I will not rehash this in depth, but it bears close reading as it is in many ways a direct rebuttal to the posturing by Rumsfeld, Wolfowitz et al that the issues of April-Present could not be foreseen, planned for and otherwise dealt with in a more proactive and realistic posture. One does, however, have to listen to the regional experts, such as myself, and take the self-serving self-dealing of people like Chalabi with a large grain of salt. But the DoD gullible neophytes took bait, hook, line and sinker.

Now as to the issue of resistance, two articles:
DISPATCHES
Iraq Resistance Remains Threat to U.S. Forces
http://www.nytimes.com/2003/10/19/international/worldspecial3/19MILI.html?pagewanted=all&position=

and

Arrest of Iraqi Cleric Sparks Confrontations With Shiites
Challenge to U.S. May Usher In Conflict With New Group
By Karl Vick
Washington Post Foreign Service
Sunday, October 19, 2003; Page A24
http://www.washingtonpost.com/ac2/wp-dyn/A47072-2003Oct18?language=printer

Both emphasize that time is running short.

That is why I find the idiotic political wrangling over the 20 (15) billion to be so very horrifying. Another set of appropriations will come up, then it will be time to take out the knives, but now we need moola and but fast.

Posted by The Lounsbury at 01:53 PM | Comments (0) | TrackBack
Filed Under: Jan-Dec 2003

Iraq: Reconstruction and Jobs - foreign labor, a time bomb [edit addition]

I wanted to bring to your attention the following on Iraq, reconstruction and jobs.

Iraqi business
Jobs for the boys—and for foreigners
Oct 9th 2003 | BAGHDAD
From The Economist print edition
"Iraqis are worried that outsiders are getting too many jobs"
http://www.economist.com/World/africa/displayStory.cfm?story_id=2126088

And The Financial Times follow on:
MIDDLE EAST & AFRICA:
"Contractors in Iraq accused of importing labour and exporting profit"
By Nicolas Pelham
Financial Times
Oct 14, 2003

From which I quote extensively insofar as I don't have a weblink for this:

The article opens noting "US sub-contractors are importing cheap migrant labour from south Asia to Iraq, despite high local unemployment and complaints from Iraqi contractors that they are being overlooked by the US-led administration in Baghdad."

Make no mistake about this, while I am not sure how extensive the labor importation actually is (is it significant? No numbers to tell.), this is a serious political issue.

It runs into a number of underlying sensitivities.

(a) Iraqis no longer feeling in control of their own country
(b) Iraqis feeling reconstruction efforts are not directed towards their priorities
(c) Iraqis feeling their country is being sold out from underneath them without their input
(d) Iraqis feeling they are not benefitting from these efforts (note for example the WB estimate that the already pitiful per capita GDP estimate of ~1000 USD has fallen -as I predicted back in what, May?- by half to a sub-Saharan African level of 400-500 USD.).

These are explosive sentiments, sentiments that will generate more opposition if not addressed.

Now, here is the root of the problem, from CPA-Iraq officials themselves: "US officials in the Iraqi capital say that six months into their occupation of Iraq, security conditions have forced companies to turn to south Asian labour to implement contracts, from prison-building to catering for US troops."

Insecurity and lack of trust requires imported labor, that lives in cantonments like the Americans, which in turn breeds... more insecurity and lack of trust as recent job demos in Baghad and Basra indicate.

Ah, but let us not forget the CPA-Iraq getting off message, you know all is well. Except they fear hiring Iraqis.

What does that tell you?

The article continues to note: "Recent weeks have seen unrest in several major cities, including the capital Baghdad, amid rising anger at Iraq's high unemployment rate. "We don't want to overlook Iraqis, but we want to protect ourselves," says Colonel Damon Walsh, head of the Coalition Provisional Authority's procurement office. "From a force protection standpoint, Iraqis are more vulnerable to a bad guy influence."" Emphasis added.

I hesitate to observe that the bolded statement highlights the problems of this approach - and the idiotic thinking. Bad guy influence, white hat, black hat.

