January 17, 2008...2:50 pm
Jump Starting a War Torn Economy: The Case of Iraq
A new report out by the Government Accountability Office says that it is impossible to accurately determine the degree to which the Iraqi government is spending its FY07 $10.1 billion [US] capital projects budget. This budget is used to rebuild the country’s critical infrastructures so that basic services such as water, electricity, transportation, and communications will be available throughout the country. Official reports indicate that only 4.4% has been spent, but this figure is disputed by US officials who state that all relevant expenditures have not been counted in the calculation of that percentage. However, what is agreed upon is that the system of accountancy does not lend itself to accurate determination of expenditures and that spending levels have not been stellar (even if they are considerably higher than the quoted figures.)
Of course, the concern is that the Iraqi government (both at the Ministerial and provincial levels) is not getting its work done, and producing operational infrastructures is essential on a number of levels. First, the low quality of life experienced by people without basic services such as safe potable water and reliable electricity could exacerbate violence. There is certainly no shortage of perpetrators of violence. A female suicide bomber killed eight just the day before last. Secondly, without good infrastructure it is so difficult to build up the economy. Businesses require reliable power, water, communications, and financial services to operate and foreign firms will not consider investing in a state without adequate infrastructure.
This all raises an interesting question about how to go about making a viable economy for a nation like Iraq, or even whether it can be done. Iraq has a number of strengths as well as its many economic weaknesses. Resource endowments are among its greatest strengths. Iraq has considerable oil and natural gas reserves, and, while it has only been self-sustaining with natural gas, it is able to export considerable amounts of oil. Crude oil accounts for the vast majority of export earnings. This could help keep it out of debt when the nation begins to stand on its own two feet. Iraq has been running trade surpluses, and so one of its problems is not rapid accumulation of debt. Though I don’t know how this will go when US and other foreign aid for reconstruction are off the books and Iraq is on its own.
A fact that is both strength and weakness is that the population is young with over 40% of the population in their school age years. Great efforts seem to be being made in revamping the educational system, which had fallen into decay through a number of wars and long periods under sanction regimes. Literacy rates are low(particularly among females it seems, for whom literacy rate estimates 20% lower than the male cohort have been suggested), but with proper educational development the human capital needed to sustain an economy can be developed. Unfortunately, this is an advantage only in the long-term, and, in the mean time, it means a smaller percentage of the population are in their working years contributing to spending and tax revenues. Of course, there is an ever-present possibility that events will transpire that could send the educational system back into decay. If the educational system can be built up (virtually from the ground up) and maintained, the long-term benefits could be extraordinary. Getting skilled teachers is presumably another problem.
At the moment, Iraq is in such a quandary economically that it is hard to imagine a swift, as opposed to generational, pull-out. The country’s basic economic indicators are depressing. Between a quarter and a third of the population is unemployed. Inflation rates have been over 50% and are projected to decline to a mere 35% before leveling off for a while. Economic growth seems to be respectable in the 4-5% range, but this is a recent development over rates under 2%. It is not yet the kind of growth that one would hope for a country starting out where it has.
One thing about being war-torn is there is an opportunity for technological leapfrogging in which one adopts the latest technologies all at once up front. This can be seen in the country’s 9 million cellular phones (as opposed to less than 2 million land-line phones) that provide communication for one in three Iraqis. However, projections of Internet use are a small fraction of one percent.
Among the most devastating challenges to the economy arise from the activity of spoilers. Relatively modest levels of violence and destruction will keep Iraq from being considered a reasonable destination for investment, whether financial or direct. It is hard to imaging this factor being overriden any time soon. It has been estimated that 40% of Iraq’s professional class has left the country, and it is difficult to imagine many of these, much needed, individuals returning while country remains in turmoil.
The tasks ahead are daunting, and must all be gotten right to provide a solid economy that can be an exemplar within the region. The infrastructure must be built in a manner that makes it resilient, and it must be maintained. Teachers must populate all these newly refurbished schools who can teach students the skills needed in a cutting edge economy. Finally, the violence perpetrated by spoilers has to be reduced to such a low level that some of the professionals feel comfortable moving their families back, that businesses can operate without disruption, and that outsiders feel it is in their best interest to invest in Iraq.
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