INTERNATIONAL INSTITUTE FOR STRATEGIC STUDIES VIDEO: Hussein Shahristani's IISS-Oberoi Lecture

New Baghdad Administration Finds Millions Stolen In Corrupt Construction Deals

 

In 2013, most of Iraq’s provinces received new governments following elections. One of the first things many of the new administrations did was announce that the previous governorate councils walked away with millions of dollars in corrupt development deals. Over 200 of such cases were just discovered in Baghdad. The new governor blamed the theft for the lack of services in the province. The problem is the new officials are likely to be just as crooked as the old ones as stealing government funds is considered a privilege of holding office in Iraq.

In September, new Baghdad Governor Ali al-Tamimi announced that tens of millions of dollars had been stolen by the previous provincial government. The governor held a press conference saying major politicians and businessmen from the previous administration were involved. He said one project had $68 million taken, while another had $18 million missing, and included such notable landmarks as the Baghdad Airport. In total, the new provincial council turned over 211 cases to the anti-corruption Integrity Commission to investigate. He added that none of the projects surpassed a 5% completion rate, and was the reason why the capital lacked essential services. Baghdad is not the only new local government that has charged the old one with stealing tons of money. Governor Tamimi also has a vested interest in condemning the former council. Tamimi is from the Sadr Trend, while his predecessor was from Prime Minister Nouri al-Maliki’s State of Law. One of the themes that the Sadrists have been pushing in recent years is that they are against corruption. Moqtada al-Sadr has also become increasingly critical of the premier in anticipation of the 2014 national vote. The governor therefore is killing two birds with one stone by bringing up these cases. He can try to win over the public with his claim of clean government, while taking on Maliki at the same time. The real question is if anything substantive will come of it. Iraq is rated one of the most corrupt countries in the world. That’s because graft has become institutionalized as a means of ruling the country. Taking money is considered part of the compensation for taking a public job, and accepting bribes is how things get done. Therefore there is no push to follow through on any major corruption case. Since these ones allegedly involve powerful people nothing will come of them, and Governor Tamimi is just looking to score political points by making them public.

Baghdad’s news that millions were absconded with by the previous provincial government should come as no surprise. The administration before that probably stole as much as it could, the last one did the same, and the new one will too. This is the sad story of Iraq today. Since the country earns such huge sums of money from oil revenues officials believe they can take what they want. The result is dozens and dozens of projects that were either just started or only in the planning stages are now sitting dormant across Baghdad. This needs to be considered every time politicians announce some new project in any part of the country. There’s a good chance that they will result in nothing, because they are simply a scheme to steal money. Iraq has huge needs in terms of infrastructure and services after years of sanctions and war. Many of those will never be met because of the chronic corruption, which is more widespread today than it ever has been.

SOURCES

Dananer, “Baghdad: assignments of 2011 projects to the Integrity Commission,” 9/14/13

- “Governor of Baghdad reveals corruption in the work of the previous administration at 80 billion dinars,” 9/11/13

Radio Nawa, “Governor of Baghdad reveals theft of tons of billions in construction projects,” 9/10/13

Iraq Signs Consulting Contract With BP For Kirkuk Oil Field

 

In September 2013 Iraq’s Oil Ministry and British Petroleum (BP) signed a contract for the Kirkuk oil field in northern Iraq. This appeared to be controversial at first, because the field is in the disputed territories, and the Kurdistan Regional Government (KRG) has demanded that all deals for the field have to have its approval. BP is only doing technical work however. It is interested in developing Kirkuk as well, but the arguments between the central and regional governments will likely prevent that from happening any time soon.

The Kirkuk field stretches from the disputed territories into the Kurdistan region

BP will be evaluating the Kirkuk field for the Oil Ministry to see how to renovate it. The contract might be worth up to $100 million. The Kirkuk field is divided into three domes. BP will only be working on the two under Baghdad’s control, which are the Baba and Avana Domes. The corporation signed a preliminary deal for Kirkuk back in January after more than a year of talks. The Oil Ministry is interested in this work, because Kirkuk is the oldest field in the country having been discovered in 1927, and production has seen a steady decline. In the early 2000s it was pumping around 900,000 barrels a day. Today it is only producing approximately 260,000 barrels. It is therefore in desperate need of repair and restoration. BP is hoping to do this work, but so is Russia’s Lukoil. A production contract for Kirkuk has been held up due to Baghdad’s dispute with Kurdistan over who has control over oil policy. The KRG claims that any development deal signed with the Oil Ministry for Kirkuk would be illegal and unconstitutional, claiming that it must be involved. Kurdish officials have told BP that they can study the field, but not do any drilling or production work. The KRG occupies the northern dome, but its long-term ambition is to annex the entire area for its vast oil reserves. That’s why it has objected to any Oil Ministry production contract. That hasn’t stopped Baghdad from hearing offers, and it is obviously hoping to revive the field due to its declining output. The differences within the country over hydrocarbons have prevented that from happening so far, and will probably continue to do so in the foreseeable future.

The Kirkuk field is divided into 3 domes with the KRG controlling the northern Khurmala Dome and Baghdad running the other two (GEO ExPro)

The argument between Baghdad and the KRG over petroleum has been deadlocked for years now with no end in sight. Each claims that it has the sole authority to sign contracts and manage natural resources. Kirkuk is one centerpiece of this dispute, because it is coveted by Kurdistan. That’s why the BP signing made such headlines when it was announced. It was only for studying the field however, which the Kurds have agreed to. Until the larger issues over oil are resolved there’s little hope that either the central or regional governments will be able to move ahead with their plans for Kirkuk.

