IRAQONOMICS: Michael Keane and the Market of War (for Marshall Magazine, 2009)
by Ted Rabinowitz
It was cold and wet on Highway 1 out of Mosul. Members of the 101st Airborne had been patrolling all night, hunting for al-Qaeda operatives who were expected to attack the local broadcast station. Michael Keane shrugged deeper into his flak jacket as he watched the soldiers pulling over local vehicles and searching for terrorists, RPGs and AK-47s.
It was a hell of a way to study market economics.
Debate on Iraq focuses on elections and troop deployments, international opinion and war-crimes tribunals. Michael Keane, a professor at the University of Southern California's Marshall School of Business, wants to expand the discussion to include economics. His thesis: The United States has ignored the financial aspects of the Iraq War. As a result, we have missed opportunities to stabilize the country, end the insurgency, and reduce the cost of the occupation.
Keane comes to the subject with considerable expertise. An investment banker with degrees in law, business and economics, he is also a regular participant in the Naval War College's Current Strategy Forum. He has visited Vietnam twice to study guerilla warfare - once in 1989, and then again in 1995 on a fellowship from the Department of Defense. (At one point, he accompanied Vietnamese troops on an offensive into Cambodia.) In 2003, he was embedded in the Iraqi cities of Mosul and Tel Afar at the invitation of Lt. Gen. David Petraeus. He is the author of The Dictionary of Modern Strategy and Tactics (Naval Institute Press, 2005); he has been profiled in Business Week; and his op-ed pieces have appeared in The Los Angeles Times and other newspapers. A popular lecturer at Marshall and at military conferences, he has carved out his own niche in the study of military history: the economics of warfare. It's a subject, he feels, that hasn't received enough attention from the current Administration.
First causes
"Go back to when Paul Wolfowitz testified before Congress, and they asked him 'Okay, what's the cost of the war in Iraq going to be?' And [he]...refused to answer the question. [He] said 'We don't really know, it's not consequential.'" Keane shakes his head. "How can you look at any undertaking without analyzing its costs and its benefits?" When the White House was finally forced to "give some kind of an estimate, it turned out to be grossly inaccurate." From the start, says Keane, "the economic analysis of the Iraq War was disturbingly bad."
That analytic failure starts with the reasons for Iraq's instability. "Economics," says Keane, "are the primary cause of insurgencies throughout history." In addition to the political and military issues, Keane sees two economic ones: oil and unemployment.
Although the White House once claimed that Iraqi oil was a blessing, a source of revenue that could finance the war effort, Keane believes the oil is actually a curse. A resource curse, in fact. "There's a huge economic prize...laying there in the middle of the desert," says Keane. "It's like a hundred-dollar bill in the middle of the table." A valuable natural resource can be a boon to a country with a diversified economy, but Iraq "is not an economy that's based on the human capital of Silicon Valley type workers." In a country with weak infrastructure and few strong industries, the value of an easily exploited, highly prized natural resource (like oil or diamonds) can dwarf any other possible source of capital. It becomes a resource curse – an incentive to conflict and corruption for all of Iraq's political, ethnic and religious factions. It is a dynamic that has disrupted countries like Nigeria and Angola, and Keane now sees it at work in Iraq. "Iraq is a winner-take-all...everybody's going to try to grab that prize." Keane believes that much of the maneuvering today represents the efforts of Shiites, Sunnis, Kurds and insurgents to gain control of oil revenues for tomorrow, when the US will no longer be around to divide up the pie.
Unemployment has also been a problem for Coalition forces. However, when Keane discusses out-of-work Iraqis as a destabilizing factor, he means a very special class of the recently downsized. "The biggest mistake [former CPA head] Paul Bremmer made was disbanding the Iraqi Army...We immediately engendered hostility by throwing out of work a million people and removing the means of support for probably another four million. [This was] out of a population of 25 million. And then we're surprised that an insurgency develops." It is a point that seems obvious in hindsight: Try not to aggravate the people with military training.
Unintended consequences
Meanwhile, ignoring the economics of war has created perverse incentives that raise the cost of the occupation. "Who's the largest army in Iraq, next to the United States?" asks Keane. "It's the PMCs, the private military contractors" - companies like Bechtel and Halliburton and their subsidiaries. "PMCs have been encouraged and financed by the United States. Meanwhile, retaining army personnel has become increasingly difficult, [because] we've got guys who are going back for their third or fourth tours of duty in a war zone. Retention rates are dropping. But [these soldiers] can go over to the PMCs and...double, triple, quadruple their pay. We invest thousands of dollars in training for Special Forces, for example, and then they can go out the door to the private military contractor." The PMCs, hired by the Department of Defense, are competing for personnel with the US Army...and winning.
