After two decades as a pariah state shut off from the international system, Iraq has been taking steps since 2003 towards being a fully fledged participant in the global economy – sometimes in spurts, sometimes with stumbles, but all the while moving doggedly in that direction. Investors are watching the progress with a huge degree of interest; many have raced to capture commercial opportunities in a long-closed but potentially lucrative market.

 “Iraqis are ready and equal to engage in trade and investments with the rest of the world,” says Dr Sami Al Araji, head of the National Investment Commission (NIC), the government body charged with attracting investment to Iraq.

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WTO goal

 In the bid to rejoin the global trading system, World Trade Organisation (WTO) accession is a primary goal which came within closer reach with the successful completion of a Second Working Party meeting in Geneva earlier this year. The country will submit a goods offer to the WTO imminently.

 The WTO bid is providing an impetus for Iraq’s moves to bring its regulatory and legal framework – especially in such crucial areas as customs clearance and intellectual property protection – in line with international standards. The Ministry of Trade has pinpointed five services sectors for liberalisation and openness to foreign businesses post-WTO entry: tourism, finance/insurance, telecommunications, computers/R&D services and transportation.

A taste of normality

 Off the back of improved security, Iraqis are grasping at normality. Consumers are keen to spend money and with rising purchasing power and higher private-sector salaries, more of them are in a position to do it. While car sales plummet elsewhere in the world, they are booming in Baghdad as the wealthy snap up snazzy new imports from Jordan and the United Arab Emirates, no longer so worried that such a flagrant sign of affluence will invite carjacking or kidnapping. Electronic appliances are flying off the shelves in newly opened shops. Restaurants and cafes are packed with patrons, and street markets are bustling with activity.

 “With a GDP growth rate of 6%, inflation and foreign exchange rate in control, domestic markets growing, and oil revenues rising; the economic fundamentals are robust with a bright future. If the genie of instability is kept inside the bottle, Iraq’s underdeveloped ‘frontier economy’ is well-poised to utilise its vast untapped resources for multi-level socio-economic development and become a free-market economy,” predicts an analyst report by Dijlah & Furat Bank, a banking institution created with the mission of capitalising on Iraq’s burgeoning market for Islamic financial services.

 But change on this magnitude, from a command to demand economy, can only happen so fast. The state continues to hulk over, and at times impede, the fledgling private sector. As overall employment levels increase, public-sector hiring is outpacing that of private enterprise. According to an Iraq Labour Force Analysis, from 2004 to 2007, private-sector employment declined from 63% to 56% of total employment. Many Iraqis still prefer the security of being on the government payroll to the possibility of earning a fatter private-company pay cheque. The result is a skills shortage in the private sector and a still-bloated bureaucracy.

Government reliance

 Government revenues (mostly from the state-run oil sector) still account for two-thirds of GDP. While the economy grew in real terms more than 70% from 2003 to 2008, the private-sector’s share of the expanding pie remains stalled, at roughly a quarter.

 The government has vowed to readjust the ratio. “We are encouraging the private sector to get more involved in the economy,” says Dr Sami.

 Economic progress is being made, despite legislative hurdles. Isolation from global capital markets has shielded the Iraqi economy from much of the turmoil of the financial crash and worldwide recession. Iraq’s growth rates exceed Middle Eastern averages. The country has reached the end of a three-year financing deal with the International Monetary Fund and is in the final stages of agreement with the Paris Club of donor countries. The IMF estimates the Iraqi economy will have grown by more than 7% in 2009.

Five-year plan

 The Ministry of Planning has launched for the first time a five-year plan (2010-14) for a provisional capital budget. “The capital budget is based on the production of oil. So it is very important to attract investors who would invest in all the sectors of the economy in order to cover all needs, and especially in infrastructure projects -- houses, electricity, water, hospitals, universities, schools, transportation and communication,” says Dr Sami. The oil and gas sector alone needs investment of $100m, according to prime minister Nouri Al Maliki.