SOURCES

Ajrash, Kadhim and Al-Ansary, Khalid, “Iraq Seeks to Boost Crude Exports to China as Oil Output Rises,” Bloomberg, 4/3/13

Al-Ansary, Khalid & Razzouk, Nayla, “Iraq Plan to Let BP Develop Oil in Kirkuk Is Illegal, Kurds Say,” Bloomberg, 1/17/13

Aswat al-Iraq, “Russian Lukoil desires to work in Kirkuk oilfields,” 8/4/13

Chazan, Guy, “BP warned off oilfield plans in northern Iraq,” Financial Times, 1/29/13

Ebel, Robert, “Geopolitics and Energy in Iraq,” Center for Strategic and International Studies, August 2010

Hafidh, Hassan, “Kurdistan: Iraq Must Seek Approval For Kirkuk Oil Field Upgrade,” Dow Jones, 3/26/12

International Crisis Group, “Iraq And The Kurds: The High-Stakes Hydrocarbons Gambit,” 4/19/12

LeVine, Steve, “BP and ExxonMobil take up opposite sides of the front lines in Iraq,” Qartz, 1/28/13

Ma, Wayen, Hafidh, Hassan and Williams, Selina, “BP to Help revive Iraq’s Kirkuk Oil Field,” Wall Street Journal, 9/11/13

Mackey, Peg, “Iraq wants BP to revive northern Kirkuk oilfield,” Reuters, 4/17/12

Al-Najar, Kamaran, Lando, Ben, and Staff, “BP signs Kirkuk deal for consulting, not drilling,” Iraq Oil Report, 9/13/13

Neuhof, Florian and Yee, April, “Kurdistan looks to awaken giant,” The National, 9/20/12

Reuters, “BP set to sign key Iraq oilfield deal,” 8/31/13

- “UPDATE 2-Baghdad seeks to involve BP at Kirkuk oilfield,” 2/24/12

Rudaw, “Redevelopment of Kirkuk Oilfield by IOCs is Unlikely,” 4/1/12

Tanner, James, “After the War Iraq Is Fast Rebuilding Its Ravaged Oil Trade Into a World Leader,” Wall Street Journal, 1/8/90

Al-Wannan, Jaafar, “Iraq and BP seal agreement to increase production of Kirkuk oil field,” AK News, 3/24/12

Yackley, Ayla Jean, “UPDATE 2-Kurds say Iraqi oilfield auction is being rushed,” Reuters, 12/10/09

Understanding Anbar Before And After The Awakening Part IV, Sheikh Wissam Abdul Ibrahim Hardan

Sheikh Abdul Abu Risha and Sheikh Wissam Abdul Ibrahim Hardan were the brains behind the Anbar Awakening. The two met in 2006, and decided to organize the major tribes in the province against the insurgents. The problem was that many of the sheikhs were reluctant at first to join in Abu Risha and Hardan’s scheme. The Awakening also had to convince the Americans of their sincerity, and deal with the Iraqi Islamic Party that controlled Anbar. Once they overcame these difficulties, and were successful in expelling the militants however, the Awakening began breaking up. Those divisions are still apparent today as Hardan has now become an ally of Prime Minister Nouri al-Maliki, and opposes his former Anbar brethren. The Awakening experience for Hardan then was a disappointment. He became a hero for fighting militants, but then failed to gain the local and national power that he hoped for.

Sheikh Hardan had his own views on opposing the insurgency before the Awakening was formed. He felt that the militants were using indiscriminate violence. They killed former military officers and sheikhs in Anbar, along with pushing out many of the province’s Shiite residents. Many of these people became refugees in neighboring countries or within Iraq itself. Sheikh Hardan finally had enough, and in 2005 gathered around 500 ex-soldiers to fight the insurgents. He went to then Defense Minister Sadoun Dulaimi who was a relative of his to ask permission for his fighters to carry weapons, but he was turned down. That put an end to Hardan’s initiative for the time being, because without government support his men could be arrested and killed by the security forces. Hardan’s main motivation was his belief that the insurgents had gone too far in Anbar. His first attempt at challenging them failed, but he did not give up.

In 2006, Hardan was stirred into action again, this time by Sheikh Abdul Abu Risha. The two were connected by marriage, as Hardan’s wife was Abu Risha’s cousin. Abu Risha contacted Hardan to meet with him about an idea to get the sheikhs in Anbar organized against the militants. Hardan was reluctant at first, but they eventually got together and came up with a plan. The first step was that they needed to convince the tribes that the time had come to confront the insurgents. The second was that they had to get popular support. Hardan then went about contacting the clerics in the province such as Abdul Malik al-Saadi and Ahmed al-Kubaysi. Hardan eventually got a fatwa condoning attacks upon the militants. This was the first move towards forming the Awakening. Many American accounts of Anbar stress the tribes, but fail to mention the role of the religious establishment in transforming the province. Abu Risha and Hardan knew their importance, and that was why they went to them first. Their personal relationship was also important, because Abu Risha was a young sheikh from a minor tribe. He came up with the idea of a new tribal revolt, but lacked the standing to convince others of his idea. That was why he reached out to Hardan who was far more prominent to talk to the sheikhs. He became the elder statesman of the Awakening.

