Dr. Ahmed Abrehi Ali
This is a perspective within the normative framework—what ought to be—and is not concerned with explaining actual economic performance and its political determinants. It is connected to previous studies and articles, and to avoid burdening readers, we suffice with a summary.
The Economic System and the Political Prerequisite for Deep Reform
Iraq’s economic system, as it stands, did not emerge post-regime change as a result of deep and responsible dialogue regarding the division of labor between the public and private sectors, the scope and controls of foreign involvement, the methodology of economic development and its sectoral priorities—especially industrialization and the balance between goods and services—the path of infrastructure development, the spatial organization of economic activity and its connection to urbanization and housing, and the philosophical foundations of social justice, among others.
In practice, economic management has remained reliant on rudimentary tools, limited to budgetary funding and contracting for projects and procurements. The public sector has not adhered to a unified approach, and the work culture within government institutions is impoverished. There are virtually no traditions that support the entrenchment of decision-making principles. Improvisation prevails widely, allowing personal temperament—whether strict or lenient—to influence outcomes.
There are seminars, reports, plans, and so-called programs by political parties and electoral lists, but they are not sincere and remain disconnected from the work culture of the state and the decision-making process. The reason, as I see it, lies in the delayed emergence of a social force organized around a political orientation, genuinely invested in the Iraqi common good—economically and socially, present and future. This force must embody the national identity and is essential to completing the construction of a modern state for the entire people and achieving deep, comprehensive economic development centered on industrialization and a productive populace.
This awaited force will begin to take shape when Iraqi consciousness settles in the homeland and realizes that the land is the foundation of human society. There are no moral justifications for the state except to organize this society based on the best principles that ensure freedom, human dignity, and social justice. The modern state is composed of institutions, not personalities, and it is time to abandon the outdated legacy of “who rules whom.” Iraq must not be used as a pliant tool for regional or international strategies, nor as a sphere of influence for neighboring or other countries. Foreign dictates and those who seek the support of outsiders must be rejected and condemned. Upholding the Iraqi people’s right to an independent and sovereign state—these honorable principles must not be relinquished under the pretext of political rationality or realism. Those who desire a state of integrity, competence, and social justice must sincerely belong to the entire people and be rooted in the land, with a natural bond of brotherhood with fellow citizens, unconditioned by religion, ethnicity, sect, or tribe—a brotherhood grounded in partnership in Iraq and in shaping its future.
The realities of the Iraqi economy and its international relations to date are incidental outcomes of complex settlements among competing powers over authority, public administration positions, and internal and external influence. Sovereign wealth and the public sector are central axes of competition and settlements. The private sector comprises individuals and groups connected through personal ties—traders, money changers, contractors, suppliers, real estate agents—whose common denominator is seizing as much public money as possible. It is no secret that Iraq, in terms of the ratio of oil rents to GDP, ranks highest in the world after East Timor. The share of non-oil commodity output is extremely narrow compared to other rentier states, let alone normal economies at Iraq’s stage of development.
From the Current Situation to an Alternative
Population growth is high, while the economy’s capacity to productively absorb the labor force is dwindling. Iraq’s opportunity to avoid an impending crisis lies in immediately launching deep industrialization aimed at export, making it the organizing axis of comprehensive economic development. Empty talk about promoting agriculture, industry, tourism, and the like is ineffective. Even worse is reliance on foreign investment or spontaneous private sector initiatives—this is fanciful, assuming good intentions; otherwise, it is a policy of procrastination. What is required is not mere growth, but its sources—building a solid and broad productive base for the Iraqi economy.
In a previous article, I referred to the concept of functional efficiency in the economic system, one of its main manifestations being structural balance between labor forces in the totality of goods-producing and service activities (broadly defined). This ratio changes with labor productivity development, expressed as average output per worker after excluding rent. Also crucial is the annual accumulation level, i.e., capital formation to GDP, which should exceed 30% in the Iraqi economy. Investment efficiency must be maximized, requiring meticulous design and specification reviews paired with standard costs and strict adherence to them, detailed elsewhere. This aligns with a comprehensive review of public investment management. Within this context, an industrialization program should be presented: technically defined projects with comprehensive financial, economic, and spatial analysis, prepared by competent, impartial Iraqi entities.