As Martin Wolf observed in The Financial Times and I do not tire or repeating: occupations are by their nature incentive incompatible. Here we see the clear tension between the protect yourself needs of the occupier in the short term, and the reality of what the resistance generates in terms of self-defeating security responses.

However, the article also notes: "US troops and some companies under contract to the US government nevertheless seem prepared to take the "risk". Iraqis form the bulk of the workforce for reconstructing Iraq's prisons. General Janis Karpinski, who is overseeing the prison programme, says she has had "no single security incident" involving Iraqi contractors. "You find other [non-Iraq] nationalities in out-of-the-way corners taking 15 minute naps," she says. "Iraqis see work as a way of getting the country on its feet." and adds that "Bechtel, which is handling a $680m (577m, £408m) reconstruction programme for USAid, has meanwhile held open days for Iraqi contractors and intends to spend $215m of $300m on Iraqi sub-contracts."

This last I have heard directly from Bechtel people but I confess over time I have come to doubt it. By the way, their initial representations, in June, had the number at 90 percent of the program financing, I see we are down to less than half and working towards a third. I predict that Bechtels Iraq spending numbers will look more anemic as time goes on. I also note, however, I don't really like the Bechtel people I have met on the ground here (in the region) - I am sure they are competent, but...

The article later notes:
"But a number of businesses based in Saudi Arabia and other Gulf states that have contracts to supply the US army are wary of employing indigenous labour. "Iraqis are a security threat," says a Pakistani manager in Baghdad for the Tamimi Company, based in the Saudi city of Dammam, which is contracted to cater for 60,000 soldiers in Iraq. "We cannot depend on them." The company, which has 12 years' experience feeding US troops in the Gulf, employs 1,800 Pakistanis, Indians, Bangladeshis and Nepalese in its kitchens. It uses only a few dozen Iraqis for cleaning. ..... A Tamimi manager says the company pays an average salary of one Saudi riyal ($3) a day and grants leave once every two years. The contracts are awarded by Kellogg Brown and Root (KBR), a subsidiary of Halliburton ... [whose] Iraqi share is worth "in excess of $2bn", according to officials of the Defence Contract Management Agency in Baghdad."

Well, two items here.

First, one can see something of Gulf issues arising here.

In the Gulf, in its wierd little world of "gastarbeiter" - the foreign 'guest workers' who make the Gulf work but can never settle there - is a clannish place, where other than the free floating Westerners, each nationality or regional grouping tries to hire and look out for its own. Lebanese try to hire Lebanese or at least other Shami Arabs, Egyptians, Egyptians, Indo-Pak sub-Continental, etc. etc.

Regrettably you see no small underlying tensions between the groups, and mutual accusations of distrust. Part of the nature of the strange, distorted labor markets in the Gulf, which in part depend on the clientellage of the Emirs and Sheikhs.

Second, of course, the isssue of inter-regional distrust.

The article notes ""The US military have never outsourced resources on this scale," says the DCMA's Colonel Damon Walsh. "If it weren't for this service support we would have needed at least 20,000 more troops." KBR officials in Baghdad declined to provide details of their employment policy in Iraq, or the size of their Asian workforce."

I might note that the appearance, the sense of injustice as as important as the reality, above all insofar as the CPA-Iraq seems, to date, largely secretive and incapable of communicating in an effective convincing manner with Iraqis. For example from the article: "The potential for ill-feeling nevertheless remains. "US contractors are importing labour and expatriating the benefits," says Hakim Awad, an Iraqi construction manager who queues for contracts outside Baghdad Airport every day. "Where's the benefit accruing to Iraq?""

A further note, on the historical tone-deafness and indeed illiteracy of American efforts:
"The recourse to an Urdu-and Bengali-speaking workforce has historical echoes for Iraqis, who recall the south Asian workers the India Office imported to maintain the British army following their invasion of Iraq during the first world war. Some also fear the replication of labour patterns from Gulf states, whose economies are dependent on Arab and Asian migrants."

I believe the last is likely exagerated, but the political implications of the first are deep, and deeply felt.

