by D.W.  MacKenzie

[Posted April 16, 2003]

Now that the regime of Saddam Hussein has passed into history, the most pertinent question is what kind of authority will emerge in its place. A U.S.-sponsored gathering of various Iraqi factions has agreed on a 13-point program, the first principle of which is that "Iraq must be democratic."

This is not the first time that the U.S. and U.K. governments have been in the position of influencing the fate of people just liberated from tyranny. It is the first time that George Bush and Tony Blair have headed these governments when faced with these circumstances.

Given their lack of personal experience, we should hope that they will learn from the lessons of history. Surely, Bush and Blair will avoid the errors of Versailles. There is no indication that Bush and Blair plan to impose reparations or other deliberate punitive measures on the Iraqis.

The U.S. and U.K. have done well in more recent instances of post war and tyranny occupation. West Germany, Hong Kong, and Japan all did well following the Second World War. Why?

Immediately after the war, the policies of Hitler's National Socialist government persisted. Inflation made the official currency worthless, so people resorted to barter. Between inflation and a high and complex set of taxes, work for pay was hardly worthwhile. Price controls distorted the allocation of what little production did occur.

Economists at the University of Freiberg, like Wilhelm Roepke and Ludwig Erhard, implemented free-market reforms after attaining posts in the interim government. In the summer of 1948, German inflation ceased, price controls disappeared or became ineffective, taxes fell and the tax code became simpler and flatter.

These reforms yielded excellent results. The barter system collapsed as people returned to monetary exchange. Absenteeism fell from 9.5 hours a week (May 1948) to 4.3 hours per week (October 1948). Production was at 51% of 1936 levels in June 1948. By December it rose to 78%—a 50% increase in a few months. Per capita productivity tripled following these reforms.

As for the Marshall program, this aid amounted to only 2 billion through 1954. Even at its peak it was less than 5% of German G.D.P. Reparations amounted to over 1 billion, thus negating most Marshall aid. Germany did avoid having to fund its' own national defense during these years. However, the Allies charged post-war Germany 2.4 billion dollars for defense. The German economic revival derived from radical privatization and deregulation, not the Marshall plan. Free-market reforms propelled West Germany into the prosperity and rapid development that it enjoyed during the 50's and early sixties.

What would have happened if West Germany had adopted democracy early on? The Marshall plan would have been the same, but not the Erhard/Roepke plan. The social democratic party opposed the Erhard/Roepke reforms. Party representatives, like Kreyssig, argued that price decontrol and currency reform would not work. The socialists in Germany eventually succeeded in reinstituting extensive intervention into the German economy, though not as much as under Hitler.

As Germany became more democratic, it also became more regulated, and developed less rapidly. From the sixties on, the West German economy became burdened with an extensive regulatory and welfare state. Given the proclivity of the German electorate for intervention, a rush to democratize German society after the war would have almost certainly prevented the German economic revival of the 1950's.

Nations like Hong Kong and Japan rose from the ashes of the Second World War as free-market economies. Hong Kong was and is particularly free market and undemocratic. South Korea also developed into a relatively prosperous nation without democracy. Japan transitioned to democracy, but maintained a relatively free market environment in the process.

In contrast, India has democracy and widespread poverty. Per capita G.D.P. in India is a mere 1/10^th of what it is in nondemocratic Hong Kong. One out of every four Indians cannot even afford a proper diet. While this empirical evidence casts doubt upon the notion that democracy is good per se, it does not prove that democracy must yield bad results.

The United States developed as a constitutional democratic republic. This, and other nations with relatively well behaved democratic governments show that democracies need not end up as poor as India. James Buchanan argues that effective constitutions make prosperity and democracy compatible. Antony De Jasay claims that constitutions are like chastity belts, for which the government has the key in reach. As Alexander Tytler put it "A democracy cannot exist as a permanent form of government. It can only exist until a majority of voters discover that they can vote themselves largess out of the public treasury."

It is quite obvious that a nation that focuses on transferring wealth among its' citizens must be poor relative to nations that focus on producing wealth. There is no doubt that the U.S. government has respected property rights better than most other countries in history. It is also the case that many special interests use the U.S. government to transfer wealth from those who have earned it. While the exact reasons remain unclear, some democracies manage to avoid becoming poverty ridden transfer states, while others manage to fend off transfers well enough to enable continued development. What reasons do we have to believe that Iraq will follow the example of the U.S., rather than that of India?

The U.S. came into existence in the wake of the enlightenment. Proponents of secure property rights, like John Locke, influenced the thoughts of early Americans greatly. Adam Smith also affected the way people at that time thought by teaching them how the invisible hand of markets generates prosperity. These ideas became institutionalized. Beliefs in America have changed, yet it remains one of the freest and most prosperous nations in the world.

Iraq is a poor nation with no prior experience with free markets. The Iraqi people will therefore not benefit from an entrenched system of property rights and free enterprise. Of course, this does not mean that the Iraqis cannot choose to adopt free markets, but why should we expect them to? Have the Iraqi people learned about the efficiency of free markets? Do they appreciate the natural rights of man to life, liberty, and property?

It seems unlikely that Saddam Hussein required, or even allowed, Iraqis to read the writings of Paine, Locke, Montesquieu, or more recent exponents of freedom and prosperity, like F.A. Hayek and Ludwig von Mises. The socialist and totalitarian nature of the Hussein regime makes it likely that any economic education that the Iraqi people did receive was a poor one. This being the case, it seems likely that an immediate move towards democracy in Iraq would result in the establishment of a transfer state, and the institutionalization of poverty. Unless there exists some unseen undercurrent of support for free markets and secure individual rights in Iraq, Iraqi democracy will mean unlimited democracy.

Most governments in history have been nondemocratic. Some of these nondemocratic governments have worked well. Recent experiences with Hong Kong, West Germany, and Japan have shown that people who survive war and escape tyranny can benefit from a lack of democracy. Since the results of adopting democracy are at least in question, and the likely requisites for success under democracy seem in doubt with Iraq, Bush and Blair would be wise to consider delaying their plans for democratizing Iraq. It might be better for the Iraqis to experience free enterprise first and democracy later.

D.W. MacKenzie is a graduate student in economics at George Mason University. Send him MAIL and see his Mises.org Daily Articles Archive.  See also Hans Hoppe, Democracy, The God that Failed. 

Sources

De-Jasay, Anthony. The State Liberty Fund, Inc (March 1998).

Hazlett, Thomas W. "The German Non-Miracle." Reason 9 (April 1978):  33–37. 

Heller, Walter W. 1949 ."Tax and Monetary Reform in Occupied Germany." National Tax Journal 2, no. (3):  215–31.

Klopstock, Fred H. (1949). "Monetary Reform in Western Germany." Journal of Political Economy 57 (4 ): 277–92. 

Lutz, F. A. (1949): "The German Currency Reform and the Revival of the German Economy." Economica 16: 122–42. 

Mendershausen, Horst. (1949): "Prices, Money and the Distribution of Goods in Postwar Germany." American Economic Review 39: 646–72. 

Tullock, Gordon "Undemocratic Government" Kyklos 55 (2): 247–64.

Wallich, Henry C. (1976). "Mainsprings of the German Revival." Greenwood Publishing Group.

Online sources

http://usinfo.state.gov/regional/nea/iraq/text2003/0408bush-blair2.htm

http://www.cia.gov/cia/publications/factbook/geos/in.html

http://www.cia.gov/cia/publications/factbook/geos/hk.html