Economy in Iraq Goes in All Directions

Times Staff Writers

The crowded sidewalks along Sanaa Street offer one picture of Iraq’s economy, a bustling entrepreneurial mecca that’s a cross between Silicon Valley and the HBO western “Deadwood,” where the young and ambitious can make their fortunes if they’re not shot dead first.

The staid hallways of the Interior Ministry’s residency office show another glimpse. Here, idle men and women shuffle papers and look ambivalent as desperate foreign visitors trudge from office to office in search of the elusive stamp that will let them stay in Iraq.

Umm al Shabab, a sleepy farming village along the Euphrates River, shows yet another side of Iraq’s patchwork economy: Sharecroppers use ancient tools to plow the last bits of wheat and barley from the tired soil.


Taken as a whole, Iraq’s economic landscape remains wasteful and primitive, with a touch of the postmodern, a touch of the feudal and a heavy dose of tedious state bureaucracy that sucks up much of the country’s resources and energy.

Analysts estimate that Iraq’s gross domestic product grew from $20.5 billion in 2002 to $29.3 billion last year, and President Bush has touted the visible signs of economic vitality, such as consumer sales and private business start-ups. But analysts believe these stirrings have had a limited effect, thanks to a lack of basic infrastructure and decades of neglect.

Although American officials in Baghdad recently said Iraq’s economy grew between 3% and 4% in 2005, one commercial service, the Economist Intelligence Unit, said Iraq’s GDP fell 3% in 2005, though it predicted that it would rise in 2006.

“To be fundamentally optimistic would be to go too far,” Michael O’Hanlon, senior fellow at the Washington-based Brookings Institution, said of the Iraqi economy. “The economy is only changing very gradually. In 2005, Iraq was treading water, with a slight forward motion. 2006 will be largely the same; the insurgency will impede the recovery.”

U.S. officials at a recent briefing in Baghdad said Iraq’s December election of a four-year government would bring the stability necessary to improve economic conditions. More than $18 billion in U.S. funds have been allocated for relief and reconstruction.

On a recent helicopter tour of Baghdad, American officials pointed to a water treatment plant, the Baghdad International Airport terminal, the Ministry of Environment building, two electrical power plants as well as a police academy to show that U.S. reconstruction money was being put to good use.

Such showcase projects may please U.S. taxpayers, but they rarely mollify Iraqis. Americans and Iraqis use different measures in assessing Iraq’s progress, with Americans praising big steps forward since the March 2003 U.S.-led invasion, and Iraqis unable to forget the relatively good times of the late 1980s, before the Persian Gulf War and a dozen years of sanctions that destroyed Iraq’s middle class and infrastructure.

Besides, many here and abroad say, such investments are sometimes wasted on Iraq’s bloated public sector, which remains unreformed and stifles Iraq’s commercial potential.

Beefed up under Saddam Hussein to mask joblessness, the public sector employs as much as half the country’s working population. Since the invasion, government salaries have risen dramatically, further entrenching a culture in which Iraqis expect handsome paychecks for showing up for jobs that are essentially unnecessary.

For instance, all foreign visitors to Iraq, including businesspeople, must spend hours after arriving and before leaving Iraq checking in with the Interior Ministry’s residency office, a Kafkaesque warren of hallways filled with idle functionaries doing little more than taking bribes for moving papers from office to office.

To Iraqis, the system is even more merciless, ignoring merit and rewarding connections. Hind Abdulmunim, a 26-year-old art school graduate, applied for a job as a teacher. Her application went nowhere until her mother, who knew somebody who knew somebody, intervened.

“I applied as everyone else does at the Ministry of Education, but as everybody knows, you need connections to get your work done in any office in Iraq,” she said.

Endemic corruption and the constant threat of insurgent attacks have kept foreign investors away. A recent U.S. Senate report said that “corruption has not abated, and we should not expect that it will for some time.”

On the bright side, PepsiCo has renewed a partnership with a Baghdad soft drink company it originally set up in 1990 but had to rescind because of sanctions.

But of the foreign banks licensed to open shop in Iraq, none has done so because of security worries.

The handful of Western businesspeople who do come to Iraq spend thousands of dollars to hire armored cars and helicopters to make the six-mile trip from the airport to Baghdad’s business hub.

Nearly 300 non-Iraqi civilian contractors have been killed since May 2003, according to a Brookings study, and a recent U.S. government report concluded that 25 cents of every dollar spent on Iraq reconstruction goes toward security.

Many of Iraq’s wealthiest citizens, terrified by the nation’s security woes, have left the country.

“The money has been parked outside,” said a Western official involved in economic matters in Iraq, who spoke on condition of anonymity. “We talk to Iraqi businessmen abroad. They want the same things anybody wants. They want security. They even want better schools for their kids before they come back.”

