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COPYRIGHT 2006 Professors World Peace Academy
Economic recovery is important for stability and peace in Iraq. The Iraq Study Group proposed financial aid to Iraq of around $5 billion annually, while President Bush has increasingly stressed the importance of job creation in that country. Unfortunately, significant economic progress in Iraq is unlikely unless part of a comprehensive strategy is designed to overcome several forces currently impeding reconstruction and economic recovery: (a) the growth and dynamics of the shadow or informal economy, (b) the deterioration in social capital, and (c) the evolving relationship between tribes, gangs and the insurgency. The dynamic interrelationship between these factors is causing a downward economic spiral. Progress in one or two areas alone will not be capable of generating significant economic gains. All of these factors need to be addressed.
INTRODUCTION
In a significant policy statement (1) released toward the end of 2005 the United States outlined its strategy for victory in Iraq. Victory is defined in terms of a sequential set of completed goals: (1) Short term, Iraq is making steady progress in fighting terrorists, meeting political milestones, building democratic institutions, and standup security forces; (2) Medium term, Iraq is in the lead defeating terrorists and providing its own security, with a fully constitutional government in place and on its way to achieving its economic potential; and (3) Longer term, Iraq is peaceful, united, stable and secure, well-integrated into the international community and a full partner in the war on terrorism.
The US strategy is essentially three pronged: developing democracy, providing security and reviving the economy. In the economic area U.S. and coalition efforts have focused on helping Iraq restore the country's neglected and damaged infrastructure with the goal of restoring and expanding essential services. Other objectives include: the creation of a market based economy, and greater transparency and accountability in the public sector. (2)
Iraqis themselves have become increasingly skeptical of the ability of this strategy to produce lasting economic gains and a semblance of stability. Certainly the ability to complete infrastructure projects on time and within budget has proven to be a nearly impossible task. As noted by the U.S. Inspector General for Iraq Reconstruction infrastructure programs in that country have been plagued by "violence, corruption and mismanagement." (3) As a result, "the ambitious US reconstruction effort in Iraq is likely to fall far short of its goals because soaring security costs and poor management have slashed the amount of American money available for rebuilding projects." (4) Just as serious is the all too apparent long lead time before any tangible benefits in terms of improved living standards are seen by the average Iraqi.
Implicit in Ambassador Bremer's assessment is that the main flaw in the US strategy has been its inability to deliver short-run economic gains to large segments of the Iraqi population. Also complicating Iraq's recovery is the fact that we still don't have a complete picture of the contemporary dynamics of the Iraqi economy. Clearly, factors such as the "brain drain" and the lack of commercial credit (5) together with uncertainty due to the security situation have largely brought investment in the formal segments of the economy to a halt. (6)
A third of Iraq's professional class is reported to have fled to Jordan, a flight of skills worse than under Saddam. UN monitors now report 2,000 people a day are crossing the Syrian border. Over a hundred lecturers at Baghdad University alone have been murdered, mostly for teaching women. There are few places in Iraq where women can go about unattended or unveiled. Gunmen arrived earlier this month at a Baghdad television station and massacred a dozen of the staff, an incident barely thought worth reporting. The national museum is walled up. Electricity supply is down to four hours a day. No police uniform can be trusted. The arrival anywhere of an army unit can be prelude to a mass killing.... All intelligence out of Iraq suggests this is no longer a functioning state. (7)
Yet, from anecdotal accounts (8) there are indications that many areas of the shadow economy are prospering and, as during the period of sanctions, successfully adapting to the harsh environment. On the other hand, the shadow economy has provided a boon to criminal gangs and a major source of funding for the insurgency. (9)
The importance of economic recovery was again stressed in the Iraq Study Group's assessment of conditions in Iraq: (10)
No political and security progress can be sustained in Iraq unless the Iraqi people experience improvement in their daily lives. This will demand substantial progress on simple tasks like clearing garbage; as well as complex tasks like rebuilding a shattered oil industry and establishing law and order. To achieve these goals, Iraq will need assistance from the United States and other countries that want to prevent a further slide towards chaos.
While the Iraq Study Group proposes financial aid to Iraq of around $5 billion per annum, it is silent on the strategies likely to be most effective in sustaining economic recovery and growth. With these themes in mind, the purpose of the sections that follow is to attempt to gain an understanding of the forces at work in Iraq impeding reconstruction and economic recovery.
ECONOMIC DYNAMICS OF POST-WAR IRAQ
Our working hypothesis is that any efforts to restore the economy will be conditioned by a number of interrelated factors including: (a) the growth and dynamics of the shadow or informal economy, (b) the deterioration in social capital, and (c) the evolving relationship between tribes, gangs and the insurgency as conditioned by the dynamic interactions with (a) and (b).
The Shadow Economy
When coalition officials arrived in Iraq after the war, they planned on turning Iraq into a free market economy--a model for capitalism in the Middle East. (11) As part of this plan, they expected private companies, both foreign and domestic, to play a leading role in jump-starting the economy. Free market incentives driven by pent-up demand and a massive aid-financed reconstruction program were thought to be sufficient to induce a massive wave of investment and hiring of Iraqi workers. (12) But violence, crime and uncertainty over the future have undermined investor confidence, preventing market-driven mechanisms from playing their anticipated role. As a result nominal GDP contracted by about 35 percent in 2003. It has recovered little since then, despite the U.S.-led reconstruction efforts.
The only part of the economy to have survived both Saddam Hussein and the post-2003 period of instability and insurgency is the country's informal economy. In fact, there is ample evidence that the country's informal economy has expanded considerably since Saddam's overthrow. In this regard, Iraq's informal economy is following a pattern seen in other parts of the world--the informal economy tends to grow during periods of political, economic, and social crisis.
Despite the obvious importance of the informal economy, it is barely mentioned in the many official economic reports. In fact, few systematic attempts have been made to integrate the analysis and quantification of the informal economy into an overall review of economic and military developments in Iraq. This gap in our knowledge has hindered the development of a systematic framework for understanding and planning reconstruction and counterinsurgency strategies in the contemporary Iraqi setting.
Preliminary analysis (13) suggests a clear pattern exists whereby the relative size of a country's informal economy (as a share of Gross National Product) is related to its progress in opening up to the world economy. Those countries that are relatively closed and inward-oriented (like Iraq around the year 2000) tend to have large informal economies, while those countries open to the pressures of globalization have much smaller informal economies. Furthermore, the informal sector becomes significantly smaller as countries increase their control over corruption.
As might have been expected, Iraq under Saddam was in a group of countries with the highest probability of possessing a large informal economy. The profile of these countries is an inward-oriented trade regime with high levels of corruption. On this basis, Iraq's shadow or informal economy probably accounted for around 35 percent of Gross Domestic Product (GDP) in 2000 (14) with nearly 70 percent of the labor force employed in informal...
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