Next on the agenda was a trip to Amman, Jordan to convince the sheikhs who had fled the fighting in Anbar to come back and join the revolt. Sheikh Hardan was again at the forefront contacting tribes and their leaders trying to get them to commit 50 fighters each. Many did not want to work with Abu Risha, because he had contacts with the Americans, and was therefore considered a collaborator with the occupation. Others accused Hardan and Abu Risha of not being real sheikhs, and attempting to usurp their power over their tribes. Hardan used the murder of Sheikh Khalid Araq Ataymi from the Albu Aetha tribe by Al Qaeda in Iraq as a rallying point, saying that the other tribes needed to avenge his death. Ataymi was thinking of his own uprising at the time, and was killed as a result. Finally a meeting was set in September 2006, which led to the formation of the Anbar Salvation Council. 41 sheikhs were chosen to be on the council with Abu Risha named governor of Anbar since the group claimed the real one was illegitimate, Hardan was made his deputy, and Sheikh Hamid Farhan al-Hayes was made head of the group. Hardan’s standing in Anbar and the continued violence of the insurgents helped turn opinion in Abu Risha’s favor, and led to the creation of the Awakening. Hardan also claimed that he was given a speech by the Americans to deliver to the sheikhs. If true, that might have convinced some to join as well, because that meant they would get the military support of the U.S.

After several tribes rose up in Anbar, Hardan and Abu Risha tried to acquire government approval for their actions. Hardan contacted his friend Parliamentarian Mithal al-Alusi from the Ummah Party to get him to be a middleman with Baghdad. Eventually an appointment was made with Prime Minister Maliki, which went very badly. The premier did not want to give the tribes any aid, they in turn threatened him, and it seemed like nothing was achieved. Two days later, National Security Adviser Mowfaq Rubaie announced that the government was backing the Awakening. Hardan gave no explanation for this turn around. One of the goals of the Awakening from the beginning was to gain official recognition, something Hardan had tried and failed at in 2005. The group always wanted to be accepted by the authorities so that they could openly operate, and more importantly it wanted to put their men into the local police and army units, so that they could eventually take over Anbar. By controlling the security forces they would have a monopoly on the use of force a traditional way to power in Iraq. Maliki was weary of them at first, since they were Sunnis, and many had contacts with the insurgency, but they were eventually accepted as an indigenous Iraqi movement. That would later cause divisions in Anbar, as Abu Risha and Hardan were accused of being puppets of Baghdad. Those internal disputes would be the downfall of the Awakening.

Getting the support of the Americans and the Anbar provincial government proved much more difficult and divisive for the Awakening. Abu Risha was always in contact with Americans forces to inform them of his operations so that his units would not be attacked. They went back and forth, but eventually threw their lot in with the tribes. The governor of Anbar at that time was Mamoun Sami Rasheed from the Iraqi Islamic Party. He did not approve of the Awakening seeing it as a threat to his power. Hardan also warned Abu Risha about getting involved with politicians, believing that they could easily manipulate the sheikh. The Americans set up a meeting in Fallujah between Governor Rasheed, Abu Risha, General Richard Zilmer the Marine commander in the province, and a delegation from the U.S. Embassy. After a large argument between Abu Risha and Governor Rasheed, General Zilmer suggested a compromise between the two, which eventually allowed five members of the Awakening to join the provincial council. This deal caused a split between Hardan and Abu Risha and his brother Ahmed Abu Risha. Hardan accused Ahmed Abu Risha of being close to the Islamic Party, and selling out the tribes. Hardan claimed that this divide within the movement increased in the following months, and led to it being infiltrated, and Abdul Abu Risha’s eventual assassination in September 2007. The Americans did finally come around and support the Awakening after a rough start. The outreach to the Islamic Party proved much more difficult, and was perhaps the undoing of the organization. Ahmed Abu Risha continued to make deals with the Islamic Party such as before the 2009 provincial elections. This was condemned by other members of the Awakening such as Sheikh Hamid al-Hayes. It also led to the official break-up of the group as Abu Risha, Hayes, and two other prominent members Ali al-Sulaiman and Amer al-Sulaiman all ran separately in the vote. Abu Risha’s party ended up winning the most seats on the Anbar council in 2009, but at a price, the end of the Awakening. Today, the major sheikhs in the movement have all reverted to their own individual agendas. Abu Risha continues his ties with the Islamic Party, and is a major leader in the Anbar protest movement, while Hardan is now allied with Sheikh Hayes and Prime Minister Maliki in opposition. Once the unity of the sheikhs was lost, so were their hopes for greater power within the country. The break-up of the Awakening allowed the Islamic Party, Baghdad, and others to cut deals and play divide and conquer in Anbar. It is these continued splits within the province that help explain why Speaker Osama Nujafi’s Mutahidun, which was backed by Abu Risha and the protesters only won eight out of 30 seats in the 2013 provincial elections. There are simply far too many leaders in Anbar to win a decisive political victory there. From the start, Abdul Abu Risha and Hardan wanted national status. It seemed like they were going to achieve that when both Baghdad and the Americans supported the Awakening, they were able to place their men within the Anbar security forces, and gain seats on the Anbar council. That success however, led to jealousy and bitterness between the sheikhs, which still exist and divides the province.

