3.1. Background of the occupation and reform program

The Coalition Provisional Authority (CPA) was established on 21 April 2003, a month after the invasion if Iraq.Footnote ⁶ On 11 May 2003, L. Paul Bremer was named chief executive of the CPA. In this role, Bremer was responsible for overseeing the occupation of Iraq. This included reforming Iraq's economic, social, and political institutions. Economic reforms were to be based on ‘free market’ principles, including privatization, reduced government intervention, and openness to foreign investment and trade (King, Reference King2003). These reforms were introduced in the form of 100 orders that were issued by the CPA under Bremer's leadership. According to the CPA, these orders ‘are binding instructions or directives to the Iraqi people that create penal consequences or have a direct bearing on the way Iraqis are regulated, including changes to Iraqi law’.Footnote ⁷

The CPA orders covered a wide range of issues and activities. For example, Order 1 declared the ‘De-Baàthification of Iraqi Society’, while Order 2 dissolved the Iraqi army and intelligence service. Order 39 called for the privatization of Iraqi state enterprises, while Order 40 opened the previously state-run banking system to foreign banks. Order 49 reduced the tax rate on Iraqi corporations from 40% to a flat rate of 15%. Order 12 suspended all tariffs, duties, taxes, and surcharges for goods imported or exported from Iraq.

In addition to the 100 orders issued by the CPA, Bremer had a distinct vision of how reformed political, legal, and social institutions in Iraq should look. Myerson (Reference Myerson2007) notes that Bremer's vision of the new Iraq was grounded in the development of a national constitution that would not only establish checks and balances, but also clearly establish rights for individuals and minority groups. Moreover, Bremer's vision called for a professional police force that would enforce the rules set forth by the constitution. The police force was to be subject to the rule of law, meaning that it was to be governed by the same laws as all other Iraqi citizens. Bremer appointed a council – the Iraqi Governing Council – to draft a provisional constitution known as the transitional administrative law.Footnote ⁸ The transitional law remained in effect until the permanent constitution was approved in October 2005.

To date, the institutional reforms implemented by Bremer and the CPA have failed to have the desired effect. Political and social institutions remain fragile and unpredictable. Continued violence by insurgents has contributed to the general instability. The Iraqi economy has struggled to recover following the invasion and war. For example, a 2006 report by the World Bank emphasized that ‘oil production and exports have yet to reach prewar levels, and non-oil sectors remain sluggish. High unemployment, poverty, and weak social protection systems dominate public concerns and threaten the fragile democracy’ (1). The report also noted that 8–10% of the Iraqi population was living in absolute poverty, while another 12–15% of the population was vulnerable to falling into that category. Of course, much of the economic devastation can be attributed to the command economy under the Hussein regime as well as the war itself (see Crocker, Reference Crocker2004). Nonetheless, the reform orders passed by the CPA have failed to generate the economic turnaround that many predicted and Bremer's vision of Iraq's reconstructed political, legal, and social institutions has failed to take hold. The central question is: Why has the US failed to effectively reform Iraq's institutions?

It is our contention that the issue in Iraq has not been the nature of the reforms per se, but rather the failure to effectively signal credibility. More specifically, the failure of reforms in Iraq is due to the inability of occupiers to establish a credible commitment so that Iraqi citizens view the reforms as binding. Instead, many Iraqi citizens expect policymakers to renege on promises in future periods. In the context of the games depicted in the previous section (Figures 1 and 2), the ‘policymakers’ in Iraq consist of the foreign occupiers and foreign political elite as well as the indigenous political elite who influence the specifics of the reforms implemented. The ‘citizens’ refer to all other Iraqi citizens as well as other foreigners (e.g., foreign investors, business people, and so on) who are not policymakers. As depicted in these games, the citizens must decide to ‘buy in’ or ‘stay out’ of the proposed reforms. In the latter case, the reforms fail to get off the ground and will not sustain over time. To date, this has been the most common outcome in Iraq. To understand why this has been the case, we consider the myriad games and players involved in the current reconstruction of Iraq, which can be summarized as follows:

1. 1. Games

   1. (a) Military game: Policymakers are attempting to reduce violence, establish peace, and secure local support against the insurgency. A key aspect of this process entails training an effective Iraqi police and military force.