Then there is the weapon buyback program. "In certain places we would buy weapons from Iraqis, and we would set the price of the weapons that would come in. Now, do you think any Iraqi is going to sell back his weapon for less than it's worth? We bought back weapons clearly above market price. We bought back rifles that probably hadn't been fired since Lawrence of Arabia's day." And in doing so, the Army simply gave Iraqis the money they needed to buy more and better weapons. "We had people who showed up at the base with one RPG round, and then we'd negotiate - thirty-five, forty dollars, twenty dollars, whatever. But clearly it wasn't just one RPG round lying there, right? They knew where to find the rest, and we were paying twice what they were so they could then go out and buy the others."
Meanwhile, the insurgents have displayed a grim pragmatism when it comes to market forces. While embedded in Iraq, Keane discovered that the insurgents had established going rates for attacks on soldiers and civilians. "Literally there was a market, just like here you have a market for stocks. It was known to the soldiers and to the population what [the insurgents] would pay: If you shoot an American soldier, you get paid X, if you throw a grenade at an American soldier, you get Y...It was a free market for violence."
Using the market
When the Coalition has used its economic power, the investment tended to pay off. The insurgents' "market for violence," for instance, mirrors the CIA's pre-invasion tactics. Keane notes that "most of the CIA guys are economists. In Iraq before the invasion, the CIA guys that went up there just handed out steamer trunks full of cash." Special Forces used the same approach against the Taliban. "The forces we worked with in Afghanistan, they operated as a private army for us. We used our economic power to motivate the local forces to work with us there very effectively."
When Lt. General Petraeus commanded the western sector of Iraq, he integrated economics into his security strategy. While he commanded the sector, it was one of the most secure in Iraq – even though it included part of the infamous "Sunni Triangle." Not surprisingly, Keane points to Petraeus as an example of how we should be proceeding in the country as a whole.
Keane recalls sitting in on the general's briefings, watching "a daily collage of PowerPoint slides...a hundred, maybe more, [dealing with] developments in the sector. The impressive thing was the number of [slides] devoted to economic issues: economic development, power production, electricity production, oil production, employment. It really had as much of a focus on those type of issues as it did on military operations."
Petraeus made a point of providing economic development, cash incentives, and even entertainment to the populace. "[He had] a Hot Tips line. Call in and turn in an insurgent," says Keane, smiling. "He instituted a ‘Star Search' program for the local TV station." Petraeus also maintained contact with local residents by creating a weekly call-in show for questions and complaints...a customer-service line, if you will.
More important were the economic projects funded and overseen by Petraeus and his staff. "The local political leaders would come to us with a list of projects, and a budget for each project that we insisted they have," says Keane. "They'd say ‘We want to build a school. It would cost this much to build it, this is how it would be spent, this is how soon it would be ready,' and the colonels would all monitor and supervise the disbursal of funds to get that done."
Keane makes the point that, to some extent, all of this economic work – and the ground-up way in which it took place - went against the Army's corporate culture. "[Petraeus] was one of the big proponents of disbursing more capital directly through the local commanders into the area. It was the troops on the ground who were going to have to defeat the insurgency...and of course there was a huge bureaucracy that wanted to disburse it through a different agency. To get something approved you had to go through a lot of red tape.
"This wasn't something they were trained to do at the Army War College," says Keane. "the Army's like a huge corporate entity that's not as agile and innovative as smaller forces like the Marine Corps...But [the troops] were incredibly adaptive."
Ending the insurgency
When it comes to ending the insurgency, Keane points to the vital importance of severing the link between the guerrillas and the populace. He quotes Mao Tse-Tung, the most successful insurgent in history: "The guerilla must move among the people as a fish swims in the sea." Insurgencies that were finally defeated (in Malaysia, the Philippines, and Greece) all lacked support from the locals. "You don't destroy an insurgency by killing guerrillas," says Keane. "You destroy it by robbing it of support from the population."
