Reforming Baghdad

How Iraq's Economy Can Turn Itself Around

The South Gas Company sign is seen in Basra, southeast of Baghdad, March 30, 2016. Essam Al-Sudani / Reuters

Iraq’s outlook is bleak. Low oil prices have devastated the nation’s finances, which are already strained by the fight against the Islamic State (ISIS) and the flood of internally displaced refugees that has come with it. Although Iraqi forces and their affiliates have regained ground against ISIS, uprooting the group entirely will be a lengthy and expensive ordeal. All the while, Iraq’s critical oil pipelines and infrastructure are being damaged and, in some cases, destroyed. This has reduced domestic fuel supply and curtailed oil exports.

There is, however, an even larger threat to Iraq’s long-term stability and prosperity: its bloated, inefficient government sector. Iraq’s bureaucracy devours the major portion of the country’s resources, yet it fails to deliver basic services and infrastructure or to create real economic development. Seventy percent of the country’s budget is spent on payroll for state employees who do very little. According to Mudher Salih, an economic adviser to Iraqi Prime Minister Haider al-Abadi, public sector workers are productive for an average of just 15 minutes per day. State-owned factories, already hampered by outdated and poorly maintained equipment, produce at only a fraction of capacity, yet they employ many more workers than they need.

In more prosperous times, Iraq’s welfare state worked well enough for everyone despite its inefficiency. Iraqis were given government jobs, food rations, and subsidized fuel and electricity. At the same time, its political elites used the system to dispense patronage and increase their power. But in the current economic crisis the system is no longer sustainable. Without serious reform, the state sector could soon bankrupt the country.

Wasteful welfare states are common in resource-based economies, and Iraq’s financial woes are widely known. But surprisingly, the myriad challenges that Iraq now faces have in fact created a unique window for meaningful reforms that cut government waste, stabilize state revenue, promote private-sector growth, encourage productivity, and ultimately set the country on a path to long-term economic health.

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