11 May 2009

War is…economics…by other means?

Three articles came out in the last few days (courtesy of Small Wars Journal) which commented on the economic situation in Iraq. Economics is one of those key factors that underlies much of Iraq's internal security. During the Awakening and the Surge, many former insurgents were actually paid money to stop fighting for groups such as al Qaeda in Iraq and to serve as concerned local citizens--a sort of ad hoc police force which kicked the remnant of al Qaeda out of their towns. Counterinsurgency theory would dictate that, since some portions of the population become insurgents simply because being an insurgent pays better than legitimate business, that it is good practice to give people economic opportunities which provide incentives for leading a somewhat more placid life.

With that said, let's take a look at Iraq. Saddam Hussein's years of domination meant that, among other things, he controlled the economy, the money, and the means of production. Many Iraqis expected the government—not private industry--to compensate them for work. To be certain, there are plenty of legitimate ways that Iraqis can work for the government—hundreds of thousands are joining the Iraqi Police and Army, and many others are still being employed as the "Sons of Iraq". All of these are legitimate alternatives to fighting as insurgents (most of the time). Others, on the other hand, work for the government performing menial ad-hoc work, such as picking up trash in the cities, or performing routine maintenance on American forward operating bases. Unfortunately, as the US leaves, there's less and less money available to put many of these unskilled laborers to work.

Moreover, even though the Iraqi Army and Police provide security for the population, they're just like all government employees in that they don't produce revenue—they take it up. The private sector needs to step up to fill the gap, if Iraq is to have any semblance of autonomy. Unfortunately, thefledgling private sector hasn't quite been able to step up to the challenge.

Some economists thought that Iraq was so isolated that it would not be affected by the recent economic crisis. They must not have heard about this little thing called globalization.

Anyway, on to the articles.

Article number one is from the Wall Street Journal, and primarily discusses the effects on the security situation with the American drawdown. However, the author notes that, along with American troops withdrawing from the cities, so do American dollars.

U.S. officials say job-creation programs like the one Mr. Hadi oversaw in Adhamiya yielded big counterinsurgency gains. Many are now being abandoned.

Mr. Hadi's Iraqi contracting firm, Rosco Co., got its first U.S. contract in 2005, clearing the hulks of bombed-out cars from the streets. It won more U.S. jobs, becoming one of Adhamiya's largest employers. Neighborhood elders erected a billboard thanking Mr. Hadi for the work.

"We bought a lot of security with these jobs," says Army Maj. J.P. Hart, a civil-affairs officer in Baghdad. "Now the city just can't afford to pay these guys."

The U.S. military is trying to persuade the government to take over such projects. But Mr. Hadi, 32 years old, says he hasn't signed a new contract since October. "There are no contracts, no work and no money," he says.

Ashraf Amin, a quiet 26-year-old, says he supported his sick father for the past year and a half on the $12 a day he earned from one of Mr. Hadi's contracts. Driving down Adhamiya's main drag, he pointed to dozens of apartment blocks, store fronts and single-family homes that he painted in pastels. When U.S. funding on his contract ran out late last month, Mr. Amin lost his job.

"Every family I know in this neighborhood has at least one person working on these U.S. contracts," Mr. Amin says. "They don't realize yet that there is no more work coming."

Article number two is from the Los Angeles Times, and discusses the precipitous drop in oil prices. What's actually eerie to note is that some of these sentences look as if they were stolen word-for-word from a newspaper describing the economy in the US and most other Western nations. Looks as if the Iraqis might become familiar with that old American custom of base closures (and the associated turmoil it causes in those communities):

"Some people said Iraq wouldn't be affected," said Bassem Jamil Anton, an economist who sits on the board of the Iraqi Federation of Industries. "Those people were stupid.

It's easy to see why Iraq was never going to escape unscathed. The collapse in the price of oil from a peak of $147 a barrel last summer to about $50 today has gutted revenues in a country that depends on oil for 90% of its income. U.S. reconstruction funding has dried up, and no new resources are likely to be forthcoming from the Obama administration, which has vowed to unwind U.S. involvement in Iraq.

In 2009, Iraq will be cushioned by surpluses from previous years. But by next year, there is a real danger that the government will be in a position "where they basically run out of money," said a senior U.S. official here, who spoke on condition of anonymity.

Forced to curtail spending because of a budget deficit this year of at least $18 billion, Iraq has launched a major drive for foreign investment. But private investors have shown little inclination to commit resources to a country where bombings and shootings, though greatly reduced, are still a regular occurrence.

Most immediately, the shortfall in revenues has forced the government to impose a freeze on new hires; at least 30,000 planned recruits to the police and army are on hold.

It also puts in jeopardy the government jobs promised to about 90,000 members of the Sons of Iraq, with potentially worrying implications for their support for the government. The Sunni paramilitary fighters who switched sides and fought the insurgents were instrumental in turning the tide of the war, but it remains unclear how they will be absorbed into a postwar society.

More generally, Iraq needs to create jobs for the estimated 28% of young Iraqi men who are unemployed, and for the 825,000 new entrants to the job market every year, if it is to deter them from turning to the insurgency for funds to support their families.

But surprise, surprise, there's one area of Iraq that's able to attract foreign investors and produce oil (Courtesy of the Wall Street Journal). (Bonus: the Iraqi spokesman is named "Mr. Jihad")

Despite those issues being still unresolved, Baghdad -- under increased financial strain because of weak oil prices and falling revenue -- will allow the Kurds to begin exporting 60,000 barrels a day from June 1, oil ministry spokesman Assem Jihad said. "We are agreeing to the exports," he said. The Kurds said Friday they would start exports regardless of the ministry's approval. [Ed.—there's a shock]

Mr. Jihad didn't say why Baghdad had reversed itself, but it is likely that the central government's need for more revenue played a part in its decision. The government has slashed its 2009 budget three times because of falling oil prices.

Baghdad's acquiescence is also welcome news for the small foreign oil companies, including Norway's DNO International ASA, that have plowed hundreds of millions of dollars into finding and producing oil in Kurdish Iraq but haven't been able to export a single barrel.

Afterword: I went looking for an article on the Wall Street Journal on a government computer, and, wouldn't you know it, the Wall Street Journal's primary URL, www.wsj.com, is blocked. The Wall Street Journal, of all newspapers. Just who the hell runs the proxy server? Are they sitting behind their desk, cackling as they click "ban" on alleged American propaganda sources, such as the Wall Street Journal?

"Ah, finally those capitalist pigs will pay for their crimes, eh Comrades?"

No response…

"I'm so ronery…"


SunJun said...

I'm not sure what they can do for Iraq in terms of economic development. Most resource rich nations tend to be really lousy at growing real economies (Saudi Arabia, Nigeria, Iran, etc.) in part because they become too dependent on the ease by which oil props up their people and coffers. Attempts to diversify have usually fallen flat.

Some say that one of the reasons East Asian nations like Japan, Singapore, and South Korea were able to develop powerful economies was because they had no natural resources to rely on and had to build from scratch. American-hegemony backed security also helped in that regard, but I don't think that's an option for Iraq.

SunJun said...

Oh, and as for the Wall Street Journal, perhaps its an appointee of a new Democratic administration who's sticking one to the evil conservative bastion of Rupert Murdoch.