Tag Archives: Iraq

To Escape From Violence, Iraq Must Tackle Its Economic Problems As Well As ISIL

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Smoke billows from a key oil refinery damaged by ISIL attacks in northern Iraq in June. Repairs are expected to take more than a year.

After months of political wrangling in Baghdad and advances made by the Islamic State of Iraq and the Levant (ISIL) – also known as IS or ISIS – the Iraqi Parliament finally approved a new, more inclusive government led by a new prime minister, Dr. Haider al-Abadi, in early September.

At a recent roundtable event with Iraqi and U.S. experts, held under the Chatham House Rule, participants expressed cautious optimism over the new government. However, in the uphill battle to confront immediate threats to the country’s security, Iraq’s economic crisis has largely been ignored.

According to one participant, the fact that the new cabinet of ministers included members of Iraq’s various minority groups, and that three leading political rivals – former Prime Ministers Nouri al-Maliki and Iyad Allawi and former parliament speaker Usama al-Nujaifi – were given posts as vice presidents, was a good sign.

Another in the room pointed to the moderate leadership of Iraq’s new Prime Minister. Dr. Abadi, who belongs to the Shi’ite Islamic Dawa party, has a reputation as a political moderate, was educated in the UK, and has served on various Iraqi parliamentary committees since 2006, including those for finance and economics. A change in political leadership at the top, the participant argued, could rebuild trust between the central government in Baghdad and Iraq’s marginalized communities. More importantly, Abadi has pledged to foster national dialogue, political reconciliation, and decentralization.

Iraq’s economic challenges – high unemployment, poverty, rising prices, and food shortages – will only contribute further to the security crisis if they are not addressed. More than 50 percent of the goods imported into Iraq – including raw materials and food – have been blocked at the only official border crossing with Jordan, which is now under the control of ISIL. Iraq’s final budget for fiscal year 2014 remains unapproved by the Iraqi Parliament, and since the economy is dominated by the public sector – the government and state-owned enterprises employ about half of Iraq’s total workforce – the lack of government spending has ground the entire economy to a halt.

At the end of the day, ordinary citizens in Iraq are bearing the brunt of economic damages caused by the regional insecurity and the political process in Baghdad.

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Advancing Private Sector Participation in Iraq

CIPE partner the Iraqi Businessmen Union leads a public-private dialogue session in Baghdad, Iraq.

CIPE partner the Iraqi Businessmen Union leads a public-private dialogue session in Baghdad, Iraq.

The Iraqi private sector continues to pursue steps towards building a modern market economy. Over recent decades, Iraq’s institutions supporting the economy became highly centralized as authoritarian rule sought to enhance state economic and political control. In Iraq today, government officials and the business community recognize the need to transform the economy into a modern, market-economy, capable of providing jobs and opportunity to all citizens. Achieving this goal, however, has proven to be a slow and arduous process.

Since 2003 CIPE has supported the Iraqi business community in its efforts to participate more effectively in the country’s economic transition. CIPE has partnered with business associations and civil society to develop provincial and regional business agendas and draft policy papers that increase the information available on issues inhibiting private sector growth.

To supplement the efforts of CIPE’s local partners, CIPE commissioned surveys to measure the views of Iraqi businesses, most of which are small sole-proprietorships, towards the prevailing economic conditions, factors affecting business growth, and a host of other key policy and economic issues.

In this week’s Economic Reform Feature Service Article, Program Officer Jenna Mace presents key results from CIPE’s most recent Iraqi Business Survey. The article includes a discussion of trends in the costs of corruption and opportunities for women, as well as the business community’s views of economic conditions.

Read the entire article here.

John Zanikos is Assistant Program Officer for the Middle East & North Africa at CIPE.

Making it Easier to Do Business in Iraq

Iraq 2020 shares their results with a parliamentary drafting committee. (Photo: Staff)

Iraq is a tough place to do business.  And according to the World Bank’s Ease of Doing Business report, it is getting tougher.  Iraq ranks 164 out of 183 countries this year in ease of doing business, down five spots from the previous year.  For a company to register in Iraq, it would, on paper, take on average of 77 days and cost thousands of dollars.

