EAST LANSING, Mich. -- With states' budgets in crisis, being president of a large public university is even more difficult than it is when, as the saying goes, campus preoccupations are parking for faculty, football for alumni and sex for students. So it might have been a relief for Peter McPherson, president of Michigan State University, to spend five months in Iraq overseeing economic reconstruction.

McPherson, a former banker, is not a novice in government service at the national level. He served in the Ford White House, then headed the $6 billion Agency for International Development and was President Reagan's deputy secretary of the treasury. Because of McPherson's extensive experience with the challenges of developing nations, it is newsworthy that he has returned from Iraq encouraged. But he is dismayed by what he considers ``a seriously bad idea'' gaining ground in Washington, not least among Capitol Hill Republicans.

Iraq, McPherson says, has three assets most developing countries lack--a large number of educated people, an entrepreneurial spirit, and oil.

All countries, McPherson says, have intelligent people. But Iraq, like some Eastern European nations as they emerged from Soviet domination, also has a sizable cadre of people who have received fine higher educations, especially in technical courses, most of them taught in English.

As Americans on the scene in Iraq have learned to their dismay, under Saddam Hussein's regime, with its focus on war-making and private enrichment, Iraq's infrastructure decayed much more than was understood by experts exercising their expertise from afar. That Iraq functioned as well as it did is, McPherson believes, partly because it has ``an abundance of engineers of who held things together with bailing wire.''

Iraq's second asset, what McPherson calls ``an entrepreneurial spirit you can still feel,'' is a rarity -- a pleasant postwar surprise. It exists partly because of an unpleasant aspect of prewar Iraq -- pandemic corruption. That was a hard school, always in session, teaching participants how to operate in the interstices of rules and in the shadowy conditions of the black market. McPherson notes that unlike the Soviet Union, Saddam's Iraq never nationalized retailing, which was a whetstone that kept commercial skills sharp.

Oil will eventually lubricate Iraq's financial revival. At least it will unless it provokes shortsighted American parsimony that could have costly political as well as economic consequences.

Congressional critics of the Bush administration's request for approximately $20 billion for reconstruction of Iraq are asking why this should be provided largely in grants, as was the case with much of the Marshall Plan aid to war-devastated Europe, rather than in loans to be repaid by oil revenues. Such critics are reflecting, or appealing to, Americans' longstanding -- and not unjustifiable -- skepticism about foreign aid. The skepticism is heightened when, as now, American government budgets are rationing pleasures and imposing pains. Continued...