[edit added]
I note also of interest is this article from The Financial Times
US companies to be big gainers from Iraq outlay
By Alan Beattie in Washington
October 17 2003
http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1059480693215&p=1031119383196

The article notes "Much of the US financial contribution to Iraqi reconstruction will be earmarked for American companies, according to the top international official at the US Treasury."

The article notes that most of the aid will be 'bilateral' and that under "tied aid" rules of the US AID, "which have repeatedly been criticised as unfair and inefficient by most development experts" such aid is reserved for US bidders. This opposed to putting aid through an international trust fund open to all bidders at the most competitive rates.

I believe we can count on pork rather than efficiency driving appropriations.

Posted by The Lounsbury at 01:18 PM | Comments (0) | TrackBack
Filed Under: Jan-Dec 2003

Putin & Iraq: More on interview, al-Jazeerah, etc.

President Putin gave a kick ass interview (if lying like scum) on al-Jazeerah. Why are not more high US officials on al-Jazeerah and al-Arabiyah. Absence cedes the game.

Putin, for all that he is a scheming bastid (and I confess, I have soft spot for scheming bastids – one does not get ahead without that characteristic) knows how to spin, and although I did not understand the Russian, the translation said to me that someone had prepped him on the points that would appeal to the al-Jazeerah audience – for example he had clearly been prepped on various shared Arabo-Russian vocabulary which allowed him to make nice connexions, and he had clearly been prepped on the proper reference to upcoming Ramadan. Or Russians simply speak better to Arab issues – maybe yes, maybe no, but it is clear Putin had done his homework on a number of levels including evocative turns of phrase. I believe my dear Eva Luna would probably enjoy this interview.

Let me address this last item for a moment. I am not well learned in Russian issues, despite a passing interest in Soviet issues that led me a long time ago to study in East Germany when there was still such a thing. However, I have in the past ten years met my share of Russians in this region, and I the following strikes me as probably reasonable observations. It strikes me that the 1960s to early 1980s saw the USSR develop some ‘interesting’ relationships with the Arab world, above all the in the ‘socialist’ Arab states. It strikes me that Putin, coming from a KGB background, has access to a set of people who know, if nothing else, who to connect more or less well with the rhetorical style.

Now, the interview was not terribly hard hitting, although the follow up on usage of nuclear weapons and threats was not bad, weak but not bad. What does one expect from an interview with Putin? At the same time, I feel that Putin crafted his remarks well. He dealt with the Tchechan issue more or less well (but of course was not challenged, that in my opinion is a black mark on interview – who by the way conducted his interview in Russian). I might suspect the questions were screened. Still it was outside Russia (Malaysia) and while his self-serving representations re Tchechnia were not challenged, the pre-interview run up was moderately critical. At the same time, he got his message out in a fairly positive context. That’s better than ceding the field.

Posted by The Lounsbury at 11:19 AM | Comments (0) | TrackBack
Filed Under: Jan-Dec 2003

The Bin Laden Tape

I spent part of Saturday evening listening to the new Bin Laden tape. Quite clear, sounded like his voice, I rather suspect it will be confirmed as the real deal by the experts.

Very clearly recently done, I should think this will put an end to the wishful thinking that Bin Laden is dead. It covered the expected points, Iraq, Afghanistan, and threats of ‘martyrdom’ operations against American interests in and outside the US. Of note a section directly addressing the American people and then Bush directly – the section addressing the American people was a bit odd, saying that the people have been ‘deceived’ by the Jews and thus I suppose implying Americans in general are not fully responsible, an almost moderate statement by Bin Laden. Oddly placed, no doubt posturing. For Bush, threats along the lines that the price to be paid will be heavy. He got quite emotional, voice-wise, at the end. Sounded tired, perhaps a bit weak, but he’s always been soft voiced.

Most importantly, the ‘audio letter’ indicated that al-Qaeda will focus on Iraq, and it included numerous appeals to the Iraqis to fight the Americans and named specific parties as ‘infidels’ – such as the Kurdish ‘secular’ parties and the Baath party (drawing a parallel with Karzai et al). Well, the line in the sand has been drawn. He also noted a number of countries in terms of I suppose probable targets: GB, Spain and Yemen, although chillingly Kuwait, the Gulf States, and Jordan were mentioned. Call to action, or arms.

