Introductory Economics Lesson One: Price controls can backfire. Exhibit A: New York City rent control. Landlords neglect repairs, and harass poor tenants into leaving. Meanwhile, well-to-do renters pay thousands of dollars in “key money” to owners or supers to obtain choice apartments.
Exhibit B: Iraqi oil price control. Remember when the Provisional Authority took over in Iraq under the direction of Paul Bremer? In its eagerness to impose free markets, the Authority privatized most public enterprises, throwing thousands out of work. Yet when it came to oil, astoundingly, it retained Saddam Hussein’s policy of paying subsidies to hold prices well below market!
In “Attacks on Iraq Oil Industry Aid Vast Smuggling Scheme,” (Sunday, June 4) The New York Times reports the predictable result:
“Once thought to be only a tool for insurgents to undermine the government, the pipeline attacks have evolved into a lucrative moneymaking scheme for insurgents and enterprising criminal gangs alike. Ali Al Alak, the inspector general for the Oil Ministry, said the attacks are now orchestrated by both groups to force the government to import and distribute as much fuel as possible using thousands of tanker trucks.”
“In turn, the insurgents and criminal gangs — distinguishing among them has become increasingly problematic — have transformed the trucking trade into a potent tool for smuggling.”
“In many cases documented by Mr. Alak and other Iraqi officials, truckers, often collaborating with smuggling gangs, pay bribes or use forged papers to inflate the value of their load, tamper with their fuel meters, or simply turn their loads over to the gangs.”
“As a result, as much as 30 percent of imported gasoline is promptly stolen and resold abroad by smugglers, according to American and Iraqi officials. The shortfall is part of what forces Iraqi families to spend more on fuel from the black market, where it is far more expensive than from legal outlets.”
“Oil Ministry data suggest that the total [cost] was $2.5 billion to $4 billion in 2005, said Yahia Said, a research fellow at the London School of Economics and director of the Iraq Revenue Watch at the Open Society Institute, a policy foundation.”
“Even at the low end, that would mean smuggling costs account for almost 10 percent of Iraq’s gross domestic product, $29.3 billion in 2005.” (www.nytimes.com
/2006/06/04/world/middleeast/04smuggle.html)
One assumes the Authority feared repercussions–either rioting by ordinary Iraqis accustomed to low gas prices (after waiting in line for three days), or sabotage by the vast network of local officials and tribal chiefs dependent on oil smuggling.
A recent deal with the International Monetary Fund to forgive Iraq’s debts includes a provision to end the Saddam-era oil subsidies. But the new Iraqi government, even more than the Provisional Authority, may fear public response–not to mention resistance of corrupt politicians.
There could have been–and could still be–an alternative: Issue coupons to Iraqi families in the amount of the average per-family subsidy, and let oil prices rise to market. In effect, give the subsidy to Iraqi families instead of to smugglers.
Meanwhile, financed by US taxpayers, insurgents and criminals continue the slaughter.