Sheikh Hardan’s story highlights the rise and fall of the Anbar Awakening. He and Sheikh Abu Risha were the founders of the Awakening, and had a grand vision of turning their tribal revolt in Anbar into a national movement that would lead to influence in Baghdad. Their early success turned to disappointment when they got involved in politics. Hardan warned about cutting deals with the Iraqi Islamic Party, and that led to divisions within the movement, and its eventual break-up. Today there are several different Awakening groups in Anbar all competing with each other. Hardan leads one, and has aligned with Premier Maliki against Abu Risha and the protests. These internal rivalries have weakened the sheikhs, pitted them against each other, and opened the door to outside influence. That explains why the Awakening did not go from a local success story to a national power in Iraq.

SOURCES

Ali, Ahmed, “The Struggle of the Iraqi Security Forces: 2013 Iraq Update #33,” Institute for the Study of War, 8/21/13

Dagher, Sam, “Tribal Rivalries Persist as Iraqis Seek Local Posts,” New York Times, 1/20/09

Habib, Musafa, “govt neglect of anti-al-qaeda movement to blame for iraq’s deadly summer?” Niqash, 8/22/13

Jaffe, Greg, “How Courting Sheikhs Slowed Violence in Iraq,” Wall Street Journal, 8/8/07

Kazimi, Nibras, “An Initial Look at the Registrants for Provincial Election,” Talisman Gate, 6/12/08

Long, Austin, “The Anbar Awakening,” Survival: Global Politics and Strategy, 4/1/08

Al-Mada, “Iraq Awakening: Insurgents began infiltrating the residential cities in Anbar to the impunity of the security forces,” 7/8/13

McWilliams, Chief Warrant Officer-4 Timothy, and Wheeler, Lieutenant Colonel Kurtis, ed., Al-Anbar Awakening Volume II, Iraqi Perspectives, From Insurgency to Counterinsurgency in Iraq, 2004-2009, Virginia: Marine Corps University, 2009

National Iraqi News Agency, “BREAKING NEWS Tens break away from Sahwa, joint protestors in Anbar,” 5/28/13

Shadid, Anthony, “Iraq Election Highlights Ascendancy of Tribes,” Washington Post, 1/25/09

Synovitz, Ron, “Sunni Rivalries Threaten Iraq’s Local Elections,” Radio Free Iraq, 4/7/13

Exploring The Structural Problems With Iraq’s Economy, Interview With Lehigh University Prof. Frank Gunter

Iraq’s economy is based upon a contradiction. It has huge natural wealth with its petroleum reserves that are being developed, and provides most of the country’s revenues. At the same time that industry hardly provides any jobs. That is a classic dilemma posed by the oil curse. To help explain this issue and others that affect the country is Lehigh Professor of Economics Frank Gunter. Previously Prof. Gunter was the lead economist to the U.S. military in Iraq from 2005-2006 and 2008-2009. And he is the author of The Political Economy of Iraq: Restoring Balance in a Post-Conflict Society (Edward Elgar Publishing, 2013).

1. Iraq is a classic example of the oil curse. Can you briefly explain what that theory is and how it applies to Iraq?

The oil or natural resource curse – also known as the paradox of plenty – concerns developing countries whose economies are dominated by the production and export of a single natural resource. Such countries tend to have worse economic and political outcomes then countries with more diversified economies. Iraq is seriously vulnerable to the oil curse. Not only is it the most oil-dependent country among the Middle East and North Africa (MENA) countries, Iraq is the most natural resource dependent country in the world. Oil production and exports account for roughly two-thirds of the country’s GDP and provide almost 95% of government revenues.

One aspect of the oil curse is the Dutch disease where a large value of exports leads to an appreciation of a country’s currency. In Iraq, the dinar has appreciated about 20% since December 2005, which reduced the competitiveness of the country’s non-oil exports and contributed to a flooding of the Iraqi economy with cheap imports. 

Also, the large and growing revenues from oil exports have not only allowed the Iraqi government to increase the number and compensation of government workers but also oil wealth has fundamentally changed the relationship between the government and the people. Concentration of economic power tends to lead to concentration of political power. If the party that controls the government also controls the economy then those in power begin to believe that choosing the national leadership is too important to entrust to the voters.

There is also an important psychological effect. In most long-lived democracies, the major source of government revenue is tax receipts. People in such countries feel that they are “buying” government services and if the government fails to provide, at reasonable cost, the services demanded by the taxpayer-citizens then they will attempt to “fire” the government through the ballot box. But in Iraq, the government doesn’t need to tax citizens. Cynically, the primary role of Iraqi citizens is to receive - and be grateful for – whatever level of service that the government decides is appropriate. In this sense, Iraqi citizens are not independent entities that support the government. Rather they are symbolically, and often in reality, clients of a “beneficent” government. As Samuel P. Huntington stated in 1991: “’No taxation without representation’ was a political demand; ‘no representation without taxation’ is a political reality.”

Iraq might best be described as having partially evolved from Saddam-era central planning to state-guided capitalism in which government tries to guide the market by supporting particular industries that it expects to become ‘winners’ or that are important sources of employment.  But, if oil continues to dominate the economy, there is a real danger that Iraq’s state-guided capitalism is only a way station to becoming an oligarchic capitalistic state - like most of the other countries in the Arab Middle East - in which the bulk of the power and wealth is held by a small group of individuals and families. Despite wealth from natural resources, such oligarchic capitalistic states tend to have great income inequality, sluggish growth, large informal or underground sectors, and massive corruption.

2. You’ve argued that failure to develop the economy away from the oil industry is a national security issue for Baghdad. What kinds of risks are involved if Iraq doesn’t break away from its oil dependency?

