The Underbelly of Iraq’s ‘Economic Boom’

Introduction

Dijlah Village, a sprawling 6,000-square-meter complex boasting restaurants, high-end meeting rooms, and a health center, opened in Baghdad in summer 2022. It sits on the banks of the Tigris River, where a fountain show takes place every half-hour to a soundtrack of Arabic pop hits. Iraqi political elites and their associates use it to showcase how far the country has come.

The glamour of the luxury development, however, is not enough to hide the glow of the gas flare from the Dora Oil Refinery visible on the other side of the river. As diners pose for photos in front of the fountain, the refinery behind them spews toxic gases, poisoning people and the planet, while also flaring off precious fuel that could be used to provide electricity for ordinary Iraqis.

This poignant contrast raises questions about where investments are being made, by whom, and for whose benefit.

Most ordinary enterprises are forced to navigate an economic system dominated by Iraq’s powerful and wealthy political parties.

Not all businesses have the enormous capital that makes Dijlah Village possible. Most ordinary enterprises are forced to navigate an economic system dominated by Iraq’s powerful and wealthy political parties.

Drawing on interviews with owners and employees at small and medium-sized businesses, this paper explores the strategies that enable such companies to survive and generate capital. If Iraq’s current economic boom is to avoid an eventual bust, the government and multilateral organizations must develop ways to support such enterprises and remove the many barriers that prevent their growth.

Explosion of Investment

In recent years, Iraq’s political elite and their business associates have preferred to invest their wealth in local projects as a safe haven for ill-gotten gains.

This money is made from state coffers. Under the ethno-sectarian apportionment system implemented after 2003, the dominant political parties meet following each election for negotiations to divide up control of government ministries and their corresponding assets.

Each major political party controls one or more ministries.

As a result, the distribution of lucrative government contracts is heavily influenced by partisan interests.

“Economic committees” staffed by party members review ministerial contracts and require a commission to sign off on any deal.

In part to disguise the origins of their illegally obtained funds, the political elite have allegedly taken to investing in upscale residential compounds, malls, private universities, and other real estate ventures, resulting in a “visible boom” in Baghdad's development.

However, many of these projects are inaccessible to ordinary Iraqis, who experience numerous economic difficulties. To illustrate, pursuing a dentistry degree at a private Iraqi university costs around $6,000 per year, whereas a meal in Dijlah Village costs an average of 30,000 IQD (around $20) per plate. These expenses starkly contrast with the average monthly salary in Iraq of just $583.

Increasingly, the political elite opt to invest in local projects because of growing restrictions on moving money out of Iraq.

Moreover, high oil prices led the Iraqi parliament to approve a budget of $153 billion for 2023, a record amount.

This increases the political elites’ access to public money.

A recent Washington Post report indicated that these investments provide a way for the elite to launder money acquired from state entities and government contract manipulation.

Some citizens initially appreciated that they were at least getting to enjoy a wider variety of malls and restaurants after many years of insecurity.

But attitudes are changing and, increasingly, ordinary Iraqis are starting to see that they are the ones who bear the brunt of rising prices for essential goods and services.

As a consequence of the enormous influx of investment into Iraq’s real estate sector, the cost for a single square meter of land in Baghdad, even without access to basic utilities like electricity and water, now exceeds $2,300.

Navigating the System

In a troubling development, however, the political elite is increasingly using its resources and power to assert control over smaller businesses, which creates new challenges for entrepreneurs.

A restaurant owner in Baghdad said that “I am already paying bribes to keep my restaurant afloat.

When I attempted to expand, I encountered political obstacles that made me reconsider. I chose to abandon the idea, as I am unwilling to be entangled with such associations.”

 If Iraq’s current economic boom is to avoid an eventual bust, the government and multilateral organizations must develop ways to support such enterprises and remove the many barriers that prevent their growth.

Striking a delicate balance between achieving business success and avoiding unnecessary attention from political parties means walking a tightrope.

Businesses in Iraq must tread carefully to navigate the complexities of the political landscape and safeguard their operations while pursuing growth and profitability.

Negotiating the intricate landscape of starting and maintaining a business in Iraq requires a keen understanding of the prevailing political dynamics.

Immense Challenges Facing Businesses

Small and relatively independent companies face immense challenges in acquiring contracts and deals, in contrast to party-connected entities.

Business owners interviewed for this paper said that bureaucracy, government indecision, and the unpredictable economic environment pose significant challenges for their ventures. From company registration and tax payments to dealing with customs and logistics, each administrative process is accompanied by its own set of challenges.

For example, one interviewee who manages a tech startup said that "the government's inconsistent decisions can greatly impact businesses, especially in sectors that require frequent government interactions."

Another entrepreneur who has worked with multiple companies said that "when you start doing business in Iraq, it's not easy. There's much bureaucracy. You need to figure out who holds the power and influence in different sectors. Knowing who to talk to and who to bribe becomes almost essential.

It's unfortunate, but sometimes, paying bribes or cutting political deals seems like the only way to get things done efficiently."

Even for powerful international commercial entities operating in Iraq, deals often fall through due to bureaucratic obstacles and endless political interference.

A notable recent example is "Al-Rafeel City," which involved the construction of an administrative complex on the outskirts of Baghdad to house government ministries.

