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Commentary By Judith Miller

Will Iraq Fall Victim to the Oil Curse?

The Baghdad government runs a top-down command economy and only pays lip service to private jobs and economic diversification.

Since America toppled Saddam Hussein in 2003, Iraq has had three free-wheeling, relatively fraud-free national elections. Its military has been reconstituted, its soldiers and some of its police retrained. The infrastructure has been partially rebuilt. Iraq, with its 30 million people and the world’s third-largest oil reserves, could one day be fabulously rich.

But the country’s bountiful oil supplies could also be a curse. They encourage Iraq’s government to continue running an oil-centric, top-down command economy and to largely pay lip service to creating private-sector jobs and economic diversification. Oil now accounts for almost 95% of all government revenues and over 60% of gross domestic product, while employing only 1% of the Iraqi workforce.

“In liberal economies,” says Kanan Makiya, an Iraqi professor at Brandeis who travels often to Iraq, “governments are accountable to individuals who produce wealth that is taxed. In oil or ’rentier’ societies, there’s a built-in independence of the political class, an indifference to the will and needs of the people.”

Meanwhile, the government is the nation’s largest single employer, largest property owner (some 90% of land), and controls the largest segment of its manufacturing sector. In recent years, the ministries of Industry and of Social Affairs together lent about $1.5 billion a year, probably more than all Iraqi banks combined.

The exception to Iraq’s dispiriting economic track record is the northern region of Kurdistan. Despite its autocratic tendencies, the Kurdish provincial government has restored security, unshackled the private sector from cumbersome regulation, and attracted some $3.5 billion in foreign investment. The region is flourishing economically despite exporting only 100,000 barrels of oil per day, mostly to Turkey (its principal investor). That’s a fraction of the 2.4 million barrels per day that Baghdad pumps.

Having awarded contracts to private companies to build power plants and distribute electricity, Kurds get an average of 18 hours of electricity a day. By contrast, Baghdad—which finally pushed out its electricity minister following protests over power shortages this summer—provides an average of three. “We simply provided opportunities for public-private partnerships,” says Falah Mustafa Bakir, the head of the Kurdish regional government.

In Baghdad, ministries are still largely seen as patronage posts and government oil revenues as spoils to be divided among the country’s warring political factions. Like so many American diplomats, most ministers and senior officials still dwell in the International Zone, an oasis of power surrounded by cement walls and concertina wire. This zone is as remote from the rest of the city as it is from the 18 provinces that depend on Baghdad’s largess.

Anbar province, for example, is home to nearly 1.5 million people, the vast majority of whom are Sunni. The Sunni revolt in 2007 against al Qaeda in Anbar, coupled with the U.S. “surge,” turned the war’s tide.

In his heavily fortified compound, Qasem Mohammed, the 55-year-old governor, proudly displays a giant mockup for “New Ramadi.” This $6 billion-$8 billion project would include 16,000 homes and villas, office space, cafes and restaurants, and even an international exhibition center. Anbar needs 83,000 housing units to meet growing demand.

But this grand vision faces obstacles. First, potential investors would demand dependable security, which neither Baghdad nor the provincial government can yet provide. While Ramadi is only 60 miles from Baghdad, security checkpoints along the highway make it a roughly three-hour drive from the capital, which itself has close to 1,500 checkpoints. There have been three devastating suicide strikes near or within the Anbar governor’s compound since late last year, the most recent on July 4. Mr. Qasem lost his left hand in an attack last year.

Yet Iraqis and Americans concur that such violence is now a less important hindrance to development than Baghdad’s political disarray and its disastrous economic stewardship. Hameed al-Janabi, an investment adviser to Mr. Qasem, complained that Baghdad shelved plans to build a new power plant in energy-starved Anbar and instead decided to build a solar energy plant in the Shiite city of Karbala. “They say that America and Iraq have invested $17 billion in generating electricity since 2003,” he said. “But I’m sick of empty promises.”

U.S. Provincial Reconstruction Teams (PRT) have helped repair infrastructure and boost agriculture throughout Iraq, especially in Anbar. And the U.S. Agency for International Development has been operating microlending and training programs that Rabaa Muhammad Nayil al-Alwani, Anbar’s youngest regional parliamentarian, called America’s “most important contribution to the province’s 100,000 widows and 7,000 divorced women.”

But the more than $100 million invested in Anbar—a fraction of the $53 billion spent on aid projects throughout Iraq by more than 60 American agencies since 2003—have barely dented that province’s, or Iraq’s, needs. A project to provide 97% of Anbar residents with drinkable water by the end of 2010, for instance, will provide far less. (A PRT spokesman declined to estimate the projected shortfall, blaming the gap on frequent power outages, a lack of maintenance, equipment failures and other problems.)

Anbar is only one example of a U.S. reconstruction effort “misdirected from its inception,” says Joost Hiltermann, a director of the International Crisis Group. Carl J. Schramm, the head of the Kauffman Foundation, which supports entrepreneurship, notes that the importance of creating a vibrant economy has been underestimated by the U.S. military, which now controls one-fifth of U.S. foreign aid. In Iraq, he wrote recently in Foreign Affairs magazine, Washington hired contractors like Bechtel, bypassing Iraqi citizens and a chance to build indigenous capability.

Clark Johnson, an economist and a former civilian adviser in Iraq, also faults Washington for not promoting a more growth-friendly monetary policy, more nonbank market-driven finance channels, or the adoption of modern property rights—all of which, he recently wrote in the National Interest Online, would “reduce the relative role of government ministries in the economy” and “lessen the scope for official corruption.”

In Baghdad, Mowaffak al-Rubaie, a former adviser to Prime Minister Nouri al-Maliki, blames his own government, not solely American mismanagement, for Iraq’s economic morass. While expressing confidence that Iraq’s divided political parties will eventually reconcile, he is deeply discouraged by the government’s failure to restructure the economy.

“We wanted to run a free-market economy with all the rules, regulations and structures of the past,” he said in an interview. “We can’t go on like this. And then we do.”

This piece originally appeared in Wall Street Journal

This piece originally appeared in The Wall Street Journal