Agriculture, too, continues to struggle, caught between the inefficiency of the old regime’s central planning and the as-yet-unrealized promise of a free-market economy.

As seen from a U.S. Army helicopter, the farmland bordering the Tigris and Euphrates rivers is reminiscent of California’s San Joaquin Valley, tilled fields stretching for miles in every direction. But unlike American agribusiness, this is a land of mud hut villages and families in traditional tribal dress often working the fields with primitive tools.

Like all Iraqis, farmers suffer from a lack of electricity and a corrupt system of price supports and subsidies. Bribery is widespread, allowing rich landowners to sell poor quality crops at high prices, said Ali Abu Areef, 52, who works a 5-acre farm on the eastern bank of the Euphrates River near Najaf. Areef said he can earn only about $500 a year and is $8,000 in debt.

Farming, considered to be a noble calling in the United States and Europe, falls at the bottom end of Iraq’s social order.

“We were treated unfairly during Saddam’s time; we’re treated unfairly now,” said Areef, whose farm supports four wives and 28 other family members.

“Government support goes to the rich landowners,” Areef said. “The others take what’s left.”

Much of the work is still done by sharecroppers such as Kashash Yassin Mashhadi, 85, who lives with his two wives and eight children in Umm al Shabab, 10 miles east of Najaf. The house and land are owned by two men, one the brother of a Najaf city council member.

Mashhadi takes a percentage of the proceeds from the dates, rice and wheat he grows. He irrigates with water pumped directly from the Euphrates using the same gasoline motor that generates electricity for his brick house.

“We also drink from that water because there have never been any water projects in the village,” he said.

Signs of vitality do appear in Iraq’s private sector. Ambitious Iraqis cluster around places like Sanaa Street, Iraq’s high-tech capital, where boys push wooden wheelbarrows full of the latest laptop computers and printers.

The Nabaa Group, one of the largest firms on the strip, recently unveiled a gleaming three-story shop with a sleek glass facade.

“We’re hoping that, for once, the private sector will have the priority in Iraq,” said Ali Mizban Sulayman, a director of the firm, which in 2004 had $15 million in revenue. “In contrast to government jobs, the people who work here love their jobs.”

But Iraq’s lack of business tools means that places like Sanaa Street emerge as little more than tiny, colorful wonders. A report issued last month by the Senate Foreign Relations Committee quotes U.S. diplomats and Iraqi business leaders as saying that lack of security and a lack of basic mercantile infrastructure “are preventing the economy from taking off.”

This infrastructure includes not only power and communications but reliable transportation, the basic laws regulating business, and a free-market system that would privatize the government-owned sector and end subsidies.

The business sector is hobbled, the congressional report said, by the fact that 90% of assets are held in two state-owned banks that are unable to transfer funds electronically.

And Sanaa Street is not immune to the country’s incessant violence and lawlessness. Six months ago, Roget Nasser, an employee in one of the computer firms here, was shot dead in broad daylight as he resisted a kidnapping attempt.

“We heard yelling and gunfire,” said Sarmad Mahmoud Ismail, Nasser’s co-worker. “We saw him lying on the street in a pool of blood 10 meters from the shop.”

Still, Sulayman, the Nabaa Group director, says business has skyrocketed since the fall of Hussein and the lifting of many of the previous regime’s restrictions. “Before, if I wanted to sell a scanner, I had to get government approval,” he said.

Rather than creative policies, experts say much of the country’s economic growth so far can be attributed to removing such Hussein-era impediments.

“When you open up the borders, pump in billions from outside and lift international sanctions, it’s going to generate growth,” said Frederick Barton, a former official of USAID and the United Nations who is now at the Center for Strategic and International Studies in Washington.

Now that the post-invasion boom has subsided, the challenge is to figure out a way to overcome Iraq’s corruption and spend the country’s 2 million or so barrels a day worth of oil revenue in a way that bolsters the country’s stability instead of lavishing it on public-sector salaries.

Oil revenue accounts for 98% of Iraq’s export earnings and pays for at least 90% of the government’s $21-billion budget, according to official and independent estimates. But insurgent attacks on oil infrastructure have cost the country billions of dollars in lost revenue during a time when world petroleum prices have soared, Iraqi officials say.

“The big question for the year will be: How is oil going to be shared,” Brookings’ O’Hanlon said, “and what will it do for political cohesion of the state?”

Daragahi and Smith reported from Baghdad and Richter from Washington. Times staff writers Maggie Farley in New York and Saif Rasheed in Baghdad and special correspondent Saad Fakhrildeen in Najaf contributed to this report.