Functional economic efficiency in Iraq necessarily requires a productive role for the public sector without ideological debates. Iraq’s economy is rent-based, and the depletion of national sovereign wealth must be offset by accumulating productive capital on the ground. It would have been better not to excessively proliferate foreign oil companies, allowing Iraqis to carry out exploration, development, and operations. This expansion must stop, and a gradual reduction in foreign roles must begin. Attention must also be paid to the contradiction between protecting Iraq from external interference and this open-door invitation to foreigners—in the port, the well, the road, the metro—everything.
The infrastructure gap is wide, and demand is increasing due to population growth and the need for renewal, considering high deterioration rates linked to poor quality. It is essential to establish specialized companies for various infrastructure branches—for example, one for irrigation and drainage, another for drinking water and sanitation, a third for educational and healthcare buildings, roads, and bridges. These companies should be formed from state employees trained through hands-on work to reduce costs. Without this, Iraq will be unable to meet the growing needs for buildings and infrastructure, as current costs are exorbitant and revenues are limited.
These are executing companies, and alongside them should be project management units or companies independent of the beneficiary entities—ministries and governorates—to control costs. Additionally, there should be engineering and cost audit units to monitor both management and execution companies. Continuing the current pattern of economic management—limited to contracting and financing without actual involvement in the investment, production, and operation processes—is bound to fail and lead to crisis. It is impossible to combat financial corruption without a radical change in public investment and infrastructure management, as well as a similar change in supply management, as detailed in its context.
It is crucial to highlight the concept of economic rent—extra gains above normal returns on capital and managerial effort—which is prevalent in Iraq and signals a deviation from functional economic efficiency. When land is leased or sold below market value to a real estate investor, it constitutes rent extracted from sovereign wealth in the first case and public finances in the second. If a project’s standard cost is 10 billion dinars and it is awarded to a contractor for 12 billion, then 2 billion has been extracted as rent from public funds. If a company contracted in oil or gas deserves $3 per barrel or equivalent for its services but is paid $5, then it extracts $2 per barrel in rent from public funds, and so forth.
A real estate investor sells homes to citizens at market prices, including construction and land value. The investor obtains land cheaply from the government and financing from state banks at symbolic interest, then sells at market prices. This case egregiously violates functional efficiency and social justice principles. Some argue that housing investment would be impossible otherwise—so be it. Let the government own the land, hire a contractor to build at cost-plus or a reasonable rate, then sell the homes as the investor does, using the price-cost difference to finance other public projects. What is difficult about that?
Here we clarify that functional economic efficiency requires exchanges with the public sector at economic prices, i.e., fair transactions. These prices can be easily identified in each case—not the focus of this paper. Protecting sovereign wealth and public funds is essential.
The Private Sector in the Economic System
There has been confusion in defining the free market system or economic liberalism. As I understand it, a free system allows unrestricted non-governmental business activities, does not limit initiatives or hinder private investment, operates competitive markets without obstruction, and refrains from state intervention in pricing. The private sector is free in its international economic relations. The functional efficiency system requires preventing bureaucracy from extorting the private sector in any way and facilitating licensing procedures.
However, a free system does not restrict the public sector’s role, provided it does not monopolize activities that the private sector can perform or compete with subsidized equivalent products. The public sector should handle all tasks that the private sector avoids or cannot perform economically. For example, the private sector cannot establish a full-fledged industry for agricultural machinery or cars—should the public sector refrain and wait decades for the private sector? There are also tasks inherently public, such as roads, railways, and irrigation projects, funded and implemented more cheaply by the public sector—why contract them out? But in cases like commercial and industrial buildings, the public sector should not compete with the private sector.
We relied on private and foreign investors to build an economy capable of employing the labor force with wages sufficient for a decent living. This has not happened for two decades. Should we experiment for another two or three decades, if we can? We have absorbed many Iraqis into the public sector, but the distorted understanding of a free market economy has disabled the public sector’s role in infrastructure development and productive investment. Over 85% of high-skilled Iraqis of working age are held within the public sector—government and its extensions—and we expect the remaining 15% in the private sector to drive Iraq’s economic development. What should we call this?
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