Robert Looney Professor, National Security Affairs Naval Postgraduate School

1. Economic Reconstruction During War-Time: Academic Perspectives For Assisting Marine Efforts at Providing Stability to Iraq • Robert Looney Professor, National Security Affairs Naval Postgraduate School • II Marine Expeditionary Force Stabilization and Economic Reconstruction Roundtable Chapel Hill, NC -- November 1-2, 2006

2. Outline: Framework for Economic Efforts In Iraq • Main Areas of Relevant Research Undertaken at NPS. • Current Structural Obstacles to Reconstruction in Iraq. • Post-War Economic Strategy. • Lessons Learned From Reconstruction Efforts To-Date. • Considerations for Future Efforts. • Shadow Economy. • Deterioration of Social Capital. • Evolution of Insurgent/Criminal Networks. • Economic Strategies to Combat the Insurgency. • Guidelines for Central Role Played by the Marines.

3. Relevant Academic Research Undertaken at the Naval Postgraduate School • The Size, Expansion, and Implications of Iraq’s Shadow Economy Incorporating Theories of Corruption – The Business of Insurgency --- Robert Looney. • Gangs and Insurgencies, The 3G2 Model – Nicholas Haussler – NPS Thesis. • Economic Reforms and Efforts at Reconstruction – Dynamics of Vicious and Virtuous Circles in Iraq —Robert Looney. • Insurgencies and the Theories of Netwar – John Arquillla. • Civil Society in Iraq – Abbas Kadhim. • The Use of Foreign Aid/Assistance to Combat Terrorism/Extremism and Terrorist Recruitment – Robert Looney.

4. Naval Postgraduate School Sunni Insurgency Model

5. Current Obstacles to Reconstruction:Economic Conditions in Iraq Very Mixed Picture Since April 2003 -- Some Progress But: • Unemployment Stabilized at 30-40% -- Possibly Higher. • Unstable/Unreliable Supply Electricity, Fuel, Water. • 95% Government Income Comes from Oil. • Government Employs 50% Formal Labor – Not Sustainable. • Many Households With Lower Incomes than 1980. • Great Deterioration in Social Capital, Loss of Trust – Corruption Rate Highest in the Middle East. • High Crime Rate – Massive Capital Flight, Brain Drain . • Shadow Economy Increased to 65% GDP, 80% Labor Force.

6. Assessment of the Postwar-Economic Strategy CPA and Subsequent Reform Programs Not Optimal for Iraqi Conditions. • Precludes Large Number of Iraqis from Economic Process – Lack of Skills, Capital. • Uncertainty Too Great for Private Investors. • Inability to Produce Sustainable Short-Run Economic Gains Made Reforms Easy Target for Extremist Groups – Imperialism, Conspiracy Theories. • Since New Institutional Structures-Reforms Not Stimulated by Neoliberal Reforms – Vacuum – Only First Stage Reforms Completed. • Filled by Existing Organized Groups – Religious and Criminal. • Incomplete Reforms/Price Controls Created Profitable Black Market Arbitrage Opportunities. • Result-Economic Strategy has Created More Favorable Environment for Extremists and Criminals to Exploit than for Private Investors to Thrive and Contribute to the Recovery.

7. Lessons Learned To-Date--I • Reconstruction Entails Painful Trade-offs Rather than Easy Choices – Iraqis Bypassed. • High Hopes and Lofty Promises no Substitute for Sound Planning and Prudent Expectations. • Control Expectations at Realistic Levels. • Economic Reconstruction Depends Upon Adequate Security; Yet Security Depends on Successful Reconstruction – Need to Make Iraqis Feel Secure. • Reconstruction Requires Coordination of Short-Term Initiatives and Long-Term Structural Reforms. Need to Build on Short-Term Successes to Complete More Difficult Long-Term Transformations – Momentum Key.

8. Lessons Learned To-Date--II • Don’t Over-Rely on Market Forces in a Conflict Setting. • Ongoing Reforms Require Empowered Owners. • Broad Based Participation Critical for Maintaining Reform Momentum, But Requires Overcoming Centralization Tendencies. • Overcoming and Controlling Corruption is Extremely Difficult. • For Any Actions, Develop Several Contingency Plans.

9. Considerations For Future Economic Efforts in Iraq - I • Earlier Economic Efforts Often Failed in Part Because They Were Not Capable of Adjusting to the Growing Insurgency/Criminal Network Threat. • At This Point in Time The U.S. Government Unlikely to Commit the Added Personnel and Financial Resources to Completely Reconstruct a Failed Economy of 25 Million People. • First Priority is to Use Aid Money as a Tool to Bring About Stability, Not Long/Medium Term Growth.

10. Considerations For Future Economic Efforts in Iraq - II • Security Situation Precludes Activities Aid Agencies Would Normally Fund, Organize and Administer – Implies a Major Role for the Marines. • Current Security Situation/Shrinking Budgets Dictate a Bottom Up Rather than a Top-Down Approach. • Critical To Address Three Interrelated Areas Not Dealt With in Initial Development Efforts: • (1) Growth of The Informal/Shadow Economy, • (2) Deterioration in Social Capital, and • (3) Expansion of the Insurgency/Criminal Gangs.

