Iraq: The Economic and Governance Sides of the Crisis

There is no question that the Islamic State is the most immediate aspect of the Iraq crisis. It needs to be checked, its gains need to be reversed, and it needs to be driven out of Iraq if possible. But – and it is a critical but – Iraq requires far more. It is going to require fundamental political and economic reforms to achieve any meaningful form of unity and stability and to overcome its sectarian and ethnic divisions.

The last three years have effectively made Iraq a failed state. Prime Minister Maliki did not simply fail by becoming corrupt, authoritarian, and sectarian. He and those around him failed at every level.

Two CSIS reports illustrate the scale of the issues that must now be addressed. One provides an in depth analysis of the economic and governance problems the Maliki regime helped create and is called Iraq in Crisis

The other is called Hitting Bottom: The Maliki Scorecard in Iraq, and is a summary overview of the judgments international agencies made of Iraqi development and governance towards the end of the Maliki regime.

The Economic Challenges

It is tempting to begin by focusing on their broader failures in creating a system of governance and rule of law that could bring together Iraq’s Arab Shi’ites, Arab Sunnis, Kurds, and minorities. It is important to understand, however, that it will take more than political incentives to heal Iraq.

Iraq’s oil wealth has not been used to create the economic conditions for unity, and is a critical underlying problem in trying to heal its sectarian and ethnic divisions. The Maliki regime strongly favored itself and Arab Shi’ites over Arab Sunnis, and wavered between efforts to bribe the Kurds and force them to put all petroleum development under central government control.

The end result is that record oil revenues did little to raise Iraq’s overall per capita income and meaningful employment levels, and created a deeply discriminatory economy. There are no reliable data on Iraq’s income distribution by sectarian and ethnic faction, or even a meaningful national GINI index, but the scale of Iraq’s problems is illustrated by how its overall per capita income compares to that of other Gulf States. The CIA estimates Iraq’s per capita income at $7,100. To put this number in perspective, Iran is $12,800, Saudi Arabia is $31,300, Kuwait is $42,100, the UAE is $29,900, and Qatar is $102,100.

Maliki and company did not develop a meaningful development program. They did not address the crisis in employment. They did not find effective ways to divide and use the nation’s oil wealth. They did not reform the economy or lift the barriers to stable investment and growth. They did not deal with the massive problems in Iraq’s unproductive state sector and state own enterprises, or its inefficient agricultural sector and use of water.

They did not address education and health reform, and offer Iraq’s youth a meaningful future. They create overambitious and impractical plans for petroleum development, but did not create effective plans for the development and growth of Iraq’s infrastructure.

In fairness, many of these failures followed on U.S. failures to go beyond project and Commander’s Emergency Response Program (CERP) aid and ever develop meaningful overall development plans for Iraq.  They are the product of the lack of core competence in dealing with the broader aspect of development that the State Department and USAID have shown in both Afghanistan and Iraq over the last decade, and a focus on immediate security and short term governance issues that lasted through the departure of U.S. forces at the end of 2011.

The Demographic and Humanitarian Challenges

The UN, IMF and World Bank never seriously addressed Iraq’s overall economic problems or its massive demographic pressures from a population that the CIA estimates is extraordinarily young and creates immense pressure for new jobs. To put this pressure in perspective the U.S. Census Bureau estimates that Iraq only had a population of 5.23 million in 1950. It had risen to $12.8 million in 1979 – when Saddam Hussein consolidated power in a blood purge of the Ba’ath. It was 24.7 million when the U.S.-led invasion overthrew him in 2003. It is 32.6 million in 2014, and the US Census Bureau estimates that it will rise to 40.4 million in 2025 – some eight times what it was in 1950.

The CIA estimates that some 37% of the population is 14 years of age or younger, and another 20% in 15-24 years of age. Some 332,000 males enter a labor force of some 8.9 million each year, and 322,000 females reach employment age – a potential source of productivity that is often wasted. Official unemployment was around 16% before the new round of major civil war began, but underemployment was at least 25% and youth underemployment around 40%. No up to date estimate of the percentage of the population below the poverty line existed, but it may well have exceeded 25%.

