Thinking Politically? The 2020 World Bank Memorandum
On 30 September the World Bank released its third Country Economic Memorandum on Iraq, "Breaking Out of Fragility."
The report is remarkable in two respects: firstly, it contains a great deal of political analysis, much of which amounts to nothing less than a damning condemnation of the political elite. Secondly, the reforms it suggests are less ambitious than the 13 October white paper released by the Iraqi cabinet.
This blog post won't focus on the white paper, which includes a plan to reduce the public wage bill from 25% of GDP to 12.5% within a three to five year time period. That level of ambition, despite being an almost impossible target, is refreshing in the sense that almost all of Iraq's various economic plans are heavily influenced by organizations such as UNDP and the World Bank and envision a much slower pace of change. Indeed the Memorandum cautions that institutional reform in Iraq is a slow process that will take years.
The Memorandum makes a lot of familiar and very general suggestions about SOE reform, oil revenue management and investing in public services. It also contains some positive courses of action certain Iraqi actors might be able to take (for example, the current attempt to reduce parastatal influence at the country’s border points of entry and internal checkpoints, streamlining procedures and raising tariff revenue).
Indeed, customs modernization has been a focus of UN-led capacity building for some time. Many other suggestions will be familiar, some ideas are already underway.
Some interventions are very specific: it suggests Iraq should export more unmilled barley - not a bad idea given the recent good harvests, and especially considering the government is paying over the odds per ton for barley produced in Iraq through the Ministry of Trade’s Grain Board of Iraq. Barley also has a good salinity tolerance and comparatively low water footprint.
In the bigger picture, the entire agriculture sector needs to be overhauled, as the report makes clear. Iraq in early September announced barley exports at a starting price of $125 a ton, but the government pays Iraqi farmers between $300-$400 a ton through a nationwide food procurement system that has been responsible for some of the worst corruption in post 2003 Iraq. Similar distortions occur throughout most of Iraq’s agriculture system.
For reasons like this, most of the report’s approximately 170 pages are a depressing read, with the occasional bright spot, for example it highlights how the Central Bank of Iraq has kept inflation at around 1% for the past 10 years.
Grim diagnostics take up most of the first chapter and continue through much of the report. This won’t surprise anyone who has followed Iraq’s situation closely, at least since the protests of 2018, following the “slow onset” collapse of services in Basra.
A critical issue, which the report makes clear, is demographic pressure: the supply of services and jobs has been rapidly outstripped by population growth. Of course, we’ve been here before: the UN made clear in early 2009, Iraq needed to create 450,000 jobs that year alone.
The Memorandum reminds us that figure is now 750,000. If this was not worrying enough the report notes, in one of its more optimistic moments, that a doubling in the growth of private sector enterprises in farming might create 120,000 jobs by 2030.
This makes it all the more remarkable that Iraq has never had a development effort strongly focused on long term job creation at scale, something currently underway in Ethiopia, the 2014 - ongoing World Bank funded Competitiveness and Job Creation program, which has been allocated several hundred million dollars.
In Iraq, long term job creation should have been front and centre in a country where it has long been known that young men join paramilitary groups, often for ideological reasons but sometimes just for a few hundred dollars a month; there is much evidence of the latter.
The World Bank's 2018 paper on job creation in Iraq explicitly says it is short term. It suggests using oil revenues (recovering at the time) for measures that have, "rapid impact at scale, rather than structural reform," which the report acknowledges is "less-than-ideal or second-best." Had this effort gone ahead, it would have proven not "less than ideal" but worse than useless as the Saudi-Russia oil war began prior to COVID-19.
The World Bank seems to have a habit of recommending its own programs. A recent project for jobs has involved a disbursal of $200 million in stabilization funds for short term, cash for reconstruction work programs and microloans for small businesses; other projects involve reforming Iraq's technical and vocational training programs, but arguably these can only have a limited effect when Iraq lacks an adequate enabling environment for the private sector.
Furthermore, if oil revenues were recovering in 2018, what pressure was placed on the Iraqi government to fund these job creation programs and actually take ownership of its reconstruction challenges?
Iraq as a “Limited Access Order”
One reason for the lack of an ambitious job creation program is probably because Iraq's highly fragmented governance makes large-scale projects immensely challenging: Ethiopia's centralized autocracy has a more focused industrial strategy than Iraq.