   2. (b) Economic game: Policymakers are attempting to establish the parameters of a liberal economy (e.g., property rights, sound currency, free movement of goods, labor, capital, and so on) in order to increase investment and establish the foundations for economic development.

   3. (c) Political and social game:Policymakers are attempting to foster liberal democratic institutions, which are inclusive in nature and protect individual, civil, political, and religious rights. Critical to this game is the process of reconciliation as well as the establishment of the rule of law and other constraints on government behavior.

1. 2. Policymakers

   1. (a) The Multi-National Force: Led by the United States, the coalition of occupiers oversees the entire Iraq occupation and reconstruction effort. The coalition faces issues of credibility with the indigenous Iraq populace due largely to historical interactions and interventions directly in Iraq as well as in the broader region.

   2. (b) The US political elite: The US political elite consist of leaders and policymakers who have the power to shape the outcome in Iraq. This includes the executive and legislative branches as well as the numerous government bureaus and agencies involved in the reconstruction effort.

   3. (c) The Iraqi political elite: The Iraqi political elite consist of national and local leaders who can influence the ultimate outcome of the broader reconstruction effort. Credibility issues among the political elite are largely due to a lack of trust stemming from historical interactions with other indigenous individuals and groups.

   4. (d) Foreign governments: Iraq's neighbors (i.e., Iran, Jordan, Saudi Arabia, Syria, and Turkey) do not directly ‘make policy’ in Iraq, but they play a key role in the reconstruction. For example, the government of Iran has indirectly influenced the reconstruction with monetary and military aid to certain groups. Further, these governments will be key players when occupiers exit the country since they have the ability to undermine the institutional reforms carried out during the reconstruction.

1. 3. Citizens

   1. (a) Iraqis: This group consists of private Iraqi citizens who are not part of the political elite. Most Iraqi citizens are involved in numerous overlapping ‘nested’ games with a variety of groups and sub-groups at different levels, resulting in a complex dynamic. Citizens must decide whether to ‘buy in’ to reforms associated with the reconstruction effort or to ‘stay out’ and not support the reforms. In general, Iraqi citizens must decide if they feel confident that investments they make in the reconciliation process, as well as in economic, political, and social reforms will be beneficial and sustainable over time.

   2. (b) Foreigners:This group consists of all other individuals who are not part of the ‘policymaker’ category and who are not Iraqi citizens. Like Iraqi citizens, these individuals must decide whether or not to invest in the reconstructed country.

In what follows we consider the various aspects of the Iraqi reconstruction in more detail with particular focus on the specific reasons that the credible commitment problem persists and why reforms have failed.

3.2. Indigenous divisions

The most significant barrier to overcoming the problem of credible commitment is Iraq's deep ethnic and religious differences. Successful reforms must satisfy members of Iraq's major ethnic groups – the Arabs and Kurds – and religious groups – the Shi'a and Sunni Muslims. Given the historical experiences and interactions of the members of these groups, this is a monumental task.

To better understand these divisions, consider that while most of the Iraqi Kurds follow the religion of Sunni Islam, as do approximately one-fifth of the total Iraqi population, they possess their own unique cultural practices and use their own language. The result is that the Sunni Kurds have their own identity separate from the rest of the Sunnis in the country. Iraqi Kurds were violently repressed under the Hussein regime, but they experienced autonomy with the protection of the US military following the end of the first Gulf War. Given this history, Kurds are skeptical of the Sunni minority, who controlled the country during the Hussein era, and are concerned about the possibility of losing their independence in the post-Hussein Iraq that is currently evolving. Like the Kurds, the Arab Shi'a, who comprise approximately 60% of the Iraqi population, were violently victimized by the Sunni minority prior to the collapse of the Hussein government. In addition to violent repression, the Shi'a-dominated cities in Iraq, especially those in the southern region, suffered from a lack of investment and development under the Hussein regime. The historical experiences and interactions of the members of these groups has created a set of tensions that make the possibility of credible reforms at the national level extremely difficult, if not impossible, over the short run (see Anderson and Stansfield, Reference Anderson and Stansfield2004; Baker and Hamilton, Reference Baker and Hamilton2006: 13–19).

