The economy, stupid

17th October 2007
By Andrew Alderson

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How did the British get it so wrong in southern Iraq? Between the summers of  2003 and 2004, there was a system of government in place which included economic administration and this brought stability and relative peace.  Today Basra is a no-go zone and as dangerous as Baghdad.  What decisions were taken that led to southern Iraq sliding into the same mess as the central provinces?  What lessons need to be learned?  Do they also apply to Afghanistan?

An unprecedented international aid package totalling approximately $33bn was earmarked for Iraq, but to the frustration of the Iraqi people the effects promised on the ground have failed to materialise.

In spite of the presence of coalition forces and local Iraqi police and military and despite the emphasis on security and politics by the international community, terror attacks and a bloody insurgency continue. In the meantime, the economy has failed to re-start, leaving the country in economic paralysis.

The Iraqi government is in recess and may collapse; the much-discussed oil law is not yet ratified and corruption is endemic.  Unemployment is running at 50-60 per cent amongst adults of working age; electricity supply is approximately 4,500 MW per day, almost unchanged from April 2003 despite the expenditure of billions; the homes of Baghdad and Basra regularly run out of water and petrol.  Domestic price inflation is rampant and the overnight interest rate with the Central Bank of Iraq is around 23 per cent. There is no meaningful inward investment, and the borders are largely closed except to international companies with existing coalition contracts.  

With the average Iraqi appearing to have no stake in the present system, it is small wonder that the coalition military is dealing with a deteriorating security situation.

Today, the situation in central and southern Iraq is almost identical to the situation that was faced in June 2003.  During the summer months of 2003 riots erupted in Basra, Iraqi’s second city in the relatively peaceful southern region. At the time, five factors were raised as critical to winning the confidence of the local people, namely petrol, gas for cooking and heating, electricity, water and employment.

It was recognised that the key to regaining the confidence of the ordinary Iraqis is the rebuilding of the Iraqi economy.  As their lot improves through better overall living conditions and increased availability of goods and products through the liberalising of trade, the security situation should also improve as the undesirable elements of the community become increasingly marginalised. This should allowing the coalition military forces to focus on and prosecute extremists and former regime loyalists with greater effect.

However, in conditions of economic stagnation the security forces find that they are dealing with general public order issues caused by significant numbers of ordinary disgruntled Iraqis, rather than the pure terrorist threat. What is required is a balanced approach with equal focus on the redevelopment of the domestic economy as well as the rebuilding of the domestic security forces.

In practical terms the key to stability in Iraq is not more studies or more security contracts, but funding the development of the economy.  Without freely available funds, little reconstruction and redevelopment can take place.  The rebuilding of the economy and the improvement of security are a symbiotic relationship, each dependent on the other.  There are three keys that will unlock the Iraqi economy — finance, trade and electricity. Each of these areas needs significant attention if Iraq is to move from crisis to stability.

So why is it that the much needed funds to reconstruct these vital economic activities were re-directed towards enhanced security budgets and increased military spending?  Spending money on security, without spending money on the underlying economic administration through a truly integrated approach where all the levers of government work together, can only deliver mission failure.  This is the harsh reality that should be discussed in national coalition capitals today if we are to avoid total failure in Iraq and a sequel in Afghanistan.

A core reason for this failure is that we have ignored the configuration of our own economies which are built on trade and dominated by the private sector.  In this model, government’s role is to regulate capital, not provide it.  In contrast, Iraq’s reconstruction efforts have been dominated by government bureaucracy. The growth of security companies and several large engineering firms has been much publicised, but they are just sub-contractors, not investors.  The Soviet model failed in Eastern Europe and Russia — it has failed in post-conflict Iraq too.

The lesson that has yet to be fully grasped by the development sector is that the key to sustainable development is unlocking the potential of the private sector.  This has not occurred in Iraq, and it does not look set to occur in Afghanistan.  What is critical is the introduction of appropriate economic doctrine and the ability to see this through into effective implementation.  Failure to deliver either the doctrine or the ability to implement this coherent strategy will result in mission failure not just in foreign policy, but in military terms as well.  Today a solution is still required, yet there is little international interest, except in asking ‘When are the troops leaving?’

In the book Bankrolling Basra detail is provided about how an interim government was established in 2003 that managed all the economic activity in southern Iraq.  At the time Whitehall was pleased that the UK was achieving some success in the south whilst in relative terms chaos reigned further north.  We achieved success because we changed the paradigm and adopted a sound coherent economic strategy.   And yet in June 2004 this governing team was dramatically pulled out, creating an economic vacuum almost identical to the one that was found at the outset in the summer of 2003, thereby fuelling an insurgency that prevails today.  Overnight the UK set the conditions for economic stagnation in southern Iraq and is now reaping the consequences of those decisions.