To its credit, the Memorandum examines why Iraq's political elite has often stunted private investment at every turn, with refreshingly political analysis. This follows the World Bank’s 2017 World Development Report which advocates what is often called “Thinking and Working Politically” (TWP), an increasingly mainstream trend following mounting evidence that decades of purely “technical assistance” and capacity building in very fragile states simply does not work (see the 2017 Secure Livelihoods Research Consortium report, Service Delivery and State Capacity for a detailed review of why capacity building often fails).
TWP isn’t actually new, at least for the World Bank, but continues its rise to prominence.
An important study, which formed the centrepiece of Alexander Hamilton’s essay earlier this year The political economy of economic policy in Iraq, is the World Bank-commissioned Limited Access Orders in the Developing World from 2007. This multi-authored study (Douglass North, Joseph Wallis, Barry Weingast - henceforth NWW) classifies Iraq as a Fragile variant of a Limited Access Order (FLAO), something Hamilton explores in detail and indeed, his essay where he defines Iraq as a FLAO is referenced in the Memorandum.
For the creators of the framework, a LAO is the most common arrangement of governance in recorded human history, and among developing countries today. In a LAO, rent and “valuable activities” such as education and the enforcement of property rights are distributed among an elite coalition in a pact based purely on rational considerations for survival and “controlling violence.” Categorising Iraq this way in the Memorandum has important implications for policy and it’s worth digging into the typology in a little more detail.
By contrast, an Open Access Order allows open competition, both political and economic: freedom to form economic and political organizations - a minority of countries.
As noted, a LAO does not mean the state has total monopoly on violence, for example, Iraq under the Baath regime, (characterized by Hamilton as a “highly repressive” LAO) distributed rents to loyal tribes, both Sunni and Shia and occasionally, Kurdish supporters, but this did not always stop insurrection.
However, the fact that special privileges were granted to those who joined the Baath Party suggests the regime “limited access” to “valuable activities,” as the framework suggests.
LAOs, the authors note, can also be democratic or anocratic, giving examples of Argentina and Nigeria as countries that had a LAO arrangement, although in these hybrid regimes elections are more democratic in appearance than in reality. LAOs can also be failed states, such as the Congo.
LAOs can also be characterised as “mature,” in some cases, very successful societies and one example given is Chile, possessing more advanced political institutions and growing private economic activity. Evidently, Chile today has transitioned to an OAO.
The third type of LAO is the “basic” LAO, a highly centralized autocracy where virtually all public or private activity (and there is little of the latter) is connected to the state; examples given are “Burma, Cuba, North Korea and many Arab and sub-Saharan African countries.”
Here the LAO framework becomes slightly problematic: if Iraq after 2003 was a gradually consolidating FLAO, what was Iraq prior to 2003, presumably “basic,” since almost all conceivable activity was tightly regulated by the highly repressive state.
But Iraq under Saddam, particularly after 1990, strongly fits the FLAO type where, “the state can barely sustain itself in the face of external and internal violence.” Such was Iraq’s predicament in the spring of 1991 and the bombing campaign in the winter of 1998, notwithstanding serious local instability in 1995, 1996 and 1999, with varying degrees of foreign involvement, albeit limited. Arguably, one of the most serious challenges to Saddam came from within the Jubbour tribe in 1990, a challenge at the heart of his powerbase.
Furthermore, some of Iraq’s service provision did improve in quantitative terms after 2003 and some institutions managed to develop, albeit with significant international support (the Central Bank, the Counter Terrorism Service, the Ministry of Oil and the Ministry of Electricity) suggesting Iraq was indeed able to “sustain itself.”
This isn’t to say the state overall was not weak and factionalized to the point of struggling to provide for the population: that much is obvious. Instead, the template does not fit precisely, which has important implications for how Iraq transitions, presumably to a “mature” LAO and finally, perhaps an OAO.
In any case Iraq after 2003 is described as a FLAO, which according to NWW occurs when
“the allocation of these rent-flows is out of alignment with the balance of military power, factions demand or fight for more. Because of their instability, fragile LAOs have simple institutional structures for the state, and they cannot support private elite organizations.”
In Iraq as a FLAO, the political system is a rotting, beached Leviathan, an immovable mass in the way of progress or to Hamilton, “a significant obstacle to purely endogenous economic reform.”
Development implications
If we accept Iraq is a FLAO, many development efforts such as capacity building focused on public financial management or anti-corruption are pointless, because the LAO will constantly undermine them. This is a point made by both Hamilton and NWW, and one that holds up to analysis.