In the absence of economic diversification, there are both short-term and long-term threats to political stability. Due to the dominance of oil revenues in the national budget, government capital expenditures are on a roller coaster of world oil prices. When oil prices are high as in 2008 and 2011-2013 then the government can expand the number of civil service jobs, increase wages and pensions, increase spending on the social safety net and essential services, as well as accelerate infrastructure investment. However, during years of lower oil export revenues such as 2009-2010 then the government responds by slashing capital expenditures in order to preserve funds for current expenditures such as the government’s wage bill.

Since public investment accounts for over 90% of total fixed capital formation when the government cuts such investment in response to lower oil prices, the effect is serious. Most infrastructure and other investment in roads, electricity, schools, clinics, water supply, etc. slows or grinds to a stop. Partially completed multi-year building projects are abandoned for months or years until investment spending is restored in a future budget. When projects are restarted, it is often discovered that previous work must be redone due to looting, vandalism, environmental damage, or plan revisions. This waste and delay tend to have the most serious impact on private sector firms and workers resulting in increased unemployment. As discussed below in response to another question, this rise in unemployment threatens political stability.

3. Baghdad says that it is committed to diversifying the economy and promoting the private sector. The country consistently ranks as one of the worst business environments in the world however. What kind of regulatory barriers do entrepreneurs face, and how might that be solved?

MENA countries are not known for their friendliness towards private businesses, Iraq is one of the worst in the region. It ranks 176^th in the world with respect to the World Bank’s Ease of Doing Business survey. It is particularly difficult in Iraq to legally start a business, get credit, or engage in international trade. And in one category, closing a business, Iraq ranks dead last. Considering the competition from sub Saharan Africa, this is quite a dismal achievement.

Ever since the first port-Saddam National Development Strategy of 2005, the importance of diversifying the economy has been recognized. Unfortunately, while the economic necessity of diversification is strong, the political will to make the difficult decisions is weak. It is important to recognize that the regulatory hostility towards the private business sector in Iraq is not an unloved artifact of the Saddam era but rather is carefully maintained by the leadership of the bureaucracy. The great regulatory complexity and expense provides strong incentives for businessmen to offer bribes to helpful government officials. Also, harsh regulation of private businesses reduces competition for the state owned enterprises. These state owned enterprises tend to be high cost/low quality producers.

What can be done? Iraqi government efforts to rewrite its own commercial code will probably take more than a decade and will provide multiple opportunities for officials to extract bribes in return for inserting clauses favorable to one group or another. The World Bank and other international organizations can provide a “model” commercial code that Iraq could adopt. However, there is Iraqi concern that to adopt a “western” code would be inconsistent with the business strictures of Islam. Probably the most practical option would be for Iraq to adopt with minor modifications, the commercial code of another Islamic state such as the UAE.

4. If Iraq were ever able to build up a vibrant private sector how would that contribute to stability in the country?

In the long-term, Iraq must deal with a severe demographic challenge. Unlike Iran, its neighbor to the east, which is experiencing a demographic collapse; Iraq still is a young country with a high fertility rate. As a result, even after adjusting for the low labor force participation rate of women in Iraq, the number of new job seekers is expected to grow by at least 250,000 this year and even more in the future. And this is in a country where the combined unemployment and underemployment rate among the young is already an estimated 80%! The experience of other low-income countries is clear: a rising number of permanently unemployed young men is politically destabilizing.

Therefore, Iraq must create enough jobs to not only absorb this annual increase but also shrink the pool of current unemployed and underemployed. It is unlikely that increased public sector employment will be sufficient. Public sector entities are already severely overmanned. In addition, in the absence of a sharply higher oil export earnings, the public sector will be hard pressed to achieve its current infrastructure investment goals much less substantially increase government employment. 

In developing countries, most jobs are created by new small private businesses engaged in services and light manufacturing. Of the three institutional requirements for such job creation – favorable regulatory environment, available small business finance, and widespread literacy – Iraq only has the third. In addition to regulatory hostility, the banking system is moribund while microfinance still reaches relatively few Iraqi businesses.

5. You’ve argued that the new Iraq has led to “entrepreneurial corruption.” Can you explain what that means?

If corruption is the abuse of public power for private gain then, under Saddam, corruption in Iraq was controlled from the top in a classic case of “state capture”. It was expected that Saddam, his family, or his supporters would financially benefit from every public and private economic activity. As a result, corruption under Saddam differs in at least two ways from that in post-Saddam Iraq. First, Saddam’s family and his immediate ring of supporters captured a large proportion of the total gains from corrupt activities.  While lower levels of government were corrupt, they captured a smaller proportion since Saddam and his immediate supporters were careful to ensure that lower levels of the bureaucracy didn’t divert flows of corrupt money from reaching the top. Second, under Saddam corruption was more “honest” – honest in the ironic sense of the old Chicago joke about an “honest judge” who, when he accepts a bribe, actually performs the service that he was bribed to perform! 

In post-Saddam Iraq, gains from corruption are more widely distributed. While the top levels of the Iraqi government tend to be very corrupt, they seem to be less able or willing to constrain corruption at lower levels of government. Post-Saddam corruption is more widespread and competitive - more “entrepreneurial”. Government officials at all levels are creatively engaged in sometimes cooperative, sometimes competitive efforts to extract maximum rents from not only private persons but also from other branches of the country’s bureaucracy. As a result of this entrepreneurial corruption, bribe takers tend to be less “honest”; corrupt members of the bureaucracy are often unable to actually provide the services for which they accepted bribes.