If there was any doubt, Iraq is going to be a center of efforts to get at Americans, but very clearly not the sole focus.

This tape highlights for me the general absence of US officials not only present on the Arab TV Sat news channels, but worse, US officials prepared to address Arab audiences. Talking at the Arab world as opposed to crafting one's message to hit the right emotional and political buttons (even while staying true to one's core message/policies) strikes me as something the US has completely failed at to date (although I have noted the British spokesman for the CPA-Iraq is very, very good at this, so it is hardly impossible - excellent if Egyptian tinged Arabic).

Posted by The Lounsbury at 11:15 AM | Comments (0) | TrackBack
Filed Under: Jan-Dec 2003

On effectivenesss of 11 Sep Response

On the effectiveness of US response to 11 September, efforts and spending.

Frankly this question gets into areas where I have no real expertise, such as military and security affaires. I further, not being in the United States, do not really have a sense of activities there, other than what I read in the papers.

On overseas issues, I can only note the following, it strikes me that after an initially well-balanced response with the Afghan campaign and reaching out to various regional governments to upgrade intelligence work and the like, we have seen an unbalanced fixation on a certain kind security and specifically using military might in the place of more useful instruments, such as covert action in conjunction with local governments.

While the statement often thrown carelessly about, that the US can not make those who undertake suicide missions to blow up buildings like it, that is a mis-framing of the issue. The issue is risk management and influence, to use economic thought, on the marginal potential consumer of extremism.

It strikes me that on one hand those already sold on violence as a solution are, generally but always, not subject to influence and compromise. It is correct to note their minds can not be changed.

What is not correct is to confuse that group – whatever the percentage of the population, let’s say 30 percent to include the fellow travelers who will support but not act – with the clear majorities that, however much they may detest US foreign policy, admire the US and are subject to convincing, given the right combination of carrots and sticks. But there must be carrots, by which I mean not the purely negative “carrot” of not getting killed (really the stick) but support for real changes that help their lives.

Now in this area it must be admitted that the US has relatively limited space for action. Certainly much support for the al-Qaeda types derives from the sclerotic nature of the political economies of the Middle East – where corrupt faux-secular elites or oligarchies strangle societies and economies for their own narrow benefit. At the same time, as matters of convenience, and at times sold on the idea these faux-secular elites necessity for fighting Islamism, the US supports them. Egypt, Jordan, Morocco, Tunisia, Yemen come to mind – the Gulf is a somewhat different case but if we leave aside the secular adjective, it is similar.

Recent policy, however, seems to opt for the easily sold but in my mind, long term inefficient military option – we see in Iraq spending of say 100 billion USD or more on the purely military options – with meager efforts in the economic realm where I believe greater returns are to be found.

The example of Israel’s long struggle with the Palestinians and the current madness rather illustrates this. Sharon is presently walking down the same path he walked, to a bloody failure, in the late 1970s and 1980s, attempting to solve a political issue through pure application of force, while simply trying to install quisling leaders to administer the conquered population. By the way, The Economist has two excellent articles on this, including a telling map of the security, or rather Annexation Fence:
The Middle East conflict
Israeli frustration versus Syrian impotence
Oct 9th 2003 | CAIRO AND JERUSALEM
http://www.economist.com/World/africa/displayStory.cfm?story_id=2124664

and including a telling map
Israel's security barrier
A safety measure or a land grab?
Oct 9th 2003 | JERUSALEM
http://www.economist.com/background/displaystory.cfm?story_id=2119356

I note the Israeli conflict in this context because I believe the Sharon's ever escalating and ever more futile responses illustrate that security, as other endeavors respond to the economic law of diminishing returns and likely indeed the marginal utility on security spending, if mapped, would likely took somewhat of an upside down U shape, if on the Y axis we plotted 'security' meaning safeness etc. as an increasing positive value (insecurity as a decrease, etc.) and on the X axis we plotted security dollars spent. I mean, in this case the crudest security dollars, military dollars. From a given point, down on the U, increases result in more security, but as we reach the peak, increases deliver progressively less security and eventually actually generate insecurity.

