Imperial Life in the Emerald City (14 page)

McPherson's team met several times in his office to figure out a solution. No Iraqis were invited. Nor were Carney and his staff. McPherson viewed the latter as “special pleaders.”

McPherson advocated a clean-slate approach. All debts and assets would be nullified. State-owned enterprises would start from scratch. Others on the economics team voiced doubts. They cited the precedent of Alexander Hamilton, who, as America's first treasury secretary, had insisted that the nascent federal government make good on its foreign and domestic debts. Post-Saddam Iraq should follow the same policy, they argued. McPherson refined his argument. The government would make good on private debts. After all, there was $1 billion in the banks to pay private depositors. But intragovernment debts, those among ministries and state companies, would be forgiven. To compensate state firms for their disappearing assets, McPherson promised to allocate $60 million from the 2003 budget to the Ministry of Industry. Carney, Corliss, and Jackson could figure out how to divvy up the money. To McPherson, it seemed more than fair.

When Corliss heard about McPherson's decision, “a hundred red flags” went up.
This is bad,
he thought.
This is really bad.

McPherson's decision meant that the al-Faris Company, which had $1.5 million in the bank, now had nothing. So much for buying that generator to restart its assembly line. Cement companies were in the same position. They had cash in the bank, or so they thought, that they needed in order to resume production. At the same time, some of the country's most unprofitable companies would be left with a windfall. Most galling to Corliss was the case of the State Company for Cotton Industries. It had borrowed $75 million from a state-run bank to purchase a three-year supply of cotton. (There was literally a small mountain of raw cotton piled up next to the factory.) All of a sudden, that cotton was free. Instead of using it to produce cloth, factory managers sold it to neighboring countries and pocketed millions of dollars in under-the-table commissions.

“The very companies that matter most to us got hurt the most,” Corliss said. “The very companies that were, in McPherson's terminology and mine, the dogs that you got to take out back and shoot benefited the most… . Who owes a bunch of money? Weak companies. Who had a bunch of money? Strong companies. So we just reversed that… . It was exactly the opposite of what we were trying to achieve.”

Corliss also maintained that the $60 million that McPherson was allocating to the Ministry of Industry was not nearly enough. Preliminary assessments estimated damages from looting at the forty-eight state-owned companies at more than $400 million. Then there was the cost of buying raw materials and otherwise funding operations.
There's no way we can do this with
$
60 million,
he thought. He asked for a meeting with McPherson.

The two men met for dinner in the palace's gymnasium-size cafeteria. For over an hour and a half, Corliss explained why he thought McPherson's decision was wrong. “And his attitude at the end of it was just simply, ‘You're going to spend forever unwinding these intercompany payables and receivables. They're going to play games on you, and you already told me the accounting is a mess. How in the heck do you think you're going to figure this out?… And by the way, Glenn, all of their deposits in the bank? There's no money in the bank to back that up. So if I don't implement this policy, all of your companies that have money in the bank are going to go to the bank to get their money, and guess what? It's not there. It's just not there.'

“And what I said to him? ‘That's fine, sir. I agree with you. You made my life a lot more simple, and believe me, now I've got a clean working balance sheet… . But the problem is, sir, you've got all these wacky things. You've got the cotton company with $75 million worth of cotton. You've got the petrochem company that is owed money by all these other companies. And plus you have the problem of every company I now go to talk to, the first words out of their mouth is, “You stole my bank account.” I can tell them the money was never there. They're not going to believe me. They're going to say, “You Americans stole my bank account,” and that's what they're convinced of.'”

“I agree there's ramifications,” McPherson said. “But you know, there's pros and cons to every decision. This is the decision we're making. We're moving forward.”

As Corliss walked away, he announced that he wasn't giving up. “Sir,” he said, “I'm going to try to convince you otherwise.”

The next day, Corliss wrote a one-page e-mail to Carney and Jackson. He didn't pull any punches. On the cancellation of assets and debts, he wrote, “We will be saddling most of the Companies with negative working capital balances—a major red flag for investors and a drag on future performance of the Company… . This policy also says to the companies, ‘any sales you made before June 1 but haven't been paid for yet were for naught. Sorry, but you got ripped off. Hope you didn't work too hard getting that deal done.'” He called the decision to devote just $60 million to the ministry “nothing short of a guaranteed death sentence for all but the strongest” state-owned enterprises. “I recognize that these are controversial opinions and I've made little attempt to communicate this diplomatically. Nonetheless, I believe it's a critical enough issue that one should not mince one's words. Furthermore, I have little interest in participating in destruction of otherwise viable Companies.”

Two days later, Carney sent a note to McPherson titled “Fatal Flaws in Budget Policy Towards State-Owned Enterprises.” He argued that the decision violated the Geneva Convention by undermining “assets of the Iraqi people.” He also accused McPherson of drawing up the policy “without adequate Iraqi participation. Instead of transparency, with major concerned Iraqi Ministries and academics engaged, the policy seems to be the thinking of a small group in the Coalition Provisional Authority.”

“We need to rethink this,” he wrote in closing.

Carney left Baghdad for good the next day, his ninety-day commitment over. Before departing, he had a brief meeting with Bremer in the palace. “Good luck,” Carney told Bremer, “and don't forget to rely on Iraqis.”

