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Iraq’s Faltering Economy
Sada - [2/3/2012]
Iraq’s parliament reconvened this week after the Iraqiyya bloc ended its two-month boycott protesting the alleged persecution of Sunni officials and the arrest warrant issued on terrorism charges for Vice President Tariq al-Hashemi. As the political crisis seems to abate and parliamentary activity resumes, all eyes will turn toward the annual budget discussions and what they reveal about the country’s federalism and the ongoing economic tensions in Iraq.
Almost a decade after its regime change, Iraq’s economy is still in flux. To date, political accords have not been reinforced by the necessary economic measures and, most importantly, the decentralization policies to redress the negative impacts of Saddam Hussein’s economic programs in the provinces and energize these tormented regions’ dormant economies. The measures proposed hitherto have either been incomplete or otherwise neglected in the subsequent stages of their implementation.
For over four decades, Iraq’s governments have pursued economic policies based on a strategy of strict central management that impoverished the rest of the country to Baghdad’s advantage. As the National Development Plan of 2010-2014 indicates, an analysis of Iraq’s economy at the aggregate, sectoral and spatial levels during this 40-year period reveals large disparities between the capital and the rest of the country in schooling, health care, unemployment, literacy, and other development indicators. Through the nationalization of banks and the wholesale trade in the 1960s, the Baathist regime systematically transferred trade margins and investment funds from the regional provinces to the central capital. Since most of Iraq’s non-agricultural products are imported—and because these traded goods usually carry a minimum of 15 percent trade margin—the central government was able to keep the trade margins in the capital and thereby deprived the regions of an important source of saving and investment. This erosion process further worsened when entrepreneurs and skilled workers fled from the regional centers to Baghdad in search of higher wages and better opportunities.
Iraq’s current government is cognizant of the center-region disparities and of the need to decentralize economic management. It is aware that to stamp out the root of political unrest in the provinces, it must energize those regions’ economies. On paper, progress has been made: the 2005 constitution not only removed public sector domination of the economy, but also distributed oil revenue—more than 48% of GDP and 96% of government revenues—to the provinces based on to their population, and made their governments partners in drawing and managing the oil and gas resources of the country.
But while the allocation of policy competencies has been outlined in the constitution, their actual provision or management is yet to be clarified. The goal of devolving authority to sub national governmental structures is clearly stated in the constitution, but operating budgets are currently controlled by the central government, and the financing for service administration still goes through the line ministries. Additionally, the centralized system not only has been retained its previous form (which served the dictatorial regime), but has even increased in influence: the number of government ministries, for example, increased from 20 to 38 even at a time when the capital attracted a disproportionate amount of terrorism and violence, and skilled and experienced workers left Baghdad to the provinces.
Even worse is that central ministries have followed the Gulf model by means of foreign contracting when implementing investment projects—completely disregarding the fact that the Gulf countries have a small population relative to their large financial resources and their need to do so is necessitated by those small populations. Iraq not only has a comparatively large labor force, but one that is (for the most part) either already trained or easily trainable to greater productivity.
The negative progression of policy can also be seen in the changes between the first and second national development plans. The first national development plan (2005-2007) honestly articulated many of the country’s acute developmental needs and recognized that economic centralization was problematic—encouraging instead the establishment of five “regional development centers” to identify investment priorities and supervise the implementation of investment budgets at the regional level. Yet the regional aspects were ignored, and the regional centers, enshrined in the plan document and approved by the Cabinet of Ministers, never formed.
The second national plan (2010-2014) allocates additional funds ($12.5 billion) to redress the regional disparities, but has discarded the structure of regional development centers and has assigned their responsibilities to the governing councils in the provinces. These councils, however, are made up largely of politicians and lawyers and lack the technical and managerial skills to carry out investment tasks.
Additionally, most of the provinces’ development problems are multifaceted and can only be handled effectively through a holistic approach that is still lacking. Despite the centralization of the economic system, there is little communication among the different ministries. Even the ministry of planning, which overlooks adherence to budget allocation in other ministries, is sectorally structured. To be able to deal with their regional problems holistically, each region would have to formulate its own development priorities and match it with its own investment strategy. It is therefore imperative that the regional development centers stipulated in the first national development plan are set up in the regions.