The tensions in Iraq go beyond the major religious and ethnic groups discussed above. In addition to the issues with inter-group interactions, there are also intra-group tensions that create problems for reforms. For example, there are various intra-group factions in the broader Sunni and Shi'a groups in Iraq at both the national and local levels. Further, Shi'a political leaders are divided into at least four major sub-parties and there are factions within those sub-parties (see Fearon, Reference Fearon2007: 10).

As another example, consider that Muqtada al-Sadr, a Shi'a cleric, and Ayatollah Ali Sistani, a well-respected Shi'a authority in Iraq, both have varying levels of control and influence over different parts of the broader Shi'a group. The ability of each of these individuals to influence the legitimacy and success of the Iraqi reconstruction are evident. For example, early in the reconstruction (2003–2004), al-Sadr utilized anti-Americanism to rally his militia and violently fight the occupiers. More recently, al-Sadr has used his position of power to negotiate local ceasefire agreements, which have aided the reconstruction process. Ali Sistani resisted initial attempts to establish a transitional parliament in 2004 because it was not directly elected (Diamond, Reference Diamond2004: 48). Similar to the Shi'a, the Sunnis are characterized by a similar array of sub-groups throughout Iraq. Putting aside the issue of inter-group coordination, these various intra-group layers make widespread and credible cooperation within each ethnic and religious group extremely costly.

Given the long history of conflict and tensions both within and between these groups and sub-groups, why would each group view the claims of the others as credible? Further, even if the various groups and sub-groups are sincere in their claims, enforcement mechanisms are lacking. Currently the US is the main enforcer of agreements struck between the parties, but the length of the occupation is unclear resulting in uncertainty regarding the future stability of agreements reached in the current period. The problem is that indigenous actors cannot determine the extent to which any agreement is credible absent the provision of enforcement by the third-party occupiers. To the degree that Iraqis believe that the sustainability of agreements is due to enforcement by military occupiers, they are unlikely to accept reforms as being credible and binding in future periods.

The inability to bargain toward a mutually agreeable outcome has contributed to the ongoing insurgency and security issues that plague Iraq (Diamond, Reference Diamond2004). As Keefer (Reference Keefer2007) indicates, when political leaders lack credibility, they cannot make binding promises to potential insurgents. The absence of credibility makes the likelihood of continued insurgency that much more likely. This, in turn, further contributes to the inability of occupiers to carry out other aspects of the reconstruction such as building infrastructure and facilities.

3.3. The dynamics of alien rule

The potential for overcoming the problem of credible commitment becomes even more complex when one considers the role of foreign occupiers. In addition to the interactions between the groups and sub-groups within Iraq, these same groups also interact with the occupiers. In addition to expectations regarding how other indigenous groups will act, those in Iraq also have expectations regarding the actions of the occupiers. Most Iraqis view the military occupiers as ‘alien rulers’ instead of liberators committed to Iraqi self-determination. For example, a CNN/USA Today/Gallup Poll of Iraqi citizens, conducted between 22 March and 9 April 2004, found that 71% of those polled viewed Coalition forces as occupiers, while only 19% viewed them as liberators.Footnote ⁹ Along these lines, Diamond (Reference Diamond2004: 44) notes that, ‘Deep local suspicions of US motives combined with the memory of Western colonialism . . . generate a massive lack of legitimacy for the occupation authority.’ As such, many Iraqis have responded with resistance to the efforts of the occupiers. This course of action is summed up by an Iraqi tribal leader who told a reporter that the Americans should allow Iraqis to choose their own direction, or ‘we will keep resisting until we force them to leave the country’ (Quoted in Tyler, Reference Tyler2003).