In a country where business owners in a recent CIPE survey listed corruption as their number one concern and the inconsistent application of rules and laws in the top three, this 77days and thousands of dollars would likely be viewed as a “best case scenario.”  The opportunities for bureaucrats to delay paperwork and demand bribes for each of the eleven steps to register are numerous.  The potential for recourse for the business owner is almost nonexistent.

To illustrate this point, let’s take the step where business owners must obtain a tax registration.  Essentially, the business owner applies to the tax agency, and pays the equivalent of about $380 (bear in mind that Iraq’s per capita GDP is around $3,900 per year) in order to certify that he or she is current with their taxes.  In a country that still relies heavily on paper filing, this is an arduous and expensive task and is rife for unscrupulous bureaucrats to claim irregularities that cannot realistically be verified.   To give a relative comparison, scaling the numbers for the US GDP, this is like an American paying the IRS something like $4,687 to audit them, while knowing that whoever processes the application is likely going to ask for a kickback to not claim there are back taxes owed.  This helps explain why in that same survey only 44% of Iraqi business owners reported that their businesses were actually registered.

The regulations for starting a business in Iraq are extremely constrictive, and directly hinder many companies from becoming formal, and thus legally protected.  This locks them out from avenues to growth.  They are not able to get loans, purchase property, or perform other normal functions a business would do.  This means they are not able to invest in future growth, and, along with their employees, remain in the shadow economy with little recourse or protection.

While the problem can seem overwhelming, a solution may shortly be at hand.  CIPE is working with a local Iraqi organization, Iraq 2020 Assembly, and other private sector representatives to articulate the issues with starting a business by analyzing the existing Company Registration Law,  the law that governs the legal requirements to start a business. As is crucial in any democracy, this sort of advocacy can be the key to ensuring that laws protect Iraq’s overall interest while not unnecessarily stifling economic growth.   By updating this law and reducing the burdens to doing business, the Iraqi economy and Iraq’s shadow workers would benefit immensely.

CIPE and Iraq 2020 Assembly have developed recommendations in conjunction with the Iraqi business community, including the Federation of Iraqi Chambers of Commerce, to address issues and put forth a set of concrete solutions for how to improve the process, including such things as streamlining government procedures to reduce the time and number of steps it takes to register and moving many of the procedures online to reduce opportunities for corruption.

This work has garnered significant attention, including invitations from Iraq’s Parliament to present the recommendations as the government works to draft a new law.  While the problems may seem insurmountable, the Iraqi Parliament’s positive efforts to bring the private sector into the conversation represent a step in the right direction, identifying real solutions to stimulate growth and strengthening Iraq’s democracy.

CIPE and Iraq 2020 Assembly presented the final policy paper on the Company Registration Law to both private and public stakeholders in Baghdad on February 19.

The great race for independence: the private sector in Kurdistan

Go cart racing in Erbil. Photo: http://bolen88.files.wordpress.com/

On a recent trip to the Iraqi Kurdish region, my friends invited me for a night out in Erbil.

Having been to Erbil many times, I thought I knew the drill. If lucky, I would go out to a nice restaurant. I would sit at a white table parked on lush, green grass. There, I would eat terrific kabobs until my heart was content. Sometimes, I would eat so much maskouf that my stomach would beg for mercy. I would drink coffee, listen to music, and make conversation.

While these relaxing nights cemented some of my closest friendships, I had never come close to using the words exhilarating or thrilling to describe a night out in the Kurdish region. On my last trip, that changed.

We headed out to Erbil Speed Center, a sprawling course of go kart race tracks adjacent to an upscale housing subdivision called Dream City. There were three types of go karts available and kilometers worth of tracks as wide as highways. Upstairs, there was a full restaurant and bar.

I popped on a helmet, thankful for once that I no longer have to worry about helmet hair, and strapped myself into a kart. Driving along so many others, so unsteady in these imitations of automobiles, was terrifying. I zipped around the track, laughing much of the way.

