Baghdad: Year Zero - Naomi Klein

Baghdad: Year Zero
******************

by Naomi Klein
Harpers - Sept 24, 2004
http://harpers.org/BaghdadYearZero.html

It was only after I had been in Baghdad for a month
that I found what I was looking for. I had traveled to
Iraq a year after the war began, at the height of what
should have been a construction boom, but after weeks
of searching I had not seen a single piece of heavy
machinery apart from tanks and humvees. Then I saw it:
a construction crane. It was big and yellow and
impressive, and when I caught a glimpse of it around a
corner in a busy shopping district I thought that I was
finally about to witness some of the reconstruction I
had heard so much about. But as I got closer I noticed
that the crane was not actually rebuilding anything --
not one of the bombed-out government buildings that
still lay in rubble all over the city, nor one of the
many power lines that remained in twisted heaps even as
the heat of summer was starting to bear down. No, the
crane was hoisting a giant billboard to the top of a
three-story building. SUNBULAH: HONEY 100% NATURAL,
made in Saudi Arabia.

Seeing the sign, I couldn't help but think about
something Senator John McCain had said back in October.
Iraq, he said, is "a huge pot of honey that's
attracting a lot of flies." The flies McCain was
referring to were the Halliburtons and Bechtels, as
well as the venture capitalists who flocked to Iraq in
the path cleared by Bradley Fighting Vehicles and
laser-guided bombs. The honey that drew them was not
just no-bid contracts and Iraq's famed oil wealth but
the myriad investment opportunities offered by a
country that had just been cracked wide open after
decades of being sealed off, first by the nationalist
economic policies of Saddam Hussein, then by
asphyxiating United Nations sanctions.

Looking at the honey billboard, I was also reminded of
the most common explanation for what has gone wrong in
Iraq, a complaint echoed by everyone from John Kerry to
Pat Buchanan: Iraq is mired in blood and deprivation
because George W. Bush didn't have "a postwar plan."
The only problem with this theory is that it isn't
true. The Bush Administration did have a plan for what
it would do after the war; put simply, it was to lay
out as much honey as possible, then sit back and wait
for the flies.

* * *

The honey theory of Iraqi reconstruction stems from the
most cherished belief of the war's ideological
architects: that greed is good. Not good just for them
and their friends but good for humanity, and certainly
good for Iraqis. Greed creates profit, which creates
growth, which creates jobs and products and services
and everything else anyone could possibly need or want.
The role of good government, then, is to create the
optimal conditions for corporations to pursue their
bottomless greed, so that they in turn can meet the
needs of the society. The problem is that governments,
even neoconservative governments, rarely get the chance
to prove their sacred theory right: despite their
enormous ideological advances, even George Bush's
Republicans are, in their own minds, perennially
sabotaged by meddling Democrats, intractable unions,
and alarmist environmentalists.

Iraq was going to change all that. In one place on
Earth, the theory would finally be put into practice in
its most perfect and uncompromised form. A country of
25 million would not be rebuilt as it was before the
war; it would be erased, disappeared. In its place
would spring forth a gleaming showroom for laissez-
faire economics, a utopia such as the world had never
seen. Every policy that liberates multinational
corporations to pursue their quest for profit would be
put into place: a shrunken state, a flexible workforce,
open borders, minimal taxes, no tariffs, no ownership
restrictions. The people of Iraq would, of course, have
to endure some short-term pain: assets, previously
owned by the state, would have to be given up to create
new opportunities for growth and investment. Jobs would
have to be lost and, as foreign products flooded across
the border, local businesses and family farms would,
unfortunately, be unable to compete. But to the authors
of this plan, these would be small prices to pay for
the economic boom that would surely explode once the
proper conditions were in place, a boom so powerful the
country would practically rebuild itself.

The fact that the boom never came and Iraq continues to
tremble under explosions of a very different sort
should never be blamed on the absence of a plan.
Rather, the blame rests with the plan itself, and the
extraordinarily violent ideology upon which it is
based.

* * *

Torturers believe that when electrical shocks are
applied to various parts of the body simultaneously
subjects are rendered so confused about where the pain
is coming from that they become incapable of
resistance. A declassified CIA "Counterintelligence
Interrogation" manual from 1963 describes how a trauma
inflicted on prisoners opens up "an interval -- which
may be extremely brief -- of suspended animation, a
kind of psychological shock or paralysis. . . . [A]t
this moment the source is far more open to suggestion,
far likelier to comply." A similar theory applies to
economic shock therapy, or "shock treatment," the ugly
term used to describe the rapid implementation of free-
market reforms imposed on Chile in the wake of General
Augusto Pinochet's coup. The theory is that if painful
economic "adjustments" are brought in rapidly and in
the aftermath of a seismic social disruption like a
war, a coup, or a government collapse, the population
will be so stunned, and so preoccupied with the daily
pressures of survival, that it too will go into
suspended animation, unable to resist. As Pinochet's
finance minister, Admiral Lorenzo Gotuzzo, declared,
"The dog's tail must be cut off in one chop."

That, in essence, was the working thesis in Iraq, and
in keeping with the belief that private companies are
more suited than governments for virtually every task,
the White House decided to privatize the task of
privatizing Iraq's state-dominated economy. Two months
before the war began, USAID began drafting a work
order, to be handed out to a private company, to
oversee Iraq's "transition to a sustainable market-
driven economic system." The document states that the
winning company (which turned out to be the KPMG
offshoot Bearing Point) will take "appropriate
advantage of the unique opportunity for rapid progress
in this area presented by the current configuration of
political circumstances." Which is precisely what
happened.

L. Paul Bremer, who led the U.S. occupation of Iraq
from May 2, 2003, until he caught an early flight out
of Baghdad on June 28, admits that when he arrived,
"Baghdad was on fire, literally, as I drove in from the
airport." But before the fires from the "shock and awe"
military onslaught were even extinguished, Bremer
unleashed his shock therapy, pushing through more
wrenching changes in one sweltering summer than the
International Monetary Fund has managed to enact over
three decades in Latin America. Joseph Stiglitz, Nobel
laureate and former chief economist at the World Bank,
describes Bremer's reforms as "an even more radical
form of shock therapy than pursued in the former Soviet
world."

