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Benador Associates Public Relations

THE IRAQI PEOPLE'S FUND
by Vernon L. Smith
Wall Street Journal
December 22, 2003

With the capture of Saddam Hussein, President Bush has a great symbolic victory against his critics. However, the unfinished Iraqi economic reconstruction presents the president with a historic opportunity to craft a new geopolitical-economic paradigm that could -- and should -- become a world model for the movement of assets from governments to citizens.

The last decades have seen a world-wide transfer of state-owned assets to private entities, most often as governments have found themselves unable to afford their varying brands of socialism. However, this transfer of assets has served largely to generate funds for governments -- sales to retire government debt, fund political priorities, or as an alternative for raising taxes -- creating a funding system easier for politicians but more difficult for the public it serves.

For long-term success, the enormous task of nation rebuilding in Iraq requires attention to more than the creation of a political democracy. No matter how well-intentioned and democratic it might be, the next government will be tempted to corruption, violation of rights and expanded political power if it owns and controls the great economic wealth potential of Iraq. This is the time, and Iraq is the place, to create an economic system embracing the revolutionary principle that public assets belong directly to the public -- and can be managed to further individual benefit and free choice, without intermediate government ownership in the public name.

In Iraq, the rights in question are to the former government's producing properties, transportation, terminal facilities, waterways, land and subsurface rights. These assets should first be declared transferred to the account of the citizens, recognizing the birthright of each citizen to a personal, empowering property right in the land and assets of the country of their birth. All citizens should have an equal share in this fund and be issued the same number of share claims to the fund.

Over a period of several decades, all Iraqi assets should be auctioned to the highest bidders in an individual, national and international business competition so that each asset or bundle of complimentary assets is transferred to the bidders who value them most for production, development or exploration. The auction could begin by selling existing producing oil properties, refineries, pipelines, and gathering, separating and terminal facilities over the next several years, then move to mineral, oil and gas exploration leases, and to land surface rights.

The proceeds would be deposited in a giant mutual fund for investment in index securities of the world's stock markets and monitored -- but not managed -- by the U.N. Investing in stock indexes would minimize the need for discretionary financial management, and the prospect of the next government exercising or re-establishing any central control over Iraqi assets. The Iraqi Fund should be a closed-end fund whose shares are tradable and listed on world stock exchanges. The proceeds of each new property auction would be deposited to the account for investment in index funds. Redemptions at market value would go to any Iraqi citizen who elects at any time to cash out any portion of his shares.

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There is a very important precedent, in part, for this action -- the Alaska Permanent Fund. The state of Alaska elected to put a portion of its vast Prudhoe Bay annual royalty revenue into a citizens' Permanent Fund for investment in securities. Each year a dividend from this fund is paid to every Alaskan citizen. This Fund was the first to recognize the full rights of citizens to share directly in the income from public assets.

This Fund, however, had three important shortcomings that should not be repeated in the proposed Iraqi Fund.

• First, Alaska did not put all of Prudhoe Bay state revenue into the people's account. A portion of it went to the state government. When oil prices went up, the state succumbed to the temptation to repeal its income tax and spend its oil income like there was no tomorrow. Consequently, today the Alaskan state government has a budget crisis and a deficit gap, but the 600,000 Alaskan citizens still share equally in the dividends from their Fund, now worth $27 billion.

It is better, because it disciplines government spending, for the political process to have to pass through the eye of the needle of voter scrutiny of tax and spending policies, than to have free priority access to what should be the people's earnings on their assets.

• Second, the Alaska Fund is not a ready source of private investment and venture capital for its individual owners. This is because there are no tradable certificate shares in their mutual fund. This lack of liquidity denies citizens' access to capital markets: An individual citizen cannot sell some portion of his shares for investment in a private start-up business, or borrow against the shares for such investment. It serves as a serious impediment to individuals desiring to finance private economic developments and new ventures.

• Third, the Alaska Fund was a one-time-only event: Only the Prudhoe Bay revenues were committed to the Fund. There was no permanent recognition of citizen rights to have the proceeds of all future state-asset sales placed in the fund.

The Iraqi People's Fund would consist of tradable shares; all public property would be held, then sold, for the account of the fund; and the new government would be required to obtain its revenue from taxes levied on the citizens who are willing to elect them and finance their spending programs. The government could not raid the fund to finance its operations. All this could be made explicit in the Iraqi constitution.

There should be room in the proposal for a temporary transition mechanism. For example, sales of citizen shares in the fund might be limited at first, but gradually lifted as citizen registrations and claims were settled, and the auction/sales mechanisms became established. Also, an initial budget set-aside for financing the new government might be in order, but this budget should decline on a fixed planning schedule at 15%-20% per year as the new government gets its tax and spending program together.

This action would launch the new Iraqi state as one based on individual human rights, and the rule of law, and anoint it with rock-hard credibility by giving every citizen a stake in that new regime of political and economic freedom. The objective is to undermine any citizen sense of disenfranchisement in the country's wealth, economic and political future, and to galvanize citizen support for a democratic regime. Now is the time to act, before post-war business-as-usual creates de facto foreign and domestic spoils-of-war property right claims, leaving out a citizenry brutalized enough by a totalitarian regime, and in sore need of empowerment in their own future.

Despite its simplicity, this proposal is by no means a modest venture -- demonstrated by unsuccessful half-efforts at privatizing public assets around the world. However, the political devil in focusing on too many competing details is to risk missing the overarching principle of restoring individual ownership in Iraq. Like the Marshall Plan, the details must be subjugated to the principle. The details, if wrong, can later be repaired. The principle, once corrupted can never be reinstated. The Iraqi Citizen's Fund requires that the principle of individual ownership be primary.

A central issue in Iraq -- as well as the U.S. and other countries -- remains whether the people control government through voting and taxes or the government controls the people though a monopoly on natural resources. To break that monopoly, the Bush administration and the Iraqi Governing Counsel have a momentous opportunity to instate a new paradigm. Only an owner-people can ensure a prosperous Iraqi state.

Mr. Smith, the 2002 Nobel Laureate in Economics, is a professor at George Mason and a visiting professor at the University of Alaska, Anchorage.

 

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