Having lived in Washington, DC for so long, I had forgotten that driving can be fun. More importantly, driving fast can be very fun. Driving on a world-class course that symbolizes the Kurdish region’s fast track to a better future, however, was nothing short of exhilarating.

After taking off my helmet and catching my breath, I pondered the future of a region that is changing so quickly. Indeed, there is a race underway in the Iraqi Kurdish region.

Above ground, the Kurdish private sector is flourishing. Often referred to as “the other Iraq” because it has been relatively unencumbered by the instability that has plagued the rest of the country, the Kurdish region has been a magnet for post-war investment. Joining the Erbil Speed Center are new stores and restaurants opening every day.

Already a vibrant national tourist destination, replete with brand new hotels and tourist operations, the Kurdish region appears poised to become an international attraction as well. This year, National Geographic named the region one of the twenty most enticing tourist destinations of the year. When a Washington Post reporter visited to confirm the region’s charm, she noted that in Erbil “businesses are flooding here to gain a foothold, and tourists from the rest of the country swarm here to shop in the rapidly proliferating malls and to eat and drink in safety at the restaurants, bars and outdoor cafes.”

The development of the region’s private sector is a good thing for its people. Throughout the Middle East, Arab populations have been rising up against their governments because those governments have largely denied them the ability to achieve dignity through high value employment. If granted the proper environment in which to develop, the Kurdish region’s private sector appears poised to offer that dignity.

Its ability to do so, however, may be under threat. In 2007, when the semi-autonomous Iraqi Kurdish Regional Government enacted an oil law allowing it to sign agreements with foreign companies and profit from them, it set off a race that could determine the fate of the Kurdish region. The Kurdish Regional Government’s budget will grow rapidly. The question remains whether the private sector can grow fast enough to keep pace.

Thus far, disagreements with Baghdad and growing pains in its technical capacity have limited the Kurdish region’s ability to generate significant oil revenue. That it will one day do so, however, seems clear. When former BP CEO Tony Hayward’s investment firm Vallares Plc announced that it was making a $2.1 billion investment in the Kurdish region of Iraq, he called the region “one of the last great oil and gas frontiers.”

Indeed, the riches under the ground that have investors salivating will soon pump the government full of cash to spend. This year, the budget for the Kurdish Regional Government sits just below $10 billion. Next year, some have predicted that it could nearly double. Whether that cash will benefit public officials or the Kurdish people holistically depends on whether the private sector can grow strong enough to compete.

Already, the government has used some of that revenue to benefit businesses in the short term. For example, the government has offered businesses no-interest loans, subsidized electricity and water, and even provided free land for those that fit the government’s strategy of development. Many businesses, noting the deluge of subsidized Turkish and Syrian goods entering the region, argue that this assistance is crucial if Kurdish enterprises are to survive what they perceive as a dirty fight. Some businesses have even argued that the level of their own subsidization is insufficient.

The danger, of course, is that these training wheels, designed to get Kurdish businesses moving, could become crutches as businesses become dependent on the handouts of an ever richer government. At this point, currying government favor would likely become more important to success than elevating efficiency and competitiveness.

The private sector, which in well-functioning democracies serves to provide job opportunities independent from public office, could become a supplicant. Waste, inefficiency, and misallocation of resources could stunt the economy. Corruption and abuses of power could destroy what could have become a promising democracy.

Of course, this dark scenario is not inevitable. It is certainly possible that businesspeople and public officials will determine at some point that the threat of Turkish and Syrian goods no longer merits the danger of resource misallocation posed by subsidies. Iraqis in the Kurdish region might also determine that their lives are better if they are served by a private sector that exists to meet their demands, such as the demand for a well-maintained go kart course, not to lobby for government subsidies.