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Sada - [2/3/2012]
Iraq’s parliament reconvened this week after the Iraqiyya bloc ended its two-month boycott protesting the alleged persecution of Sunni officials and the arrest warrant issued on terrorism charges for Vice President Tariq al-Hashemi. As the political crisis seems to abate and parliamentary activity resumes, all eyes will turn toward the annual budget discussions and what they reveal about the country’s federalism and the ongoing economic tensions in Iraq.
Almost a decade after its regime change, Iraq’s economy is still in flux. To date, political accords have not been reinforced by the necessary economic measures and, most importantly, the decentralization policies to redress the negative impacts of Saddam Hussein’s economic programs in the provinces and energize these tormented regions’ dormant economies. The measures proposed hitherto have either been incomplete or otherwise neglected in the subsequent stages of their implementation.
For over four decades, Iraq’s governments have pursued economic policies based on a strategy of strict central management that impoverished the rest of the country to Baghdad’s advantage. As the National Development Plan of 2010-2014 indicates, an analysis of Iraq’s economy at the aggregate, sectoral and spatial levels during this 40-year period reveals large disparities between the capital and the rest of the country in schooling, health care, unemployment, literacy, and other development indicators. Through the nationalization of banks and the wholesale trade in the 1960s, the Baathist regime systematically transferred trade margins and investment funds from the regional provinces to the central capital. Since most of Iraq’s non-agricultural products are imported—and because these traded goods usually carry a minimum of 15 percent trade margin—the central government was able to keep the trade margins in the capital and thereby deprived the regions of an important source of saving and investment. This erosion process further worsened when entrepreneurs and skilled workers fled from the regional centers to Baghdad in search of higher wages and better opportunities.
Iraq’s current government is cognizant of the center-region disparities and of the need to decentralize economic management. It is aware that to stamp out the root of political unrest in the provinces, it must energize those regions’ economies. On paper, progress has been made: the 2005 constitution not only removed public sector domination of the economy, but also distributed oil revenue—more than 48% of GDP and 96% of government revenues—to the provinces based on to their population, and made their governments partners in drawing and managing the oil and gas resources of the country.
But while the allocation of policy competencies has been outlined in the constitution, their actual provision or management is yet to be clarified. The goal of devolving authority to sub national governmental structures is clearly stated in the constitution, but operating budgets are currently controlled by the central government, and the financing for service administration still goes through the line ministries. Additionally, the centralized system not only has been retained its previous form (which served the dictatorial regime), but has even increased in influence: the number of government ministries, for example, increased from 20 to 38 even at a time when the capital attracted a disproportionate amount of terrorism and violence, and skilled and experienced workers left Baghdad to the provinces.
Even worse is that central ministries have followed the Gulf model by means of foreign contracting when implementing investment projects—completely disregarding the fact that the Gulf countries have a small population relative to their large financial resources and their need to do so is necessitated by those small populations. Iraq not only has a comparatively large labor force, but one that is (for the most part) either already trained or easily trainable to greater productivity.
The negative progression of policy can also be seen in the changes between the first and second national development plans. The first national development plan (2005-2007) honestly articulated many of the country’s acute developmental needs and recognized that economic centralization was problematic—encouraging instead the establishment of five “regional development centers” to identify investment priorities and supervise the implementation of investment budgets at the regional level. Yet the regional aspects were ignored, and the regional centers, enshrined in the plan document and approved by the Cabinet of Ministers, never formed.
The second national plan (2010-2014) allocates additional funds ($12.5 billion) to redress the regional disparities, but has discarded the structure of regional development centers and has assigned their responsibilities to the governing councils in the provinces. These councils, however, are made up largely of politicians and lawyers and lack the technical and managerial skills to carry out investment tasks.
Additionally, most of the provinces’ development problems are multifaceted and can only be handled effectively through a holistic approach that is still lacking. Despite the centralization of the economic system, there is little communication among the different ministries. Even the ministry of planning, which overlooks adherence to budget allocation in other ministries, is sectorally structured. To be able to deal with their regional problems holistically, each region would have to formulate its own development priorities and match it with its own investment strategy. It is therefore imperative that the regional development centers stipulated in the first national development plan are set up in the regions.
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