A Tale of Two Springs

Facilitating peace, development and banking in Mosul, Iraq

Rapid Development Without a Private Market?

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Can Iraq have a modern economy without embracing free market principles? Every few weeks over the last year, I have sat down with bankers in Mosul, where it is reported the last vestiges of the Saddamist insurgency remain. Concrete T-walls still line many parts of the city, the capital of a region known just one decade ago for providing grain to the entire nation of Iraq. What do bankers say? What do they want? What do they think of us? What do they believe is the way forward?

In my first meeting, I asked the bankers what I, new to the Mosul business community, needed to know about banks in the region. How could we help them grow and thrive? What capacities could we help build? The first banker spoke. “You should know,” he explained to me, “the first banks in the world were here, in temples, thousands of years ago.” True? Who knows? But the point was made. Our Iraq experience is not a typical reconstruction job. The country has not suffered from centuries of dysfunction. It is a functional country going through a dysfunctional time. And all indications are that time is winding to a close. What will come next, in economic terms, is not clear.

After the fall of Baghdad in 2003, the US attempted to simultaneously do three things, each of which was revolutionary. We tried to rebuild Iraqi Security Forces and create a democracy. The slow success of the security and political systems has been reported closely. But we also tried to dissolve a state-owned economy and re-create it as a market economy.

While government leaders in Baghdad often speak of Iraq’s market economy of tomorrow, Mosul business leaders are less clear. Throughout the 1970s and 1980s, Saddam asserted increasing state control over nearly all aspects of economic life. Iraqis received their food, their land, their salaries from the state. They banked with state banks and took business loans from those state operated banks. Iraq’s professional class today, including all the seven private bankers with whom I regularly meet, was trained in that state owned economy. And amidst all the complaints we hear about Saddam’s Iraq, I have heard none about the economic system. To the contrary, most are nostalgic, even adamant, that Saddam did it better than the Americans. Open-ended discussions with private bankers on how to grow consumer lending ultimately focus on the need for the Iraqi central government to give more low- or no-interest loans to citizens.

The Eastern European, Asian, Latin American and Sub-Saharan African experiences suggest that, though transition is painful, a market economy is a must for sustained economic growth. But is it?

The Mosul region, like much of Iraq, currently has inefficient state owned industries that employ a lot of people, a bloated bureaucracy and a budget with revenue due to double in coming years as oil revenue increases. It also has a rapidly growing economy. Mosul bankers say the state should continue to subsidize the inefficient industries with oil money. Our conversations do not discuss bank profitability or drivers of financial sector growth; rather, they suggest additional government subsidies for the economy.

Insofar as the goal is an efficient, modern state, the bankers are wrong. But if the goal is stability, to keep employment high and avoid the pain of market transition, with black gold rising out of the land, Iraq may be able to maintain an inefficient state-run market for another generation. Assuming efficient distribution of state resources, the Saddam-type economy that many Iraqis remember so fondly could work. Based on what private and state-owned bankers tell me, the majority of the people of the Iraqi democracy yearn for the stability of the Saddam state. The Iraqi democracy and security forces have taken major steps forward. A market economy may lag many years behind.

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Written by treadingupthetigris

January 11, 2011 at 10:09 am

Posted in Uncategorized

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