The Tijara Provincial Economic Growth Program is run by the
United States Agency for International Development (USAID). Its goal is to help
Iraq develop a market economy. At the end of 2012, it released a report,
“Assessment of Current and Anticipated Economic Priority In Iraq.” The
paper went over Iraq’s National Development Plan, and the difficulties it is
facing in diversifying its economy. The report claimed that Iraq was at a
crossroads over whether it would be able to escape the oil curse and its
state-led economy. Below is an interview with Thomas Doherty and Vladimir
Halama who helped put the document together.
Vladimir
Halama, an Australian economist with experience in working in transitional
economies, has worked in Iraq from 2005 until February 2013 in a number of
advisory assignments, most of which involved working with Iraqi government
bodies. From September 2011 until November 2012 he led a team of specialists in
putting together “An Assessment of
Current and Anticipated Economic Priorities in Iraq” for the
USAID-Tijara project.
Thomas Doherty
is a U.S. lawyer who has worked on a number of assignments in Iraq at various
times since October 2003, including with the Coalition Provisional Authority,
the State Department, and USAID. Until December 2012, he was the regulatory
advisor of the Business and Investment Enabling Environment Component of
USAID-Tijara project.
USAID said
that Iraq is at a “crossroads” over whether it will be able to escape the
resource curse and its state-run economy (AP)
1. The Tijara report
said that Iraq was at a crossroads between its past of being a state-run system
and its future of developing a market economy. Can you explain what role the
government plays in employment?
Vladimir
Halama: The government is the main employer as well as the employer of choice
for most Iraqis. Of those employed for 40 hours per week or more, an estimated
60% are on the payroll of the government, the security forces or state owned
enterprises. They enjoy security of tenure, generous pension provisions, and
other advantages such as grants of land or loans on favorable terms. This
distorts motivation on the supply side of the labor market. Much effort and
bribery is expended in trying to get onto the government payroll, and
resignations are unheard of. Employment in the private sector is less sought
after. In, for example, construction and services, some employers resort
to employing workers from Turkey or South East Asia.
Thomas
Doherty: I agree, and add that often times the main purpose of government in
Iraq seems to be to provide perquisites for government workers. For example,
recently the Ministry of Housing and Construction announced a new housing
development in Wasit province only for employees of the Ministry of Housing and
Construction. The reservation of state-owned land for largesse to workers in
government and state-owned enterprises also makes it more difficult for private
investors to obtain land for housing, industrial, and retail developments.
2. How about the
state-run banks?
Vladimir
Halama: Lending by state banks is under the direction of the government, and is
mostly at concessional interest rates. Even the repayments of the principal are
often waived, for example in the case of loans to the agricultural sector. As
can be expected under such circumstances, the loans usually go to those with
lobbying power. State banks have been directed to make loans covering the
payroll costs of many state-run enterprises where revenues fail to cover
operating costs. The backlog of unrecoverable loans in state banks is large,
and the banks are de facto bankrupt. However, Iraqis still place their savings
with them, as they are confident that the government will keep these banks
operational.
Thomas
Doherty: The concessionary terms given out by the state banks crowd out private
sector banking. In this regard, the recent enactment by the Council of
Representatives to establish a state-run Islamic bank is troubling, as it will
probably make it more difficult for the private Islamic banks now operating in
Iraq to grow. There have been orders from the Council of Ministers directing
Iraqi government agencies to only do their banking at the state banks, so this
is another drag on the private sector.
3. Can you talk more
about what’s happening with the state-run enterprises (SOEs)?
Vladimir
Halama: Many of them are barely making ends meet, despite receiving hidden
subsidies through low energy costs and through being the supplier-of-choice to
the government. The traded goods sector is particularly badly off as Iraq is
uncompetitive in every product market with the exception of minerals. In other
sectors, the state enterprises are doing better. However, overstaffing is rife
everywhere. Workers have the same security of tenure as public servants, and
everyone is kept on the payroll, even in factories that were totally destroyed
during the military campaigns against Iraq in 2003 and before. Since 2003,
several attempts to reform the SOE sector have been announced, but they have
not yielded any results as yet. Despite occasionally claiming efforts to the
contrary, the politicians are very reluctant to initiate any reform, which
would lead to redundancies for fear of political backlash and losing the
benefits of patronage, which control over SOEs brings to the various political
parties controlling different ministries. Instead, the creation of another
130,000 jobs in the state sector had been heralded in February 2013.
