Draining Iraq's swamp

Draining Iraq's swamp
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Violent protests in Iraq’s largest cities have led to over 100 deaths and thousands of injuries, and may lead to a collapse of the government. Although it is generally accepted that the protests are driven by widespread youth unemployment, lack of public services and especially the ubiquitous corruption, the most popular solution of prosecuting more officials for corruption probably will fail to improve the situation. What is required is not the drama of hanging corrupt officials from lampposts but the unexciting process of reducing Iraq’s regulatory hostility towards its private sector.

Treating corruption in Iraq primarily as a law enforcement problem has failed over the past decade and a half, but it has had one long-term result. The Iraqi population has become extremely cynical about anti-corruption initiatives. Many believe that when an official is indicted, it has little to do with corruption and more to do with that official being on the wrong side of a political dispute. And they believe that any new official appointed to replace the disgraced one eventually will become just as corrupt. 

What is needed are anti-corruption actions that are not only effective but can be directly observed to be effective. And the failure to reduce corruption has contributed to the country’s massive youth unemployment and underemployment.

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Each year, as a result of a fairly high fertility rate, about 800,000 Iraqis become old enough to work. Even after adjusting for retirements, deaths and the extremely low labor force participation rate among women — 14.5 percent — the nation must create hundreds of thousands of jobs to prevent an increase in the pool of unemployed young people. But since 2003, job creation has fallen short. Although the quality of data is low, it is estimated that around 80 percent of young urban men are looking for work. Drive through Baghdad at mid-morning on any non-holiday and you will see groups of young men loitering on every street corner.

When oil prices were high, the government of Iraq was able to act as “employer of first resort” by creating large numbers of government jobs. But current low oil prices mean that the Iraqi government no longer can afford to create enough jobs. It is hoped that the private sector will create the needed jobs. But Iraq’s small private sector is crippled by extreme regulatory hostility.

According to the World Bank, Iraq’s business environment in 2018 ranked 171st out of 190 countries surveyed. Legally operating a business is unnecessarily complex, expensive and time consuming. 

Current regulations make it particularly difficult for private businesses to obtain credit or trade across international borders (Iraq is tied for the worst in the Middle East and North Africa) or resolve insolvency (Iraq is tied for the worst in the world). This regulatory hostility reduces job creation and motivates corruption. For example, for an Iraqi to get permission to start a business not only takes 27 days but also costs about $1,000.

In the face of these heavy regulatory burdens, a potential Iraqi small businessman can either pay the exorbitant legal fees and wait impatiently until the bureaucracy acts, bribe an unending line of petty bureaucrats to allow the firm to operate in the shadows, or not even try to establish a business. The result is fewer firms, reduced employment and widespread corruption.

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What can be done? If Iraq adopted the business regulations of the United Arab Emirates (UAE) whose mostly Islamic population also speaks Arabic, then it could be expected to have favorable impact on both youth unemployment/underemployment and corruption. For example, in the UAE, getting permission to start a new business takes four days and costs half as much as in Iraq. While getting permission to build a warehouse takes 167 days in Iraq, it takes one-third as long in the UAE.

Reductions in the expense and bureaucratic delays involved with owning a private business in Iraq will lead to more businesses and increased private sector employment. Reducing the current regulatory hostility towards private businesses in Iraq also should reduce corruption by decreasing the benefit to the bribe payer. If the delay in getting permission to build a warehouse were reduced from 167 days to 50 days, there probably would be fewer and smaller bribes offered because the corrupt official has less to offer. It would become harder for officials to earn a dishonest dollar.

Finally, and perhaps most importantly, fighting corruption by reducing bureaucratic demands on businesses should reduce cynicism surrounding Iraqi government anti-corruption efforts since any businessperson can directly observe the effects of this policy. Reducing Saddam Hussein-era regulatory hostility towards private business is not a new idea in Iraq. It was discussed in detail in the 2005 National Development Strategy. What makes it difficult is that each piece of bureaucratic red tape has its defender because it enables some official to extract a bribe. 

The government is engaged in a decade-long effort to create a modern regulatory environment. However, in view of the recent violent protests, Iraq doesn’t have a decade. It must act quickly to reduce regulatory hostility towards the private sector, both to weaken corruption and create jobs.

Frank R. Gunter, Ph.D., is a professor of economics at Lehigh University and senior fellow at the Foreign Policy Research Institute. He is the author of “The Political Economy of Iraq” (2013).