It is likely that, although Saddam and his supporters were able to steal a larger proportion of the nation’s income; current entrepreneurial corruption imposes a more serious burden on the Iraqi people because of the increased uncertainty resulting from entrepreneurial corruption.

6. Another side effect of the bureaucracy and corruption is the growing and vibrant underground economy. What is that sector like?

Private businesses in Iraq must choose between seeking to become a legal enterprise, which due to regulatory hostility is a difficult and expensive process, or operating in the underground economy with all of the associated inefficiencies. One characteristic common to both options is the necessity of paying bribes to a long line of corrupt officials. One survey of corruption in Iraq showed that one-fifth of private businesses reported paying 40% or more of their firm’s total revenues in bribes. 

Excluding agriculture, an estimated 6% of the labor force is employed by private legal enterprises while 20% is employed in the underground economy. Firms in the underground economy tend to be small-scale, engaged in services or light manufacturing. In many cases, underground entities are engaged in illegal activities such as selling black market fuel or smuggling across Iraq’s long open borders. However, other underground firms are engaged in other wise legal activities that are concealed to avoid the choice of meeting arduous regulations or paying bribes to inspectors to ignore violations. As expected, workers in the underground economy lack legal protections and there are stories of workers being denied pay or even physically abused. Generally firms in Iraq’s underground economy are very inefficient. This inefficiency arises not only from the usually small-scale production but also from the necessity of operating in such a way so as to avoid coming to the attention of rapacious officials.

7. Iraq’s economy also suffers from political interference. How have politicians attempted to manipulate and control the economy for their own gain?

Most politicians in Iraq – like everywhere else – seek to do the right thing for their country as long as it doesn’t injure their own self-interest. Just because a person has been elected or appointed to a responsible government position, doesn’t make him or her more virtuous. And like in other countries, politicians in Iraq manipulate the economy to achieve a better life for themselves in at least two ways.

First, as discussed above, politicians engage in corrupt activities and some have succeeded in stealing vast amounts for themselves and their families through such illegal activities.

Second, politicians can personally benefit through activities that, although they are not illegal, have an adverse effect on Iraqi economic development. A major source of status and political influence for politicians in Iraq is their control of large numbers of government jobs. It is irrelevant that a ministry in incredibly ineffective or that a state owned enterprise is a low quality/high cost producer of a good or service; what is important for the status of a high level government official is the number of jobs that they control. As a result, the ministries and state owned enterprises tend to be seriously overmanned. As one example, the Iraqi publicly owned railroad industry has over 10,000 employees running a system that in other countries would require one-fourth to one-tenth as many. And that is true with other state owned enterprises, these workers can not be fired for failure to perform their assigned tasks to expected standards or even have their pay docked for failure to show up for work.

Proponents of excessive ministerial and state owned enterprise employment argue that it reduces political instability by providing jobs for unskilled young men. However, expanded government employment in Iraq may actually be destabilizing. It is not uncommon for a state owned enterprise or ministry to be “captured” by a religious sect, party, sect or tribe as a means of providing funding for the organization as well as jobs for its members. Thus government employment can be destabilizing by supporting - with government funds - members of political parties or other groups that may be in opposition to the rule of law.

8. Iraq has huge needs in terms of its infrastructure and services, and that is drawing in increasing amounts of foreign investment. Do you think that those foreign companies can help diversify the economy and help the private sector grow?

To date, almost all of the foreign direct investment (FDI) flowing into Iraq has been associated either with one of the ministries or one of the almost 200 state owned enterprises. In other words, very little of this investment is purely private. Association with a government agency has both advantages and disadvantages. A government partner can help cut through bureaucratic red tape especially with respect to bringing capital equipment and key personnel into Iraq. In addition, having a government partner can reduce the demands for bribes.

However, the government partner probably expects to benefit from the relationship with the foreign investor in ways that may not be clearly delineated in a partnership agreement. Several examples might illustrate this expectation. One European corporate investor agreed not to fire any workers in a severely overmanned Iraqi factory. Apparently, the foreign firm thought that it could gradually reduce the workforce through attrition until it reached efficient levels. However, the Iraqi government partner not only demanded that a new worker should be hired to replace each one who departs but also that the government agency alone should select the new workers. As discussed above, this demand reflected what the government agency saw as political reality that the agency’s influence in Baghdad was a function, in part, of the number of jobs that it provided for Iraqis. Another example involved a foreign hotel management company that was informed rather late in contract negotiations that the rooms on one floor of the hotel would be reserved for the sole use of the Iraqi government partner without payment although it was expected that the foreign management company would be responsible for maintaining these rooms.

As long as most foreign investment continues to take the form of partnerships with public entities, it will have little effect on the degree of economic diversity in the Iraq economy.   

9. What direction do you see Iraq moving in the future? Will its private sector eventually start to grow or will it remain oil dependent with a large state-sector or something in between?

Over the next decade, Iraq’s future will be determined to a great extent by the degree to which the civil war in Syria on Iraq’s western border and the dispute over nuclear sanctions between Iraq’s eastern neighbor, Iran, and the west affect Iraq. So far these two disputes have had an adverse impact on Iraq’s political stability as well as greatly complicated economic policymaking but – surprisingly – these ongoing conflicts seem to have a favorable effect on Iraq’s real economy. However, the price of oil will remain the dominant determinant of economic development and political stability in Iraq for the next decade.

