The Washington Post has published an outstanding report on the Commanders Emergency Response Program (CERP) in Iraq with the provocative title "Money as a Weapon" [1] CERP is an effort to be smarter about ‘winning hearts and minds” in Iraq by behaving more like a private charity. It has good and bad aspects and illustrates the inherent disadvantages of government employees spending tax payers’ money compared to spending their own money or private enterprise (or charity) employees spending the owners’ (donors’) money.
Any economic activity by groups larger than a family faces the challenges of coordination and monitoring the performance of the individuals within the group. If you are a parent, you know that this challenge exists even within the family. These challenges exist for private sector enterprises operating in free markets as well as for government bureaucracies. On several occasions I have noted that governments suffer serious disadvantages in these regards, but as there are some things only governments can do we need to put up with them while limiting government as much as possible to what only it can do.
Private enterprises have the advantages that they are risking their own money and are thus able to take greater risks (both in how they address the coordination and monitoring challenges and in what goods or services they choose to provide), and that they are forced by competition to make good decisions or parish. They are disciplined by their bottom line (profitability). Governments, on the other hand, must be accountable to the public for the use of tax money. Thus they require more rigid and intrusive performance monitoring procedures (more reporting than doing). In addition to adding an extra layer of cost, this tends to under value and thus stifle creativity. Civil service employees, for example, tend to be rewarded by length of service rather than performance evaluations to ensure that bosses do not show favoritism to friends and relatives. Public school teachers in many states in the U.S. suffer from the performance stifling impact of seniority systems with tragic results for the quality of public education. Even efforts to introduce merit pay for government employees are fraught with risks because of the absence of a bottom line and competition.[2]
In addition to being a smarter approach to overcoming terrorists and insurgents in Iraq, CERP also attempts to overcome the sluggish bureaucracy inherent in government programs. “Soldiers walk the streets carrying thousands of dollars to pay Iraqis for doorways battered in American raids and limbs lost during firefights. Sheiks appeal to commanders to use larger pools of money locked away in Humvees and safes at military bases for new schools, health clinics, water treatment plants and generators, knowing that the military can bypass Iraqi and U.S. bureaucratic hurdles.”[3]
CERP “has so far spent at least $2.8 billion in U.S. funds.”[4] That will pay for a lot of battered doors. All of it was handed out in U.S. dollar bank notes by American soldiers. “The program is intended for short-term, small-scale ‘urgent humanitarian relief and reconstruction.’ But as the broader $50 billion effort to rebuild Iraq with big infrastructure projects runs dry, CERP is by default taking on more importance as a reconstruction program, something it may not be equipped to do in a coordinated, nationwide way.”[5]
It is obvious that solders walking the streets can make quick and beneficial judgments about where a few bucks will get the best result in ways that more bureaucratically controlled procedures could never dream of. Most of the solders I met in Baghdad were fine people and could be counted on to serve their country’s interests first. I seriously believe that very little of this cash found its way into our solders’ pockets (but reread Catch 22 or M*A*S*H for a different perspective). Thus the broken door and missing limbs payments and candy and t-shirts for the kids are surely some of the best money we are spending in Iraq. However, it suffers at the end of the day what all government programs suffer from: the solders are giving out taxpayers’ money and thus are not guided by a bottom line of their own. This particular innovative, responsive, and flexible program also suffers a lack of coordination with broader efforts to pacify and rebuild Iraq.
I have an additional problem with the way this program is implemented, which is modest but not trivial, which is that U.S. dollar bills are being used rather than Iraq’s own currency. Doing so undercuts the development of Iraq’s monetary system, makes the monetary policy of the Central Bank of Iraq more difficult, and pours hundreds of millions U.S. dollar bank notes into the country in ways the make anti money laundering and combating the financing of terrorism measures impossible. When Iraqis exchange these dollars for dinars, where do the dollars wind up? Iraqi dinars could and should be used for this operation.[6]
“CERP is, in fact, a reconstruction program in addition to being a counterinsurgency weapon.”[7] The real problem with the program comes with the larger expenditures—the “schools, health clinics, water treatment plants and generators, etc.” These are all good things potentially but schools with no teachers, health clinics with no medicine, are a waste of money. “A $33 million hotel, office and retail complex at Baghdad International Airport” may be the best use of that money, but it is very unlikely that the mechanisms for allocating CERP cash resulted in valuing this project against all others being financed by the U.S. or Iraqi governments. That is exactly what government budgeting is all about (or should be)—setting priorities. Resources (money) are limited and thus projects must be prioritized in order to finance the most valuable ones to get the highest value per tax payer dollar (or dinar). Furthermore, the value of one project, a farm irrigation system say, may depend on other projects, such as the roads needed to transport farm output to market. Thus an overview of all projects and coordination among them may also be important, which CERP does not provide but USAID does (or at least tries to).[8]
“Outside Kirkuk, in northern Iraq, an $8.3 million water treatment project completed in February with CERP funds took more than two years and was $1.7 million over budget — and it is not far from another water treatment system that USAID paid $4.1 million to build two years ago.” In another more successful example, “In the violence-prone city of Ramadi, Army Capt. Nathan Strickland and his battalion used CERP money to hire day laborers to clear away trash and rubble. The military strategy: Get young men to pick up shovels instead of guns.”[9] I remember in the early months of American occupation of Iraq Peter McPherson, assigned to the Coalition Provisional Authority to oversee the reconstruction of Iraq, killed a similar idea as wasteful welfare.[10]
Over a trillion dollars or more later we have learned a lot, made many adjustments, and things are going better in Iraq. The Post article is full of fascinating examples of successes and failures and the difficulties of making the government function more like the private sector. Of course, it raises the question that should always be raised of whether this was really something our government should be doing in the first place.
[1] Dana Hedgpeth and Sarah Cohen, “Money as a Weapon”, The Washington Post, August 11, 2008, Page A01.
[2] “David Whitman, in his book "Sweating the Small Stuff: Inner-City Schools and the New Paternalism," reports that in Chicago from 2003 through 2006, just three of every 1,000 teachers received an "unsatisfactory" rating in annual evaluations; of 87 "failing schools" — with below-average and declining test scores — 67 had no teachers rated unsatisfactory; in all of Chicago, just nine teachers received more than one unsatisfactory rating, and none of them was dismissed.” Quoted by George F Will in "Where Paternalism Makes the Grade", The Washington Post, August 21, 2008, page A15.
[3] Ibid.
[4] Ibid.
[5] Ibid.
[6] A modest problem with doing so currently is that the largest ID bill (25,000 ID) has a dollar value of only about $20.00.
[7] Ibid.
[8] In the interest of full disclosure, I am BearingPoint’s Senior Monetary Policy Advisor to the Central Bank of Iraq under a consulting contract financed by USAID. I am expressing my own views here only.
[9] Ibid.
[10] Warren Coats and Kenneth Weisbrode, "The Strange Tale of Financial Reconstruction in Iraq" October 25, 2003.
Warren's space 
Here is a telling observation about limitations and risks of having the government do it, from the mouth of an expert (Libyan leader Muammar Gaddafi) in his annual September 1 speech (quoted by BBC News):
"The money that we put in the education budget, I say let the Libyans take it," Col Gaddafi said in a 100-minute televised speech to the General People’s Congress, Libya’s equivalent of a parliament.
"Put it in your pockets and teach your kids as you wish, you take responsibility."
"As long as money is administered by a government body, there would be theft and corruption".