The tone of Bremer's tenure was set with his first
major act on the job: he fired 500,000 state workers,
most of them soldiers, but also doctors, nurses,
teachers, publishers, and printers. Next, he flung open
the country's borders to absolutely unrestricted
imports: no tariffs, no duties, no inspections, no
taxes. Iraq, Bremer declared two weeks after he
arrived, was "open for business."

One month later, Bremer unveiled the centerpiece of his
reforms. Before the invasion, Iraq's non-oil-related
economy had been dominated by 200 state-owned
companies, which produced everything from cement to
paper to washing machines. In June, Bremer flew to an
economic summit in Jordan and announced that these
firms would be privatized immediately. "Getting
inefficient state enterprises into private hands," he
said, "is essential for Iraq's economic recovery." It
would be the largest state liquidation sale since the
collapse of the Soviet Union.

But Bremer's economic engineering had only just begun.
In September, to entice foreign investors to come to
Iraq, he enacted a radical set of laws unprecedented in
their generosity to multinational corporations. There
was Order 37, which lowered Iraq's corporate tax rate
from roughly 40 percent to a flat 15 percent. There was
Order 39, which allowed foreign companies to own 100
percent of Iraqi assets outside of the natural-resource
sector. Even better, investors could take 100 percent
of the profits they made in Iraq out of the country;
they would not be required to reinvest and they would
not be taxed. Under Order 39, they could sign leases
and contracts that would last for forty years. Order 40
welcomed foreign banks to Iraq under the same favorable
terms. All that remained of Saddam Hussein's economic
policies was a law restricting trade unions and
collective bargaining.

If these policies sound familiar, it's because they are
the same ones multinationals around the world lobby for
from national governments and in international trade
agreements. But while these reforms are only ever
enacted in part, or in fits and starts, Bremer
delivered them all, all at once. Overnight, Iraq went
from being the most isolated country in the world to
being, on paper, its widest-open market.

* * *

At first, the shock-therapy theory seemed to hold:
Iraqis, reeling from violence both military and
economic, were far too busy staying alive to mount a
political response to Bremer's campaign. Worrying about
the privatization of the sewage system was an
unimaginable luxury with half the population lacking
access to clean drinking water; the debate over the
flat tax would have to wait until the lights were back
on. Even in the international press, Bremer's new laws,
though radical, were easily upstaged by more dramatic
news of political chaos and rising crime.

Some people were paying attention, of course. That
autumn was awash in "rebuilding Iraq" trade shows, in
Washington, London, Madrid, and Amman. The Economist
described Iraq under Bremer as "a capitalist dream,"
and a flurry of new consulting firms were launched
promising to help companies get access to the Iraqi
market, their boards of directors stacked with well-
connected Republicans. The most prominent was New
Bridge Strategies, started by Joe Allbaugh, former
Bush-Cheney campaign manager. "Getting the rights to
distribute Procter & Gamble products can be a gold
mine," one of the company's partners enthused. "One
well-stocked 7-Eleven could knock out thirty Iraqi
stores; a Wal-Mart could take over the country."

Soon there were rumors that a McDonald's would be
opening up in downtown Baghdad, funding was almost in
place for a Starwood luxury hotel, and General Motors
was planning to build an auto plant. On the financial
side, HSBC would have branches all over the country,
Citigroup was preparing to offer substantial loans
guaranteed against future sales of Iraqi oil, and the
bell was going to ring on a New York-style stock
exchange in Baghdad any day.

In only a few months, the postwar plan to turn Iraq
into a laboratory for the neocons had been realized.
Leo Strauss may have provided the intellectual
framework for invading Iraq preemptively, but it was
that other University of Chicago professor, Milton
Friedman, author of the anti-government manifesto
Capitalism and Freedom, who supplied the manual for
what to do once the country was safely in America's
hands. This represented an enormous victory for the
most ideological wing of the Bush Administration. But
it was also something more: the culmination of two
interlinked power struggles, one among Iraqi exiles
advising the White House on its postwar strategy, the
other within the White House itself.

* * *

As the British historian Dilip Hiro has shown, in
"Secrets and Lies: Operation 'Iraqi Freedom' and
After," the Iraqi exiles pushing for the invasion were
divided, broadly, into two camps. On one side were "the
pragmatists," who favored getting rid of Saddam and his
immediate entourage, securing access to oil, and slowly
introducing free-market reforms. Many of these exiles
were part of the State Department's Future of Iraq
Project, which generated a thirteen-volume report on
how to restore basic services and transition to
democracy after the war. On the other side was the
"Year Zero" camp, those who believed that Iraq was so
contaminated that it needed to be rubbed out and remade
from scratch. The prime advocate of the pragmatic
approach was Iyad Allawi, a former high-level Baathist
who fell out with Saddam and started working for the
CIA. The prime advocate of the Year Zero approach was
Ahmad Chalabi, whose hatred of the Iraqi state for
expropriating his family's assets during the 1958
revolution ran so deep he longed to see the entire
country burned to the ground -- everything, that is,
but the Oil Ministry, which would be the nucleus of the
new Iraq, the cluster of cells from which an entire
nation would grow. He called this process "de-
Baathification."

A parallel battle between pragmatists and true
believers was being waged within the Bush
Administration. The pragmatists were men like Secretary
of State Colin Powell and General Jay Garner, the first
U.S. envoy to postwar Iraq. General Garner's plan was
straightforward enough: fix the infrastructure, hold
quick and dirty elections, leave the shock therapy to
the International Monetary Fund, and concentrate on
securing U.S. military bases on the model of the
Philippines. "I think we should look right now at Iraq
as our coaling station in the Middle East," he told the
BBC. He also paraphrased T. E. Lawrence, saying, "It's
better for them to do it imperfectly than for us to do
it for them perfectly." On the other side was the usual
cast of neoconservatives: Vice President Dick Cheney,
Secretary of Defense Donald Rumsfeld (who lauded
Bremer's "sweeping reforms" as "some of the most
enlightened and inviting tax and investment laws in the
free world"), Deputy Secretary of Defense Paul
Wolfowitz, and, perhaps most centrally, Undersecretary
of Defense Douglas Feith. Whereas the State Department
had its Future of Iraq report, the neocons had USAID's
contract with Bearing Point to remake Iraq's economy:
in 108 pages, "privatization" was mentioned no fewer
than fifty-one times. To the true believers in the
White House, General Garner's plans for postwar Iraq
seemed hopelessly unambitious. Why settle for a mere
coaling station when you can have a model free market?
Why settle for the Philippines when you can have a
beacon unto the world?

