The US has proved to be as unprepared to lead a coalition in nation-building as it was prepared to lead a coalition in a war against Saddam Hussein's regime. It has become painfully clear that President Bush failed to develop a co-ordinated approach within his own government, and that his National Security Council (NSC) failed to develop a cohesive nation-building effort that brought together the resources of the US military, the office of the Defence Secretary, the State Department and other US agencies which should have been involved.

The US, however, has inherited 30 years of Saddam's political, military and economic failures. It is doubtful that even Iraqis understood how fragile the political system and economy had become before the war. The UN sanctions imposed following the 1991 Gulf war were only part of the problem and not the dominant cause. A small Sunni elite had presided over Iraq since its founding although the nation was more than 60 per cent Shiite, and over 15 per cent Kurd and other minorities. Nearly three decades of Baathist rule had left Iraq without any political opposition with any experience in governing, and Saddam had begun actively killing and imprisoning the secular opposition in 1979.

People who talked about Iraq as a wealthy nation before the war failed to take into account the fact that Iraqi oil export earnings peaked at $57,800 million in 1980. They collapsed to $19,600 million in 1981, because of price drops and the Iran-Iraq war, and ranged between $10,400 million-21,900 million between 1982-90. By 1991, Iraqi oil exports had dropped to only $350 million and did not rise back over the $1,000 million threshold until 1996, when Saddam finally agreed to the UN oil-for-food programme. As figure 1 shows, export earnings rose rapidly in the early years of the programme before Iraq's oil export capabilities began to be eroded by more than a decade of under-investment.

As for the rest of Iraq's economy, the government never seriously tried to use the oil-for-food money for effective recovery, and key elements of its infrastructure became progressively more strained while the rest stayed frozen in a command economy that had made little sectoral or structural progress since the early 1980s. It is a tribute to Iraqi administrators and technocrats that they could hold so much of the oil industry and infrastructure together, but they did so with patch after patch - virtually every key element of Iraq's petroleum sector was in decline or on the edge of failure. As a result, limited wartime damage and post-war looting produced cascading failures in petroleum production and distribution, as well as in critical civil areas such as water and electricity supply.

The US failure to plan for conflict termination and nation-building thus interacted with decades of war and failure by the Baathist regime. At best, it was a recipe for local anger and frustration in a nation with no real political structure. Iraq still suffered from the fact that Britain formed it in a way that gave a small Sunni elite dominant power and privilege. Combined with Arab anger over the Israeli-Palestinian conflict, a history of nationalism in dealing with outside powers and differences in culture and religion, the US and its allies at best faced a daunting set of problems.

The US also, however, was not prepared to deal with the fact that Saddam's regime had spread weapons and explosives throughout the country before the war, especially around Baghdad, Mosul and the 'Sunni triangle' formed by Tikrit, Ar Ramdai and Baquba. It did not secure rear areas as it advanced, it did not secure Baghdad or key facilities and it was unprepared to secure the country once Saddam's regime fell. It neither foresaw looting and serious armed resistance nor reacted quickly and effectively once they began. The cost of this initial US failure to create effective plans for conflict termination and nation-building is perhaps the most important lesson of the war. Some form of war after the war was probably inevitable, but every US, allied and Iraqi casualty since late April is to some extent the fault of inadequate military preparation for the tasks at hand, the failure of the nation-building and security planning within the office of the Defence Secretary and a failure to force inter-agency co-ordination between key departments like the State Department and the Defence Department on the part of the NSC and the White House.

Since the beginning of May, the US has sought to compensate for its initial mistakes, and has made significant progress in some areas. It has captured many senior Baathists and pro-Saddam leaders, and seized large numbers of arms and explosives. The flow of aid and nation-building activity are gathering momentum. The US is putting more forces on the ground and lighter forces better suited to dealing with guerrilla combat and peace-making. The delivery of aid and contracts for new programmes began to gather real momentum in August, with disbursements of over $1,000 million a month. These steps began five critical months too late, but are still capable of changing Iraqi perceptions. The US still has a decisive edge in military resources and many opportunities to put a nation-building programme back on track. It is more than possible that the US faces a pro-Saddam/Baathist Sunni threat that is local and limited enough in terms of leadership and support, so that the war after the war will be won by some point during the first half of 2004.

At the same time, the role of outside volunteers and extremists is growing and Shiite support is uncertain. It is far from clear that any of the massive inter-agency problems between the state and defence departments, and the NSC that led to much of the present war after the war have been fully solved. There is sometimes paralysing micromanagement of the nation-building effort by both the Coalition Provisional Authority (CPA) headquarters in Baghdad and the policy cluster within the office of the Defence Secretary. It has also become clear that the scale of nation-building and reconstruction is far greater than anticipated, and many critical aspects of the initial survey and planning of what needs to be done over the medium-term will not be completed until late 2003 or early 2004. The choice of US nation-builders has also been heavily politicised - the ideological and neo-conservative have been favoured over the experienced - and contracting procedures have sometimes been uncertain. In addition, co-ordination between the US, the UN, other international agencies and non-governmental organisations (NGOs) remains poor.

The history of nation-building is particularly discouraging where it has had to be attempted in a climate of violence. In most such cases in the past, those involved in the mix of war fighting and nation-building failed to systematically address the issues and risks involved. They also began to lie to themselves and failed to honestly address the complexity of what had to be done, the full range of problems in security and the need for honest measures of success. Even where such efforts were successful, they usually became successful because those involved in the security and nation-building efforts learned the hard way and became grimly realistic over time.