The proposed solution is to pursue development policies which in the long run, do not so much sideline Iraq’s corrupt elite but allow it to sideline itself as elites myopically seek oil rent while a separate class of private entrepreneurs develops, slowly “undermining the FLAO” and changing the political economy of Iraq, creating virtuous circles. Of these reforms, Hamilton observes,
“As long as they do not antagonise the short-term rentier objectives of incumbents, they have a reasonable chance of success. Specifically, private sector development and concessional capital support that can transform the political and economic space in the long run may be feasible, because neither will significantly impact on the ability of incumbents to redistribute (oil) rents today.”
It’s hard to say whether this is a bleak assessment or an optimistic one. Hamilton also suggests “conditional reconstruction instruments that foster better policy making in the long run.” The World Bank’s major recent projects in Iraq, focused on transport infrastructure, at least point in this direction.
Furthermore, conditionality is sorely needed following the localised corruption in Mosul and Basra which caused tremendous delays to vital infrastructure projects, as documented by Mac Skelton and Zman Ali Saleem.
One problem here is that foreign aid offered to Iraq is simply not substantial enough to meaningfully improve the services crisis in vulnerable cities such as Basra, for example, a proposed 1000,000 cubic meter per day reverse osmosis water treatment plant at Al Fao would likely cost in the region of $1bn, not including building water lines and training staff.
Concessional capital support will only go so far for such a project because in the long term, water supply will have to be metered, which would represent an entirely separate, high risk project.
Regarding conditionality, far more external pressure may have at least meant the Hartha water treatment project in Basra province was finished on schedule, almost certainly lessening the severity of the 2018 water crisis.
One risk here is that if elites really dig their heels in trying to extract funds from reconstruction projects, the projects will simply not go ahead, which happened with a major proposed project in the water sector in 2018, which was to be implemented by Biwater.
Private sector development may be much more problematic, because it usually involves some prior state capacity and a level of cooperation and coordination across government that one would think is inherently missing in a FLAO, whether we follow the German Ordoliberal model of development or the Chicago school.
Of course, development projects can directly target the private sector, if the Iraqi government allows, and many have done so such as UNIDO’s effort circa 2008 to train 600 entrepreneurs (who knows where they are now?). But without an environment that allows better access to capital and lower bureaucracy, such interventions may be limited.
This is why millions of dollars have been spent on projects such as UNIDO’s “Enhancing investments to Iraq through the development of industrial zones” project or the OECD Iraq Project, which focused on the investment policy framework with the National Investment Commission. It's extremely hard to know if these private sector development projects had any lasting impact.
In other words, the government may be “a significant obstacle to endogenous economic reform” but unfortunately, it is hard to see how it can be avoided.
Perhaps more worryingly, if we see Iraq’s elites as existing in a FLAO configuration and therefore, private sector development that does not threaten their short term, rent seeking objectives could “undermine” the FLAO, what is to say the elites won’t eventually predate on this emerging private sector?
Anyone who read the leaked Hakluyt report in 2018 will have a grasp of what this means, but state pressure on non-resource dependent private sector activity has presented a serious challenge to reform in Syria (pre-2011) Algeria (with the ongoing fight over industry as “Le Pouvoir” implodes) and Egypt.
Joined up government?
The report continually reminds us that Iraq is so politically fragmented that any kind of coordination resembling a “whole of government” approach to tackling problems is almost impossible.
Herein lies a contradiction within the analysis: despite repeatedly emphasizing that Iraq is highly politically fragmented, the report later calls for a “whole of government approach,” but suggestions as to how this can happen are vague.
Foreign attempts to institutionalize cross-ministry cooperation are a tried and tested approach to Iraq’s fragmented governance, which has led countless reconstruction projects to fail as political parties tussle over contracts, kickbacks and jobs for loyalists.
For example, a “National Water Council” was intended to coordinate the Ministry of Water Resources and Ministry of Agriculture, as well as other government bodies relevant to water resources, but it was never established despite a UNDP capacity building project to this end. The final report on the NWC simply stated that parliament never passed the law needed to establish the body.
This does not stop the World Bank report calling for an effort in the agriculture sector to,
“institutionalize solid coordination between the Ministry of Agriculture and the Ministry of Finance, the Ministry of Planning, and the Ministry of Trade.”
Similarly, the report calls for
“a wide range of interfaces with other sectors and areas, such as water management, the environment, trade, land administration, education, transportation, social protection, health, and displacement.”
