State-Run Iraqi Enterprises Offer Prospect of Stability, Growth

By Tim Kilbride
Special to American Forces Press Service

May 21, 2007 – Economic expansion through the revitalization of domestic industrial capacity is a major factor for stability in Iraq, a senior defense official said May 18 during a call with "bloggers" and online journalists. Iraq's state-run factories once served as the lynchpins of diversified regional economies, said Paul Brinkley, deputy undersecretary of defense for business transformation.

Turning those factories back on not only would provide employment and wages for hundreds of thousands of Iraqis, he said, but also would set off a ripple effect of smaller business generation throughout the areas in which factories are located.

More importantly, Brinkley added, "Economic prosperity is a counter-measure against social unrest and violence."

Pointing to studies of the post-World War II reconstruction of Europe under the Marshall Plan, Brinkley said it was programs to return people to work and prevent economic stagnation that kept the continent from falling back into war.

While Iraq presents different circumstances, he observed, the fundamentals of the problem are the same.

"This is a human population that's suffering economic distress," he said. "And if you alleviate the suffering, I believe the job our forces have and the Iraqi defense forces have gets much easier."

Religious zealots will remain a problem, but that situation is more easily controlled, Brinkley said, if the greater environment in which they operate is normalized.

"If you take away the portion that is simply frustrated and fed up after four years, and seeking any income," he noted, "then I think the job of our forces and the ability to stabilize the country gets much, much easier."

Iraq's industrial legacy includes more than 200 formerly state-run factories, with a skilled work force more than 200,000 strong, Brinkley said.

Because of United Nations sanctions lasting from 1991 to 2003, Brinkley said, Iraq was forced to move beyond a dependence on oil exports and develop an industrial capacity to meet its internal needs. "This country already had a diversified economy," he noted.

"When you look around the country what you find is just a variety of factories making ... essentially anything an economy can consume, with the exception of high-tech goods," he explained.

Brinkley now heads up a team tasked with turning that production capacity into a tool for stability through growth. His Task Force for Business and Stability Operations - Iraq is charged with evaluating Defense Department business processes and systems affecting contracting, logistics, fund distribution and financial management, to ensure alignment to theater commanders' goals for reconstruction and economic development in Iraq.

The program originated with Army Lt. Gen. Peter Chiarelli, former commander of Multinational Corps Iraq. Chiarelli identified a relationship between unemployment and insurgent activity after collecting numerous reports of former Iraqi factory employees being paid to lay roadside bombs. According to Brinkley, the connection is obvious.

"Probably the worst time we ever had in the United States of America was the Great Depression," Brinkley said. "And, the Great Depression was a time of great social unrest. It was violence in areas around the country, and the peak unemployment rate in the United States during the Great Depression, I think, was in 1933, and it peaked at 25 percent.

"The work force in Iraq is experiencing an unemployment rate, an effective unemployment rate, in excess of 50 percent," he continued. "I don't know of any population in the world ... where if you impose 50 percent unemployment there aren't going to be militia roaming the street and people blowing things up. I just accept, and I think most rational people accept, that economic distress creates sympathy for violent activity."

Turning the employment situation around involves a three-pronged strategy to support the restoration of Iraq's commercial engine and create markets for Iraqi goods, Brinkley explained.

First, he said, the U.S. military could become a primary consumer, contracting for goods that "meet the requirements of military planners to support our forces."

The second part, Brinkley said, involves reconnecting "the commercial links that existed throughout Iraq" under the U.N. sanctions. Iraq's import gap from 1991 to 2003 was made up with domestic industry and business-to-business sales within the country, he explained. "It was part of the fabric that held the society together," Brinkley said, and holds the hope of mitigating some of the more overt factional tension that has emerged since 2003.

The final piece for now is to attract foreign investment, Brinkley said. His task force is leading U.S., European and regional business executives on tours of Iraqi factories, encouraging the purchase of Iraqi goods, and negotiating contracts to transfer work into Iraq, he said. In the country's areas of relative stability, he noted, what is "probably the most highly-skilled work force in the Middle East" is capable of manufacturing a wide range of products.

The Iraqi government is funding the factory-turnaround effort, Brinkley said. He added that those factories already selected for rehabilitation are on a "transitional path to privatization, very similar to the model that we've seen very effectively used in the Asia-Pacific region, in countries like China."

Key to the Asia-Pacific model of moving slowly away from state ownership, he said, is privatization in phases: reducing the work force in factories over time; and putting in place profit and loss models.

Iraq is operating in a critical window to successfully restore a diversified, competitive economy, Brinkley cautioned. With pressure on the Iraqi parliament to pass hydrocarbons and revenue-sharing legislation in the near future, he said, the country needs to take active steps now to avoid letting oil become its sole economic driver.

Brinkley described two models typical of oil-rich countries. In the first, he said, foreign companies come into the country, create walled compounds around wells and refineries, and import all of their equipment and labor from abroad. In the second model, energy companies are encouraged through incentives and legislation to consume goods manufactured in the host country and put to use domestic capacity. This latter option is key to successfully managing Iraq's oil resources, Brinkley said.

The compound model, by comparison, "would be a terrible mistake" since profit would accrue with the government but wouldn't necessarily reach the population.

If Iraq manages to revitalize its industrial sector, develop markets and encourage investment in a timely manner, Brinkley predicted, "then this country could become something unique in the Middle East - a diversified economy with a skilled work force, a professional middle class, an educated middle class, that serves as an example to the rest of the region."

He added, "I believe that's what we'll see here, and I hope that's what we see here, but to me this next 6 to 12 months (are) really critical as those decisions are taken and as those first contracts for petroleum development take hold."

(Tim Kilbride is assigned to New Media, American Forces Information Service.)

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