabated rate of attacks on US forces. That's a decision, if and when it comes, that will probably prove unpopular among US voters. But the alternative could be worse.

The first years of any country's transition to democracy are fragile ones, and the failure of democracy to deliver tangible benefits - higher growth rates, stronger social safety nets, and jobs - often breeds nostalgia for the bad, "good old days" of authoritarian rule.

In Iraq, this problem is heightened by anger at the US occupation and the expectations that immediately followed the invasion. Saddam Hussein might be responsible for most of Iraq's economic misery, but most Iraqis feel the US should clean up the mess it left behind. In Baghdad, 87 percent of respondents to a recent Gallup poll said they think the US and Great Britain should pay for recovery.

"It's not all about injecting funds into Iraq, but there are these incredibly high expectations within Iraq, and disappointing these expectations can have dangerous consequences," says Loulouwa al-Rachid at the International Crisis Group, a Brussels-based think tank.

Iraq's own oil industry, in partial disrepair after years of war, could be part of the answer. The coalition anticipates that in the next three years, 97 percent of Iraq's government budget will come from its annual oil revenue, which the coalition expects to jump to $12 billion in 2004 and up to $19.5 billion by 2006, from about $5.4 billion this year.

But only $11.1 billion of this money - 22 percent - will go towards reconstruction. The rest will be spent on things like government salaries and food subsidies. And the industry has proved vulnerable to an ongoing campaign of sabotage.

The Madrid meeting will be attended by representatives of nearly 60 countries, and in addition to cementing pledges, it will look at how the money will be spent and who will control the spending.

The European Union and the United Nations want most money channeled through UN- and World Bank-supervised agencies, but the US has kept control thus far over its own funds.

"This money can be spent over a 10-year period instead of a shorter period," says an economist who has examined Iraq's financial needs. "But less money spent now means slower economic recovery" and more risks. He recommends more spending soon to improve the chances of a successful transition.

That will bump up against growing anger inside the US at the bill for the Iraq war and its aftermath, particularly as administration officials promised the burden would be minimal.

Before the war, Paul Wolfowitz, deputy defense secretary, said Iraq "can really finance its own construction, and relatively soon." But with a record deficit in the US, a recent CBS poll found most Americans are opposed to spending any money on Iraq's reconstruction.

A bill before Congress promises $20 billion for rebuilding. The bill is currently deadlocked in a dispute between Congress and the White House, after a vote Wednesday by the House of Representatives to convert about half this money into loans.

About $5 billion of these funds will be spent training and arming Iraq's new security forces, with the balance largely going toward improving oil production and other infrastructure needs.

President Bush has threatened to veto the bill if it requires Iraq to repay any of the funds. According to White House budget director Joshua Bolten, who wrote a letter to Congress on Tuesday warning of a possible veto, converting the aid to loans will "raise questions about our commitment to building a democratic and self-governing Iraq."

Iraq is already burdened with $120 billion in debt and war reparations left behind by the Hussein regime.

For now, there are few other sources of funds. While Great Britain and Japan have made promised substantial aid ($912 million and $5 billion, respectively), wealthy countries like France and Germany remain largely on the sidelines.

These two nations, and Russia, have said they probably won't provide much money until there's an elected Iraqi government.

But CPA officials and others say that may not be in Iraq's best interests. "Spending $1 now is like spending $10 five years from now,'' says Mr. Othman. "I hope that France and Germany don't punish the Iraqi people because of their problem with the US. Our unemployment problem is huge, and it's directly linked to our security problem."

Iraq, despite having the world's second-largest oil reserves, is not in a position to solve its economic problems entirely on its own. "There's this deep-seated belief that Iraq is a rich country and that it can reconstruct itself without help from outside actors. This is wrong,'' says Ms. Rachid.

She says that even more important than aid is restoring Iraq's sovereignty, which she sees as a necessary condition to improving security. "The problems of Iraq aren't going to disappear overnight,"she says.