 Iraqi officials presented 750 projects in 12 main sectors for perusal by potential partners at the US-Iraq Business and Investment Conference in Washington, DC, in October, following the 500 that were announced at a similar event in London in April. Housing is a priority: there are immediate plans to construct 500,000 housing units; but the estimate is that more than 3.5 million are needed over the next decade. The government has pledged to invest 25% of the costs (roughly $6.5bn). “This will hopefully give us an infrastructural push for meeting the needs of the Iraqi people,” says Dr Sami. Meanwhile, a stimulus package that would offer a further boost has been held up in parliament because of a delayed payment scheme.

 “We inherited a very bad economic situation,” says Mr Al Maliki. “We are paying particular attention to education and agriculture because they have been neglected and suffered from the last regime’s economic policies.”

 The damage from those policies will take some undoing, and in the meantime the spectre of renewed violence, the regrouping of terrorist organisations and widespread civil unrest must be constantly warded off. The efforts go hand in hand, however. Some have termed it ‘economic counter-terrorism’: bringing in jobs, income and economic stability to deny radical groups recruiting power and diminish their appeal.

 “Security and economy are complementary and should have equal care,” says Mr Al Maliki.

 The much-needed jobs can be created in large part by engagement with foreign investors – provided the conditions are right.

 “The potential for private-sector job growth in Iraq is great,” argued Frank R Gunter, who was the senior civilian economics adviser to the Multinational Corps in Iraq from 2008 to 2009, writing in a newspaper opinion piece in November. “The country is blessed with a strong entrepreneurial tradition, a relatively well-educated labour force and a natural resource more valued in the Middle East than oil: water. Only Iraq and Turkey have sufficient water for large-scale agribusiness, and Iraq is surrounded by wealthy countries that need to import food. But to exploit these advantages, Iraq needs to make important changes.” The key change he urges is the rationalisation of the country’s clunky commercial code and the speeding up of licensing procedures.

 The drive to attract investment continues in stride, although some investors are taking a wait-and-see attitude concerning national elections that are scheduled for early 2010. Political wrangling has caused deadlines for setting the elections to slip, in turn causing considerable hand-wringing by interested outside observers. Investment projects are in some case being put on hold while breaths are held to see if the elections come off and what degree of violence might surround them.

 Dr Sami insists the work and focus of the NIC will carry on irrespective of politics. And many in the country argue it is not who wins the elections that is important, or even the precise level of unrest over them, so much is the fact elections take place at all.

Patience pays

 It is easy to be impatient with Iraq. It is easy to focus on how much is left to do.

 But consider the very short timeline. The US invasion was a mere six years ago. The Iraqi constitution was approved in October 2005 and the first 275-member council of representatives was elected in December 2005. The first provincial elections were held in January 2009 – the same length of time US president Barack Obama has been in office. So one must ask whether it is more appropriate – more fair – to count what has not been achieved in this tiny sliver of time, or what has been achieved already.

 Col Adam Such is well placed to appreciate the difference a few years has made. Former deputy commander of the 5th Group, an elite special forces unit that fought in the brutal battle in Fallujah, he left the US military earlier this year and now facilitates investment into Iraq through the private-equity firm he works for.

 “When you step back and look at Iraq and realise the country only recently had its system of government completely replaced, for there to have already been a series of elections and for the Iraqis to have come as far as they have since 2003, it’s actually incredible. We tend to look at micro trends and ignore the macro. The overall trend continues to move forward,” he says.

 “I take a longer view. I take the elections as a positive sign that electoral democracy is taking root. Yes, there will be violence. But things will calm down again. It’s a natural progression. We’ll get past it, the new government will settle in and investors will keep coming.”

COUNTRY PROFILE

IRAQ

 Population: 28.9 million

Pop. growth rate: 2.5%

Area: 437,367 sq km

GDP growth (2009): 5%

GDP per capita: $3400

Current account: $14.05bn

Largest sector (% of GDP): Industry 70%

Labour force: 7.75 million

Unemployment rate: 18%

 

The cost of this supplement was underwritten by the United States government. Reporting and editing were carried out independently by fDi Magazine.