Nothing novel in this observation I may add, theoricians in security issues have observed that at some point a search for security begins to generate feelings of insecurity among previously unconcerned parties, thus generating more opposition and eventually insecurity for the actor seeking "perfect" security.

I would not pretend that this "security utility" graph is either terribly knowable or indeed constant over time, it likely shifts in or out constantly. However, I do believe that the War on Iraq, a useless piece of idiocy, was security seeking that pushed the US well over the top of the inverted U such that present security spending in Iraq actually has negative returns.

Posted by The Lounsbury at 11:01 AM | Comments (0) | TrackBack
Filed Under: Jan-Dec 2003

Coming soon here: a rant on the idiocy of the forced loan to Iraq

I have a rant, but then I decided a more coherent item would really be useful here as much of the rant is said in prior entries when this forced loan concept came up.

I can only say this is a black mark on the Democrats, the worst kind of empty short-sighted political posturing as opposition I can imagine.

Posted by The Lounsbury at 10:56 AM | Comments (0) | TrackBack
Filed Under: Jan-Dec 2003

Iraq: Reconstruction � Myths, Micro Lending, Venture Capital etc (long and analytical)

Iraq: Reconstruction – Myths, Micro Lending, Venture Capital etc

Well, I was not able to get around to my intention to write something on my particular view of how to go forward in Iraqi reconstruction efforts, however Eva Luna posed an interesting question in regards to the potential role of micro lending which in many respects dove tails with some thoughts I have on tools in reconstruction. This post is long, but I believe useful.

First, let me note that although micro-lending can be a useful tool, it is personnel intensive, in staffing and in training, and difficult to quickly scale up. Thusly, in the near term, micro lending – taking as a given that there are few, if any, Iraqi specialists in this area – cannot play a real role. However, as part of a toolkit with similar aims – which is to say a ‘grassroots’ effort to build up Iraqi capacity to confront the new free market world – micro lending could play a real medium term role.

In order, however, to understand the utility I think it useful to take a look at the Iraqi economy and the myths prevalent in the West – and indeed in this region – that surround Iraq and get in the way of thinking through the issues.

The first, of course, is oil wealth, or more broadly, hydrocarbon wealth. Much ink has been spilled by economists and others on what has been termed “the Paradox of Plenty” and the poor performance of single commodity but especially oil producing states in terms of building durable real economies, whether in the Middle East (e.g. Saudi Arabia’s progressive impoverishment, with current per capita income a meager 8K USD) or South America (Venezuela) or elsewhere.

I will not try to reproduce those analyses here: I direct interested readers to the following resources: Karl, Terry Lynn “The Perils of the Petro-State: Reflections on the Paradox of Plenty.” Journal of International Affairs Fall 1999, 53, 1, p. 31-48; Amuzegar, Jahangir “OPEC as Omen.” Foreign Affairs 77, 6, Nov./Dec. 1998, p. 95-111 on the “quick money fever” and corrupting influence of quick oil wealth, and in regards to substantive political economy focused analyses of the global oil market: Mitchel, John, et al. The New Economy of Oil: Impacts on Business, Geopolitics and Society. London: Royal Institute of International Affairs, 2001; Claes, Dag Harald The Politics of Oil-Producer Cooperation. Oxford: Westview Press, 2001. These later two are serious studies from a real political-economic view, not popular trash you usually get.

In general, empirically, it is rather clear that after the 1970s and early 1980s, OPEC no longer controlled oil prices – indeed its influence was always exaggerated and with the entry of ever more non-OPEC players into the market, their pricing influence even when cheating by cartel members is minimal, is marginal. With long term oil price declines (in real terms) and poor ex-hydrocarbon economic performance for virtually every oil-dominated economy, the stereotype of boundless wealth that was fixed in the West as well as in the region is no longer true.

