The Iraqi Economy II: Economic Programs at the Local Level

1. The Iraqi Economy II: EconomicPrograms at the Local Level Army Human Terrain Team Ft. Leavenworth, Kansas November 13, 2009 Dr. Robert E. Looney relooney@nps.edu

2. Outline I • Introduction • Regional Contrasts and General Considerations • Income Patterns • Unemployment • Development and Reconstruction Expenditures • Internal Migration • Development Strategies—General Consideration • Links with Counterinsurgency Strategy • Economic Development and Provision of Essential Services • Strategy Trade-Offs

3. Outline II • Elements of a Localized Strategy for Iraq • Relevant Studies • Socio-economic Linkages • Shadow Economy • Deterioration of Social Capital • Evolution of Insurgent/Criminal Networks • Bottom-up Development Strategy • Integrated Framework for Growth • Implications for Local Projects • Vocational Training • Micro-Credit

4. Outline III • Questions? -- Break • Implementing an Economic Strategy at the Local Level • Overall Aid, Reconstruction Expenditures • CERP Program • Provincial Reconstruction Teams (PRTs) • Al-Anbar Case Study • Areas for Improvement • Suggestions for HTT Surveys

5. Regional Income Disparities

6. Iraqi Development and Reconstruction Expenditures

7. Iraqi Capital Budget by Province: 2003-2008 I

8. Iraqi Capital Budget by Province: 2003-2008 II

9. Regional Budget Shortfalls Source: New York Times, October 30, 2008, p. A15

10. Reconstruction Expenditures Source: New York Times, October 30, 2008, p. A15

11. Daily Attacks and Budget Execution, 2007

12. Daily Attacks and Budget Execution 2008 (projected)

13. Regional Unemployment

14. Internal Migration I • 1.4 million refugees • Tend to migrate to areas where they have family or friends and the environment is considered safer -- typically an area with homogenous sectarian composition. • Northern Iraq • Northern provinces outside Kurdistan are multi-sectarian melting pots that have complex patterns of migration. In Kirkuk, the situation is unstable. • Sunni areas • Many Sunnis from dangerous multi-sectarian communities, who cannot afford to travel abroad, have relocated to predominately Sunni provinces such as Al-Anbar and Salahuddin. Many non-Sunnis have left these provinces.

15. Iraq: Number of Internally Displaced Persons by Province

16. Iraq: Provincial IDPs, Security Incidents

17. Internal Migration II • Central/Southern Provinces • Large numbers of Shia left Baghdad for the nine predominately Shia provinces of central and Southern Iraq • The majority will seek to settle in new areas • Baghdad • The number of displaced persons inside Baghdad has doubled since February 2006 • Eighty-five percent of these migrants have relocated from one part of the city to another • 72% are Shia Arabs • 99% feel they are safer since they moved to neighborhoods controlled by their sectarian bloc

18. Internal Migration III • Within Iraq, displaced persons strain local economies by: • Inflating rents, and prices of food and commodities • Reducing local access to jobs, healthcare and fuel • Several of the more stable governorates now restrict entry or are closed to migrants • Karbala now requires that new residents have family in the local area that will formally sponsor them

19. Internal Migration IV

20. Displacement and Trauma • Displacement has taken a long run toll on the energy and mental health of many Iraqis. Of those displaced: • 77% reported being affected by air bombardments and shelling or rocket attacks. • 80% were witness to a shooting. • 68% were interrogated or harassed by militias or other groups with threats to their lives. • 22% had been beaten by militias or other groups. • 23% had been kidnapped • 72% had been eye witness to a car bombing • 75% knew someone close to them who had been killed or murdered.

21. Elements of Development Strategy I • The Counterinsurgency Field Manuel recommends a strategy that relies on first restoring essential services, then promoting economic development • Essential services • Should be restored immediately regardless of the security situation • These include: police; fire protection; water; electricity; schools; transportation networks; medical aid; sanitation; food supply, fuels and basic financial services • Economic Development = programs to improve living standards • Includes: job creation; local investment; clarifying property ownership and resolving conflicts; protecting property rights; creating markets, and providing vocational training.

22. Elements of Development Strategy II • The distinction between essential services and economic development is one of timing • Restoration of services must begin immediately. • Economic development must often wait until security is restored. • As a general rule, at the present time, economic development should be the focus in peaceful regions such as Sahul, Irbil, Sulaimaniya, Qadisya, Misan and Muthanna • Essential services are more important in the unstable areas of Ninevah, Baghdad, Babil, and Kirkuk and Basra.