To further illustrate this point, consider the following array of interactions involving the US occupiers and various groups throughout Iraq. The Kurds fear that they will lose part of their independence and autonomy in the new Iraq. They also fear that they will lose the continued protection of the US. Sunnis are concerned that the occupiers will punish them for their repression of the Shi'a and Kurds. They also fear losing the power they possessed under the Hussein regime. Finally, many Shi'a feel betrayed by the actions of the US during the first Gulf War (August 1990–February 1991). From the viewpoint of many Shi'a, the US did not provide them with support during their attempt to revolt and take power from the Hussein regime following US military intervention. The revolt ultimately failed and the Hussein regime maintained control of the country until the second Gulf War. As a result, the Shi'a further suffered under Hussein as punishment for the attempted revolt. These relationships become even more complicated when one considers the relationship between the occupiers and the sub-groups within these larger ethnic and religious groups.

Similar to the array of interactions between the indigenous groups and sub-groups in Iraq, the past and present interactions between these groups and the occupiers adds an additional layer to the traditional credibility problem. The United States views its occupation of Iraq as an exercise in benevolence. Following the removal of the oppressive Hussein regime, the aim of the occupation is to establish liberal democratic institutions. From the standpoint of the United States, this is a preferable state of affairs. The establishment of such institutions would allow for the protection of the rights and property of Iraqi citizens and for peaceful interaction between Iraqi and American citizens. From an economic standpoint, the peaceful and mutually beneficial exchange that would take place under such institutions would increase the standard of living in Iraq. However, many of the indigenous actors of Iraq view the situation in a drastically different manner as compared to the occupiers.

As mentioned, indigenous Iraqis are involved in a wide array of interactions with other indigenous groups and sub-groups, as well as with the occupiers themselves. These various ‘nested games’ constrain the ability of foreign occupiers to solve the larger Iraqi ‘meta game’ (see Coyne, Reference Coyne2006). Stated differently, many indigenous Iraqis view the reconstruction situation, as well as the credible commitment problem within that context, in a fundamentally different fashion than the alien occupiers. What the occupiers view as benevolent and beneficial is often viewed with suspicion by the very people they are attempting to assist.

The situation in Iraq illustrates the often overlooked epistemic aspect of the credible commitment problem. In order to be successful, occupiers must not only overcome the problem of incentives, but also the problem that Iraqis view their proclamations of benevolent reforms as insincere. As Diamond (Reference Diamond2004: 43) notes, ‘Part of the problem was that [General Jay] Garner and Bremer never comprehended how Iraqis perceived them . . .Thus the coalition never grasped, for example, the fact that, although most Iraqis were grateful for having been liberated from a brutal tyranny, their gratitude was mixed with deep suspicion of the United States’ real motives (not to mention those of the United Kingdom, a former colonial ruler of Iraq).’ The result is that many of the reforms announced by the US lacked credibility in the eyes of Iraqis and have failed to take hold.

This insight regarding the epistemic aspect of the credible commitment problem can be extended beyond Iraq and generalized to all efforts to exogenously impose institutions. Because occupiers are often trying to impose formal institutional structures that do not necessarily align with the existing informal institutions (e.g., belief systems, values, organizational forms, and so on), the problem of credible commitment is magnified.Footnote ¹⁰ The pattern of beliefs in a society is a central factor in the institutions that emerge and sustain over time (North, Reference North1990, Reference North2005; Weingast, Reference Weingast1997). Where occupiers fail to understand the underlying belief systems of indigenous citizens, including how those citizens perceive and interpret the occupiers and the proposed reforms, reconstruction efforts are more likely to fail.

3.4. Regime uncertainty

Yet another constraint on finding a solution to the problem of credible commitment in Iraq is the persistence of ‘regime uncertainty’. Regime uncertainty refers to a lack of predictability in the rules of the game. When regime uncertainty exists, both indigenous and exogenous actors cannot be confident in the stability of rules over time. Note that the relationship between regime uncertainty and the problem of credible commitment runs in both directions. A lack of credible commitment on the part of policymakers contributes to regime uncertainty, and ongoing regime uncertainty makes it increasingly difficult for policymakers to send a credible signal in future periods. This is because individuals, to some degree, base their decisions in the current period on the past actions of policymakers.

