Kyle McEneaney on Iraqi economy

September 15, 2010

People power will fuel Iraq’s future prosperity

Kyle McEneaney

Iraqis possessed of a television and the electricity to operate it may have caught some of the US President Barack Obama’s declaration of an end to combat operations as they rose for the early morning Ramadan meal at the start of this month. What they heard won’t have surprised them.

Watching the speech, I recalled driving from Basra to Najaf early one morning in May, on the highway that traces the frontier between the barren Western Desert and the edge of the fertile Euphrates plain. A hundred years earlier, this route would have conveyed caravans taking spices and silk from the Far East overland or upriver for sale at Baghdad, Aleppo or Damascus.

Just outside of Nasiriyah I passed a caravan of a different sort – a line of tractor trailers, perhaps 30, every third one accompanied by a mine-resistant, ambush-protected armoured vehicle, all hurtling towards the Kuwaiti border at 145kph with their payloads of US Army chattel. My Iraqi companion barely took notice; such convoys have been a regular sight since the drawdown of US troops began more than a year ago.

The official end to combat operations, though little more than a symbolic milestone commemorating a transition that began long ago, has inspired much handwringing over the country’s political stability, particularly as the March elections have yet to produce a government. But Iraq has missed political deadlines before and in doing so has often reinforced stability by not forcing issues that were not ready to be resolved, as in the case of Kirkuk. Beneath the surface of the current impasse are positive indicators of stability: free, fair and popular elections; recourse to the judiciary over constitutional interpretation; and intense coalition building.

Iraqi politics will eventually work itself out, as it has done since the country’s first free elections in 2005. The real challenge to Iraq’s stability is its ability to build and sustain a well functioning economy now combat operations are over.

And what does Iraq’s economy need to function well? Not oil, of course. Or land. Or even water. Iraq is replete with resources, not least its people, whose renowned entrepreneurial acumen is already hard at work.

Iraqicompanies are building stadiums, such as the Basra Sports City, slated to host the 21st Gulf Cup in 2013. They are bottling Pepsi and servicing oil wells, and building parks. Even the most exotic goods have an enterprising Iraqi to supply them. As I discovered on my most recent trip, you could buy an emu as far south as Basra and as far north as Sulaymaniyah, were you so inclined.

Iraq lacks not resources but the ability to deploy those resources effectively. What the country lacks is infrastructure. The bones of its commerce are brittle, its veins sclerotic. Consider finance: credit is scarce. With few exceptions, banks lend only to friends and family and require 100 per cent or more in cash or land collateral. Iraq is a cash economy in the first degree. Its small and growing number of ATM cards generally work only at whichever bank issued them. Not even the leading hotel in the Kurdish capital of Erbil, by far Iraq’s most polished business city, takes credit cards.

Or consider oil, the country’s main source of income: Iraq exports 80 per cent of its oil through two offshore terminals in the Gulf, both ageing and overdue for repair after 30 years of war and deferred maintenance. The other 20 per cent goes to the Turkish port of Ceyhan via a pipeline that is regularly attacked by militants. Iraq – probably with more oil reserves than Saudi Arabia – imports diesel fuel because it cannot make enough on its own.

Major infrastructural initiatives have transformed the Iraqi economy before. In the late 19th century, the advent of steamships and railroads made the county an exporter of dates and wheat (the latter of which Iraq is now one of the world’s largest importers).

During this era, in Iraq and throughout the region, a debt-laden Ottoman government granted European companies concessions to build and operate transport networks for which it had neither the finance nor expertise.

The present Iraqi state also lacks the capacity to undertake large infrastructure projects but, unlike its Ottoman predecessor, it is wealthy from oil and will soon be far more wealthy. That enables it to negotiate with international companies from a position of strength, as demonstrated by the recent oil contract auction rounds.

Iraq has already outlined ambitious plans: light rail in Baghdad; four new export terminals in the Gulf; power plants; cement plants; and refineries – all built by companies from Europe, the Middle East, the US and Asia.

If anything, the symbolic decision to end combat operations in Iraq confirms that Iraqis have taken the reins of reconstruction, even if they will need assistance to secure it. Perhaps there is an effective role for US and other world governments in the reconstruction process, although it may prove difficult to sell this idea to Iraqis as they contemplate the half-finished prisons and wastewater treatment plants left behind by US government contractors.

But ultimately, the rebuilding of Iraq will not be sustainable unless it is led by Iraqis. Much of the capital for this reconstruction will come from abroad, and as investors such as the company I represent, Northern Gulf Partners, work to channel this money into rebuilding Iraq’s infrastructure, the co-operation of Iraq’s authorities, from municipalities and governorates up to the major ministries, has been improving.

And on that Kuwaiti border for which the American forces are headed? A different caravan, headed the other way, this one an unbroken line of trucks waiting to carry goods from Iraq’s overburdened port of Umm Qasr. Situated on one of Iraq’s two main maritime arteries – both clogged with silt, shipwrecks and the occasional unexploded mine – Umm Qasr is one of two functioning ports serving Iraq’s 30 million people yet it handles less cargo by weight than New Haven, Connecticut.

Iraq’s political institutions may lack experience and punctuality but they have endured and matured despite adversity. Undoubtedly it is a difficult task to master the mechanics of a state under threat of violence and without the benefit of an established political culture. But if Iraq is to realise the elusive “victory”, to become and remain a stable and prosperous state, it must replace its tattered infrastructure to sustain economic growth and create paths to prosperity for Iraqi people. Iraq’s ability to do so will be the true determinant of its long-term stability.

Kyle McEneaney is vice president of Northern Gulf Partners, an Iraq-focused investment company with offices in Baghdad and New York