23. Elements of Development Strategy III • The key is to demonstrate that programs are bringing prosperity to the average Iraqi • Where possible, focus on economic development projects that have a quick pay-off and create as many winners as possible who have a stake in the future • Effectiveness is more important than efficiency • More efficient, integrated state-of-the-art systems, like a national electricity grid, are fragile and vulnerable to the insurgency • More robust systems, like community generators, are equally effective and much less vulnerable

24. Stability Operations Lines of Effort

25. Elements of a Localized Strategy I • The security situation dictates the role of government in the economy • Active government substitutes for the lack of markets • Government focus should be on establishing an institutional framework that will allow markets to develop and grow • The security situation and shrinking budgets also dictate strategy • The first priority is to use aid-related funds as a tool to bring about stability, not long- or medium-term growth. • This implies a bottom-up approach, rather than the traditional top-down strategy

26. Elements of a Localized Strategy II • To begin generating development at the local level, it is critical to address the way projects, programs and policies impact and interact with: • The informal/shadow economy, • social capital formation • Insurgency/criminal gangs. • The object of policy is to create positive linkages and feed-back loops between these elements and the economy so as to create virtuous circles of growth and development capable of offsetting the negative forces at play.

27. Socio-Economic Linkages & Insurgency

28. Large Shadow Economy

29. Deficient Social Capital I • Social capital deteriorated significantly under Saddam and continues to deteriorate under today's stresses. • Social capital can be defined as networks of relationships that bind people together • Trust is a key element of Iraqi social capital. • There are three main kinds of trust: • Ascribed Trust – Kinship groups and family members. • Process-Based Trust – Individuals that have known each other for some time – a key element in business networks. • Extended Trust – Transactions between individuals with limited information about one another

30. Deficient Social Capital II • Currently in Iraq: • Most networks are built on ascribed trust • A smaller number are built on process-based trust • Few rely on extended trust • Improving process-based and extended trust is critical to establishing a market based economy • Restoring trust and social capital is a long process that can best be done through community development and the restoration of stability.

31. Criminal Activity in Iraq • Criminal activity in Iraq presents numerous obstacles to reconstruction and economic prosperity • Under Saddam Iraq resembled an extended Mafia family • After the overthrow of Saddam, Iraq became an ideal environment for organized crime – state had lost its monopoly over power, militias, traditional jihadists, non-state groups better organized as state and police. • Three overlapping, reinforcing economies evolved – shadow, criminal and insurgent or war economy. • Iraqi government became as much a part of the problem as well as solution – lack of control over corruption, blurring of politics and crime – perpetuates state weakness. • Results: delivery of goods and services dismal (perpetuating poverty), failure to build on initial reforms (perpetuating inefficiency and corruption), establishment of an environment not conducive to private sector activity (suppressing economic development and growth).

32. Insurgent/Gang Networks I • Iraq exhibits many of the key elements described in the Third Generation (3G2) Gang Model: • Violent networks exist in the context of a state constrained by minimal capacity, • The country suffers from is poor economic performance • There are significant social, political and economic disparities • Many Iraqi insurgent gangs have evolved over time • Their influence has grown from street to sub-national level • They have evolved from protective groups into prominent political and economic actors • Gangs have been able to expand due to the vacuum created by state retrenchment, corruption and incompetence • Gangs have increasingly turned to criminal activities in the shadow economy and use violence to increase their resources

33. Insurgent/Gang Networks II • The 3G2 Model divides gang activity into 3 generations: • Generation 1 consists of traditional street gangs which do not pose a major threat to security: • They are localized, turf-oriented, with inter-gang rivalries • They lack sophistication and have a loose leadership structure • In Iraq, they may protect ethnic or tribal groups • They quickly exploited the vacuum after Saddam's overthrow • They finance themselves through opportunistic criminal activity • Generation 2 gangs are a major threat to security and law enforcement • They evolve from the most successful Generation 1 gangs through violence and intimidation and often have ties to the insurgency • They have sophisticated structures, similar to businesses, and tend to think in markets rather than turf • They finance their activities through shadow economy activities, like oil smuggling, drugs, and kidnappings

34. Insurgent/Gang Networks III • Generation 3, the final stage of gang evolution, is a major problem for security • Gen 3 gangs are highly sophisticated and have fully evolved political aims • Their goals are power and financial acquisition • They are protected by government officials, whom they have corrupted • To increase their support and funding, they form foreign alliances with states like Iran • They may evolve into enclave states that provide services and function as de facto governments

35. Insurgent/Gang Networks IV • To combat the insurgency and slow or stop the formation and evolution of gangs, in addition to better law enforcement and security, it is necessary to: • Rapidly create jobs in the formal sector • Reduce the size of the informal/shadow economy • Increase the strength of the legitimate political sphere

36. Bottom-Up Development Strategy • A bottom-up orientation that focuses on the local population is best for addressing Iraq's shadow economy, social capital deterioration and criminal/insurgent gangs • Instead of a simple free market strategy, opt for an "evolutionary" development strategy that begins by focusing on a limited number of critical development constraints • Use trial and error at the local level to find out what works before making major commitments of funds and personnel • Build on established institutions and traditions to prevent further economic disruption and social capital deterioration • Sequence activities to generate a virtuous circle so that local Iraqis become winners invested in advancing the reform process