In an earlier sub-section (3.2), we discussed the impact of indigenous divisions on the reconstruction of Iraq. The inability of the various groups and sub-groups to bargain toward sustainable institutions is a major cause of regime uncertainty. Given the fragility of institutions, Iraqi citizens and foreigners cannot be confident that agreements and reforms will be stable in future periods.

The attempted reforms and policies of the CPA have contributed to regime uncertainty on several margins. Many of the orders passed by the CPA included the possibility of ‘adoption or replacement’ by future Iraqi governments. To provide one example of this, consider CPA Order 39. This order calls for the privatization of Iraqi state enterprises and also provides the terms and procedures for making foreign investments in Iraq. Order 39 contains the caveat that the order can be changed or replaced by future Iraqi governments. From the standpoint of potential foreign investors, this creates a situation of regime uncertainty. Stated differently, there is no credible signal that foreign investments will be protected over the long run. For instance, Looney (Reference Looney2004: 94) contends that if Iraqis were given the chance to vote on the issue, they would seek to modify or remove many of the orders issued by the CPA. To the extent this is true, neither indigenous Iraqi citizens nor foreigners view reforms as legitimate and credible.

The status of Iraq's sovereignty is yet another aspect contributing to regime uncertainty. A key aspect of the reconstruction, announced by the US government, involves Iraqis engaging in self-determination. In late June 2004, the US announced that it was officially transferring sovereignty to the Iraqi people. However, statements by US officials resulted in confusion around what this transfer actually meant. President Bush announced that it was a transfer of ‘full sovereignty’ (see Bumiller, Reference Bumiller2004). In contrast, a State Undersecretary announced that the transfer was one of ‘limited sovereignty’ (see White and Weisman, Reference White and Weisman2004). Secretary of State Colin Powell announced that it was a transfer of sovereignty, but that some of that ‘sovereignty they [the Iraqis] are going to allow us to exercise on their behalf. . .’ (quoted in Allen, Reference Allen2004). These various announcements regarding the extent and nature of sovereignty created regime uncertainty both within and outside Iraq regarding the status of the new Iraq as well as the ongoing role of the US occupiers. On the one hand, officials were indicating that full sovereignty had been transferred to the Iraq people. At the same time, other officials were claiming that sovereignty would be limited (see Weisman, Reference Weisman2004).

The credibility issue associated with sovereignty continues to this day. While the first permanent post-Hussein government of Iraq was established in May 2006, the US occupiers continue to exert major influence over the operations of the country. As mentioned in an earlier section, the presence of the US as a third-party enforcer creates a credibility problem regarding any power-sharing agreement between the various groups of Iraq. In short, there is no way for citizens to know whether the parties to the agreement are truly credible or whether the stability of the agreement is based on the presence of the US forces. Citizens will refuse to fully support and adopt reforms if they believe they will be unenforceable once occupiers exit.

The international dimension also contributes to regime uncertainty in Iraq. While our discussion has mainly focused on the interactions between indigenous Iraqi citizens and between Iraqi citizens and occupiers, in reality the reconstruction is even more complex. The reconstruction of Iraq is not taking place in isolation, but instead is heavily influenced by forces outside of the country. For example, there have been numerous reports of Iran sending financial support as well as weapons to support the insurgency against the occupiers. Further, the role of Iraq's neighbors – Iran, Jordan, Saudi Arabia, Syria, and Turkey – in future periods is unknown to policymakers, occupiers, and Iraqi citizens. What will the governments of these countries do once the reconstruction and occupation ends? Will they support the ‘new Iraq’ or will they take active steps to undermine the reforms and institutions? Given the uncertainty surrounding the answer to these questions, Iraqi citizens cannot be confident that reforms in the current period will be binding in future periods. Even if institutional reforms in Iraq generate some semblance of stability, that progress could be undermined by the actions of other countries in the region. This makes the problem of credible commitment even more complicated. In order to buy into the reforms in Iraq, citizens must be confident that they are binding and will not be undermined be other citizens, the new government of Iraq, and the governments and citizens of neighboring countries. To the extent this confidence is absent or weak, regime uncertainty will persist and reforms will fail to be self-sustaining.