The Iraqi Economy II: Economic Programs at the Local Level

The Iraqi Economy II: EconomicPrograms at the Local Level NS3040 December 2008 Dr. Robert E. Looney relooney@nps.edu

Outline I • Introduction • Regional Contrasts and General Considerations • Income Patterns • Unemployment • Development and Reconstruction Expenditures • Internal Migration • Development Strategies—General Consideration • Links with Counterinsurgency Strategy • Economic Development and Provision of Essential Services • Strategy Trade-Offs

Outline II • Elements of a Localized Strategy for Iraq • Relevant Studies • Socio-economic Linkages • Shadow Economy • Deterioration of Social Capital • Evolution of Insurgent/Criminal Networks • Bottom-up Development Strategy • Integrated Framework for Growth • Implications for Local Projects • Vocational Training

Outline III • Questions? -- Break • Implementing an Economic Strategy at the Local Level • Micro-Credit • CERP Program • Provincial Reconstruction Teams (PRTs) • Al-Anbar Case Study • Areas for Improvement • Lessons Learned -- Possible Strategies for the Future • Suggestions for the Army • Suggestions for HTT Surveys

Regional Income Disparities

Employment and Wage Structure by Governorate (2004) • ID1450/$

Iraqi Development and Reconstruction Expenditures

Iraqi Capital Budget by Province: 2003-2008 I

Iraqi Capital Budget by Province: 2003-2008 II

Availability of Goods

Internal Migration I • 1.4 million refugees • Tend to migrate to areas where they have family or friends and the environment is considered safer -- typically an area with homogenous sectarian composition. • Northern Iraq • Northern provinces outside Kurdistan are multi-sectarian melting pots that have complex patterns of migration. In Kirkuk, the situation is unstable. • Sunni areas • Many Sunnis from dangerous multi-sectarian communities, who cannot afford to travel abroad, have relocated to predominately Sunni provinces such as Al-Anbar and Salahuddin. Many non-Sunnis have left these provinces.

Internal Migration II • Central/Southern Provinces • Large numbers of Shia left Baghdad for the nine predominately Shia provinces of central and Southern Iraq • The majority will seek to settle in new areas • Baghdad • The number of displaced persons inside Baghdad has doubled since February 2006 • Eighty-five percent of these migrants have relocated from one part of the city to another • 72% are Shia Arabs • 99% feel they are safer since they moved to neighborhoods controlled by their sectarian bloc

Internal Migration III • Within Iraq, displaced persons strain local economies by: • Inflating rents, and prices of food and commodities • Reducing local access to jobs, healthcare and fuel • Several of the more stable governorates now restrict entry or are closed to migrants • Karbala now requires that new residents have family in the local area that will formally sponsor them

Internal Migration IV

Elements of Development Strategy I • The Counterinsurgency Field Manuel recommends a strategy that relies on first restoring essential services, then promoting economic development • Essential services • Should be restored immediately regardless of the security situation • These include: police; fire protection; water; electricity; schools; transportation networks; medical aid; sanitation; food supply, fuels and basic financial services • Economic Development = programs to improve living standards • Includes: job creation; local investment; clarifying property ownership and resolving conflicts; protecting property rights; creating markets, and providing vocational training.

Elements of Development Strategy II • The distinction between essential services and economic development is one of timing • Restoration of services must begin immediately. • Economic development must often wait until security is restored. • As a general rule, at the present time, economic development should be the focus in peaceful regions such as Sahul, Irbil, Sulaimaniya, Qadisya, Misan and Muthanna • Essential services are more important in the unstable areas of Ninevah, Baghdad, Babil, Anbar and Basra.

Elements of Development Strategy III • The key is to demonstrate that programs are bringing prosperity to the average Iraqi • Where possible, focus on economic development projects that have a quick pay-off and create as many winners as possible who have a stake in the future • Effectiveness is more important than efficiency • More efficient, integrated state-of-the-art systems, like a national electricity grid, are fragile and vulnerable to the insurgency • More robust systems, like community generators, are equally effective and much less vulnerable

Stability Operations Lines of Effort

Elements of a Localized Strategy I • The security situation dictates the role of government in the economy • Active government substitutes for the lack of markets • Government focus should be on establishing an institutional framework that will allow markets to develop and grow • The security situation and shrinking budgets also dictate strategy • The first priority is to use aid-related funds as a tool to bring about stability, not long- or medium-term growth. • This implies a bottom-up approach, rather than the traditional top-down strategy