The key actors in Iraq for the British are the Foreign Office, responsible for diplomacy, the Ministry of Defence, responsible for security, and DfID, responsible for overseas development.  These departments are simply not configured to deliver any form of economic effect in hostile or complex environments.  DfID’s published mission is to ‘eradicate world poverty’ and therefore it largely focuses its efforts on the lowest income countries and delivery of social and welfare programmes.  Initially Iraq did not fit this paradigm.  Meanwhile, the Ministry of Defence is configured to fight and win wars but  lacks the ability to deliver any form of sustainable reconstruction.  The Foreign Office is diplomatic in nature — it observes and reports, but does not implement.  Therefore not only is there an absence of a coherent economic strategy, there is a clear capability gap between reported policy and the ability of UK government to implement a strategic plan for Iraq.

The exit strategy, in the form of economic redevelopment whose limited purse strings are managed by DfID, is now being managed from Kuwait because the security situation is so poor whilst the military remain largely confined to base.

The role of government should be to assist this process by developing an integrated approach. What central government must not do, as its departments have had a tendency to do in Iraq, is to attempt to fulfil the specialist roles of commercial enterprise and the private sector.  International donor aid will at best only ‘prime the pump’ of economic activity and at worst, as has happened in Iraq, will distort any opportunity genuinely to encourage long-term investment by the private sector.

Meanwhile, in international capitals the debate rages about whether we should have invaded Iraq in 2003. What is needed instead is a debate about the decisions that were taken after we arrived there and how we might constructively address the situation that we face today. Who took the decisions in 2004 to focus on an ‘end date rather than an end state’ — a time line driven by politics in national capitals rather than the situation on the ground — and recommend the early hand-over in the centre and the south? By removing the framework of technical assistance and ongoing economic administration in southern Iraq, a power vacuum  was created into which the insurgency, previously held at bay by economic activity, flowed.

From an economic perspective, the reconstruction of Iraq is still a $80bn problem, just as it was in 2003 (there is hardly anything to show for the $20bn spent by the US). In order to ‘fix’ Iraq there needs to be significant investment in systems, administration and infrastructure. Where will the funds come from?

The US has been Iraq’s largest donor but has little appetite for any further allocation.  There is reportedly $20bn still unspent in the Ministry of Finance. This gives Iraq some money to ‘pump prime’ the economy, but is still $60bn short of the funding needed to rebuild the economy.  Therefore Iraq has little choice but to look to its Gulf neighbours and the private sector to bridge the financing gap.  How can Iraq best approach this challenge? How can the UK assist?

The problem is that the other Gulf States are busy building their own economies with their surplus petrodollars. And anyway, long-standing tribal and religious rivalries that transcend the national boundaries of the Gulf States suggest that some neighbouring countries may not necessarily want to see a stable and prosperous Iraq, but nor do they want the jihadist terror threat to spread to their own countries.  The UK still has significant political and diplomatic influence; it must use this to assist the process by helping to create a new consensus in these states that their interests lie in a stable, economically prosperous Iraq, not just a weak one.

Where will the people come from who will rebuild the country? With the continued insurgency there has been an exodus of more than two million intelligent and educated Iraqis to neighbouring countries, and with it the loss of intellectual capital so vital to build an economy.  With the exodus of this human capital, compounded by the early de-Ba’athification process, the reconstruction process is likely to take an entire generation.  

What donor money has been spent has not been used wisely and has not achieved the desired effect on the ground.  There must be a re-evaluation of current ‘development’ and post-conflict reconstruction doctrine. This needs to be done now if lessons are to be applied in other theatres, most immediately Afghanistan.

As the US and UK military draw down their troops, who will take over the international mandate for long-term redevelopment?  The UN is very much in the frame, but is unlikely to be given the resources to deliver on the mandate they inherit. Fifteen years after UN sanctions were imposed that allegedly destroyed much of the infrastructure, the same organisation that was heavily criticised for its corrupt ‘oil for food’ programme may be put in charge of rebuilding the infrastructure of Iraq.  Is the United Nations equipped for the task?  In light of past performance, should it be given the task?  Will it be able to deliver effective solutions?

Small wonder the Iraqis are sceptical, or as a senior UK government official once suggested ‘If we, the international community, cannot agree what needs to be done, what hope have we got of offering any sort of consistent and coherent advice to the Iraqis who we are supposedly here to help?’

The route to security and stability in Iraq — and Afghanistan — is via the application of practical economics within the framework of diplomacy and good governance. Without an economic road map and a means to achieve its practical implementation, failure will continue to occur.

Andrew Alderson is author of ‘Bankrolling Basra’ and CEO of Gulf Capital, a specialist advisory firm offering independent strategic advice and practical commercial solutions in some of the world’s most complex emerging markets.  www.gulfcapital.co.uk

Filed Under: , Iraq, Foreign Policy, Afghanistan, Economy, Insurgency
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