The great race for independence: the private sector in Kurdistan

Go cart racing in Erbil. Photo:

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.