Thomas
Doherty: There was an announcement some time back that the Ministry of Trade
was going to privatize the State Company for Automobiles and Machinery and the
State Company for Markets, two SOEs that sell cars and operate retail
stores. These would seem to be able to
be easily privatized or just dissolved in favor of the private sector. Well, it turned out that the reforms were
rolled back, and now they are just talking about granting some contracts to
foreign investors to operate shopping malls. This is another problem, the SOEs
becoming required “partners” to any private sector enterprise.
In other sectors,
the SOEs don’t have any picture of what their bottom lines really are, because
of the complicated subsidies they receive. Some operate like spendthrifts who
believe that as long as there are blank checks left in the checkbook or there
is enough political capital they can hire and spend more. On the other hand,
the managers of commercially viable SOEs, who really do want to operate better,
have no discretion to hire, fire or purchase without tortuous bureaucracy
through their own ministries and the Ministry of Finance. The United Nations
Development Programme has provided a roadmap for eventual commercialization of
the SOEs, but it’s going to be a gradual process.
Of course, the
SOEs do provide needed employment, even if it’s often not productive employment.
Paul Brinkley’s Task Force on Business Stability Operations, and other donors
spent a lot of money on the SOEs in the hope that increasing employment would
decrease the insurgency, which is recognition that employment is important to
social peace. This is something the U.S. also recognized with the auto industry
bailouts.
We talked to
the Iraqi Railways people, and I was glad that they have an ambitious program
to build an expanded cargo and passenger network, including a Baghdad commuter
rail network, and cargo rail lines from the new Al Fao port. Railways are a
worthy SOE for investment right now, in my opinion. Why not build a Baghdad
Metro, too? The plans are supposedly on file from the 1970s. Unfortunately, the
announcement of a Baghdad monorail to be built by Alstrom does not appear to
have advanced much in the almost two years since that project was announced to
great fanfare.
4. Another issue is
the role of the oil industry in the development of the country, and the oil
curse. What problems could Iraq be heading for with the growth of the petroleum
business?
Vladimir
Halama: The symptoms of the oil curse already permeate the Iraqi economy, and
are more acute than in other resource-based economies. Currently, all
development depends on crude oil export revenues, as it is almost the sole
source of income for the government. Large sums are spent on investing in the
oil industry to increase the output levels as fast as possible, based on the
view that much larger oil revenues will then adequately fund the development in
areas that are currently underinvested, for example health, education, and
labor-intensive productive sectors. This approach ignores the possibility
that, in the meantime, social unrest could reach explosive levels as a result
of, for example, the large numbers of young people reaching working age each
year. Alternative approaches, suggested in the USAID-Tijara Assessment, would
see an increase of investments in other areas at the expense of oil sector
investments, a distribution of a portion of oil revenues through direct
payments to Iraqis, and the setting up of a wealth fund for future generations
that would invest in assets abroad.
Thomas
Doherty: The report notes how little employment the oil industry actually provides
relative to Iraq’s need for jobs. The oil money has to be cycled back into the
economy in a way that provides jobs, and the education that provides future
capacity for the health, education, and other sectors of the economy.
5. What kind of
affect does the large oil-funded public sector have upon investment?
Vladimir
Halama: As regards private sector investment, competition from subsidized SOEs
has crowded out many areas of potential private sector economic activity. An
exception to this is Kurdistan, which is experiencing a construction boom
financed by Turkish capital, the telecommunication sector (mobile phones), and
the recent crude oil service contracts awarded to oil multinationals, which are
expected to finance the expansion of production and recoup their investment
afterwards. While data is hard to come by, the volume of private sector
investment so far appears to have been considerably lower than the forecasts
that were made in the NDP.
Thomas
Doherty: In Baghdad, the Ministry of Communications is seeking more and more of
a role in the market. They are seeking to control 100% of the bandwidth in and
out of Iraq, and the mobile phone operators are required to eventually use
these government-controlled gateways as a condition of their licenses. Whether
this will eventually lead to the banning of private-sector satellite gateways
for internet services and other data, with the political and cultural
implications this could mean, time will tell.