The Iraqi Year Zeroists made natural allies for the
White House neoconservatives: Chalabi's seething hatred
of the Baathist state fit nicely with the neocons'
hatred of the state in general, and the two agendas
effortlessly merged. Together, they came to imagine the
invasion of Iraq as a kind of Rapture: where the rest
of the world saw death, they saw birth -- a country
redeemed through violence, cleansed by fire. Iraq
wasn't being destroyed by cruise missiles, cluster
bombs, chaos, and looting; it was being born again.
April 9, 2003, the day Baghdad fell, was Day One of
Year Zero.

While the war was being waged, it still wasn't clear
whether the pragmatists or the Year Zeroists would be
handed control over occupied Iraq. But the speed with
which the nation was conquered dramatically increased
the neocons' political capital, since they had been
predicting a "cakewalk" all along. Eight days after
George Bush landed on that aircraft carrier under a
banner that said MISSION ACCOMPLISHED, the President
publicly signed on to the neocons' vision for Iraq to
become a model corporate state that would open up the
entire region. On May 9, Bush proposed the
"establishment of a U.S.-Middle East free trade area
within a decade"; three days later, Bush sent Paul
Bremer to Baghdad to replace Jay Garner, who had been
on the job for only three weeks. The message was
unequivocal: the pragmatists had lost; Iraq would
belong to the believers.

A Reagan-era diplomat turned entrepreneur, Bremer had
recently proven his ability to transform rubble into
gold by waiting exactly one month after the September
11 attacks to launch Crisis Consulting Practice, a
security company selling "terrorism risk insurance" to
multinationals. Bremer had two lieutenants on the
economic front: Thomas Foley and Michael Fleischer, the
heads of "private sector development" for the Coalition
Provisional Authority (CPA). Foley is a Greenwich,
Connecticut, multimillionaire, a longtime friend of the
Bush family and a Bush-Cheney campaign "pioneer" who
has described Iraq as a modern California "gold rush."
Fleischer, a venture capitalist, is the brother of
former White House spokesman Ari Fleischer. Neither man
had any high-level diplomatic experience and both use
the term corporate "turnaround" specialist to describe
what they do. According to Foley, this uniquely
qualified them to manage Iraq's economy because it was
"the mother of all turnarounds."

Many of the other CPA postings were equally
ideological. The Green Zone, the city within a city
that houses the occupation headquarters in Saddam's
former palace, was filled with Young Republicans
straight out of the Heritage Foundation, all of them
given responsibility they could never have dreamed of
receiving at home. Jay Hallen, a twenty-four-year-old
who had applied for a job at the White House, was put
in charge of launching Baghdad's new stock exchange.
Scott Erwin, a twenty-one-year-old former intern to
Dick Cheney, reported in an email home that "I am
assisting Iraqis in the management of finances and
budgeting for the domestic security forces." The
college senior's favorite job before this one? "My time
as an ice-cream truck driver." In those early days, the
Green Zone felt a bit like the Peace Corps, for people
who think the Peace Corps is a communist plot. It was a
chance to sleep on cots, wear army boots, and cry
"incoming" -- all while being guarded around the clock
by real soldiers.

The teams of KPMG accountants, investment bankers,
think-tank lifers, and Young Republicans that populate
the Green Zone have much in common with the IMF
missions that rearrange the economies of developing
countries from the presidential suites of Sheraton
hotels the world over. Except for one rather
significant difference: in Iraq they were not
negotiating with the government to accept their
"structural adjustments" in exchange for a loan; they
were the government.

Some small steps were taken, however, to bring Iraq's
U.S.-appointed politicians inside. Yegor Gaidar, the
mastermind of Russia's mid-nineties privatization
auction that gave away the country's assets to the
reigning oligarchs, was invited to share his wisdom at
a conference in Baghdad. Marek Belka, who as finance
minister oversaw the same process in Poland, was
brought in as well. The Iraqis who proved most gifted
at mouthing the neocon lines were selected to act as
what USAID calls local "policy champions" -- men like
Ahmad al Mukhtar, who told me of his countrymen, "They
are lazy. The Iraqis by nature, they are very
dependent. . . . They will have to depend on
themselves, it is the only way to survive in the world
today." Although he has no economics background and his
last job was reading the English-language news on
television, al Mukhtar was appointed director of
foreign relations in the Ministry of Trade and is
leading the charge for Iraq to join the World Trade
Organization.

* * *

I had been following the economic front of the war for
almost a year before I decided to go to Iraq. I
attended the "Rebuilding Iraq" trade shows, studied
Bremer's tax and investment laws, met with contractors
at their home offices in the United States, interviewed
the government officials in Washington who are making
the policies. But as I prepared to travel to Iraq in
March to see this experiment in free-market utopianism
up close, it was becoming increasingly clear that all
was not going according to plan. Bremer had been
working on the theory that if you build a corporate
utopia the corporations will come -- but where were
they? American multinationals were happy to accept U.S.
taxpayer dollars to reconstruct the phone or
electricity systems, but they weren't sinking their own
money into Iraq. There was, as yet, no McDonald's or
Wal-Mart in Baghdad, and even the sales of state
factories, announced so confidently nine months
earlier, had not materialized.