In terms of Iraq, we have the mirage of vast oil wealth because (a) of the fairly and low cost to extract extensive reserves– said to be second in the world after Saudi Arabia although I would caution numbers need to be confirmed now – somewhere between 100 and 200 billion barrels; (b) the mirage of big numbers, in which X billion in oil sales sounds like a lot – for all that in fact the Iraqi economy in 2002 was not large, somewhere between 25 and 35 billion, versus, for example the US at 10.4 trillion, UK at 1.52 trillion, even poor Portugal, among the poorest EU nations, 182 billion for a population of 10 milllion, or Poland in Eastern Europe with 368 billion; (c) the revenue numbers are gross, not net, such that an estimated ~40 billion USD in export revenues (assuming, for example 3.5 million barrels per day in exports at 30 USD/barrel) sounds large, but we need to subtract production costs and required plow back into capital investment. That 40 billion USD disappears very quickly; (d) ignores other costs the Iraqis must meet, such as debt service, etc.

However, the Administration stupidly pimped the idea that Iraq could pay for its own reconstruction. It could, should it wish to stumble along in poverty, frustration and failure.

Next, Iraq’s non-oil resources. I have seen loose statements about an Iraq with a world class infrastructure and a well-educated populace, with according to President Bush 'an entreprenurial tradition.' These statements, excepting the last, were true, once upon a time. Again, were true. Let me turn to the CPA-Iraq’s own statements at an investment conference I attended in June. Roughly fifty percent of the population is under age 16, adult literacy is roughly 54 percent, collapsing from 1980 level of ~70 percent, with fewer and fewer Iraqis able to obtain formal education.

The image of a well-trained and well-educated population, with world-class educations is a mirage, which like the mirage of oil wealth and oil sheikhs dates from the 1970s and 1980s. The reality of the past 20 years, and this is true throughout the region, is collapsing living standards and educational standards. There are several causes, clearly in the case of Iraq, overspending on military adventures –including two draining wars- and then a decade of sanctions are key.

However, do not forget the pressures of the demographic explosion since the 1960s. This is a clear factor in all the Arab countries, where the State has had a terrible time keeping up with the galloping population growth. Fertility rate at present is roughly 5 children per woman, again this based on June CPA-Iraq estimates – recall again roughly 50 percent of the population is under 16 and all that implies in terms of pressure on providing proper schooling resources, even in the most efficient of systems, never mind a quasi-Stalinist nightmare state.

Further to this issue, recall also that whatever the quality of Iraqi schooling and training – once it was indeed among the best in the Arab world – training was very much skewed to a quasi-socialist economy. Iraq shared many of the characteristics of the Egyptian system, both in turn sharing many of the characteristics of the old Soviet system, reinterpreted in an Arab context.

First, a focus on producing engineers and technical specialists, people to execute plans. Not creative thinkers, which are dangerous, but executors and elaborators of plans. Second, a focus on producing professionals, in the old sense of the term, doctors, lawyers. Commercial education was fairly non-existent (and even remains so to this date in Egypt) and a rigid educational system renders liberal or literature diploma holders with fairly useless degrees, except to fill positions in the State bureaucracy, an ever rarer commodity in the Arab world with its bloated bureaucracies that nonetheless have compensation schemes generally more attractive than the private sector.

One can count on the fact that in the absence of proper educational facilities, and now with the end of the police state, that the Islamic medresa will enter the picture for the impoverished, and likely in the hands of radicals.

However, the main point here is the image of a well-educated Iraqi populace ready to take over the wreckage of a quasi-Stalinist economy, although one should qualify this, is a pure mirage. Even presuming that in the Iraqi diasporas of perhaps 2 million, there is some reservoir of appropriate talent, that pool of talent will not return until there is some stability. The Arab diasporas saw what happened to the Palestinians who jumped too quickly back into Palestine in the burst of hope in the 1990s – an analogous situation insofar as the Palestinians were also well reputed for their education, but in the past 20 years that too has collapsed under twin pressures of demographic expansion and economic collapse – for all that the diasporas remain well educated.

