Al Araji believes that Iraq must diversify its economy, both to expand and broaden the job market, and also to provide a stable tax base. For this to happen, Baghdad needs to relinquish control of its monopolies. The government dominates the oil, energy, and service sectors through government-owned companies. In a bid to increase revenues, the state has often tried to compete aggressively with private firms, rather than support private sector growth. The Iraqi State Company for Land Transportation, for example, has doubled its profits since 2011, largely at the expense of private firms. “Not everything can be a part of mega projects. You have to have a private sector that is a productive element in society, not dependent upon government contracts,” al Araji said.
The growth of the small and medium-sized enterprises that Iraq needs, however, will only come with foreign investment. That’s because domestic banks are extremely risk-averse, and rarely lend money to local businesses. Often, they only offer loans to businesses that own their own land, and can offer it up as collateral—an unrealistic proposition for them, given that most don’t have the necessary capital. This leaves Iraqi businesses desperate for partnerships with foreign companies who can obtain capital.
Iraq’s rebuilding dilemma, then, is that, in order to rebuild, its small and medium-sized businesses must play a central role. But they require external investment, which will only arrive once investors are confident in the integrity of Iraqi institutions and the viability of projects. Getting to that stage depends on the Iraqi government embracing a radical program of privatization and economic reform, which, even during peacetime, would be ambitious.
Consider Iraq’s electrical sector. Generous subsidies drive down prices, leading to overconsumption by households, subjecting Iraqis to regular power outages. This, in turn, forces Iraqis to pay private diesel or petrol-powered generator firms. Prime Minister Abadi has sought to privatize parts of the energy sector and remove subsidies. In January, the Iraqi government signed a $1.4-billion deal with General Electric to expand its power supply and modernize the country’s gas-powered turbines. More controversially, the government is looking to reduce the provision of subsidized electricity, shifting Iraqis onto paid contracts. “It may be politically unpopular,” al Araji said, “but we have to stop subsidies.” The less the government spends on salaries and subsidies, the more it can spend on new infrastructure, and on the liberated territories like Mosul, which is currently without electricity.
Iraq therefore stands at a pivotal moment. There is potential for serious economic reform to drive reconstruction, and thereby build a pathway for stabilizing the liberated territories. There is also a serious possibility that bureaucratic paralysis and corruption will undermine reform, prevent investment from entering the liberated areas, and that, without jobs or services, insurgency will renew with a vengeance. For now, international investors and foreign governments are cautious, waiting to see whether the investment environment improves. In the meantime, Iraq’s future is in Iraqi hands.