Despite these calls for a “whole of government approach, we later hear that,
“Iraq established a national Trade and Transport Facilitation Committee in 2015 following a United Nations Economic and Social Commission for Western Asia workshop that brought together the Iraqi ministries of trade and transportation and private sector representatives. But despite the alleged creation of the committee, its organizational structure, membership, and functional efficiency are unknown... there is no online record of its activities since it was established.”
This recognition that external efforts to join up Iraq’s disjointed government haven’t gone so well is interesting, because in the spirit of TWP, the report warns:
“Without (a) understanding how Iraq’s fragility and political economy shape economic reform and development and (b) addressing these factors as part of a wider strategy and reform agenda, the best technical solutions are likely to fail or be derailed by continued political instability and social unrest...”
In addition to this and many other points of interest the report also covers:
Digitizing Transparency
The report notes how
“Petty corruption and bureaucratic harassment hurt citizens as much as grand corruption, and they could be addressed through delivery mechanisms such as e-service delivery and online grievance-redress mechanisms. Public perception of corruption can also be improved by measures that signal the willingness of political leaders to make amends, such as the public disclosure of the asset, income, and financial declarations of government officials.”
The implication here is that e-governance can enhance transparency. This may be the case - in Chile for example, the online disclosure platform Chilecompra has been welcomed for reducing corruption in public procurement, and was proposed for Iraq by the Task Force for the Future of Iraq in 2017. The problem is, while Chilecompra discloses contracts, the public is not privy to contract renegotiations.
It’s not hard to imagine a similar scenario with an Iraqi version, or some “grievance redress” service that the report suggests. Much of this comes down to the will of the public servant and fundamental rule of law issues such as whether a failing public official will be removed from office.
E-service delivery could be more promising, as Ali Al Mawlawi has highlighted, the ability to apply online for a national ID card has been relatively successful. In the bigger picture, a system that generates bureaucracy to incentivise bribery may struggle to implement wider rollout of e-services.
Secondly, the requirement of financial disclosure of public officials is an old issue, as Frank Gunter pointed out in his article for this site: only 8% of Iraqi parliamentarians had met a requirement to disclose their personal finances by 2017. Without a strictly applied punishment of failing officials, it’s hard to imagine such e-governance initiatives will result in much more than many unaddressed, angry online comments.
Direct Distribution of Oil Revenues and Taxation
The report suggests
“Iraq could...transfer part of the country’s oil revenue directly to citizens through uniform and universal cash transfers and then introduce the direct taxation of distributed revenues. Taxation fosters social demand for government accountability that oil revenues do not, because “they go directly from the extractive company—usually a multinational—to the government, without passing through the citizens.”
Turning oil revenues into cash transfers is perhaps one of the oldest ideas for a new political economic arrangement in Iraq, a suggestion made by Thomas Palley in 2003, but it has never gained traction.
While Unconditional Cash Transfers (UCTs) are currently in place in Iraq covering 700,000 households (the Social Safety Net, established in 2009 by Iraq’s Ministry of Labor and Social Affairs and USAID) this has been subject to ongoing reform because it is badly targeted. While it would be more equitable, a nationwide UTC faces some challenges.
An obvious issue is that these revenues are currently not available for the foreseeable future. Looking at current revenue volatility, turning a portion of Iraq’s oil revenues into what amounts to a form of basic income is a high risk strategy: if these funds become available, the sum is unlikely be transformative, especially given the high cost of living in Iraq (private electricity generator fees, trucked and bottled water etc). One estimate of a direct distribution mechanism (DDM) in Iraq in 2005 calculated that giving each Iraqi $500 a year would cost $5bn.
That level of funding would only really impact the most vulnerable Iraqis and would come at a risk to the investment budget for services, especially because Iraq’s population continues to grow. Indeed, the memo acknowledges the sharp decline in investment spending in 2018 to just 17% of the budget from 41% in 2014. There is already little room for investment without a nationwide UTC/DDM.
This would have to be given to everyone, because there is evidence that targeted cash transfers can cause local economic distortions and there are vexing problems with targeting transfers in a way that is perceived as “fair.” This is one reason why Progresa, Mexico’s world famous cash transfer program that was held up as a model for cash transfers globally, was scrapped in 2019.
Taxing such a transfer could also be extremely controversial, at least initially, if recent attempts by the Kadhimi administration to tax pensions are anything to go by. The problem, as has been the case for so long, is that the disparate gaggle of political groups in Iraq’s parliament support a broken social contract where nothing is asked of the people (eg. tax, electricity payments that reflect the cost of production etc) and in return, the people have to tolerate political rent seeking. In cabinet it has often been a different story, but reformists such as former minister Luay al Khatteeb and Ali Allawi in the current government are the minority. Allawi is now trying to change this social contract, and will have to pick up from where Abadi left off with electricity tariff reform.