Some of the holdup had to do with the physical risks of
doing business in Iraq. But there were other more
significant risks as well. When Paul Bremer shredded
Iraq's Baathist constitution and replaced it with what
The Economist greeted approvingly as "the wish list of
foreign investors," there was one small detail he
failed to mention: It was all completely illegal. The
CPA derived its legal authority from United Nations
Security Council Resolution 1483, passed in May 2003,
which recognized the United States and Britain as
Iraq's legitimate occupiers. It was this resolution
that empowered Bremer to unilaterally make laws in
Iraq. But the resolution also stated that the U.S. and
Britain must "comply fully with their obligations under
international law including in particular the Geneva
Conventions of 1949 and the Hague Regulations of 1907."
Both conventions were born as an attempt to curtail the
unfortunate historical tendency among occupying powers
to rewrite the rules so that they can economically
strip the nations they control. With this in mind, the
conventions stipulate that an occupier must abide by a
country's existing laws unless "absolutely prevented"
from doing so. They also state that an occupier does
not own the "public buildings, real estate, forests and
agricultural assets" of the country it is occupying but
is rather their "administrator" and custodian, keeping
them secure until sovereignty is reestablished. This
was the true threat to the Year Zero plan: since
America didn't own Iraq's assets, it could not legally
sell them, which meant that after the occupation ended,
an Iraqi government could come to power and decide that
it wanted to keep the state companies in public hands,
or, as is the norm in the Gulf region, to bar foreign
firms from owning 100 percent of national assets. If
that happened, investments made under Bremer's rules
could be expropriated, leaving firms with no recourse
because their investments had violated international
law from the outset.

By November, trade lawyers started to advise their
corporate clients not to go into Iraq just yet, that it
would be better to wait until after the transition.
Insurance companies were so spooked that not a single
one of the big firms would insure investors for
"political risk," that high-stakes area of insurance
law that protects companies against foreign governments
turning nationalist or socialist and expropriating
their investments.

Even the U.S.-appointed Iraqi politicians, up to now so
obedient, were getting nervous about their own
political futures if they went along with the
privatization plans. Communications Minister Haider al-
Abadi told me about his first meeting with Bremer."I
said, 'Look, we don't have the mandate to sell any of
this. Privatization is a big thing. We have to wait
until there is an Iraqi government.'" Minister of
Industry Mohamad Tofiq was even more direct: "I am not
going to do something that is not legal, so that's it."

Both al-Abadi and Tofiq told me about a meeting --
never reported in the press -- that took place in late
October 2003. At that gathering the twenty-five members
of Iraq's Governing Council as well as the twenty-five
interim ministers decided unanimously that they would
not participate in the privatization of Iraq's state-
owned companies or of its publicly owned
infrastructure.

But Bremer didn't give up. International law prohibits
occupiers from selling state assets themselves, but it
doesn't say anything about the puppet governments they
appoint. Originally, Bremer had pledged to hand over
power to a directly elected Iraqi government, but in
early November he went to Washington for a private
meeting with President Bush and came back with a Plan
B. On June 30 the occupation would officially end --
but not really. It would be replaced by an appointed
government, chosen by Washington. This government would
not be bound by the international laws preventing
occupiers from selling off state assets, but it would
be bound by an "interim constitution," a document that
would protect Bremer's investment and privatization
laws.

The plan was risky. Bremer's June 30 deadline was
awfully close, and it was chosen for a less than ideal
reason: so that President Bush could trumpet the end of
Iraq's occupation on the campaign trail. If everything
went according to plan, Bremer would succeed in forcing
a "sovereign" Iraqi government to carry out his illegal
reforms. But if something went wrong, he would have to
go ahead with the June 30 handover anyway because by
then Karl Rove, and not Dick Cheney or Donald Rumsfeld,
would be calling the shots. And if it came down to a
choice between ideology in Iraq and the electability of
George W. Bush, everyone knew which would win.

* * *

At first, Plan B seemed to be right on track. Bremer
persuaded the Iraqi Governing Council to agree to
everything: the new timetable, the interim government,
and the interim constitution. He even managed to slip
into the constitution a completely overlooked clause,
Article 26. It stated that for the duration of the
interim government, "The laws, regulations, orders and
directives issued by the Coalition Provisional
Authority . . . shall remain in force" and could only
be changed after general elections are held.

Bremer had found his legal loophole: There would be a
window -- seven months -- when the occupation was
officially over but before general elections were
scheduled to take place. Within this window, the Hague
and Geneva Conventions' bans on privatization would no
longer apply, but Bremer's own laws, thanks to Article
26, would stand. During these seven months, foreign
investors could come to Iraq and sign forty-year
contracts to buy up Iraqi assets. If a future elected
Iraqi government decided to change the rules, investors
could sue for compensation.

But Bremer had a formidable opponent: Grand Ayatollah
Ali al Sistani, the most senior Shia cleric in Iraq. al
Sistani tried to block Bremer's plan at every turn,
calling for immediate direct elections and for the
constitution to be written after those elections, not
before. Both demands, if met, would have closed
Bremer's privatization window. Then, on March 2, with
the Shia members of the Governing Council refusing to
sign the interim constitution, five bombs exploded in
front of mosques in Karbala and Baghdad, killing close
to 200 worshipers. General John Abizaid, the top U.S.
commander in Iraq, warned that the country was on the
verge of civil war. Frightened by this prospect, al
Sistani backed down and the Shia politicians signed the
interim constitution. It was a familiar story: the
shock of a violent attack paved the way for more shock
therapy.

When I arrived in Iraq a week later, the economic
project seemed to be back on track. All that remained
for Bremer was to get his interim constitution ratified
by a Security Council resolution, then the nervous
lawyers and insurance brokers could relax and the sell-
off of Iraq could finally begin. The CPA, meanwhile,
had launched a major new P.R. offensive designed to
reassure investors that Iraq was still a safe and
exciting place to do business. The centerpiece of the
campaign was Destination Baghdad Exposition, a massive
trade show for potential investors to be held in early
April at the Baghdad International Fairgrounds. It was
the first such event inside Iraq, and the organizers
had branded the trade fair "DBX," as if it were some
sort of Mountain Dew-sponsored dirt-bike race. In
keeping with the extreme-sports theme, Thomas Foley
traveled to Washington to tell a gathering of
executives that the risks in Iraq are akin "to
skydiving or riding a motorcycle, which are, to many,
very acceptable risks."

But three hours after my arrival in Baghdad, I was
finding these reassurances extremely hard to believe. I
had not yet unpacked when my hotel room was filled with
debris and the windows in the lobby were shattered.
Down the street, the Mount Lebanon Hotel had just been
bombed, at that point the largest attack of its kind
since the official end of the war. The next day,
another hotel was bombed in Basra, then two Finnish
businessmen were murdered on their way to a meeting in
Baghdad. Brigadier General Mark Kimmitt finally
admitted that there was a pattern at work: "the
extremists have started shifting away from the hard
targets . . . [and] are now going out of their way to
specifically target softer targets." The next day, the
State Department updated its travel advisory: U.S.
citizens were "strongly warned against travel to Iraq."