While the reputable Emirati company Emaar was selected by the Council of Ministers to carry out the project, political interference and demands for bribes ultimately led to the project’s failure.

Such practices deter foreign investment and irritate partners.

The Emirati ambassador to Iraq had previously raised concerns about corruption in Iraq’s business landscape.

Although efforts have been made to streamline and simplify government and bureaucratic procedures, substantial improvements are still needed in order to make the business environment easier to navigate. Indeed, according to the latest World Bank “Doing Business” report, Iraq ranks 172 out of 190 countries in terms of ease of doing business.

Strategies

Interviews with business owners pointed to various strategies that have emerged in response to Iraq’s complex business environment.

One approach is to adhere strictly to bureaucratic protocols when establishing a business, which is a challenging yet attainable feat. Under this approach, business owners register their companies, pay their taxes and follow all the rules like they would do in any other country.

However, this path often leads to encounters with political entities, armed groups, or their associates who seek involvement in the business.

Once faced with those actors, businesses are presented with limited choices: resist and face potential consequences, shut down operations and incur losses, or opt for the seemingly more straightforward route of cooperation with these entities.

The experience of one of Iraq’s e-commerce businesses illustrates this choice.

The business has been running for many years, expanding slowly with private investments from both inside and outside Iraq.

However, due to bureaucratic hurdles, the volatile political and security landscape, and global economic challenges following the Covid-19 pandemic and the Ukraine crisis, some investors chose to withdraw their support. It came at a bad time, as the business had just expanded, which rendered its operations unsustainable.

After a period of struggle, the business had to accept investments from companies and individuals who are connected to Iraq’s political elite in order to continue operations.

Tragically, for many companies, the only workable solution is to play within the parameters of the party-dominated economic system by working with a politically connected agent.

These partnerships facilitate relationships with the political elite and ensure smooth business operations. The chosen partner may be a political party or a party-aligned individual or business.

This either leads to full alignment with the partner’s interests or the partner acts as a broker that navigates the system on behalf of the business.

These partnerships not only facilitate bureaucratic processes but also provide a degree of protection from undue political pressure.

One example of this dynamic involves an international ridesharing company that began operations in Iraq a few years ago.

Before launching, they took proactive measures to establish close ties with firms with well-established political affiliations and connections within the bureaucratic framework.

This strategic decision was designed to ensure their ongoing presence and business growth in Iraq.

Indeed, it was an effective strategy and the company has expanded into multiple governorates across the country.

Conclusion, Policy implications, and Recommendations

Addressing entrenched issues within Iraq's party-dominated economy requires recognition of the challenges that businesses face, including bureaucratic complexity and intricate political dynamics.

The government’s failure to create conditions for businesses to flourish has inevitably led to an economy controlled by a select few with privileged access to state resources.

Iraq's white paper offered potential remedies for the hurdles facing businesses, such as reviving the private sector support fund, simplifying bureaucratic procedures for the private sector, and supporting small and medium-sized businesses.

However, this effort has been ineffective due to the government's selective approach and lack of implementation.

Moreover, while international donors have sought to bolster Iraqi entrepreneurs and promote private sector growth, many of these initiatives have failed to introduce real reforms.

Sometimes they had the effect of reinforcing the political elite's stranglehold on the public and private sectors.

Increased transparency within the bureaucracy is an important first step toward reducing bureaucratic hurdles and eliminating the grip of the political elite on Iraq’s economy.

The elite’s control over bureaucratic processes stems from a lack of clarity about what procedures businesses must follow, which are often subject to change.

Streamlining procedures and implementing digital services will help address this and reduce interference from political actors.

 Addressing entrenched issues within Iraq's party-dominated economy requires recognition of the challenges that businesses face, including bureaucratic complexity and intricate political dynamics.

These recommendations can be implemented in several ways.

First, the Iraqi parliament should pass an “access to information” law mandating that ministries and governmental bodies must publicly share their data.

This would establish a framework of transparency that is immune from manipulation and decrease the politically sanctioned corruption within the ministries.

Second, the government, through the Council of Ministers' Secretariat, should modernize its e-governance infrastructure, with UR platform (the Iraqi government’s digital services center) as a starting point. This will facilitate seamless electronic transactions for businesses and circumvent bureaucratic barriers that are often exploited by the political elite.

Third, international organizations like UNDP can play a positive role by providing support for these initiatives. This includes technical assistance, capacity enhancement, and sharing best practices. To ensure the practical application and sustainability of these proposals, partnerships should be made with reformists within the system. Their involvement will help guarantee effective implementation and long-term viability.

Addressing the core issue of interference by political elites and their exploitation of Iraq's resources is pivotal.

If this is not rectified, including in the development of the private sector, businesses that do not have connections will continue to struggle.

The urgency of this problem will only increase as demographic and climate pressures grow and more people migrate to the cities looking for work.

By Hayder Al-Shakeri

Al-Shakeri is a research fellow with Chatham House, MENA Programme focusing on Iraq’s political economy, accountability, and civil society.

This article will be in included in the ninth edition of the Iraq Economic Review.

https://auis.edu.krd/iris/projects/iraq-economic-review

https://auis.edu.krd/iris/publications/underbelly_iraqs_economic_boom