There are also
various exclusive agencies written into Iraqi law for SOEs. For example, the
Ministry of Transportation’s State Company for Land Transportation has the
exclusive concession to move cargo overland out of Iraqi ports. Another of these
exclusive agencies, one which the Ministry of Transportation through Iraqi
Airways granted a Sharjah company, RUS Aviation, actually stopped other air
cargo services from flying into Iraq, at least for a while. This is just
another burden on business and job growth for the sake of a little rent collecting.
6. Can you explain
how the oil industry affects the social contract between the citizens and the
government?
Vladimir
Halama: Personal and corporate taxes yield very little, and that blunts government’s
sense of accountability towards citizens. The oil industry, massive in
comparison with the rest of the economy, is government owned and controlled,
and gives politicians ample scope for self-dealing and favoritism.
To avoid a misconception on part of
the readers, it is necessary to digress here and stress that while terms like
'state-run' and 'government-controlled' suggest a unitary system of the Soviet
kind, this is far from being the case. An uneasy truce among a number of gangs
running protection rackets would be a closer analogy. Iraq has been listed for
a number of years now among the ten most dysfunctional countries in the world,
according to the Fund for Peace index, and it is not difficult to see why.
Neither the parliament nor the cabinet are worthy of their name. Iraq's
inclusive government contains political groupings, which are mutually hostile.
Any proposed activity requiring cooperation among Ministers from different
political, religious and ethnic affiliations engenders suspicion, and results
in inaction. In turn, officials within the ministries, belonging as they often
do to differing groups, do not cooperate with each other. Thus the Ministers do
not carry out the decisions of the Council of Ministers, Directors General do
not carry out the wishes of their Ministers, and officials, particularly at the
provincial level, disregard the instructions of their Directors General, with
killings not being an unknown form of resistance, particularly in areas which
give rise to substantial kick-backs and bribes. True, many investment projects
are embarked upon behind the facade of established institutions, but their
effectiveness is highly dissipated by the cuts taken at all levels by prime
contractors, and the numerous bureaucrats whose approvals are needed.
Additionally, those in the vicinity of the projects want to be paid for not
destroying them. For example, tribes living in the vicinity of oil pipelines
want their members to be paid as members of oil pipeline protection forces, and
carry out attacks on the pipeline to make their point. Such universal brigandry
does spread the wealth around, but in a very unsystematic way. In fact, even
the tribesmen employed in the oil protection force are not particularly well
off when, as is so often the case, they have to give a share of their income to
the local powerbrokers. In other words, there is no social contract between
citizens and the government because people are primarily beholden to those
immediately above them in the food chain.
Efforts by international institutions and aid agencies and
diplomats and politicians of foreign powers to bring a measure of order and
sanity to the situation have amounted to a little more than a spit in the
ocean. However, you would hardly get that impression from reading
pronouncements and 'success stories' published by these organizations.
Thomas
Doherty: As Vlad and the report say, the oil fosters conflict over revenues,
and also a sense of entitlement among elites and government employees.
7. Baghdad came up
with a National Development Plan for 2010-2014. The Tijara report found some
major flaws with its strategic goals. Can you explain some of those?
Vladimir
Halama: Actually, the goals of the National Development Plan cannot be faulted.
They include all manner of desirable outcomes: balanced development of regions,
overcoming gender imbalances, reducing maternal mortality, improving private
sector enabling environment, and so on. Rather, the problem is that the NDP is
not an actionable plan. Actions needed to achieve the goals are not listed or
costed, so there are no benchmarks against which the outcomes could be
monitored and evaluated. The few quantitative guidelines in the NDP, which
relate to the allocation of the investment budget, have not been reflected in
the budget. In practice, little heed is paid to the Development Plan.
Thomas
Doherty: Agree with Vladimir, the NDP’s worthy, but broad goals have to be
supplemented with specific actions needed to achieve those goals. It’s long
past the time where the Iraqi government should just be saying it wants to
“develop the private sector.” It’s time
to do some of the things, which numerous USAID, World Bank, and other donor
programs have recommended to allow diversification of the economy. An Iraqi
businessperson should be able to operate without checking with the government
every day, which would be the case with a growing enterprise seeking to
diversify its activities – the company would need approval from the Companies
Registrar for increasing its capital and operating new lines of business.
