Socio-Economic Strategies to Combat Islamic Extremism in Iraq

1. Socio-Economic Strategies to Combat Islamic Extremism in Iraq • Robert Looney Professor, National Security Affairs Naval Postgraduate School • U.S. State Department Workshop on Countering Islamic Extremism Arlington, VA July 22, 2005

2. Outline: Countering the Pull of Extremism in Iraq • Focus on The Factors Contributing to the Pull of Islamic Extremism in Iraq -- Socio-Economic Perspective. • Economic Conditions in Iraq: pre-War/post-War • Alternative Views of the Iraqi Economy. • The Post War Economic Development Strategy. • Implications for Extremism. • Components of a Comprehensive Development Strategy to Restore Growth and Lessen Pull of Extremism in Iraq. • Final Issues.

3. Factors Underlying Pull of Extremism • Spectrum of Factors Across Different Extremist Groups – Affecting Disaffected Youth. • Palestine Issues, U.S. Support of Israel, “War Against Islam” The West’s “Cultural Aggression” Socio-Economic Deprivation, Exclusion from Political Process, Dislocation in Transition to Modernity, Globalization. • Common Element – Thwarted Expectations for a Better Life, Humiliation, Treatment as “Second Class” by Governments and Others. They are inspired by al-Qaida Type Ideology. • Some Elements -- the Occupation, Perceived U.S. Intentions in Iraq, the Mistreatment of Iraqis, Anti-Shia Sentiment and Sunni Fears of Exclusion Bring a Unique Mix to Iraq – Numerous Iraqis Join the Insurgency Rather Than Extremists. • Still, Socio-Economic Factors are Contributing to Extremist Recruitment in Iraq, but Exact Extent is Difficult to Separate From Other Factors. Conditions have been Building for Years.

4. Economic Conditions in Iraq – pre-War • In 1970s Set to Dominate Middle East – Possessed Oil Industrialization, Agriculture and Large Population – by 2000. • Oil Sector at Least 75% GDP. • Distorted Pricing System – Wide Spread Inefficiency and Waste, Stagnant Agricultural Sector. • 50% Population Under 24 Years of Age. • Widespread Unemployment -- Up to 50%. • 60% Population Dependent on Food Rations. • Macroeconomic Imbalances – High Inflation. • Shadow Economy At Least 35% GDP -- Large Criminal Economy/Corruption

5. Economic Conditions in Iraq -- Postwar Very Mixed Picture Since April 2003 -- Some Recovery 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. Alternative Views of the Iraqi Economy Post-War Economy Not Pure Case –Complication for Policy: • Transition Economy – Establishment of a Market System, Openness to Trade and Integration into Global Economy. • Failed State – Restoration of Government Services, Law and Order, Open Trade Regime, Resolve Group Grievances and Halt Economic Decline. • Rentier Economy – Diversification from Oil, Counter Authoritarian Tendencies – Oil Funds. • Post Conflict Economy – Restoration Social/Physical Capital. Achieve Stability before Initiating Economic Reforms. • Failed Take-Off Economy – Increased Economic Freedom – Improved Regulatory Institutions – Anti-Corruption.

7. Post-War Development Strategy Based Largely on Transition Economy (Shock Therapy). • Extreme Version of Neoliberal Reform Package. • Open Economy, Low Taxes, Economy Open to Foreign Private Investment. • Intent to Wipe Slate Clean and Start New Economy. • Macroeconomic Stability– Independent Central Bank But Government Largely Passive in Dealing With Economy. • Strategy Intended to Have High Job Creation Through Rapid Private Sector Investment and Expanded Output, FDI a Key Ingredient. Profitable Imbalances Created by Massive Reconstruction Projects.

