No country can flourish if it has a toxic combination of high unemployment, rising inflation, and a large public payroll. Unfortunately, that is exactly the position in which southern Iraq finds itself [“Iraq Private Sector Falters; Rolls of Government Soar,” by Campbell Robertson, New York Times, 10 August 2008].
“Hampered by years of violence, a decimated infrastructure, a lack of foreign investors and a flood of imports that undercut local businesses, Iraq’s private sector, particularly its small non-oil economy, has so far failed to flourish as its American patrons had hoped. In its absence, the Iraqi government has been sustaining the economy the way it always has: by putting citizens on its payroll. Since 2005, according to federal budgets, the number of government employees has nearly doubled, to 2.3 million from 1.2 million. The impetus is not only economic: In exchange for abandoning the insurgency that plunged the nation into civil war, many of the 100,000 members of civilian patrols known broadly as the Awakening movement have been promised jobs in the security forces or in reconstruction, though many Sunni Muslim members complain it is not happening quickly enough.”
As tempted as one might be, one cannot easily point fingers at Iraq’s central government for the current dilemma. The country’s economy nosedived following the U.S. invasion and the insurgency in the south slowed reconstruction, discouraged potential investors, and prevented entrepreneurs from jump-starting the economy. The government naturally felt compelled to step in as an employer.
“But this growth has not come without problems. Already, a huge wage increase to government workers that was instituted — but then suspended because of fears that it was pushing up inflation — has underscored the difficulties of being far and away the largest employer in an unstable country. In 2006, 31 percent of Iraq’s labor force was working in the public sector, according to the agency for statistics in the Ministry of Planning. The agency expects that figure to reach 35 percent this year, about 5 percentage points short of where the C.I.A. estimated it to be on the eve of the 2003 invasion.”
That sounds bad (and it’s not good), but Robertson notes that the Iraqi situation is not out of line with other countries in the region.
“This figure is not atypical for the region, but it hardly indicates the free market state initially envisioned by the United States-led Coalition Provisional Authority, which pushed for full and rapid privatization in its first few months. ‘For all the talk about the private sector taking off in Iraq, it didn’t materialize,’ said Haider al-Abbadi, who is on the parliamentary economic committee, and is disappointed by Iraq’s reversion to its old statist habits. ‘People would say, “Well, these people are poor; we need to help them.” It’s true, but we didn’t create jobs. I think this is a huge problem.’ While some ministries need to keep growing — the Defense and Interior Ministries, which each include Iraqi security forces, account for about a third of government employees — others have tried to curtail hiring.”
Considering that the thing most needed in the south is security, the fact that the Defense and Interior Ministries can still attract people into the law enforcement and military fields is actually encouraging. Robertson agrees that the Iraqi government has few options open to it.
“But to combat unemployment, a factor contributing to much of Iraq’s violence, there are few other options right now. Nothing sent recent graduates and out-of-work Iraqis scrambling to land civil service jobs more than the hefty raises that went into effect in June. Given how large a proportion of the country’s population is on the government payroll, this series of wage increases, like the two that came before, in 2003 and 2007, was essentially a form of widespread economic relief. The salaries of many Iraqis were more than doubled. Some economic advisers and members of Parliament worried that a raise for government workers could be a nightmare for others when a sudden flood of cash poured into the market. They argued that the raises should be phased in gradually to prevent a spike in inflation, which, at around 14 percent — a sea change from two years ago, when it neared 70 percent — has largely been tamed by a disciplined fiscal policy, robust oil revenues and an influx of low-cost imports.”
Although Enterra Solutions has had a hand in helping set up a trading exchange and call center to help encourage business growth in Iraq, most of the growth has been seen in the north where the Kurdistan region has benefited from a much more secure environment. As the south eventually gets a grip on the security situation there, the opportunity to promote more private economic development will increase. One reason for this is that better security means that reconstruction efforts will gain more traction. Without a strong infrastructure on which to build, the economy will remain stagnant. According to Robertson, Iraqi politicians fully understand that the country needs a vibrant private sector and that depends on getting infrastructure in place.
“The long-term answer to Iraq’s economic problems, several lawmakers said, is a thriving free-market alternative. There has been some success: new business registration is up nearly 14 percent this year. But the process is slow. ‘The private sector does not exist now,’ said Hasan al-Shammari, the head of the Fadhila Party in Parliament, ‘because there is no infrastructure.’ The Iraqi government has set aside money to help small businesses secure credit. It has also begun pushing for the creation of private banks, has taken steps toward privatizing some state-owned enterprises and has aggressively encouraged investment (the booming telecommunications industry is one bright spot). The 2008 budget even includes an item that enables the government to cover half the salary, for two years, of a civil servant who transfers to the private sector.”
In addition to building infrastructure, the government needs to get a handle on controlling corruption. Since government employment has traditionally been the most secure source of income, those jobs remain in demand.
“But for most Iraqis, the challenge is getting on the government payroll, not getting off, and they are going at it the Iraqi way — leaning on friends and relatives with connections and scraping up money for the inevitable bribe, typically a month’s salary. Like so much else in Iraq, getting a job is complicated by politics and sectarianism. While the minority Sunni Muslims run a handful of ministries, they are all but barred from some others. The policy of de-Baathification, aimed at rooting out loyalists to Saddam Hussein after the American-led invasion, resulted in a de facto purge of high-ranking Sunni bureaucrats, a purge that continued informally in certain offices that were permeated by Shiite militias.”
Another challenge facing the Iraqi economy is the fact that the last generation that prospered under a free market system is getting older. By the time the Iraqi security situation improves enough to permit entrepreneurs to flourish, many of them may be too old to lead the way to a brighter future. In the meantime, cheap imports, especially from China, are flooding Iraqi markets and forcing out local goods.
“Abdul Aama, 65, once owned a shoe factory and shop that employed 30 workers. Now he employs only one. On a recent weekday morning, the shop, off the once-teeming Rashid Street downtown, now largely blocked by blast walls, was empty. Few of the shoes on display were Iraqi-made. ‘After the fall of the regime all the factories closed,’ Mr. Aama said. Cheap Chinese imports began pouring into the market — a boon to the poor, but a bane to the local shoe industry — and the unreliable electricity did the rest.”
Protectionist policies are not the best solution. Like all emerging market economies, Iraqi businesses are going to have figure out where they have a competitive advantage. The Enterra Solutions® Development-in-a-Box™ approach is geared toward helping companies discover sustainable business opportunities that are in line with the competitive challenges presented by globalization. As Mr. Aama has discovered, it’s a new world and old solutions no longer fill the bill.