While no reliable numbers exist, it was clear that these problems were far worse for Arab Sunnis than Arab Shi’ites and Arab Kurds before surge in violence in 2012 and 2013. It is also important to stress that all of these figures are estimates that were made with little regard to the sharp rise in violence in 2013, the renewal of open civil war late that year, and a crisis that UNAMI estimates now kills 1,200-1,500 Iraqis a month, and injures 1,800-2,000 more -- even if the worst fighting in Anbar is excluded from the total.  The UNHCR estimates that it has displaced some 1.1 million Iraqis or made them refugees, and created a population of concern of 1.5 million.

There is no way to estimate the loss of homes and businesses in the fighting, the breakdown in a weak and faltering educational system, and the growing levels of sectarian segregation, exhausted savings, and major new medical problems. The United States did estimate, however, that some 70% of Iraq’s smaller minorities had left Iraq by the time its forces depart in Iraq in 2011, it is clear that recent fighting has made life an economic and violent nightmare for Iraq’s Yazdis and many of its remaining Christians.

The Governance Challenges

If Iraq is to unify and heal, it must do far more than defeat the Islamic State. It must deal with these economic problems and simultaneously reform its structure of governance to both preserve some degree of national unity and guarantee its key factions both security and equity. The Maliki government made this challenge far worse, at every level. Quite aside from the highly public sectarian and ethnic power struggles at the top level of government, it deepened the problems in creating effective provincial and urban governments, an effective police force, and a trusted legal system.

The answer may be a stronger form of federalism, sharing of petroleum revenues, and emphasis on local as well as centralized development. It is critical to understand, however, that Iraq does not easily divide along sectarian and ethnic lines. Roughly half of the Kurdish controlled area is mixed – a mixture sharply heightened by refugee problems. 

The various maps that attempt to show ethnic and sectarian zones are little more than guesstimates, but are also deeply misleading. They ignore Iraq’s actual population density, and the fact that mixed areas involve a far larger percentage of its population than is indicated in such maps – a reality that quickly becomes clear when such ethnic/sectarian maps are compared to population density maps, and one looks at the number of mixed major cities and towns.

These seemingly neat maps of ethnic and sectarian areas  also ignore the flow and control of water, access to the sea and major trade/road systems, arable land, location of petroleum reserves, and energy export routes. The fact is that virtually all of the heavily populated areas in Iraq are east of the Euphrates and concentrated along the Tigris. Iraq is not called the land of two rivers for nothing, but most of Iraq west of the Euphrates is effectively empty regardless of what some maps of Iraq’s sectarian divisions imply.

Looking Beyond the Current Fighting

There are obvious and all too real limits to what the United States and other sources of outside aide and advice can do to deal with these challenges. The United States is also scarcely the only source of advice that recent history shows lacks core competence in providing effective planning for development and governance. Like USAID, elements of the UN have done very well in  specific areas, but the UN has shown no competence in the overall coordination and planning of either economic aid or governance, and the IMF remains focused on international economic stability. Moreover, for all their flaws, the U.S. aid efforts in Afghanistan were no worse than those of other aid providing nations.

This does not, however, mean that the United States should not work with the new Iraqi government to break away from the self-destructive legacy of Maliki and his advisors and ministers. The United States may not have the right solutions, but it can help Iraqis set the right – and unifying – priorities. It can also be proactive from the start in making it clear to Iraq’s new government that the issue is not simply to defeat the Islamic State and reintegrate Iraq’s Sunnis and Kurds, but to come to grips with its economic and governance problems. It is all too clear that no faction can win the civil war or dominate without effectively losing the country.

The World Bank also has made enough progress in Afghanistan to show that creating a strong World Bank team in-country might be a way of creating the core competence that the United States and other sources of advice on governance and economics lack. It would also avoid making the United States appear to be pressuring Iraq for a solution that many Iraqis would feel was simply to serve U.S. interests.

What the United States cannot do is simply focus on the fighting. It is all very well to say there are no military solutions to insurgency and civil wars, but it is also necessary to act on such advice. Far more is needed than a token effort at stability operations, and while the United States does not like the term “nation-building,” Iraq will either have to rebuild as a nation or even the most successful military effort will fail.

Anthony H. Cordesman holds the Arleigh A. Burke Chair in Strategy at the Center for Strategic and International Studies in Washington, D.C.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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Anthony H. Cordesman

Anthony H. Cordesman

Former Emeritus Chair in Strategy