Perhaps a better idea than an oil revenue DDM, and one proposed by the World Bank and IMF elsewhere (indeed, an idea that has currently been trialled Sadr City) is to turn the PDS into a cash payment. This could at least remove some of the incredible inefficiency of the program and help the unbanked if twinned with mobile accounts, but still comes with the challenge of targeting and opposition from political parties.
That said, using fintech to help Iraq’s massive unbanked population is a real strongpoint of the report, but a potential drawback, as noted in the 2018 World Bank-Iraqi government Reconstruction Framework, is a stifling environment for investment in internet infrastructure, something the new white paper highlights as a key sector for reform. For the agribusiness sector, the report suggests
“Iraq’s digital economy could also play a significant role in revitalizing the agriculture sector and its related services and in catering to the country’s young population. A starting point could be linking financing to mobile payment systems, which would leapfrog brick-and-mortar banking.”
Opening up the economy for new ventures to compete with the “politically connected private sector”
“Iraq’s economy requires a dose of competition to shake up its large public sector and politically connected private sector, promote the private non oil economy, and help increase efficiency.”
Iraq’s elites have typically lacked enthusiasm for private competition and generally prefer private foreign investors to partner with local Iraqi companies linked to political interests. For example, a leading private taxi firm was for some time prevented from airport taxi runs because of a government-linked taxi firm (originally called the General Company for Private Transport) having a monopoly at Baghdad airport.
Nonetheless, the report suggests that increasing private competition and improving infrastructure could potentially improve SOE performance
“Overall, SOE reform might incur high costs, and it would almost certainly face political opposition...private players could prompt SOEs to increase their competitiveness and adapt to new market rules, as is taking place in China and India.”
As the report mentions, opening up the economy to private competition is extremely hard, due to the aforementioned reasons. In China for example, the government has actually taken some of the action recommended in the memo, for example, building vast infrastructure across the country to facilitate private sector activity. Has this mobilized inefficient SOEs to compete with the private sector? They have racked up vast debt, at around 80% of all Chinese corporate debt (2019).
Iraq’s main infrastructure projects, aside from the delayed, over budget Al Faw port, have mostly been built by the World Bank, such as the ongoing Iraqi Transport Corridors Project that the bank has funded with a $355 million loan, or foreign funded, such as the Japanese-funded Hartha water treatment plant.
The report outlines some vital infrastructure projects Iraq needs to focus on to improve Iraq’s regional trade integration - presumably potentially bank funded, like the TCP, which envisages a newly upgraded transport corridor from Al Faw to the Turkish border.
Overall, it’s notable that there is very little detail on other SOE reform, and instead the report suggests Iraq should simply keep trying to privatise them. In agriculture, which the report notes has fantastic potential for growth (agribusiness is already progressing in many parts of Iraq) but one issue is that there is little mention of Iraq's emerging Import Substitution Policy (ISI-- banning certain imports or putting up high tariff barriers to promote local business) which comes with various risks, including potentially higher prices for consumers, a lack of competitive development and eventual market saturation.
This is a gamble for Iraq. South Korea’s economic miracle probably would not have progressed without a transition to Export Orientated Industrialisation in the mid-1960s, although like Chile, South Korea was able to pursue this policy because of a highly technocratic autocracy under Park Chung Hee. Economic reform in Chile under Pinochet is actually mentioned as a good case study for Iraq by the Memorandum, something that is highly problematic, for reasons which should be obvious.
MILEX and SSR
“Since 2003, military expenditures have increased from less than 2 percent of public expenditures to 7.8 percent in 2019 (after a peak of more than 12 percent in 2015 because of the fight against ISIS) and from 1.7 percent to 3.5 percent of GDP in 2019.”
The report highlights the worrying rise in Iraqi military expenditure, in part explained by the war on ISIS but also due to the political system which divides security force hiring among political parties, paramilitary organizations and tribes.
While Iraq’s Ministry of Defence budget may have accounted for 7.8% of Iraq’s budget in 2019, the real picture may be much more concerning, indeed 3.5% of GDP is hardly alarming for defence spending. It is important to look at the Ministry of Interior’s budget as well: there are numerous units in Iraq’s “police” force that are closer in equipment and organization to light infantry or commando units.