In 2012, the U.S. Energy Information Administration estimated three price scenarios for 2025: a high scenario where the world price of oil is $180 per barrel (pb), a reference scenario of $120 pb, and a low scenario of $50 pb. 

The impact on Iraq of $180 pb in 2025 will probably be mixed. If Iraq is able to raise its exports to 10.0 mbpd then Iraq’s export earnings would reach $657 billion (in 2010 dollars) compared to $50 billion in 2010! With an expected 2025 population of 47 million, average per-capita income would reach about $16,000 (in 2010 dollars) – seven times greater than in 2010. This is about the same level of per capita income as Saudi Arabia had in 2010. With this massive increase in oil export earnings, everything would be possible: increased government employment and higher wages for government workers, sharp rises in investment, generous provision of free essential services, agricultural restoration, accelerated construction of homes, factories, and government offices. New soccer stadiums would appear in every town. The al Rahman Mosque in Baghdad would finally be completed. However, there would also be negative effects. There would be an explosion in corruption. Efforts to diversify the Iraqi economy away from its dependency on oil would probably grind to a stop. And, as discussed above, without diversification, Iraqi nascent democracy would be threatened.

At the other extreme, how likely is $50 pb oil? Increased petroleum and natural gas production from Iraq, the USA, and other countries; reduced energy demand from Brazil, Russia, India, and China; further improvements in energy conservation; and peaceful resolutions of the conflicts in Syria and Iran resulting in a reduction in oil risk premium could lead to a return of $50 pb oil. After all, adjusting for inflation, average oil prices were below this level for almost two decades from 1986 through 2005. The adverse impact on Iraq’s political stability of an extended period of $50 pb oil would be severe. The Iraqi government must earn at least $55 pb (in 2010 dollars) in order to pay its salary, pension, food assistance, and security commitments. There would be no funds available for infrastructure investment or expanded spending on internal or external security. If world oil prices fall below this level for a year or two then the government of Iraq would be able to pay for its basic expenditures by exhausting its Development Fund for Iraq reserves, about $18 billion at the end of 2012; by persuading the Central Bank to substantially revise its international reserves policy to make some of its $70 billion available for fiscal purposes and by taking advantage of the country’s limited access to world capital markets.

However, if there are more than two years of low oil prices then not only will there be rising levels of unemployment and underemployment but also the government will be forced to cut salaries and pensions. If Iraq’s past is any guide to its future, cuts in wages and pensions will cause the bureaucracy to turn against the government – undermining its policies, participating in street protests, and possibly engaging in violent action. Losing the support of government workers and pensioners will increase the likelihood of a return of an authoritarian government – another Saddam or Saddam-lite. 

To insure against this outcome, Iraq must defuse the resource curse by restoring balance – diversifying – its economy. Achieving such economic diversification will not only require difficult economic choices but also entail serious political risks. More than in any period since 1958, the future of Iraq is in the hands of the Iraqis. Over the next decade, Iraq will make - or fail to make - critical irrevocable decisions. Rich countries with long histories of stable government can afford to make stupid decisions. Iraq cannot.

SOURCES

Flintoff, Corey, “Iraq’s Shaky Economy Poses Threat To Future,” National Public Radio, 12/9/09

Gunter, Frank, The Political Economy of Iraq: Restoring Balance in a Post-Conflict Society. Northampton, Massachusetts: Edward Elgar Publishing. 2013.

-“Corruption In Iraq: Poor Data, Questionable Policies,” EEA Meetings, 3/7-9/08

- “Economic Development During Conflict: The Petraeus-Crocker Congressional Testimonies,” Strategic Insights, December 2007

- “Entrepreneurship, Corruption, And Economic Development In Post-conflict/Post-disaster States,” 5/13/11

- “Liberate Iraq’s Economy,” New York Times, 11/16/09

McArdle, Megan, “When Freedom Is Bad for Business,” Atlantic, March 2011

O’Brien, Andrew, “Professor Gunter previews upcoming book about Iraq economy,” Leigh Valley Live, 11/29/12

CENTER FOR STRATEGIC AND INTERNATIONAL STUDIES VIDEO: Stateman's Forum: Iraqi Foreign Minister Zebari

Iraq Opposes U.S. Military Strike On Syria

As the United States Congress was discussing a military strike against Syria for its alleged use of chemical weapons, Iran’s new foreign minister travelled to Iraq where he received widespread support for opposing any such move. The Iranian diplomat met with a number of different Iraqi politicians all of which warned about the negative repercussions of any U.S. action against President Bashar Assad. This was a rare occasion where Iraq’s elite agreed upon Syria. In the past, each political party has carried out its own foreign policy with different groups coming out for the Syrian rebels, while others have implicitly supported Damascus. The threat of U.S. missiles has brought about rare unity on this issue.