So, what we have in reality in Iraq, in terms of human capital, is a wasted asset with largely dated training and knowledge, highly skewed to serve either a rigid and politicized state sector, which operated on quasi-socialist but quasi-market bases to serve the Hussian Clan, or in the alternative a private sector run by oligarch mercantilists seeking rents rather than productive investment. The 'entreprenurial tradition' touted by Bush is nothing of the sort, there is a tradition of small commerce, rarely risk taking, always closed and family based -shopkeepers- and there is a tradition of State tied great mercantilists who again are rarely risk taking, rarely ready to engage in what we can properly call entreprenurial ventures.

None of these factors indicate a well-educated Iraqi population ready to build a free market future. Quite the contrary, like much of the Arab economies that had been or are subject to any of the various flavors of ‘Arab Socialism’ we have situations relatively similar to the situations in Eastern Europe circa 1990. I would estimate that while on one hand the “petite commerce” economy of small boutiques remained and remains more or less lively in comparison to Eastern Europe c. 1990, the remainder of the economy may actually be in some ways sicker – that is the cultural hurdles to change may be more serious insofar as unlike in Eastern Europe there is a lively counter-ideology to Western free market, quasi socialist Islamism. I note, by the way, that standard Islamic conservative thought, let’s call it Salafisme, is in no way hostile to capitalist free markets, excepting the issue of interest of course.

Now, I do not believe it is necessary to belabor the issue of the poor state of Iraq’s economy, private or public sectors, excepting the new semi-traffic of duty free (until 30 December) imports to feed the dis-saving of a merchandise starved middle class.

Taking the situation into account several items are clear.

As should be clear, any reconstruction program needs to address the weaknesses of the Iraqi economy overall, in terms of physical and human capital. One can not simply assume an ability on the part of the Iraqis to respond in good time to a brand new set of conditions, a challenging free market under rules – so far, the ones established by Bremer, a set of ideological extremism far exceeding what is well advised.

The question, then, is how to address this shock to the system. Certainly education, but that is a medium term solution, insofar as we are thinking of educational systems. However, in the short term there are other methods, which include education by doing.

Very clearly at present, in the Iraqi system, the average Iraqi is at a serious disadvantage vis-à-vis foreigners, be they exiles, Westerners or Arabs or others from the region, as well as to the Great Families, the Oligarchs of the old regime, who have access to capital, but whose habits are precisely those that have helped make the other Arab economies basket cases.

The main question, then, is how to bring ownership of a new Iraqi system to what we might call a new Iraqi Middle Class, but in an American sense of the phrase. A wider, more entrepreneurial and less clannish and rent-seeking set of economic actors – and for the first grant access to real economic opportunity to more ordinary Iraqis, not the old oligarchic families (such as the Chalabi – part of the old corrupt Shi’ite oligarchy with all its bad habits as evidenced by the Petra Bank and related issues).

How then, to achieve this? Certainly the suggestion of micro-lending is helpful, however as noted supra micro lending is a highly specialized and personnel intensive activity – which requires a gradual development, it also is relatively small scale in effect. Iraq needs rather more than micro-lending can deliver in a reasonable time frame.

Rather more interesting would be to leverage a combination of ‘business incubators’ and higher level venture capital type organizations. While again, the skills are specialized and relatively personnel intensive, we begin to look at levels of financing and assistance to potential entrepreneurs on a scale that could have real and substantial impact in the short term. It is likely that one would need several levels of such facilities – business incubators financing, through equity, initial projects along the lines of perhaps $100-500 thousand in initial capital; small private equity funds of perhaps $20 million in size taking up $500 thousand to $5 million; and perhaps the macro level funds of a $50-200 million level which would focus on privatization efforts, perhaps with a view to insuring that at least some state entities get into competent yet Iraqi public hands – and avoid the ugliness of the corrupt privatization disposals of Eastern Europe. Let us be realistic, replace avoid with minimize.