There are a multiplicity of scenarios that could be played out in Iraq over the months and years ahead (see pages 6-7). What all have in common is that nation-building and tactical victory are only at best a means to an end. It is the mix of Iraqi perceptions of what is happening - and particularly the breadth and depth of local support for US-led security and nation-building efforts - that will ultimately determine the endgame of the war after the war. The real war is for hearts and minds and must be won on those terms.

If the situation in Iraq does unravel to the point of lasting internal conflict or paralytic dissension, this will be a disaster for the Iraqi people. The same will be true if the US, UK, and the other coalition powers are driven out before they provide the aid in nation-building that Iraq so desperately needs. In fact, even the most peaceful transition to self-rule involves massive economic challenges as well as the critical political challenges of creating a new and equitable political system and a rule of law.

The US is now spending some $3,900 million a month on Iraq, and most of this is now spent on fighting. If it can win the war after the war by next spring, more money can go towards nation-building. If the Iraqis move forward with a constitution and conduct real elections, they then have a sovereign government and can take over their own destiny. These are big 'ifs', however, and the challenges Iraq must meet are far more serious than simply restoring Iraqi rule.

Iraq is likely to have a crisis budget through at least 2004 and 2005, even if it has relative peace. Annual expenditures would probably have to be at least $12,000 million and could easily exceed $20,000 million. The main source of revenue was expected to be hydrocarbon exports, but for the dilapidated oil sector to reach and sustain production levels necessary to generate such revenues it will, itself, require substantial investment. Estimates range from $1,600 million-2,500 million in 2004, rising to another $4,500 million in 2005. Yet, any foreign direct investment is now illegal, and it is far from clear whether it will come in time even if Iraq does create new laws to facilitate such activity. The best proposal to date is for Iraq to securitise reconstruction by getting loans secured by its future oil sales.

As for the middle and long terms, there is no way now to measure the challenges Iraq faces in rebuilding its economy and the limits to its 'oil wealth'. CPA chief administrator Paul Bremer has talked about costs of $50,000 million-100,000 million simply for reconstruction - and this does not approach the cost of development or nation-building or include any aspect of debt or reparations repayment. It will be spring 2004 before the US can fully survey all of the cumulative damage to Iraq's oil export capabilities caused by over two decades of war and sanctions, and by post-war looting and sabotage. As a result, estimates differ sharply over when Iraq will be able to return to production levels of 2.5 million barrels a day (b/d) or higher, and exports of 2 million b/d or more.

Regardless of when Iraq can bring substantial oil exports on stream, it will still face major structural economic problems. Iraq obtained 40-60 per cent of its food as imports when the war began, and its utilities and war systems were just as stressed by years of inadequate investment in its oil facilities. Its educational and medical infrastructure were badly hurt by under-investment, it had no globally competitive industries and its service industries had not been properly modified since the early 1980s because of the first Gulf war with Iran. Moreover, it had accumulated a mix of debt, reparations obligations and political contingency contracts totalling well over $200,000 million and possibly over $300,000 million.

The US Census Bureau estimates that over 60 per cent of Iraq's population is under the age of 34. This population has grown up in a country crippled by war, Baathist mismanagement and sanctions. Equally important, Iraq's population has ballooned from 9.5 million in 1970 to about 25 million today (see figure 2). Iraq's per capita oil earnings were $4,412 in 1980, measured in constant 2000 US dollars. This collapsed to only $498 in 2002. And Iraq had no other source of exports beyond the sale of dates. Most of its 48 major state industries were hopelessly inefficient and/or obsolete.

While US neo-conservatives - as well as many Arabs - still talk of Iraq as a wealthy nation because of the country's vast oil reserves, they ignore its overall economy, immense burden of foreign debt and reparations and the fact that Iraq's population will rise dramatically, even assuming a sharp and steady decline in the rate of population growth. Even if Iraq could export 4 million b/d in 2010, at $30 a barrel in constant dollars, it would earn some $120 million a day or $52,600 million a year, the equivalent of $1,753 per capita. This would be only a third of Iraq's 'oil wealth' in 1980 in constant dollars.

UN Security Council resolution 1483 did establish a moratorium on Iraq's debt repayments until 31 December 2007, but deferring over $100,000 million in debt is scarcely enough. Moreover, the issues of reparations and politically-motivated contingency contracts remain. Deferred payments will mortgage the country's future almost indefinitely. Oil wealth does not exist. It can be of great help, but Iraq must remain peaceful and unified enough to pursue economic modernisation and reform on a broad basis for at least a decade. It will need to become a major player in the world oil market as quickly as possible, but petroleum exports alone cannot come close to giving the Iraqis the same standard of living they had in 1980, much less the standards of a developed nation.

Moreover, US aid - indeed any realistic level of total aid from all foreign countries - will not be enough unless Europe and the Arab states forgive most or all of Iraq's foreign debt and reparations, and European, Russian and Asian firms do not insist on enforcing any contingency contracts Saddam signed on concessionary terms.

'Iraq for the Iraqis' will be an empty slogan if nation-building does not succeed in all of three critical ways: a real end to the fighting, a stable political solution and creating a debt-free modern economy that is based on far more than oil. n