While embedded in Iraq, Keane outlined an economic strategy to deal a blow to support for the insurgents. The plan was to distribute Iraq's oil revenues directly to its citizens. Each Iraqi would receive a dividend check from the revenue, just as residents of Alaska do from their state's revenue surplus. If the area was controlled by the insurgents, the money would be held in trust until the region was secured, thereby giving "the population a huge incentive to turn against the insurgents and to stabilize their area. Much more powerful than anything the insurgents could come up with." The economic plan would have been combined with an "oil slick" military strategy, in which Coalition forces established safe zones and then expanded out from these secure areas to stabilize the countryside.
Keane's proposal was never adopted. "If we had instituted something like that immediately, I think we would have undermined any perception of the United States government as having an interest in governing for itself. And it certainly would have empowered the people, who I think would have been our best friends."
Now it may be too late for this plan. Iraq has developed a local political class with a stake in the country's current oil structure. "Asking them to give up that...power," Keane acknowledges, "is going to require a tremendous amount of self-discipline for them. That's probably not going to happen."
Worse, the insurgency has grown from scattered attacks to a full-scale conflict, and Keane notes that "the best time to defeat an insurgency is in its incipient stages." Once they get going, guerilla insurgencies are notoriously difficult to defeat. Vietnam, China, and Cuba fell to guerilla forces; T.E. Lawrence's "Arab Revolt" held down the Ottomans; and insurgencies have simmered for decades in Colombia and Nepal. In fact, "it may be too late to turn the corner now."
"It was the Chinese philosopher Lao-Tzu who said that ‘When the battle is won, arrogance is the new enemy,'" says Keane. "That really affected us in Iraq. We thought because we had ejected Saddam Hussein from power, the war was over. Donald Rumsfeld himself rejected the idea, I think in May of 2003, that we were involved in a guerilla war. If you don't think you're in a guerilla war, you're certainly not going to come up with a plan to defeat it."
But even at this stage, there's still room to add economic approaches to our Iraq strategy. "Military spending as a percentage of our GNP is still a fraction of what it was during Korea or World War II," notes Keane. "Why spend $4 billion a month in Iraq just for an army? We'd be better off spending $3 billion for an army, and $1 billion for an economic program...We have a powerful economic engine that we can use as a weapon. We don't unsheathe that weapon enough."
by Ted Rabinowitz
It was cold and wet on Highway 1 out of Mosul. Members of the 101st Airborne had been patrolling all night, hunting for al-Qaeda operatives who were expected to attack the local broadcast station. Michael Keane shrugged deeper into his flak jacket as he watched the soldiers pulling over local vehicles and searching for terrorists, RPGs and AK-47s.
It was a hell of a way to study market economics.
Debate on Iraq focuses on elections and troop deployments, international opinion and war-crimes tribunals. Michael Keane, a professor at the University of Southern California's Marshall School of Business, wants to expand the discussion to include economics. His thesis: The United States has ignored the financial aspects of the Iraq War. As a result, we have missed opportunities to stabilize the country, end the insurgency, and reduce the cost of the occupation.
Keane comes to the subject with considerable expertise. An investment banker with degrees in law, business and economics, he is also a regular participant in the Naval War College's Current Strategy Forum. He has visited Vietnam twice to study guerilla warfare - once in 1989, and then again in 1995 on a fellowship from the Department of Defense. (At one point, he accompanied Vietnamese troops on an offensive into Cambodia.) In 2003, he was embedded in the Iraqi cities of Mosul and Tel Afar at the invitation of Lt. Gen. David Petraeus. He is the author of The Dictionary of Modern Strategy and Tactics (Naval Institute Press, 2005); he has been profiled in Business Week; and his op-ed pieces have appeared in The Los Angeles Times and other newspapers. A popular lecturer at Marshall and at military conferences, he has carved out his own niche in the study of military history: the economics of warfare. It's a subject, he feels, that hasn't received enough attention from the current Administration.
First causes
"Go back to when Paul Wolfowitz testified before Congress, and they asked him 'Okay, what's the cost of the war in Iraq going to be?' And [he]...refused to answer the question. [He] said 'We don't really know, it's not consequential.'" Keane shakes his head. "How can you look at any undertaking without analyzing its costs and its benefits?" When the White House was finally forced to "give some kind of an estimate, it turned out to be grossly inaccurate." From the start, says Keane, "the economic analysis of the Iraq War was disturbingly bad."