         

         

With privatization abandoned in favor of shrinkage, McPherson turned his attention to other policies designed to create a capitalist utopia in the Middle East. He persuaded Bremer, who shared his dream of a vibrant private sector, to eliminate import duties. Saddam's government had charged taxes of as much as 200 percent on some imported luxury products. With no more fees, truckloads of cars, televisions, and air-conditioners were shipped into Iraq from every neighboring country. Baghdad's Karrada Street, the capital's main shopping boulevard, was lined with new vehicles and electronic appliances for sale. Curious Iraqis pawed the products. Wealthier ones removed the dollars they had been hiding under their mattresses and purchased the newly arrived goods, which had long been out of their reach. The scene was just what the press strategists at the White House had long sought: liberated Iraqis reveling in a free market.

Emboldened, McPherson became even more ambitious. He seized upon the tax code—without waiting for the BearingPoint consultants—and took an ax to it. He slashed Iraq's top tax rate for individuals and businesses from 45 percent to a flat 15 percent. It was the sort of tax overhaul that fiscal conservatives long dreamed of implementing in the United States. No matter that most Iraqis never bothered to pay taxes. The details would be worked out later by BearingPoint, whose contract required them to develop a program to assign Iraqis taxpayer identification numbers.

The centerpiece of McPherson's agenda was a new foreign-investment law. Iraq, like almost all of its neighbors, restricted the degree to which foreigners could participate in the local economy. In most cases, a foreigner could own no more than 49 percent of a business. The rule, designed to protect indigenous firms, was out of sync with the globalizing world economy, but it played to the Iraqi public's conspiratorial, xenophobic fears that investors from Israel would seek to take over Iraqi companies. To McPherson, though, foreign investment was key to economic recovery. The way to create jobs, he reasoned, was to lure multinational firms into Iraq with the promise of being able to own not just 49 percent, but 100 percent, of the businesses they established. He figured that they would set up factories that would employ thousands of Iraqis, obviating the need for the CPA to resuscitate many state-owned firms. He pitched his idea to Bremer, who became an early convert. Others on McPherson's team also signed on. But the Governing Council was dubious. Members knew that the change would be controversial, and they didn't want to get blamed for selling the country to foreigners. McPherson and Bremer did a hard sell, bringing in economists from the World Bank, who explained that protectionist policies were the reason that the Middle East was lagging behind Africa in foreign direct investment. The discussions continued for weeks, with the council proposing various schemes to restrict the ability of foreign firms to sell goods, which McPherson and Bremer shot down. The deal eventually was sealed by Colin Powell, who told the council during a brief visit that it should support the change. The new foreign-investment law was announced a few days later, at an international banking conference in the United Arab Emirates. It was McPherson's happiest day since arriving in Iraq.

McPherson didn't see himself as an ideologue but as an American working in the best interests of the Iraqi people. He was there to dispense some bitter medicine, but he figured it was easier for him to do it than a fledgling Iraqi government, which probably would not want to squander political capital on liberalizing foreign investment or shrinking state businesses. He also forced Bremer and the neoconservative architects of the war to accept their share of tough-to-swallow news. When the CPA began running short of Iraqi currency to pay salaries to the Iraqis, McPherson decided to resume printing 250-dinar banknotes with Saddam's picture on them. Paul Wolfowitz objected, but McPherson stood his ground. He argued that if the CPA stopped paying salaries in dinars and dollars—and went exclusively to dollars—it would send a strong signal to Iraqis that their “currency was worthless.” Later, McPherson presided over one of the most successful CPA projects: the printing of new currency, without Saddam's face, and a massive nationwide exchange program to swap old bills for new ones.

A month before McPherson left, Bremer told him he would no longer have to worry about private-sector development. That job would belong to Thomas Foley, an investment banker and a major Republican Party donor who had been President Bush's classmate at Harvard Business School.

A week after arriving, Foley told a contractor from BearingPoint that he intended to privatize all of Iraq's state-owned enterprises within thirty days.

“Tom, there are a couple of problems with that,” the contractor said. “The first is an international law that prevents the sale of assets by an occupation government.”

“I don't care about any of that stuff,” Foley told the contractor, according to her recollection of the conversation. “I don't give a shit about international law. I made a commitment to the president that I'd privatize Iraq's businesses.”

When the contractor tried to object again, Foley cut her off.

“Let's go have a drink,” he said.

THE GREEN ZONE, SCENE V

A Coalition Provisional Authority press briefing.

DATE
: February 25, 2004.

SETTING
: Conference Room Three, Baghdad Convention Center.

BRIEFERS
: CPA spokesman Daniel Senor and Brigadier General Mark Kimmitt.

QUESTION
(in Arabic from an Iraqi journalist): General Kimmitt, the sound of American helicopters, which fly so low to the ground, is terrifying young children, especially at night. Why do you insist on flying so low and scaring the Iraqi people?

GENERAL KIMMITT:
What we would tell the children of Iraq is that the noise they hear is the sound of freedom. Those helicopters are in the air to provide safety, provide security. Certainly our helicopter pilots do not fly at an altitude intentionally to distract the children of Iraq. They're there for their safety. They're there for their protection. And just as my wife, who is a schoolteacher, tells the children when they're sitting in the classroom that, when they hear the artillery rounds go off at Fort Bragg, she says, “Children, that's the sound of freedom.” They seem to be quite pleased with that explanation. We would recommend that you tell the same thing to the children of Iraq, that that helicopter noise you hear above you ensures that they don't have to worry for the future.