Iranian Foreign Minister Zaris (left) and Iraqi Foreign Minister Zebari (right) during their recent meeting in Sep. 2013 (Getty)

Iraq’s major political parties all backed Iran’s opposition to American military action in Syria. Tehran’s new Foreign Minister Mohammed Javed Zaris made his first trip abroad to Iraq in September 2013. He gave a press conference with Iraq’s Foreign Minister Hoshyar Zebari where the latter said that Iraq would not be used for any attack against Syria. Zarif also met with Prime Minister Nouri al-Maliki. Before Zaris’ visit, the premier said that he opposed any military strike in Syria. Zaris paid a visit to Speaker of Parliament Osama Nujafi as well who told the press that any action against Syria would have repercussions for Iraq and the entire region. Nujafi added that resorting to the military options would only make the Syrian war worse. The next day there was a meeting of most of Iraq’s major political parties where they all expressed reservations about any attack upon Syria. This was a rare case where all of Iraq’s elite came to a consensus. They rarely agree upon anything, which has led to paralysis in Baghdad on just about every major issue including the war next door.

Before hand, each list was following its own policy towards Syria. The Maliki government is officially neutral in the Syrian conflict, but has consistently pushed for a negotiated settlement, which would allow President Assad to stay in power. It has therefore not called on Assad to step down. It has refused to vote on resolutions condemning Syria in the Arab League. It has not followed sanctions, agreeing to sell Damascus 720,000 tons of fuel oil a month for a 50% discounted rate. It has not stopped Shiite militias from sending their fighters to help the Syrian government or thoroughly checked Iranian planes transporting weapons and supplies to Syria. Transportation Minister Hadi al-Ameri from the Badr Organization claims that his ministry is inspecting Iranian flights, but given the fact that his group is pro-Iranian and has sent 1,500 fighters to help Damascus there’s no reason to believe him. Speaker Nujafi of Mutahidun on the other hand has called for international intervention to overthrow the Syrian government. Despite all these differences the threat of an American attack has suddenly united these diverse leaders. That includes Nujafi who supports the Syrian rebels, and opposes Tehran’s influence. Yet there he was meeting with the Iranian Foreign Minister agreeing with him. What brought them together is their fear of what might happen if President Obama carries through with his threat. Iraq’s Shiite parties do not want more international inference in Syria, which might tip the scales in the favor of the rebels. Nujafi on the other hand might be afraid of Iraq being used as a base by Iranian backed groups to carry out attacks both within the country and in the region against western targets. His Mutahidun party already claims Shiite militias are operating throughout Iraq. Any missile strike on Syria, might give the militants a new excuse to increase their activities further destabilizing Iraq.

Since Premier Maliki has implicitly supported the Syrian government it was no surprise that he would oppose any U.S. action, but it was striking to see other leaders like Speaker Nujafi agreeing with not only the prime minister, but the Iranian Foreign Minister as well. Iraq’s leaders hardly ever find consensus on an issue, especially when Iran is involved, yet the Obama administration has united them. That’s likely to end as soon as the threat of American intervention has passed. Then all the major leaders will return to their own positions and arguments over what should happen next door. This is all occurring while Syria is having serious blowback on Iraq. Unfortunately the fractured nature of Iraq’s elite means that they can’t agree on how to deal with it, and counter these negative influences.

SOURCES

Agence France Presse, “Iraq’s Sadr rejects US call for Assad to go,” 8/19/11

Arango, Tim, “Syrian War’s Spillover Threatens a Fragile Iraq,” New York Times, 9/24/12

Aswat al-Iraq, “Political solution necessary for Syria, Premier Maliki,” 9/8/13

- “Right of Syrian people in multiple democratic regime stressed, Maliki,” 8/31/12

Gwertzman, Bernard, “Difficult Time Ahead for Iraq,” Council on Foreign Relations, 1/10/13

Al-Khoei, Hayder, “Syria: the view from Iraq,” European Council On Foreign Relations,” 6/14/13

Knights, Michael, “Iran’s Foreign Legion: The Role of Iraqi Shiite Militias in Syria,” Washington Institute for Near East Studies, 6/27/13

- “Syrian and Iraqi Conflicts Show Signs of Merging,” Washington Institute for Near East Policy, 3/7/13

Lederer, Edith and Daniszewski, John, “Iraq Floats Plan to Get Syrian Opponents Talking,” Associated Press, 9/29/12

Mardini, Ramzy, “Metternich in Baghdad,” Foreign Policy, 5/20/13

Nakhoul, Samia and al-Salhy, Suadad, “Thousands of Shi’ites ready to fight in Syria, Iraqi says,” Reuters, 6/21/13

National Iraqi News Agency, “Three presidencies, political blocs’ leaders reject possible military strike on Syria,” 9/10/13

Niqash, “why iraq’s shiites are taking jihad to syria and supporting al-assad,” 7/25/13

Al Rayy, “Transportation: We searched more than 12 Iranian planes bound for Syria and have not found weapons,” 9/10/13

Reuters, “Arab states urge international action against Syrian government,” 9/1/13

- “Iraq Says It Can’t Halt Arms to Syria,” 7/13/13

- “Iraq’s Maliki says backs Syrian people’s wish for reform,” 9/14/12

Sadah, Ali Abel, “Iraqi Speaker: Maliki Could Resort To Military Force Against Opponents,” Al-Monitor, 4/10/13

Saigol, Lina and Peel, Michael, “Iraq sends crucial fuel oil to Syria,” Financial Times, 10/8/12

Schreck, Adam, “Iran foreign minister criticizes Syria strike plan,” Associated Press, 9/8/13

Sly, Liz, “Iraq joins Iran in opposing U.S.-led military strike in Syria,” Washington Post, 9/9/13

Smyth, Phillip, “Hizballah Cavalcade: Breaking Badr, The New Season: Confirmation of the Badr Organization’s Involvement in Syria,” Jihadology, 8/12/13