The real challenge for Iraqi development: oil wealth could be a great help--or hindrance--to Iraq's development prospects.

• Author: Birdsall, Nancy

Irag is rich in oil but surprisingly poor in human capital. Oil is at mixed blessing at best, a curse at worst. Among countries rich ill oil are many that have failed at economic or political development or both: Angola, Nigeria. Venezuela, and Saudi Arabia. Human capital, on the other hand, is an unmitigated blessing. It's been central to the economic transformation of resource-poor countries, including Korea, Taiwan, Hong Kong, and now China, and in the larger sense of what development is fundamentally about, it's an end in itself, Indeed, you might say that education and health, the most straightforward indicators of human capital at the individual level, are the point of development.

Imagine a future moment (soon we hope) when the security situation in Iraq has settled down, the initial phase of reconstruction has taken hold, and there is a new recognized government. Even then, with today's immediate problems overcome, Iraq is will face daunting challenges in dealing with their surfeit of oil and their deficit of education. In the early post-combat months, there's been little thought to these challenges, and no sign of decision-making on them. Yet neglect and indecision now put at risk any real success later in building an open and democratic state.

In fact the two challenges are not independent of each other. A radical approach to managing the oil, one that fully insulates Iraq's fragile new institutions from oil's corrosive effects, is the only hope tot Iraq's desperately needed education fix as well, and for building an open, skill-based economy.

THE SURFEIT OF OIL

Iraq has similarities and differences with other oil-dependent states--mostly working against it. On the one hand Iraq is not Angola. It has an urban middle class and a history in which there has been an effective state, though colonial and then authoritarian and often abusive. There is a civil service system that has functioned for at least three or four decades in the organization and delivery of basic public services and in the production of oil. On the other hand, like Angola Iraq is war-worn and extraordinarily poor in the basic institutions of an open market economy: property rights and the rule of law. Like Angola, it has a history in which oil has brought wealth and power to a relatively small portion of the population, and for the rest, mostly trouble, bitter ethnic rivalries, and war over oil spoils.

So Iraq is not Angola but neither is it Norway. Norway was lucky: its oil went undiscovered until it had established and honed the institutions of a working democracy with an open market-oriented economic system. Those include not just con tract and property rules and the institutions to interpret and...