8. Has the
Development Plan helped Iraq move away from relying upon the state for managing
the economy and delivering services?
Vladimir
Halama: Iraq is still a state-run economy. The operations of the private sector
are hemmed in by onerous regulations. The population receives subsidies, like
the food distribution scheme, low utility charges, and has a strong sense of
entitlement. The existing system enables those in charge of administration to
appropriate for themselves considerable amounts of public money, and they have
been successful in blocking any reform efforts. The inventiveness of the
bureaucracy and political leaders in coming up with reasons and mechanisms for
delay is breathtaking.
Thomas
Doherty: I don’t think the goals of the
NDP were internalized by many Iraqi government officers. Some of the recent
enactments of the Council of Representatives, like the establishment of a
state-owned Islamic bank I mentioned above, seem to be moving towards more state
involvement in the economy. There is also a lot of railing against “low quality
imported goods,” which is partly true and partly a stalking horse for a return
to autarky.
9. Iraqi law is also
a barrier to developing a private sector. With regards to jobs for example,
what kinds of difficulties are there to control the rapid expansion of the
number of public workers?
Thomas
Doherty: With the oil revenue available, public employment isn't so bad unless
the workers are put to work thwarting private sector growth in bureaucracies or
establishing monopolies. Iraqi law enables government bureaucracies to do that.
For example, the Law of Transportation of 1983 says that “the socialist sector
leads the transportation sector.” This
allows the Ministry of Transportation’s SOEs like Iraqi Airways and the State
Company for Land Transportation to claim exclusive agencies, which crowd out
private sector transportation enterprises. In other words, it’s not that bad
that Iraqi Airways employs a lot more people than it would need if it were
efficiently run: it’s bad if Iraqi Airways is preventing private sector
competition in air cargo and passenger services. Same thing with the Ministry
of Communications and its claim of a monopoly on international bandwidth.
The Coalition
and subsequent donor activities did very little to change Iraqi law, which
still contains numerous clauses subjecting private sector activity to state
economic planning. A generation of Iraqis grew up with a statist political and
legal philosophy, and it will take a generation to change. Although many Iraqi
government officials now understand that the bureaucracy is overly burdensome,
others believe that security or the need to prevent anyone from doing anything
wrong justifies the control they exert over businesses.
This burden of
bureaucracy falls most heavily on Iraqi businesses. Iraq has a tradition of
contracting out for large government projects with foreign companies. Foreign
companies with government contracts have glided into Iraq easily, exempted from
the import and export, and other controls which Iraqis are subject to, because
the Law of Major Development Projects of 1985, and other regulations exempted
them from these rules. This is one
reason why there aren’t large Iraqi construction and engineering companies to
build the infrastructure Iraq needs. It would be a good thing if the Iraqi
government encouraged, and allowed the formation and growth of Iraqi companies,
but that’s not going to happen under the current company law, where an Iraqi
company has to run to the Companies Registrar every time it wants to raise its
capital.
10. Iraq needs good
schools to train and prepare future workers, and help with development. How is
the country’s education system doing?
Vladimir
Halama: The intention to match the syllabus of technical schools with the
demands of the labor market is still at the planning stage. School attendance
and literacy levels have been falling in recent years. To improve the very low
computer literacy in Iraq, schools need to be equipped better. Corruption
infects the education system as well, and employers cannot be confident that
graduates are competent in the field in they have received their diplomas.
Thomas
Doherty: Until Iraqi educational capacity is fully developed, it would be a
good investment of both the Iraqi and American governments to fund Iraqis to
study overseas, preferably in partnership with Iraqi universities. A generation
of isolation and deprivation takes a generation to overcome. The Ministry of
Higher Education also needs to liberalize its bureaucracy. For example, an
Iraqi who has a bachelor’s degree in engineering or science field needs to jump
through hoops to have a foreign MBA or MPA recognized in Iraq.
SOURCES
Tijara Provincial Economic Growth Program, “Assessment of
Current and Anticipated Economic Priority In Iraq,” United States Agency for
International Development, 10/4/12
No comments:
Post a Comment