That analytic failure starts with the reasons for Iraq's instability. "Economics," says Keane, "are the primary cause of insurgencies throughout history." In addition to the political and military issues, Keane sees two economic ones: oil and unemployment.
Although the White House once claimed that Iraqi oil was a blessing, a source of revenue that could finance the war effort, Keane believes the oil is actually a curse. A resource curse, in fact. "There's a huge economic prize...laying there in the middle of the desert," says Keane. "It's like a hundred-dollar bill in the middle of the table." A valuable natural resource can be a boon to a country with a diversified economy, but Iraq "is not an economy that's based on the human capital of Silicon Valley type workers." In a country with weak infrastructure and few strong industries, the value of an easily exploited, highly prized natural resource (like oil or diamonds) can dwarf any other possible source of capital. It becomes a resource curse – an incentive to conflict and corruption for all of Iraq's political, ethnic and religious factions. It is a dynamic that has disrupted countries like Nigeria and Angola, and Keane now sees it at work in Iraq. "Iraq is a winner-take-all...everybody's going to try to grab that prize." Keane believes that much of the maneuvering today represents the efforts of Shiites, Sunnis, Kurds and insurgents to gain control of oil revenues for tomorrow, when the US will no longer be around to divide up the pie.
Unemployment has also been a problem for Coalition forces. However, when Keane discusses out-of-work Iraqis as a destabilizing factor, he means a very special class of the recently downsized. "The biggest mistake [former CPA head] Paul Bremmer made was disbanding the Iraqi Army...We immediately engendered hostility by throwing out of work a million people and removing the means of support for probably another four million. [This was] out of a population of 25 million. And then we're surprised that an insurgency develops." It is a point that seems obvious in hindsight: Try not to aggravate the people with military training.
Unintended consequences
Meanwhile, ignoring the economics of war has created perverse incentives that raise the cost of the occupation. "Who's the largest army in Iraq, next to the United States?" asks Keane. "It's the PMCs, the private military contractors" - companies like Bechtel and Halliburton and their subsidiaries. "PMCs have been encouraged and financed by the United States. Meanwhile, retaining army personnel has become increasingly difficult, [because] we've got guys who are going back for their third or fourth tours of duty in a war zone. Retention rates are dropping. But [these soldiers] can go over to the PMCs and...double, triple, quadruple their pay. We invest thousands of dollars in training for Special Forces, for example, and then they can go out the door to the private military contractor." The PMCs, hired by the Department of Defense, are competing for personnel with the US Army...and winning.
Then there is the weapon buyback program. "In certain places we would buy weapons from Iraqis, and we would set the price of the weapons that would come in. Now, do you think any Iraqi is going to sell back his weapon for less than it's worth? We bought back weapons clearly above market price. We bought back rifles that probably hadn't been fired since Lawrence of Arabia's day." And in doing so, the Army simply gave Iraqis the money they needed to buy more and better weapons. "We had people who showed up at the base with one RPG round, and then we'd negotiate - thirty-five, forty dollars, twenty dollars, whatever. But clearly it wasn't just one RPG round lying there, right? They knew where to find the rest, and we were paying twice what they were so they could then go out and buy the others."
Meanwhile, the insurgents have displayed a grim pragmatism when it comes to market forces. While embedded in Iraq, Keane discovered that the insurgents had established going rates for attacks on soldiers and civilians. "Literally there was a market, just like here you have a market for stocks. It was known to the soldiers and to the population what [the insurgents] would pay: If you shoot an American soldier, you get paid X, if you throw a grenade at an American soldier, you get Y...It was a free market for violence."
Using the market
When the Coalition has used its economic power, the investment tended to pay off. The insurgents' "market for violence," for instance, mirrors the CIA's pre-invasion tactics. Keane notes that "most of the CIA guys are economists. In Iraq before the invasion, the CIA guys that went up there just handed out steamer trunks full of cash." Special Forces used the same approach against the Taliban. "The forces we worked with in Afghanistan, they operated as a private army for us. We used our economic power to motivate the local forces to work with us there very effectively."
When Lt. General Petraeus commanded the western sector of Iraq, he integrated economics into his security strategy. While he commanded the sector, it was one of the most secure in Iraq – even though it included part of the infamous "Sunni Triangle." Not surprisingly, Keane points to Petraeus as an example of how we should be proceeding in the country as a whole.