8. Strategy Intent—Create Porter-Type Mechanisms of Private Sector Induced Reforms

9. Assessment of the Neoliberal Reforms Reform Program Not Optimal for Iraqi Conditions. • Precludes Large Number of Iraqis from Economic Process – Lack of Skills, Capital. • Uncertainty Too Great for Private Investors. • Approach Not Flexible Enough to Adapt to Shocks or Adverse Developments – Government Not Responsive To Clear Needs. • Trade Liberalization Not Likely to Induce Further Economic or Governance Reforms. • Inability to Produce Short-Run Economic Gains Made Reforms Easy Target for Extremist Groups – Imperialism, Conspiracy Theories.

10. Reform Assessment (contd.) • Since New Institutional Structures-Reforms Not Stimulated by Neoliberal Reforms – Vacuum. • 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. • System is Unstable and Could Easily Revert to a Vicious Circle of Violence and Poverty. • Much Internal Opposition to the Current Economic System and Few Supporters – Alienation. • Unfortunately, New National Development Strategy (NDS) – Appears to be Continuation of Top-Down, Neoliberal Reforms/Privatizations.

11. Iraqi OppositionTo Neoliberal Reforms • Influential Intellectuals Who View Neoliberal Reforms as Extreme and Detrimental to Economy at this Time –Point to Failures of Similar Reforms in Other Countries – Cite Credible Alternatives. • Entrepreneurs Who Fear Foreign Competition. Speculators, Corrupt Officials Profiting From Black Market Arbitrage on Administered Priced Goods. • Religious Leaders Who See Reforms as Part of War on Islam. • Problem – Outside of a Few Technocrats and Merchants, Little Popular or Influential Support for Reforms – Neoliberal Reforms Seen as Imposed With No Input From Iraqis. • The Same Reforms that were Implemented With Some Success by the Transition Countries as a Sign of Their New Independence are Seen by Iraqis as Products of the Country’s Occupation – Has Helped Extremist Group’s Credibility.

12. Implications for Extremism • Attracting Large Numbers of Recruits Requires: (a) Lack of State Capacity, (b) a “Mobilizing Belief”, and (c) Appropriate Agitators. • Iraq has all Three Plus Several Other Home-Grown Factors – Some are Attracted to Extremist Groups for the Money. Extremist Groups Appeal to Disgruntled Former Ba’athists, Republican Guards, Anti-Shia Sentiment. Moral Vacuum left by Corruption in Government and the Breakdown of Trust and Deterioration of Social Capital – Fine Line Between Criminals and Many Extremist Recruits. • Socio-Economic Improvement Can Stem Extremism in Large Segments of the Population, but Development Strategy Must be Such that the Average Iraqi has a Stake in Making the System Work and the Opportunity to Contribute to that End. • Need to Alter Approach to Development From Current Top Down to Bottom Up – More Inclusive, More Input from Iraqis. Currently, Trickle Down Won’t Work in Iraq – Corruption, Little Short-Term Impact, Market Failures.

13. Iraq: Factors Contributing to Extremist Recruitment

14. New Development Strategy: Historical Lessons • Lessons for Iraq From Developing Country Experiences: • Growth Spurts Associated With a Narrow Range of Reforms. • Policy Reforms Associated With Successful Growth Have Elements of Orthodox with Unorthodox Policies/Institutions. • Institutional Innovations Do Not Travel Well – Need Home Grown Strategy Building on Local Strengths. • Sustaining Growth More Difficult than IgnitingIt –Requires Extensive Institutional Reform.

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 Comprehensive Integrating Community Development, Project Selection, Sectorial Development, and Macroeconomic Stability. • Sequencing of Activities to Generate a Virtuous Circle with Winners Interested in Advancing Reform Process.

16. New Focus: 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.

17. New Focus: Social Capital (contd.) • In Iraq Today, Most Networks Ascribed Trust, With Some Process Based and Fewer Extended – Extended Critical for Market Development. • Deterioration in Social Capital May Explain Some of the Problems Encountered by the Neoliberal Reforms • – Lack of Response to Price Movements • – Limited Growth of Markets and Exchange • – Largely Local Market Development Rather than Regional or National.

