Prof. Dr. Dr. h.c. Şefik Alp Bahadir Center for Iraq Studies (CIS) / Institute of Economics (FAU) Economic Dimensions of Violence and Civil Conflict in Iraq Workshop-Conference on Realistic Peace and Turbulent Transitions Universidad del Rosario - Bogotá, May 27-31, 2014

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Content 1.How to avoid “state capture” and “resource curse” by dominance of oil income? 2.How to create a market-based economy by growing public sector? 3.How to diversify an inefficient open economy? 4.How to foster human development, accountability and rule of law?

1. How to avoid “state capture” and “resource curse” by dominance of oil income?

Oil wealth… can cover costly economic inefficiencies, especially an oversized public sector, creates price and wage distortions and perverse incentives, can impede non-oil exports as a result of higher real exchange rate (“Dutch disease”), and can be subject to clientelistic behavior and “state capture” of various groups leading to structural imbalances and social conflict (“resource curse”).

Iraq as a perfect trap for “resource curse” and “state capture”: (1) a former planned economy lacking cultural and practical experience with a market economy; (2) a nascent and dysfunctional market struggling against widespread incoherence; and (3) annual flows of income from oil sales that will amounts to $300 billion in 10 years.

STATE CAPTURE

DE JURE POWER DE FACTO POWER De Jure Power DE FACTO POWER

INVESTMENT IN PUBLIC SERVICES & EDUCATION INVESTMENT IN SECURITY, MILITARY, CLIENTELISTIC RELATIONS

LEGACY OF STRONG STATE

DUTCH DESEASE

2. How to create a market-based economy by growing public sector?

NDP PROJECTION ACTUAL INVESTMENT PUBLIC SECTOR PUBLIC SECTOR PRIVATE FOREIGN & DOMESTIC SECTOR PRIVATE FOREIGN & DOMESTIC SECTOR Private and Public Investment in Iraq, , trillon ID

3. How to diversify an inefficient open economy?

Divercification policies: 1.subsidization of the tradables sector 2.public investments in selected subsectors 3.investments in education and health 4.investments in infrastructure 5."Public-Private Partnerships" with leading international companies.

Achievements and shortcomings GDP per capita: grew from $3000 to over $ Poverty rate: still 21% + Unemployment: declined from 51% to 15% - Government employment has more than doubled - Youth unemployment rate: still 30% - Female employment share in non-agricultural sectors: only 7% + Sanitation and sewage coverage : rose from 6% to 36% - In rural areas: still only 2%

SOCIAL CONSTRAINS LEGACY OF STRONG STATE STATE CAPTURE ETHNOLINGUISTIC AND RELIGIOUS FRACTIONALIZATION DUTCH DESEASE & RESOURSE COURSE

4. How to foster human development, accountability and rule of law?

1.One key precondition of the sustainability of economic growth in Iraq is political stability and social security. This, in turn, necessitates a rapid improvement of the Human Development status of the population.

2. The other key precondition of the sustainability of economic growth in Iraq is the rapid reform of administrative rules and formal laws in order to achieve accountability of public and private institutions and rule of law.

To sum up, two strategies will play a crucial role in the performance of Iraqi economy in the medium term: Strategy (a): raising human development indicators toward the Millennium Development Goals, and Strategy (b): reforming regulation and legal system.

Scenario 1 - Optimism: where both strategies (a) & (b) are successfully implemented. It is expected within this scenario that the legal environment is created to support business development. There will be an increase in literacy, an advancement in skills and an improvement in citizenship and social cohesion. There will also be better governance and rule of law. The overall impact is that oil is no longer the dominant component of GDP, as industry and other economic activities are flourishing.

Scenario 2 - Missed opportunity: in which Government is successful in implementing strategy (b) but not strategy (a). In this circumstance legal incentives for business are created but the population is absent of literacy, skills, and there is weak governance. The overall impact on GDP is limited with little improvement in diversity of economic activities (e.g. oil will remain dominating sector).

Scenario 3 - Disappointment: this scenario encompasses success in (a) and failure in (b). The lack of legal reform represents higher costs and risk to business. Economic growth will be limited and some diversity in GDP, however GDP will remain dominated by oil returns.

Scenario 4 - Despair: In this scenario the government fails in both strategies (a) and (b), and the economy is in a state of stagnation and GDP dominated oil production; this scenario is no different than current state.

Prof. Dr. Dr. h.c. Şefik Alp Bahadir Center for Iraq Studies (CIS) / Institute of Economics (FAU) THANK YOU! Workshop-Conference on Realistic Peace and Turbulent Transitions Universidad del Rosario - Bogotá, May 27-31, 2014