11. Constraints on Future Economic Efforts: The Shadow Economy

12. Constraints on Future Economic Efforts: Social Capital • Social Capital Represents Networks of Relationships that Bind People Together—Deteriorated Significantly Under Saddam and Under Great Stress Today. • Trust a Key Element of Social Capital. In Iraq • Ascribed Trust – Kinship Groups and Family Members. • Process Based Trust – Individuals That Have Known Each Other for Some Time – Key Element in Business Networks. • Extended Trust – Transactions Between Individuals With Only Limited Information About Counterparts Attributes. • In Iraq Today, Most Networks Ascribed Trust, With Some Process Based and Fewer Extended – Improvements Critical for Market Development. • Will Take Long Time to Restore Trust, Social Capital, Best Methods – Community Development/Programs, Stability.

13. Constraints on Future Economic Efforts: Insurgent/Criminal Network Evolution -- I • Key Elements in 3G2 Gang Model. Fits Conditions in Iraq – • Existence of Violent Networks in Context of A State Constrained by Minimal Capacity, Poor Economic Performance and Significant Social, Political and Economic Disparities. • Groups Heavily Engaged in Informal and Criminal Activities at the Local Level. • Groups Expand Their Economic and Political Strength Relative to the State Through Corruption and Intimidation. • Gangs/Insurgents Have Expanded In Iraq Due To Vacuum Created by State Retrenchment, Corruption/Incompetence. • Gangs/Insurgents Increasingly Turn To Criminal Activities in the Shadow/Informal Economy – Tendency For Violence to Increase Over Resources.

14. Constraints on Future Economic Efforts: Insurgent/Criminal Network Evolution- II • Given Current Setting in Iraq – Networks Should Continue To Expand Through Violence. • Tendency to Capture Sectors of the Growing Informal And Criminal Economies Will Increase. • Local Criminal/Insurgent Enclaves States May Evolve. • Armed Groups Will Function as the de-Facto Governments Within These Enclaves. • Locally –Oriented Armed Groups Can Be Expected to Expand from Street to Sub-National Level, Evolving From Mutually Protective groups into Prominent Political and Economic Actors. • Strategy To Combat These Developments – (1) Reduce Size of Informal/Shadow Economy – (2) Open the Legitimate Political Sphere.

15. New Development Strategy: General Principles • Bottom-Up Orientation Focused on Iraqi Population. • Shift From Neoliberal to New Institutional Strategy Shown to be Successful in Transition Countries -- Focus is on Overcoming Limited Number of Critical Constraints to Development. • Creation of Institutional Underpinnings of Markets Needed for Strong Entrepreneurial Development. • Build on Established Institutions/Programs to Prevent Further Economic Disruption and Social Unrest. • Strategy Must be Focused at the Community Level to Assist in Developing Social Capital – Trust, Support Networks. • Sequencing of Activities to Generate a Virtuous Circle with Winners Interested in Advancing Reform Process.

16. Key Components – Immediate Implementation • Starts With Focus on Community Development – Local Communities Set Development Priorities, Draw-Up Budgets, Participate in Implementation – Social Capital Development. • Builds on Integrating Successful Programs -- Commander Emergency Response Program (CERP), Local Governance Project (LGP), and Office of Transition Initiatives (OTI). • CERP Scope Would Broaden to Include Funding Private Sector SMEs – Clear Goals --Projects Focused on Job Creation. • Dual Track Strategy focused on New SME Industries in the Formal Economy. • Private Sector Needs Official Support. Grants to Start-up Micro-Credit Financial Institutions.

17. Guidelines for Marine Economic and Reconstruction Activities - I • The Marines Have A Key Role in This Strategy: • Develop A Two-Tier Strategy To (1) Assist Local Community-Based Economic Development – Formal Sector Activity, While (2) Reducing The Size of The Informal/Shadow Economy. Projects and Activities Need to Be Evaluated in Terms of their Contribution to These Two Goals – Economic Rates of Return Secondary. • Select Projects/Activities that Are Capable of Initiating a Virtuous Circle – Creating External Linkages and Effects that Stimulate Follow on Activity. • Specific Guidelines: • Treat Aid and Economic Development As Short Term Operational Necessities Until Sufficient Security Exists for Longer Term Activities.

18. Guidelines for Marine Economic and Reconstruction Activities - II • Specific Guidelines (contd): • Give Top Priority to Local Jobs, Local Services and Efforts with Immediate Visibility and Targeted Impact on the Local Populace. • Focus on Sustaining and Expanding Key Sources of Government Revenue. • Do Not Attempt Ambitious Efforts to Restructure Infrastructure Unless These Can be Managed and Implemented at the Local Level. • Let Local Governments Take the Lead and Make Their Own Mistakes.

19. Guidelines for Marine Economic and Reconstruction Activities - III • Specific Guidelines (contd): • Do Not Rely on or Use US Contractors or Other Outside Contractors Unless Absolutely Necessary. • Provide US, Allied, or Local Military Security or Do Not Attempt the Effort. • Accept the Fact that Some Level of Waste and Corruption is Inevitable and that Meeting Urgent Needs on Local Terms Has the Higher Priority.

20. Iraq: Reconstruction Induced Virtuous Circle