Elements of a Localized Strategy II • To deal with the insurgency, it is critical to address the way projects, programs and policies impact and interact with: • The informal/shadow economy, • social capital formation • Insurgency/criminal gangs. • The object of policy is to create positive linkages and feed-back loops between these elements and the economy so as to create virtuous circles of growth and development

Socio-Economic Linkages & Insurgency

Large Shadow Economy

Deficient Social Capital I • Social capital deteriorated significantly under Saddam and continues to deteriorate under today's stresses. • Social capital can be defined as networks of relationships that bind people together • Trust is a key element of Iraqi social capital. • There are three main kinds of trust: • Ascribed Trust – Kinship groups and family members. • Process-Based Trust – Individuals that have known each other for some time – a key element in business networks. • Extended Trust – Transactions between individuals with limited information about one another

Deficient Social Capital II • Currently in Iraq: • Most networks are built on ascribed trust • A smaller number are built on process-based trust • Few rely on extended trust • Improving process-based and extended trust is critical to establishing a market based economy • Restoring trust and social capital is a long process that can best be done through community development and the restoration of stability.

Insurgent/Gang Networks I • Iraq exhibits many of the key elements described in the Third Generation (3G2) Gang Model: • Violent networks exist in the context of a state constrained by minimal capacity, • The country suffers from is poor economic performance • There are significant social, political and economic disparities • Many Iraqi insurgent gangs have evolved over time • Their influence has grown from street to sub-national level • They have evolved from protective groups into prominent political and economic actors • Gangs have been able to expand due to the vacuum created by state retrenchment, corruption and incompetence • Gangs have increasingly turned to criminal activities in the shadow economy and use violence to increase their resources

Insurgent/Gang Networks II • The 3G2 Model divides gang activity into 3 generations: • Generation 1 consists of traditional street gangs which do not pose a major threat to security: • They are localized, turf-oriented, with inter-gang rivalries • They lack sophistication and have a loose leadership structure • In Iraq, they may protect ethnic or tribal groups • They quickly exploited the vacuum after Saddam's overthrow • They finance themselves through opportunistic criminal activity • Generation 2 gangs are a major threat to security and law enforcement • They evolve from the most successful Generation 1 gangs through violence and intimidation and often have ties to the insurgency • They have sophisticated structures, similar to businesses, and tend to think in markets rather than turf • They finance their activities through shadow economy activities, like oil smuggling, drugs, and kidnappings

Insurgent/Gang Networks III • Generation 3, the final stage of gang evolution, is a major problem for security • Gen 3 gangs are highly sophisticated and have fully evolved political aims • Their goals are power and financial acquisition • They are protected by government officials, whom they have corrupted • To increase their support and funding, they form foreign alliances with states like Iran • They may evolve into enclave states that provide services and function as de facto governments

Insurgent/Gang Networks IV • To combat the insurgency and slow or stop the formation and evolution of gangs, in addition to better law enforcement and security, it is necessary to: • Rapidly create jobs in the formal sector • Reduce the size of the informal/shadow economy • Increase the strength of the legitimate political sphere

Bottom-Up Development Strategy • A bottom-up orientation that focuses on the local population is best for addressing Iraq's shadow economy, social capital deterioration and criminal/insurgent gangs • Instead of a simple free market strategy, opt for an "evolutionary" development strategy that begins by focusing on a limited number of critical development constraints • Use trial and error at the local level to find out what works before making major commitments of funds and personnel • Build on established institutions and traditions to prevent further economic disruption and social capital deterioration • Sequence activities to generate a virtuous circle so that local Iraqis become winners invested in advancing the reform process

Integrated Framework for Growth

Implications for Local Projects • The following general actions are useful at the provincial and regional levels: • Improve essential services like electricity, water, fuel , sewage, focusing on robust, easily maintained technologies • Encourage labor-intensive employment opportunities in agriculture and small business • Employ local labor to improve the quality of transportation and infrastructure, i.e., phone system, roads, bridges, pipelines • To reach those who would otherwise be locked out of the economy introduce: • Microfinance • Vocational training • Establish more efficient provincial government and institutions