Keane recalls sitting in on the general's briefings, watching "a daily collage of PowerPoint slides...a hundred, maybe more, [dealing with] developments in the sector. The impressive thing was the number of [slides] devoted to economic issues: economic development, power production, electricity production, oil production, employment. It really had as much of a focus on those type of issues as it did on military operations."
Petraeus made a point of providing economic development, cash incentives, and even entertainment to the populace. "[He had] a Hot Tips line. Call in and turn in an insurgent," says Keane, smiling. "He instituted a ‘Star Search' program for the local TV station." Petraeus also maintained contact with local residents by creating a weekly call-in show for questions and complaints...a customer-service line, if you will.
More important were the economic projects funded and overseen by Petraeus and his staff. "The local political leaders would come to us with a list of projects, and a budget for each project that we insisted they have," says Keane. "They'd say ‘We want to build a school. It would cost this much to build it, this is how it would be spent, this is how soon it would be ready,' and the colonels would all monitor and supervise the disbursal of funds to get that done."
Keane makes the point that, to some extent, all of this economic work – and the ground-up way in which it took place - went against the Army's corporate culture. "[Petraeus] was one of the big proponents of disbursing more capital directly through the local commanders into the area. It was the troops on the ground who were going to have to defeat the insurgency...and of course there was a huge bureaucracy that wanted to disburse it through a different agency. To get something approved you had to go through a lot of red tape.
"This wasn't something they were trained to do at the Army War College," says Keane. "the Army's like a huge corporate entity that's not as agile and innovative as smaller forces like the Marine Corps...But [the troops] were incredibly adaptive."
Ending the insurgency
When it comes to ending the insurgency, Keane points to the vital importance of severing the link between the guerrillas and the populace. He quotes Mao Tse-Tung, the most successful insurgent in history: "The guerilla must move among the people as a fish swims in the sea." Insurgencies that were finally defeated (in Malaysia, the Philippines, and Greece) all lacked support from the locals. "You don't destroy an insurgency by killing guerrillas," says Keane. "You destroy it by robbing it of support from the population."
While embedded in Iraq, Keane outlined an economic strategy to deal a blow to support for the insurgents. The plan was to distribute Iraq's oil revenues directly to its citizens. Each Iraqi would receive a dividend check from the revenue, just as residents of Alaska do from their state's revenue surplus. If the area was controlled by the insurgents, the money would be held in trust until the region was secured, thereby giving "the population a huge incentive to turn against the insurgents and to stabilize their area. Much more powerful than anything the insurgents could come up with." The economic plan would have been combined with an "oil slick" military strategy, in which Coalition forces established safe zones and then expanded out from these secure areas to stabilize the countryside.
Keane's proposal was never adopted. "If we had instituted something like that immediately, I think we would have undermined any perception of the United States government as having an interest in governing for itself. And it certainly would have empowered the people, who I think would have been our best friends."
Now it may be too late for this plan. Iraq has developed a local political class with a stake in the country's current oil structure. "Asking them to give up that...power," Keane acknowledges, "is going to require a tremendous amount of self-discipline for them. That's probably not going to happen."
Worse, the insurgency has grown from scattered attacks to a full-scale conflict, and Keane notes that "the best time to defeat an insurgency is in its incipient stages." Once they get going, guerilla insurgencies are notoriously difficult to defeat. Vietnam, China, and Cuba fell to guerilla forces; T.E. Lawrence's "Arab Revolt" held down the Ottomans; and insurgencies have simmered for decades in Colombia and Nepal. In fact, "it may be too late to turn the corner now."
"It was the Chinese philosopher Lao-Tzu who said that ‘When the battle is won, arrogance is the new enemy,'" says Keane. "That really affected us in Iraq. We thought because we had ejected Saddam Hussein from power, the war was over. Donald Rumsfeld himself rejected the idea, I think in May of 2003, that we were involved in a guerilla war. If you don't think you're in a guerilla war, you're certainly not going to come up with a plan to defeat it."
But even at this stage, there's still room to add economic approaches to our Iraq strategy. "Military spending as a percentage of our GNP is still a fraction of what it was during Korea or World War II," notes Keane. "Why spend $4 billion a month in Iraq just for an army? We'd be better off spending $3 billion for an army, and $1 billion for an economic program...We have a powerful economic engine that we can use as a weapon. We don't unsheathe that weapon enough."