37. Integrated Framework for Growth

38. Implications for Local Projects • The following general actions are useful at the provincial and regional levels: • Improve essential services like electricity, water, fuel , sewage, focusing on robust, easily maintained technologies • Encourage labor-intensive employment opportunities in agriculture and small business • Employ local labor to improve the quality of transportation and infrastructure, i.e., phone system, roads, bridges, pipelines • To reach those who would otherwise be locked out of the economy introduce: • Microfinance • Vocational training • Establish more efficient provincial government and institutions

39. Vocational Training I • Vocational training is another key program at the local level • It enables localities to draw on their strengths and put under-utilized resources to use • It helps solve the shortage of skilled labor, which surveys suggest is a major concern of private businesses in Iraq. • Key elements of a setting up a vocational training program include: • Determining locally needed skills and desired qualifications • Choosing a school site, keeping in mind that vocational training sites are an insurgency target • Securing buildings and conceal students’/instructors’ identities

40. Vocational Training II • Other key elements of a setting up a vocational training program: • Training the trainer • Balance language versus technical skills • Consider team teaching or sending an Iraqi translator to school • Selecting the students can be the most difficult challenge • Be sensitive to ethnic and gender considerations • Consider paying students for their participation or charging tuition to raise their stake in the outcome • Remember that subsidies are required to cover travel and living expenses • Set up a service to place the students in appropriate jobs

41. Microfinance Institutions (MFI) • Microfinance institutions are a key component of bottom-up development • Microfinance puts basic financial services within reach of the poor • It provides small loans, typically for working capital • By assessing small amounts of credit at reasonable interest rates, it gives people the opportunity to set up small businesses • Based on informal appraisal of borrowers and investments, it makes capital available to those who would be turned down by conventional banks • Records show that poor people are a good risk, with higher repayment rates than conventional borrowers

42. Microfinance in Iraq I • Currently in Iraq there are 5 MFIs: • Three are run by international NGOs and two by domestic NGOs • Together, they have twenty-six branch offices in fifteen provinces, with four more branches being organized • Outstanding as of 2007: • 19,019 loans totaling $26,765,000 total loan value • Average loan size $1,407 • Since their establishment, MFIs have made 52,768 loans with a total value of $109,471,000. • Less than 1% of MFI loans are delinquent 30 days or greater. • This success rate is the result of careful selection of potential borrowers and proper loan management • Additional grants to start up microcredit financial institutions are an excellent investment in both economic development and Iraqi goodwill

43. Microfinance in Iraq II • Microfinance is an indirect conflict resolution tool. • Microfinance works best for poverty reduction but is also an efficient job creator.  • Micro-loans create about one and a half direct new permanent jobs per every $2,000 loaned to small businesses • These small businesses tend to provide essential goods and services that have stable demand over time (e.g. localized clothiers, small electronic retailers, grocers, etc.).  • Military support of MFI should be invisible • The greatest challenge is hiring and training quality MFI staff

44. Questions -- Break • Questions? • Next : Implementation • Aid • Reconstruction Expenditures • CERP • PRTs

45. U.S. Funding for Reconstruction • Since 2003 the U.S. has appropriated $52.27 billion for Iraqi reconstruction efforts. 89% of these appropriations are accounted for by: • The Iraq Relief and Reconstruction Fund (IRRF) – $20.86 billion • Iraq Security Forces Fund (ISFF) – $18.04 billion • Commander’s Emergency Response Program (CERP) -- $3.63b • Economic Support Fund (ESF) -- $4.18billion • As of June 30, 2009 more than 42.59 billion had been expended. • Nearly $3.54 billion remains available to be obligated • $8.22 is unexpended • The preponderance of unexpended U.S. funds is in the ISFF, which supports Iraq’s military and police forces.

46. Major U.S. Aid Programs in Iraq

47. Status of Major U.S. Funds

48. Assessing U.S. Aid Programs in Iraq • While immense efforts were made between 2001 and 2008, with much local success, many problems still remain: • Only limited measures of effectiveness have been developed • SIGIR has documented immense waste and corruption • There are serious shortfalls in qualified aid, PRT and EPRT personnel • There are still issues surrounding the plans for transferring projects to the Iraqi government for management and funding

49. Iraqi Opinion of U.S. Aid

50. The Future of U.S. Funding • On June 30, 2008 the President signed the Supplemental Appropriations Act, 2008 – includes conditions-based restrictions on the use of certain appropriated U.S. funds for Iraq. The most significant new conditions: • U.S. reconstruction funds are to be made available only to the extent that the GOI matches them on a dollar-for-dollar basis. • This provision applies to new U.S. assistance provided through the Department of State and the U.S. Agency for International Development. Additionally other conditions include: • A more comprehensive anticorruption strategy. • Development of more detailed plans for future PRT activities. • The execution of an asset-transfer agreement between the United States and Iraq.