The physical risks of doing business in Iraq seemed to
be spiraling out of control. This, once again, was not
part of the original plan. When Bremer first arrived in
Baghdad, the armed resistance was so low that he was
able to walk the streets with a minimal security
entourage. During his first four months on the job, 109
U.S. soldiers were killed and 570 were wounded. In the
following four months, when Bremer's shock therapy had
taken effect, the number of U.S. casualties almost
doubled, with 195 soldiers killed and 1,633 wounded.
There are many in Iraq who argue that these events are
connected -- that Bremer's reforms were the single
largest factor leading to the rise of armed resistance.

Take, for instance, Bremer's first casualties. The
soldiers and workers he laid off without pensions or
severance pay didn't all disappear quietly. Many of
them went straight into the mujahedeen, forming the
backbone of the armed resistance. "Half a million
people are now worse off, and there you have the water
tap that keeps the insurgency going. It's alternative
employment," says Hussain Kubba, head of the prominent
Iraqi business group Kubba Consulting. Some of Bremer's
other economic casualties also have failed to go
quietly. It turns out that many of the businessmen
whose companies are threatened by Bremer's investment
laws have decided to make investments of their own --
in the resistance. It is partly their money that keeps
fighters in Kalashnikovs and RPGs.

These developments present a challenge to the basic
logic of shock therapy: the neocons were convinced that
if they brought in their reforms quickly and
ruthlessly, Iraqis would be too stunned to resist. But
the shock appears to have had the opposite effect;
rather than the predicted paralysis, it jolted many
Iraqis into action, much of it extreme. Haider al-
Abadi, Iraq's minister of communication, puts it this
way: "We know that there are terrorists in the country,
but previously they were not successful, they were
isolated. Now because the whole country is unhappy, and
a lot of people don't have jobs . . . these terrorists
are finding listening ears."

Bremer was now at odds not only with the Iraqis who
opposed his plans but with U.S military commanders
charged with putting down the insurgency his policies
were feeding. Heretical questions began to be raised:
instead of laying people off, what if the CPA actually
created jobs for Iraqis? And instead of rushing to sell
off Iraq's 200 state-owned firms, how about putting
them back to work?

* * *

>From the start, the neocons running Iraq had shown
nothing but disdain for Iraq's state-owned companies.
In keeping with their Year Zero -- apocalyptic glee,
when looters descended on the factories during the war,
U.S. forces did nothing. Sabah Asaad, managing director
of a refrigerator factory outside Baghdad, told me that
while the looting was going on, he went to a nearby
U.S. Army base and begged for help. "I asked one of the
officers to send two soldiers and a vehicle to help me
kick out the looters. I was crying. The officer said,
'Sorry, we can't do anything, we need an order from
President Bush.'" Back in Washington, Donald Rumsfeld
shrugged. "Free people are free to make mistakes and
commit crimes and do bad things."

To see the remains of Asaad's football-field-size
warehouse is to understand why Frank Gehry had an
artistic crisis after September 11 and was briefly
unable to design structures resembling the rubble of
modern buildings. Asaad's looted and burned factory
looks remarkably like a heavy-metal version of Gehry's
Guggenheim in Bilbao, Spain, with waves of steel,
buckled by fire, lying in terrifyingly beautiful golden
heaps. Yet all was not lost. "The looters were good-
hearted," one of Asaad's painters told me, explaining
that they left the tools and machines behind, "so we
could work again." Because the machines are still
there, many factory managers in Iraq say that it would
take little for them to return to full production. They
need emergency generators to cope with daily blackouts,
and they need capital for parts and raw materials. If
that happened, it would have tremendous implications
for Iraq's stalled reconstruction, because it would
mean that many of the key materials needed to rebuild
-- cement and steel, bricks and furniture -- could be
produced inside the country.

But it hasn't happened. Immediately after the nominal
end of the war, Congress appropriated $2.5 billion for
the reconstruction of Iraq, followed by an additional
$18.4 billion in October. Yet as of July 2004, Iraq's
state-owned factories had been pointedly excluded from
the reconstruction contracts. Instead, the billions
have all gone to Western companies, with most of the
materials for the reconstruction imported at great
expense from abroad.

With unemployment as high as 67 percent, the imported
products and foreign workers flooding across the
borders have become a source of tremendous resentment
in Iraq and yet another open tap fueling the
insurgency. And Iraqis don't have to look far for
reminders of this injustice; it's on display in the
most ubiquitous symbol of the occupation: the blast
wall. The ten-foot-high slabs of reinforced concrete
are everywhere in Iraq, separating the protected -- the
people in upscale hotels, luxury homes, military bases,
and, of course, the Green Zon -- from the unprotected
and exposed. If that wasn't injury enough, all the
blast walls are imported, from Kurdistan, Turkey, or
even farther afield, this despite the fact that Iraq
was once a major manufacturer of cement, and could
easily be again. There are seventeen state-owned cement
factories across the country, but most are idle or
working at only half capacity. According to the
Ministry of Industry, not one of these factories has
received a single contract to help with the
reconstruction, even though they could produce the
walls and meet other needs for cement at a greatly
reduced cost. The CPA pays up to $1,000 per imported
blast wall; local manufacturers say they could make
them for $100. Minister Tofiq says there is a simple
reason why the Americans refuse to help get Iraq's
cement factories running again: among those making the
decisions, "no one believes in the public sector."[1]

This kind of ideological blindness has turned Iraq's
occupiers into prisoners of their own policies, hiding
behind walls that, by their very existence, fuel the
rage at the U.S. presence, thereby feeding the need for
more walls. In Baghdad the concrete barriers have been
given a popular nickname: Bremer Walls.

As the insurgency grew, it soon became clear that if
Bremer went ahead with his plans to sell off the state
companies, it could worsen the violence. There was no
question that privatization would require layoffs: the
Ministry of Industry estimates that roughly 145,000
workers would have to be fired to make the firms
desirable to investors, with each of those workers
supporting, on average, five family members. For Iraq's
besieged occupiers the question was: Would these shock-
therapy casualties accept their fate or would they
rebel?

