Final installment of my interview with Ambassador Charles Ries, the senior American heading up economic transition and development in Iraq (click for Part I and Part II)...
According to Ambassador Ries, a healthy Iraqi economy will be built upon two major sectors (petro-chemical and agricultural), as well as the smaller sectors of tourism and light manufacturing. Growth and development of these areas will fuel Iraq's economic reconstruction and recovery.
The petrochemical sector awaits only the Hydrocarbon Law to open up opportunities to the large "outside" firms that will be able to explore, develop and produce in greater volume than currently. Though the details are still being worked out, this will involve companies getting a percentage of return on investment with the rest of the profits going to the Iraqi government. What the government does with those profits will in turn drive the rest of the country's economy.
However, agriculture is a strong second to oil. As the ambassador says, "Iraqi agriculture had been an economic powerhouse for millenia," built especially on irrigation canals from the valley between the Tigris and Euphrates rivers. But like other sectors, it "suffered under the state planning mindset for many years," and is currently under-capitalized in terms of machinery and structures such as silos. However, nearly one-fourth of the Iraqi labor force still works in agriculture, and with the right governmental or private investment, Ambassador Ries says Iraq's river valley would rival the Imperial Valley of California.
In fact, the agricultural industry has been a priority during rebuilding, with currently $100 million set aside from USAID alone for developing what Ambassador Ries calls the "supporting ligaments" of the agricultural economy throughout Iraq--slaughterhouses to process animals, feed grain operations to support cattle farms, packing/canning plants for vegetables so that farmers can get a higher return by growing more and spreading it beyond their locale, etc. There are also "active programs of technical assistance to help the Agricultural Ministry develop extension offices" that will conduct research and education on most effective agricultural methods. And right now the military is assisting agri-businesses with the time-sensitive work of spraying date trees by rehabilitating the helicopters required to conduct the spraying.
Tourism is another money-maker for Iraq, as was demonstrated in the recent Shia religious pilgrimages, but Iraq is full of historically-significant sites and "holy places" sacred to both Muslims and Christians. Building the housing and related services to attract and accommodate tourists from around the world as security improves will both help to kick-start the Iraqi economy and contribute to a lasting foundation.
Iraq's non-petrochemical manufacturing sector is another smaller but important piece of the puzzle. There is room for factories that will produce products that are heavy (and thus costly to ship) or are particularly suited to Iraq's natural resources. For example, that ultra-fine sand that fouls weapons, irritates sensitive body parts and destroys computers is high-quality silica perfect for glass, production of which also happens to require the high volume of energy Iraq has available.
But much of this is in the future; so far, Iraq's economic growth outside of the oil sector has been driven largely by what Ambassador Ries calls "small-scale revivals," things like retail and other small businesses. To get to the next stage--lasting growth--foreign investment is required to fuel the large projects on which the future will be built.
So, where is the foreign investment?
Ambassador Ries explains, "There is very little foreign investment right now" because there is not yet a distinct person or location to which one can apply. The investment law in 2006 set the framework for foreign investment, envisioning a National Investment Commission, which "has been stood up, and a commissioner with the rank of minister has been nominated." Unfortunately, the legislature left town before approving him, as they are expected to do when they return.
However, Ambassader Ries is very enthusiastic about the nominee, Ahmed Ridha. Mr. Ridha is an Iraqi native with a PhD from UC Davis, who has been living in Dubai for a number of years. He also has a great deal of familiarity and contacts in the entire region. Says Ambassador Ries, "[He's a] very impressive guy. Every American who has met with him says ‘wow!’” Though not yet employed by the government, Mr. Ridha has been drawing up the regulations and procedures for processing and approval of investor applications an bids, etc. "He expects to hit the ground running after he is approved by the legislature... As soon as he is nominated, he will be going around the world and meeting with people to develop and encourage [foreign] investment."
In the meantime, the Ministry of Industry is trying to attract investment in state-owned enterprises. With US help, the ministry signed production sharing agreements last week with foreign investors for three state-owned cement factories. Due to infrastructure, management and supply problems, these factories have been operating at only 20%, despite the huge demand for cement for rebuilding efforts. Under the agreements, a foreign company will take over the factory, investing in improvements while supplying management and expertise. For 15 years, they will take on all costs of running the plant: materials, employees, etc. During that time, the government will receive 30-35% of the output to use in government projects or sell for a profit. Ambassador Ries describes it as similar to an equity partnership, but not quite; it's a new concept designed specifically to work under existing Iraqi law. The cement factories are a test case, and starting in April, six factory investment opportunities in the areas of electricity and petro-chemicals will be advertised.
One lingering concern for outside observers is what has been called the "brain drain." During the worst of the fighting from mid-2005 to mid 2007, there was what Ambassador Ries described as "a very significant exodus of refugees" to Jordan and Syria. Estimates range from 400,000 people in Jordan alone to up to 2,000,000 altogether. "Clearly... the technocrats were a lot of that group," especially in Jordan. "This has been a big problem in government performance." But now that security is improving, the Iraqi government is reaching out to attract these people back. In one case, they have doubled the salaries of doctors (of which it is estimated 50% were lost to the exodus), and substantially increased salaries for other health workers.
In general, while Ambassador Ries acknowledges the severity of the problem, he also seems very optimistic about its resolution. "As the security situation gets better, they [the educated elite] will come back and serve as an accelerant for economic growth." He acknowledges that "right now, the return is only a trickle and the country suffers from the absence of professionals," but he reports "Iraqis are quite nationalistic and do maintain links; the refugees are in touch with things that are happening here." For example, a number of the private businesses in Iraq are owned by those who haven't yet returned permanently. In the meantime they frequently come back to monitor their businesses. As things get better they spend more and more time in Iraq, and Ambassador Ries fully expects them to eventually return for good.
When I introduced this interview I pointed out that economy, security and politics are all inter-connected. Though not moving as fast as most participants would like, the government is making progress in creating the laws, entities, guidelines and procedures that will support economic development and investment. The improved security in wide swathes of the country enables people to turn their minds from bare survival to economic activity. And the economic development/growth builds communities that increase citizen satisfaction with their government and discourage disruptive activities or violence. A self-reinforcing cycle, it makes Iraq's economy an entity full of tremendous potential for citizens and outsiders alike. As the military leaders I've been interviewing are quick to note, things can still go wrong. But the trend is definitely upward, and there are many reasons for optimism about the future.
A few notes... When Kat and I set out to find someone to answer economy-related questions, we were surprised to end up with the most senior American for this topic in Iraq. But besides quickly rescheduling when I was sick, Ambassador Ries was patient, forth-coming and informative, spending nearly an hour answering every question I put to him. And Kat had a HUGE role in the interview. While I was left dazed and confused by the flu last week, Kat was busy researching--feeding me items to read for prep, suggesting topics and potential questions, and helping me with unfamiliar concepts. A productive interview wouldn't have been possible without her.
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