18. 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 SME Industries in Informal Economy. • Private Sector Needs Official Support. Set Initial Tariffs for Protection at Uniform 10-15% to be Phased out over 5 years.

19. Key Components- Implementation Medium Term • Direct Distribution of % Oil Revenues – Broad Based Domestic Demand. • Allows Phasing Out of Corruption Plagued Subsidy Programs. • Development Bank Allocated % Oil Revenues – To Fund Dual Track Strategy – Private Sector SME Start-Ups as Well as Larger Private Industries Until Commercial Banks Sound. • Oil Stabilization Fund to Achieve Macroeconomic/Fiscal Stability. • Focus on Expediting Improved Property Rights/Rule of Law – Critical for Private Sector Development. • Incentives to Reverse the Brain Drain -- Entrepreneurs. • Anti-Corruption Efforts to Facilitate Private Sector Expansion.

20. New Development Strategy: Outcomes • Potential Through Creation of Balanced Supply/Demand Growth to Expand Employment, Incomes, and Iraqi Inclusion in the Formal Economy. • Virtuous Circle With Feedbacks from Economic Progress to Further Reforms and Sustained Growth. • Job-Oriented Community Development Strategy Has Potential to Marginalize Extremists by Strengthening Indigenous Democratic Processes That Generate Economic Prosperity. • Building of Social Capital Networks Creates Trust Between Different Tribes, Ethnic Groups and Regions. Increased Exchanges Between Diverse Groups Solidified National Markets • Net Effect: Creation of an Environment of Hope and Success for the Average Iraqi.

21. Iraq: Policy Induced Virtuous Circle

22. Iraq: Expanded Virtuous Circle

23. Implications for Extremist Recruitment • Within Iraq – Improved Economy Likely to Lessen Attractiveness of Extremist Message to Those Currently Frustrated by Thwarted Expectations of A Better Life –Foot Soldier Recruits. It Would Also Weaken the Non-Extremist Component of the Insurgency. • Trust-Based Development Strategy Helps Resolve Ethnic Grievances and Tensions, Integrate Markets – Helps Negate Spread of False Rumors – Extremist Recruitment Tool. • For those Motivated More by Religious Fervor or Fear of Modernization/Globalization – Lesser Impact. • Biggest Gains May Be Reducing Recruitment Outside of Iraq – Vitalized Economy Speeds U.S. Withdrawal form Iraq. Calls into Question Extremist Claims of U.S. Imperialism or the Waging of War on Islam.

24. Critical Intangibles • The Extent to Which the New Constitution Unites The Various Ethnic and Regional Groups. • Speed and Degree to Which Trust Can be Restored, Iraqi Firms Can Take Over Many Activities from Foreign Firms.. • The Extent To Which Improved Economic Performance Can Undermine the Insurgency. • Ability to Integrate CERP, LGP, and OTI and Perhaps New Programs into Community-Based Development Strategy. • The Degree and Extent to Which Average Iraqis View Free Markets as a Opportunity to Create a Better Standard of Living rather than a Threat Imposed by Outside Interests. • Most Importantly, The Extent to Which the Iraqi Government Can Evolve into a Developmental State – A Democratic Version of the 1970s Regime.

25. Contrasting Views of The Iraqi Economy • “If I Am Permitted to Dream, Iraq Will Develop into the Japan of the Middle East.” Talib al-Tabatie, Chairman, Iraq Stock Exchange • “It Seems that Many Iraqis do not Understand…why a Market Economy Can Make the Poor People Much Better off Than They Ever Were When Saddam Controlled the Oil Wealth and Doled out Perks to the Iraqis Like a Stern Parent Rewards Small Children for Being Seen and Not Heard.” Ronald Rotunda – George Mason University Foundation Professor of Law. • “We Want to Go Back to the Old Healthy Management of the 1970s.: Thamir Ghadhban – Oil Minister, Iraqi Interim Government