* * *

The answer arrived, in rather dramatic fashion, at one
of the largest state-owned companies, the General
Company for Vegetable Oils. The complex of six
factories in a Baghdad industrial zone produces cooking
oil, hand soap, laundry detergent, shaving cream, and
shampoo. At least that is what I was told by a
receptionist who gave me glossy brochures and calendars
boasting of "modern instruments" and "the latest and
most up to date developments in the field of industry."
But when I approached the soap factory, I discovered a
group of workers sleeping outside a darkened building.
Our guide rushed ahead, shouting something to a woman
in a white lab coat, and suddenly the factory scrambled
into activity: lights switched on, motors revved up,
and workers -- still blinking off sleep -- began
filling two-liter plastic bottles with pale blue Zahi
brand dishwashing liquid.

I asked Nada Ahmed, the woman in the white coat, why
the factory wasn't working a few minutes before. She
explained that they have only enough electricity and
materials to run the machines for a couple of hours a
day, but when guests arrive -- would-be investors,
ministry officials, journalists -- they get them going.
"For show," she explained. Behind us, a dozen bulky
machines sat idle, covered in sheets of dusty plastic
and secured with duct tape.

In one dark corner of the plant, we came across an old
man hunched over a sack filled with white plastic caps.
With a thin metal blade lodged in a wedge of wax, he
carefully whittled down the edges of each cap, leaving
a pile of shavings at his feet. "We don't have the
spare part for the proper mold, so we have to cut them
by hand," his supervisor explained apologetically. "We
haven't received any parts from Germany since the
sanctions began." I noticed that even on the assembly
lines that were nominally working there was almost no
mechanization: bottles were held under spouts by hand
because conveyor belts don't convey, lids once snapped
on by machines were being hammered in place with wooden
mallets. Even the water for the factory was drawn from
an outdoor well, hoisted by hand, and carried inside.

The solution proposed by the U.S. occupiers was not to
fix the plant but to sell it, and so when Bremer
announced the privatization auction back in June 2003
this was among the first companies mentioned. Yet when
I visited the factory in March, nobody wanted to talk
about the privatization plan; the mere mention of the
word inside the plant inspired awkward silences and
meaningful glances. This seemed an unnatural amount of
subtext for a soap factory, and I tried to get to the
bottom of it when I interviewed the assistant manager.
But the interview itself was equally odd: I had spent
half a week setting it up, submitting written questions
for approval, getting a signed letter of permission
from the minister of industry, being questioned and
searched several times. But when I finally began the
interview, the assistant manager refused to tell me his
name or let me record the conversation. "Any manager
mentioned in the press is attacked afterwards," he
said. And when I asked whether the company was being
sold, he gave this oblique response: "If the decision
was up to the workers, they are against privatization;
but if it's up to the high-ranking officials and
government, then privatization is an order and orders
must be followed."

I left the plant feeling that I knew less than when I'd
arrived. But on the way out of the gates, a young
security guard handed my translator a note. He wanted
us to meet him after work at a nearby restaurant, "to
find out what is really going on with privatization."
His name was Mahmud, and he was a twenty-five-year-old
with a neat beard and big black eyes. (For his safety,
I have omitted his last name.) His story began in July,
a few weeks after Bremer's privatization announcement.
The company's manager, on his way to work, was shot to
death. Press reports speculated that the manager was
murdered because he was in favor of privatizing the
plant, but Mahmud was convinced that he was killed
because he opposed the plan. "He would never have sold
the factories like the Americans want. That's why they
killed him."

The dead man was replaced by a new manager, Mudhfar
Ja'far. Shortly after taking over, Ja'far called a
meeting with ministry officials to discuss selling off
the soap factory, which would involve laying off two
thirds of its employees. Guarding that meeting were
several security officers from the plant. They listened
closely to Ja'far's plans and promptly reported the
alarming news to their coworkers. "We were shocked,"
Mahmud recalled. "If the private sector buys our
company, the first thing they would do is reduce the
staff to make more money. And we will be forced into a
very hard destiny, because the factory is our only way
of living."

Frightened by this prospect, a group of seventeen
workers, including Mahmud, marched into Ja'far's office
to confront him on what they had heard. "Unfortunately,
he wasn't there, only the assistant manager, the one
you met," Mahmud told me. A fight broke out: one worker
struck the assistant manager, and a bodyguard fired
three shots at the workers. The crowd then attacked the
bodyguard, took his gun, and, Mahmud said, "stabbed him
with a knife in the back three times. He spent a month
in the hospital." In January there was even more
violence. On their way to work, Ja'far, the manager,
and his son were shot and badly injured. Mahmud told
me he had no idea who was behind the attack, but I was
starting to understand why factory managers in Iraq try
to keep a low profile.

At the end of our meeting, I asked Mahmud what would
happen if the plant was sold despite the workers'
objections. "There are two choices," he said, looking
me in the eye and smiling kindly. "Either we will set
the factory on fire and let the flames devour it to the
ground, or we will blow ourselves up inside of it. But
it will not be privatized."

If there ever was a moment when Iraqis were too
disoriented to resist shock therapy, that moment has
definitely passed. Labor relations, like everything
else in Iraq, has become a blood sport. The violence on
the streets howls at the gates of the factories,
threatening to engulf them. Workers fear job loss as a
death sentence, and managers, in turn, fear their
workers, a fact that makes privatization distinctly
more complicated than the neocons foresaw.[2]

* * *

As I left the meeting with Mahmud, I got word that
there was a major demonstration outside the CPA
headquarters. Supporters of the radical young cleric
Moqtada al Sadr were protesting the closing of their
newspaper, al Hawza, by military police. The CPA
accused al Hawza of publishing "false articles" that
could "pose the real threat of violence." As an
example, it cited an article that claimed Bremer "is
pursuing a policy of starving the Iraqi people to make
them preoccupied with procuring their daily bread so
they do not have the chance to demand their political
and individual freedoms." To me it sounded less like
hate literature than a concise summary of Milton
Friedman's recipe for shock therapy.