Before the disaster that overtook my Fund with the little capital game my Director played, I was looking at the last. The last leg, the big end as it were, is likely to be easily done in a largely private sector context. However, the first two legs, the business incubator and the small private equity & entrepreneur support requires official support – for example US Government providing insurance and financing to reputable organizations to establish and run such organizations, mobilizing both private and public capital. Initial efforts may very well be money losing, thus a requirement for public support, although I note that US agencies such as OPIC, which supported funds in Eastern Europe and the Soviet Union on one hand had their fingers burnt, on the other hand learned lessons on how to operate funds in a difficult environment. Make no mistake, under the best case scenario, Iraq for the next five years is going to be a difficult environment. The legal system will be in a constant state of flux (this presuming the best context of a legitimate government - and normal give and take as Iraqis argue over the future of their law) with poorly trained lawyers and judges trying to get up to speed, with Oligarchs trying to sieze what they can, and endless problems over title and the like. Investing in Iraq - as opposed to selling to Iraq - will reqiure a strong stomach.

In that context, I have noted in terms of the financial sector that operators on the larger end are opting for the comfort, however doubtful, of partnering with the old Oligarchical class. And much as I personally dislike this, it is highly understandable, above all if one is thinking of putting in a few tens of millions into a situation where one has no idea what the real Iraqi future will be. The American Dream being pimped by the Bush Administration, Egypt on the Euphrates, Afghanistan on the Euphrates, Islamic Republic on the Euphrates? The first two are passable, the other options are disasters for an investor. The levels of hurdles are enormous - mind you I have not even touched on such issues as how to structure exits for our venture capitalists - we hope for a booming Iraqi stock market although IPOs in this region are rarely as attractive as in the US and trade sales are often as good.

Nota bene, among the reasons for having caution in entering and investing in Iraq is the reality of the violence. I have often noted that while the Bush Administration is technically correct that most of the country is peaceful, that is a technical point. Only 11 percent of Iraq is habitable, and ~70 percent or more of the population is urbanized, above all in the Baghdad and Basra zones. Further, nota bene, Baghdad governate represents by itself a bit over one third of the Iraqi population, and the economic heart of the country. Thus, to say that only the Sunni Triangle is subject to guerrilla warfare is really saying that the demographic and economic heart of the country is a no go zone – it is impossible to consider serious investment until this situation is addressed.

In the near term, calming things down requires bribery, and bribery means that 20 billion USD as a gift and to buy a pause.

Posted by The Lounsbury at 10:37 AM | Comments (0) | TrackBack
Filed Under: Jan-Dec 2003

October 16, 2003

Iraq: A quick round up - spin, spin and ignorance, Stonian or otherwise.

First, this item on reaction to the costs of reconstruction.
THE PUBLIC MOOD
Taxpayers Are Restless on Billions in Aid for Iraq
By LYNETTE CLEMETSON
Published: October 16, 2003http://www.nytimes.com/2003/10/16/national/16VOIC.html

Some key quotes:
" "It might make me feel more comfortable if the money wasn't all supposed to come from us," said Mr. LaVergne, 32. "They've got all of that oil. I don't see why we can't use money from Iraq's oil reserves to pay for what needs to be done." "

The myth, the stereotype of rich oil Arabs dies hard it appears.

The Administration needs to aggressively dispell this little myth.

Second:
THE OCCUPATION
Commerce Chief Says Iraq Violence Should Not Discourage Investors
By ALEX BERENSON and EDMUND L. ANDREWS
Published: October 16, 2003
http://www.nytimes.com/2003/10/16/international/middleeast/16IRAQ.html

Why, oh why do officials say these stupid things?

First, this little "most of Iraq is quiet" thing gets no my nerves. All well and fine that most of a largely empty desert wasteland is quite, but the reality is the demographic heart, the industrial heart of the country is not quiet at all.

But let us abstract away from this little lie, to the second issue. That is, until there is some form of what appears to be a stable and reliable Iraqi sovereign state, few investors are going to have the appetite for the enormous implied risk of expropriation. As of yet USG is not offering insurance products to cover Iraqi risk and no private financial institution is taking on Iraqi risk - for the good reason that it is utterly unbounded at present.

In short sping is not a solution to real problems. Making real progress with sound policy is the solution to the lack of investment, not transparently stupid spin. This spin is "fine" for fooling the yokels in the States who have no fucking clue as to the problems involved (and like our dear Sam Stone lap up the CPA-Iraq's agit-prop in blissfull ignorance.) but it does not solve real problems.