Vocational Training I • Vocational training is another key program at the local level • It enables localities to draw on their strengths and put under-utilized resources to use • It helps solve the shortage of skilled labor, which surveys suggest is a major concern of private businesses in Iraq. • Key elements of a setting up a vocational training program include: • Determining locally needed skills and desired qualifications • Choosing a school site, keeping in mind that vocational training sites are an insurgency target • Securing buildings and conceal students’/instructors’ identities

Vocational Training II • Other key elements of a setting up a vocational training program: • Training the trainer • Balance language versus technical skills • Consider team teaching or sending an Iraqi translator to school • Selecting the students can be the most difficult challenge • Be sensitive to ethnic and gender considerations • Consider paying students for their participation or charging tuition to raise their stake in the outcome • Remember that subsidies are required to cover travel and living expenses • Set up a service to place the students in appropriate jobs

Questions -- Break • Questions? • Next : Implementation --- Microfinance, CERP, PRTs

U.S. Funding for Reconstruction I • Since 2003 the U.S. has appropriated $50.77 billion for Iraqi reconstruction efforts. 91% of these appropriations are accounted for by: • The Iraq Relief and Reconstruction Fund (IRRF) • Iraq Security Forces Fund (ISFF) • Commander’s Emergency Response Program (CERP) • Economic Support Fund (ESF)

U.S. Funding for Reconstruction II • Current Funding Status • The IRRF is now largely expended, and as of September 30, 2008, its funds are no longer available for new obligations. • The ISFF, has the largest amount of funds still available for new obligation – $3.85 billion. • Of $3.74 billion appropriated to the ESF, the U.S. Department of State (DoS) has obligated approximately $1.25 billion through inter-agency agreements, grants, and cooperative agreements. • Now totaling $3.56 billion, the CERP has been placed under stricter project-approval guidelines under the recent National Defense Authorization Act for Fiscal Year 2009

U.S. Aid to Iraq by Source

Sources of Iraqi Reconstruction Funding Source: SIGIR, October 2008, p. 17

Status of U.S. Reconstruction Funds 9/30/2008 Source: SIGIR, October 2008, p. 23

IRRF Allocations by Type

Major Ongoing ISFF Reconstruction Projects

ESF Program -- Economic

ESF Program -- Security

ESF Program -- Political

U.S. Aid Spending, Projects Completed

U.S. Aid to Iraq: Overview • While immense efforts were made between 2001 and 2008, with much local success, many problems still remain: • Only limited measures of effectiveness have been developed • SIGIR has documented immense waste and corruption • There are serious shortfalls in qualified aid, PRT and EPRT personnel • There are still issues surrounding the plans for transferring projects to the Iraqi government for management and funding

Microfinance Institutions (MFI) • Microfinance institutions are a key component of bottom-up development • Microfinance puts basic financial services within reach of the poor • It provides small loans, typically for working capital • By assessing small amounts of credit at reasonable interest rates, it gives people the opportunity to set up small businesses • Based on informal appraisal of borrowers and investments, it makes capital available to those who would be turned down by conventional banks • Records show that poor people are a good risk, with higher repayment rates than conventional borrowers

Microfinance in Iraq I • Currently in Iraq there are 5 MFIs: • Three are run by international NGOs and two by domestic NGOs • Together, they have twenty-six branch offices in fifteen provinces, with four more branches being organized • Outstanding as of 2007: • 19,019 loans totaling $26,765,000 total loan value • Average loan size $1,407 • Since their establishment, MFIs have made 52,768 loans with a total value of $109,471,000. • Less than 1% of MFI loans are delinquent 30 days or greater. • This success rate is the result of careful selection of potential borrowers and proper loan management • Additional grants to start up microcredit financial institutions are an excellent investment in both economic development and Iraqi goodwill

Microfinance Outreach, November 2006

Microfinance in Iraq II • Microfinance is an indirect conflict resolution tool. • Microfinance works best for poverty reduction but is also an efficient job creator. • Micro-loans create about one and a half direct new permanent jobs per every $2,000 loaned to small businesses • These small businesses tend to provide essential goods and services that have stable demand over time (e.g. localized clothiers, small electronic retailers, grocers, etc.). • Military support of MFI should be invisible • The greatest challenge is hiring and training quality MFI staff

The Iraqi Economy II: Economic Programs at the Local Level