A few days before the newspaper was shut down, I had
gone to Kufa during Friday prayers to listen to al Sadr
at his mosque. He had launched into a tirade against
Bremer's newly signed interim constitution, calling it
"an unjust, terrorist document." The message of the
sermon was clear: Grand Ayatollah Ali al Sistani may
have backed down on the constitution, but al Sadr and
his supporters were still determined to fight it -- and
if they succeeded they would sabotage the neocons'
careful plan to saddle Iraq's next government with
their "wish list" of laws. With the closing of the
newspaper, Bremer was giving al Sadr his response: he
wasn't negotiating with this young upstart; he'd rather
take him out with force.

When I arrived at the demonstration, the streets were
filled with men dressed in black, the soon-to-be
legendary Mahdi Army. It struck me that if Mahmud lost
his security guard job at the soap factory, he could be
one of them. That's who al Sadr's foot soldiers are:
the young men who have been shut out of the neocons'
grand plans for Iraq, who see no possibilities for
work, and whose neighborhoods have seen none of the
promised reconstruction. Bremer has failed these young
men, and everywhere that he has failed, Moqtada al Sadr
has cannily set out to succeed. In Shia slums from
Baghdad to Basra, a network of Sadr Centers coordinate
a kind of shadow reconstruction. Funded through
donations, the centers dispatch electricians to fix
power and phone lines, organize local garbage
collection, set up emergency generators, run blood
drives, direct traffic where the streetlights donâ't
work. And yes, they organize militias too. Al Sadr took
Bremer's economic casualties, dressed them in black,
and gave them rusty Kalashnikovs. His militiamen
protected the mosques and the state factories when the
occupation authorities did not, but in some areas they
also went further, zealously enforcing Islamic law by
torching liquor stores and terrorizing women without
the veil. Indeed, the astronomical rise of the brand
of religious fundamentalism that al Sadr represents is
another kind of blowback from Bremer's shock therapy:
if the reconstruction had provided jobs, security, and
services to Iraqis, al Sadr would have been deprived of
both his mission and many of his newfound followers.

At the same time as al Sadr's followers were shouting
"Down with America" outside the Green Zone, something
was happening in another part of the country that would
change everything. Four American mercenary soldiers
were killed in Fallujah, their charred and dismembered
bodies hung like trophies over the Euphrates. The
attacks would prove a devastating blow for the neocons,
one from which they would never recover. With these
images, investing in Iraq suddenly didn't look anything
like a capitalist dream; it looked like a macabre
nightmare made real.

The day I left Baghdad was the worst yet. Fallujah was
under siege and Brig. Gen. Kimmitt was threatening to
"destroy the al-Mahdi Army." By the end, roughly 2,000
Iraqis were killed in these twin campaigns. I was
dropped off at a security checkpoint several miles from
the airport, then loaded onto a bus jammed with
contractors lugging hastily packed bags. Although no
one was calling it one, this was an evacuation: over
the next week 1,500 contractors left Iraq, and some
governments began airlifting their citizens out of the
country. On the bus no one spoke; we all just listened
to the mortar fire, craning our necks to see the red
glow. A guy carrying a KPMG briefcase decided to
lighten things up. "So is there business class on this
flight?" he asked the silent bus. From the back,
somebody called out, "Not yet."

Indeed, it may be quite a while before business class
truly arrives in Iraq. When we landed in Amman, we
learned that we had gotten out just in time. That
morning three Japanese civilians were kidnapped and
their captors were threatening to burn them alive. Two
days later Nicholas Berg went missing and was not seen
again until the snuff film surfaced of his beheading,
an even more terrifying message for U.S. contractors
than the charred bodies in Fallujah. These were the
start of a wave of kidnappings and killings of
foreigners, most of them businesspeople, from a rainbow
of nations: South Korea, Italy, China, Nepal, Pakistan,
the Philippines, Turkey. By the end of June more than
ninety contractors were reported dead in Iraq. When
seven Turkish contractors were kidnapped in June, their
captors asked the "company to cancel all contracts and
pull out employees from Iraq." Many insurance companies
stopped selling life insurance to contractors, and
others began to charge premiums as high as $10,000 a
week for a single Western executive -- the same price
some insurgents reportedly pay for a dead American.

For their part, the organizers of DBX, the historic
Baghdad trade fair, decided to relocate to the lovely
tourist city of Diyarbakir in Turkey, "just 250 km from
the Iraqi border." An Iraqi landscape, only without
those frightening Iraqis. Three weeks later just
fifteen people showed up for a Commerce Department
conference in Lansing, Michigan, on investing in Iraq.
Its host, Republican Congressman Mike Rogers, tried to
reassure his skeptical audience by saying that Iraq is
"like a rough neighborhood anywhere in America." The
foreign investors, the ones who were offered every
imaginable free-market enticement, are clearly not
convinced; there is still no sign of them. Keith Crane,
a senior economist at the Rand Corporation who has
worked for the CPA, put it bluntly: "I don't believe
the board of a multinational company could approve a
major investment in this environment. If people are
shooting at each other, it's just difficult to do
business." Hamid Jassim Khamis, the manager of the
largest soft-drink bottling plant in the region, told
me he can't find any investors, even though he landed
the exclusive rights to produce Pepsi in central Iraq.
"A lot of people have approached us to invest in the
factory, but people are really hesitating now." Khamis
said he couldn't blame them; in five months he has
survived an attempted assassination, a carjacking, two
bombs planted at the entrance of his factory, and the
kidnapping of his son.

Despite having been granted the first license for a
foreign bank to operate in Iraq in forty years, HSBC
still hasn't opened any branches, a decision that may
mean losing the coveted license altogether. Procter &
Gamble has put its joint venture on hold, and so has
General Motors. The U.S. financial backers of the
Starwood luxury hotel and multiplex have gotten cold
feet, and Siemens AG has pulled most staff from Iraq.
The bell hasn't rung yet at the Baghdad Stock Exchange
-- in fact you can't even use credit cards in Iraq's
cash-only economy. New Bridge Strategies, the company
that had gushed back in October about how "a Wal-Mart
could take over the country," is sounding distinctly
humbled. "McDonald's is not opening anytime soon,"
company partner Ed Rogers told the Washington Post.
Neither is Wal-Mart. The Financial Times has declared
Iraq "the most dangerous place in the world in which to
do business." It's quite an accomplishment: in trying
to design the best place in the world to do business,
the neocons have managed to create the worst, the most
eloquent indictment yet of the guiding logic behind
deregulated free markets.

