The Iraqi Economy: Rebuilding and Regrowth

The final post on my interview about the Iraqi economy is up at The Castle. I have been posting merely links here, but on John's advice I'm going to put the whole thing up for your perusal, starting with Part I.

Part I: Overview and background

Part II: Infrastructure--energy, banking and transportation

Part III: Growth sectors, the National Investment Commission and engagement with foreign companies

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On February 21st when I interviewed Brigadier General Cardon, he shared his opinion that “The real story over the next several months is going to be political and economic.” He discussed the potential for foreign investors who would bring industry and jobs to Iraqis and said now is the time for business to come and take a look. “This is a country of personal engagement…. Getting here early is a good thing if you want to have a long-term business arrangement.”

This statement inspired interest among readers in learning more about economic development and investment in Iraq. The request to 3ID's public affairs office for someone who could speak more authoritatively on the subject ultimately landed at the State Department, and what follows is the result.

This past Wednesday evening I spoke for nearly an hour with America's senior man in Iraq for economic development: Ambassador Charles Ries, Coordinator for Economic Transition in Iraq and Economics Minister. The focus of the interview was Iraq's readiness to receive foreign investment, but in a very forthcoming manner he covered topics ranging from banking and other infrastructure to labor, agriculture, and the challenges facing attempts to create a modern Iraqi economy.

The most striking message of the interview was how much security and economic development go hand in hand, reinforcing each other. They are completely inter-dependent; each without the other will not result in sustainable peace or success. Over-arching all of this is the legislative factor: full implementation of many plans and activities awaits action by Iraqi governmental leadership.

And so, in listening to Ambassador Ries, one is left with the impression of Iraq as an immensely complicated economic jigsaw puzzle, each part dependent on the other and full of bottled-up potential. The biggest challenge is the bottleneck through which it seems each piece must pass. Not surprisingly, it all comes back to oil. It is oil revenue that will fund Iraq's government, and thus fund almost every project that descends from the government. The problem right now is that because oil revenue-sharing is still not completely resolved, many of the needed improvements to oil production capabilities (which will result in increased production/revenue) can't yet be made. The success of almost all the plans and processes covered in my discussion with Ambassador Ries ultimately hinges on the Iraqis' ability to successfully resolve the revenue-sharing issues.

Despite the bottle-neck over oil revenue, a great deal of economic development is occurring in Iraq, and there is much to be excited about. "Iraq is seeing the economic indications of the successful security surge," says Ambassador Ries. "Since the middle of last year we have seen the revival of markets, more economic activity [and the] very early starts of permanent investment and banking activity. We are quite pleased."

The International Monetary fund predicts 7% growth in Iraq's economy, though predictions have repeatedly fallen flat in the past. However, Ambassador Ries is very optimistic, pointing to several factors that he says will increase growth beyond last year's sluggish rate. According to the ambassador, the lack of security in the first half of 2007 created a strong drag on the economy. "Things that couldn't happen due to the security situation were like a tax on the economy," holding it down. But with the success of the “surge” and its accompanying counter-insurgency tactics, security has improved and removed that “tax.” As an example, Ambassador Ries pointed to oil production and exports. In July (shortly after the "surge" reached full strength and just before it began to show results), Iraq was exporting about 1.5 million barrels of oil a day. Today, Iraq is "nudging up against 2 million barrels a day" (total production went from 2 to 2.5 million barrels during that time).

Ambassador Ries predicts this increase in oil production and exports will have a "trickle-down" effect that will fuel the entire economy in the coming year as oil revenue is immediately rolled over into government development projects such as construction sites. Money is already flowing into the provinces and governmental ministries for things like fixing streets, building schools, and dealing with infrastructure problems stemming from war and neglect. This results in greater employment, since people are needed to implement these projects, and the newly-employed workers in turn create demand for products they want to purchase with their earnings... Which creates money-making opportunities for other citizens, etc.

Though specific governmental ministries have been soliciting bids for very narrow projects, it is in many ways a little bit too soon to speak of general foreign investment in Iraq. As of yet, there is no way for a prospective investor to call up a single person in the Iraqi government and say, "I'd like to build a glass factory in your country." However, a highly-regarded Iraqi has been nominated to head the newly-developed National Investment Commission at rank of Minister, and his approval is expected when the legislature returns from its break. Meanwhile, the groundwork is being laid, and like so much in Iraq, is on the edge of bearing fruit.

That groundwork for investment includes not only the creation of a National Investment Commission, but rehabilitation of the energy infrastructure, development of the banking system, and most-importantly, capacity-building--the formation of functional governmental systems to enable development, research, and delivery of services to its citizens, as well as attract and process foreign investment. Over and over again in the interview, Ambassador Ries pointed to coalition efforts to teach basic governmental skills/mechanisms--everything from project management to industrial maintenance to funds distribution. Much is being done in these areas, and in many ways Iraq's economy is on the edge of a boom... a half-finished quilt in which solid and intricate squares await the national government to sew them into a larger and more functional entity.

In the meantime, the Provincial Reconstruction teams are not only reconstructing local infrastructure and business/agriculture, but teaching basic governmental skills and facilitating government functionality at the Province level. Early in the "surge," there were problems with staffing and distribution of the PRTs, but Ambassador Ries now points with obvious pride to the 25 PRTs operating throughout Iraq, "We tried to recast the way we work on civilian side to match/reinforce the strategy of the new way forward [counter-insurgency]." Five of the teams are based with provincial government, teaching and facilitating government function. The rest are called Embedded PRTs (ePRTs), and work hand-in-glove with coalition military forces. All teams are mixed civilian-military, comprised of State Department and USAID personnel, agriculture advisors, engineers, etc.

The province-based PRTs offer "lots of assistance" for local governments to help them effectively use the money they get from the federal government. Under Saddam Hussein, Iraq was a centrally-planned economy, and Ambassador Ries reports that before 2004 no money was allocated to provincial governments. Thus part of the PRTs' effort is focused on teaching project planning, acceptance of contact bids, etc.

Ambassador Ries describes the biggest role of the province-based PRTs as "de-bottlenecking problems." One example he gave was their "instrumental" role in in dealing with a cash-flow problem at the end of last year. Iraq is still a cash economy, and with the economic growth at the end of last year, Diyala Province developed a sudden and severe physical cash-flow problem. Iraqi Dinars are printed in London and must be carried by truck into Diyala. The Diyala PRT was able to use the State Department's connections and expertise to accelerate the printing and delivery of the Dinars. Ambassador Ries said that the PRT members were in constant contact with the treasury personnel at the U.S. Embassy in Baghdad, and "American expertise and connections made a noticeable difference in Diyala."

The cash-flow issue is indicative of what Ambassador Ries describes as "moving out of the bricks and mortar phase and towards capacity-building... trying to help the Iraqi government operate as a government." Efforts to provides services such as power, attract investment, develop banking, etc., is happening from the top-down in Baghdad while the ePRTs are operating with the military from the ground-up (typical counter-insurgency strategy).

The top-down and ground-up efforts meet at the still-jagged edge of foreign investment--of both money and expertise. So far, the economic rehabilitation is being driven by what Ambasssador Ries called "small-scale revival," retail development fueled by micro-grants/loans and the efforts of the ePRTs. Foreign investment and support of the banking sector are "needed to get to the next stage for lasting growth." This includes helping Iraqis tackle the big energy problems: attracting investments and developing more expertise in oil, and catching up with the demand for electricity. "Both are very large, difficult problems," says Ambassador Ries, which will "make a huge difference" once they are solved.