Creating an environment that enhances the long-term competitiveness of Iraqi Kurdish regional firms will require the cooperation of the private and public sectors. A competitive, free market economy requires institutions that protect property rights, ensure secure contracts, facilitate freedom of entry and exit into the market, and assure freedom of information. The rule of law is essential in ensuring that laws and regulations are applied consistently and fairly to all citizens.

In addition, we’ll also have to see a change in the mentality of companies, where they demand a more competitive institutional and business climate that gives them a fair chance to grow and develop rather than hand-outs and protections from the government.

Currently, CIPE is working with a range of private sector and civil society organizations to identify the specific needs and opportunities facing Iraqi Kurdish regional businesses. These partners are in the process of drafting a provincial business agenda to articulate the needs of the full range of the private sector to government. By working together with the private sector, policymakers can help create an environment that fosters competitiveness and ensures that the growing Kurdish Regional Government is accompanied by a strong, independent, and increasingly competitive private sector capable of delivering the prosperity that its citizens need.

The Kurdish region remains appealing to investors for reasons that have nothing to do with oil. That means that Kurdish regional businesses still have ample chance to grow faster and stronger than their government’s budget. If the Kurdish region is to have a healthy economy and democracy, they must.

“Resurrecting Eden”

Last Sunday on 60 Minutes, anchor Scott Pelley took viewers back with him to 2009 when he visited the region of Iraq that many biblical scholars say inspired the stories of creation and the Garden of Eden. In Pelley’s words, it was a place Saddam Hussein deployed his greatest weapons of mass destruction – six giant canals that diverted 90 percent of the water from the former lush marshlands. It is a place where people and businesses are returning to restore their lives and livelihoods.

As profiled in the 60 Minutes story, Azzam Alwash and his family were one of the many that returned to the marshes, though in Alwash’s case he returned after 25 years in America where he went to college to become an engineer. His business happens to be to restore the marshes to their former glory. He returned in 2003, after U.S. forces had removed Saddam Hussein from power, and since then his company has helped restore 50 percent of the marshes.

Life in the marshes revolves around the reeds. Families build their homes with them, feed them to their livestock, and even expand their islands with reed mats that catch sediment. Pelley and Alwash come across a reed market on their tour through the marshes, the kind of market that had operated in the area for millennia before Saddam Hussein turned the marshes to dust. As these markets return, how the new Iraqi democracy will interact with them and with all small or unregistered businesses remains a major question mark.

According to CIPE’s recent survey of 900 Iraqi businesses across nine cities, including registered and unregistered businesses, perceptions of Iraqi administrative officials lean toward skeptical or even cynical, though overall business sentiment remains optimistic.

If you’re only looking at headlines or stock footage of foreign troops leaving and Iraqi security forces struggling to take over, that optimism may seem strange.

If you’re down in the would-be Garden of Eden, that optimism seems well-placed.

For full results from the survey, RSVP here to attend this Thursday’s launch event from 2:30-4:00 p.m. on Capitol Hill, or follow along on Twitter as CIPE live tweets the event using hashtag #IraqBizViews.

What entrepreneurship means to Iraqi democracy

Iraq classically had a centrally driven economy, run by the government and fueled by oil revenues that contributed upwards of 90 percent of Iraq’s GDP. The legacy of this command economy, where business was state owned and competition was repressed, decimated the ability of entrepreneurs in Iraq to develop and grow new businesses. The costs were too high and the risks too great.

Since 2003, as democracy has taken root in Iraq, the ability of entrepreneurs to develop and thrive in Iraq has become a reality in large part due to private sector advocacy efforts to change hostile legal and regulatory barriers for entrepreneurs.

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Privatization and rebuilding trust in Iraq

As Iraqi citizens celebrate the formation of a government eight months after elections, broader government stability remains largely untested. There is more at stake than which party will be in control or which faction will have the most power. With electricity and gas prices still costing most people up to half their monthly salaries, the ability of the government to deliver basic services in an affordable manner is still in serious doubt, with serious repercussions for long-term stability. For the new government to mend this damaged relationship, it should privatize those services it can no longer efficiently or affordably deliver, providing space for innovate and cost-effective private sector solutions.

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