The violence has not just kept investors out; it also
forced Bremer, before he left, to abandon many of his
central economic policies. Privatization of the state
companies is off the table; instead, several of the
state companies have been offered up for lease, but
only if the investor agrees not to lay off a single
employee. Thousands of the state workers that Bremer
fired have been rehired, and significant raises have
been handed out in the public sector as a whole. Plans
to do away with the food-ration program have also been
scrapped -- it just doesn't seem like a good time to
deny millions of Iraqis the only nutrition on which
they can depend.

* * *

The final blow to the neocon dream came in the weeks
before the handover. The White House and the CPA were
rushing to get the U.N. Security Council to pass a
resolution endorsing their handover plan. They had
twisted arms to give the top job to former CIA agent
Iyad Allawi, a move that will ensure that Iraq becomes,
at the very least, the coaling station for U.S. troops
that Jay Garner originally envisioned. But if major
corporate investors were going to come to Iraq in the
future, they would need a stronger guarantee that
Bremer's economic laws would stick. There was only one
way of doing that: the Security Council resolution had
to ratify the interim constitution, which locked in
Bremer's laws for the duration of the interim
government. But al Sistani once again objected, this
time unequivocally, saying that the constitution has
been "rejected by the majority of the Iraqi people." On
June 8 the Security Council unanimously passed a
resolution that endorsed the handover plan but made
absolutely no reference to the constitution. In the
face of this far-reaching defeat, George W. Bush
celebrated the resolution as a historic victory, one
that came just in time for an election trail photo op
at the G-8 Summit in Georgia.

With Bremer's laws in limbo, Iraqi ministers are
already talking openly about breaking contracts signed
by the CPA. Citigroup's loan scheme has been rejected
as a misuse of Iraq's oil revenues. Iraq's
communication minister is threatening to renegotiate
contracts with the three communications firms providing
the country with its disastrously poor cell phone
service. And the Lebanese and U.S. companies hired to
run the state television network have been informed
that they could lose their licenses because they are
not Iraqi. "We will see if we can change the contract,"
Hamid al-Kifaey, spokesperson for the Governing
Council, said in May. "They have no idea about Iraq."
For most investors, this complete lack of legal
certainty simply makes Iraq too great a risk.

But while the Iraqi resistance has managed to scare off
the first wave of corporate raiders, there's little
doubt that they will return. Whatever form the next
Iraqi government takes -- nationalist, Islamist, or
free market -- it will inherit a shattered nation with
a crushing $120 billion debt. Then, as in all poor
countries around the world, men in dark blue suits from
the IMF will appear at the door, bearing loans and
promises of economic boom, provided that certain
structural adjustments are made, which will, of course,
be rather painful at first but well worth the sacrifice
in the end. In fact, the process has already begun: the
IMF is poised to approve loans worth $2.5 - $4.25
billion, pending agreement on the conditions. After an
endless succession of courageous last stands and far
too many lost lives, Iraq will become a poor nation
like any other, with politicians determined to
introduce policies rejected by the vast majority of the
population, and all the imperfect compromises that will
entail. The free market will no doubt come to Iraq, but
the neoconservative dream of transforming the country
into a free-market utopia has already died, a casualty
of a greater dream -- a second term for George W. Bush.

The great historical irony of the catastrophe unfolding
in Iraq is that the shock-therapy reforms that were
supposed to create an economic boom that would rebuild
the country have instead fueled a resistance that
ultimately made reconstruction impossible. Bremer's
reforms unleashed forces that the neocons neither
predicted nor could hope to control, from armed
insurrections inside factories to tens of thousands of
unemployed young men arming themselves. These forces
have transformed Year Zero in Iraq into the mirror
opposite of what the neocons envisioned: not a
corporate utopia but a ghoulish dystopia, where going
to a simple business meeting can get you lynched,
burned alive, or beheaded. These dangers are so great
that in Iraq global capitalism has retreated, at least
for now. For the neocons, this must be a shocking
development: their ideological belief in greed turns
out to be stronger than greed itself.

Iraq was to the neocons what Afghanistan was to the
Taliban: the one place on Earth where they could force
everyone to live by the most literal, unyielding
interpretation of their sacred texts. One would think
that the bloody results of this experiment would
inspire a crisis of faith: in the country where they
had absolute free reign, where there was no local
government to blame, where economic reforms were
introduced at their most shocking and most perfect,
they created, instead of a model free market, a failed
state no right-thinking investor would touch. And yet
the Green Zone neocons and their masters in Washington
are no more likely to reexamine their core beliefs than
the Taliban mullahs were inclined to search their souls
when their Islamic state slid into a debauched Hades of
opium and sex slavery. When facts threaten true
believers, they simply close their eyes and pray
harder.

Which is precisely what Thomas Foley has been doing.
The former head of "private sector development" has
left Iraq, a country he had described as "the mother of
all turnarounds," and has accepted another turnaround
job, as co-chair of George Bush's reelection committee
in Connecticut. On April 30 in Washington he addressed
a crowd of entrepreneurs about business prospects in
Baghdad. It was a tough day to be giving an upbeat
speech: that morning the first photographs had appeared
out of Abu Ghraib, including one of a hooded prisoner
with electrical wires attached to his hands. This was
another kind of shock therapy, far more literal than
the one Foley had helped to administer, but not
entirely unconnected. "Whatever you're seeing, it's not
as bad as it appears," Foley told the crowd. "You just
need to accept that on faith."

[Naomi Klein is the author of No Logo and
writer/producer of "The Take," a new documentary on
Argentina's occupied factories.]

Notes:

1. Tofiq did say that several U.S. companies had
expressed strong interest in buying the state-owned
cement factories. This supports a widely held belief in
Iraq that there is a deliberate strategy to neglect the
state firms so that they can be sold more cheaply--a
practice known as "starve then sell."

2. It is in Basra where the connections between
economic reforms and the rise of the resistance was put
in starkest terms. In December the union representing
oil workers was negotiating with the Oil Ministry for a
salary increase. Getting nowhere, the workers offered
the ministry a simple choice: increase their paltry
salaries or they would all join the armed resistance.
They received a substantial raise.