Some have armored vehicles and multi-launch rocket artillery, which hardly falls under the category of “policing.” Placing MOD, PMF, CTS and MOI expenditure under one heading, “security,” makes more sense; viewed this way, Iraq’s 2019 allocation for security of almost $20bn is sobering, and an important reason why there has been little room for investment in services. Of course, the World Bank can do little about this, but it’s worth highlighting a little more clearly.
Neopatrimonial development: A more useful characterization?
There is much, much more to the report than what is outlined here and anyone genuinely interested in Iraq’s economic reform efforts should read it all, for example, the section on reforming Iraq’s tariff system is superbly detailed.
But throughout, there is a feeling that Iraq has neither the capacity nor the coherent political arrangements for some of the technical solutions suggested. Hopefully, that will not be a recipe for many more workshops, which have been such a common feature of development efforts in Iraq, and have seemingly had such a small impact.
Much more ambition is needed, and it is hard to escape the fact that this will not emerge without a combination of a lot more assistance for Iraq and concurrently, a lot more pressure, the kind of high risk grand bargain now being tabled for Lebanon, following the CEDRE conference and ongoing negotiations over the IMF bailout.
In this respect it might be interesting to condition support on far reaching economic reform, using incentives and disincentives not to undermine the FLAO, but to force progress and transition to what the report hopes will be “programmatic pluralism.” In other words, incentivising elites to pursue pro-growth policies.
Arguably, the new white paper's suggestion to formalize and regulate politically connected private electricity generator providers in a kind of very small independent power producer (IPP) format could be pointing in this direction.
Combining strong incentives and disincentives was an approach the U.S. successfully used in South Korea in the early 1960s following the so-called “Dillon letter,” which outlined reforms needed to unlock very large amounts of non-military aid.
It’s easy to forget, but South Korea under Syngman Rhee was riddled with corruption and clientelism; Rhee is thought to have had a personal interest in as much as 50% of reconstruction projects and water and electricity services were languishing by 1960, the time of the Dillon letter. Reconstruction and import substitution had achieved little and unemployment was also extremely high.
The pressure to enact reforms, which unlocked continued U.S. support, assisted Korea’s efforts to build virtuous circles, for example, the government was required to raise electricity tariffs in exchange for aid, which had a transformative impact on the country’s ailing power sector, leading to one of the sharpest rises in generation capacity in history.
Of course, Park Chung Hee famously wanted this to happen and had a vision for his nation’s development, something that has been missing in Iraq, but the makings of such a vision are arguably present in the current white paper. Park ripped apart Rhee’s patronage networks (and built his own, to a much lesser extent) but by partnering with the Chaebols, succeeded in moving Korea to what has been called “neopatrimonial development.”
Korea’s incredible transformation also involved a surge in manufactured exports such as consumer goods and secondary commodities. The report touches on this, noting how “countries with strong export performance are more likely to experience economic growth and rising living standards.”
Iraq has made miniscule progress here, for example bitumen and dates are currently exported to the UAE but there is a long way to go before Iraq can once again export products such as phosphate fertilizer, as it did during the 1980s.
In order to reach this state, Iraq needs to thoroughly audit state owned enterprises - another lesson from the “Korean miracle,” and give them strict performance targets, something suggested in the new government white paper. The problem is, as the report highlights,
“Iraq still lacks critical fiscal accountability systems such as an integrated financial management information system and a centralized personnel and payroll management information system. Internal auditing has been sidelined…”
Therefore, the international community should look to partnering with Iraq to conduct independent audits with the aim of moving SOEs to becoming export focused Mixed Owned Enterprises, following the example of the Baghdad Soft Drinks company.
Conditionality and pressure is also needed to deter corrupt actors in Iraq. At the moment, the World Bank has some deterrence capacity through its Sanctions Board, but it may be high time the international community looked at changing incentive structures for economic development in fragile contexts such as Iraq.
This cannot be left in Kadhimi’s court alone: transparent investigations need foreign support, perhaps with Interpol as a leading forum, backed up by independent forensic accountancy to ensure they are targeting the right people. There has to be a credible threat of punishment - a potentially destabilizing but necessary step if Iraq is to ever escape the fragility trap. This cannot be left to Washington, through use of the Magnitsky Act.
Discussing how to do this, and how to change incentive structures in Iraq to encourage neopatrimonial development would need another report at least as large as the Memorandum. But it might provide a more promising path than merely “undermining the FLAO,” and hoping the FLAO does not prey upon the non-oil private sector.
