Socio-Economic Strategies to Combat Islamic Extremism in Iraq

Robert Looney Professor, National Security

Affairs Naval Postgraduate School

U.S. State Department Workshop on Countering Islamic Extremism

Arlington, VA July 22, 2005

Outline: Countering the Pull of Extremism in

Iraq

Focus on The Factors Contributing to the Pull of Islamic Extremism in Iraq -- Socio-Economic Perspective.

Economic Conditions in Iraq: pre-War/post-War

Alternative Views of the Iraqi Economy.

The Post War Economic Development Strategy.

Implications for Extremism.

Components of a Comprehensive Development Strategy to Restore Growth and Lessen Pull of Extremism in Iraq.

Final Issues.

Factors Underlying Pull of Extremism Spectrum of Factors Across Different Extremist Groups –

Affecting Disaffected Youth.

Palestine Issues, U.S. Support of Israel, “War Against Islam” The West’s “Cultural Aggression” Socio-Economic Deprivation, Exclusion from Political Process, Dislocation in Transition to Modernity, Globalization.

Common Element – Thwarted Expectations for a Better Life, Humiliation, Treatment as “Second Class” by Governments and Others. They are inspired by al-Qaida Type Ideology.

Some Elements -- the Occupation, Perceived U.S. Intentions in Iraq, the Mistreatment of Iraqis, Anti-Shia Sentiment and Sunni Fears of Exclusion Bring a Unique Mix to Iraq – Numerous Iraqis Join the Insurgency Rather Than Extremists.

Still, Socio-Economic Factors are Contributing to Extremist Recruitment in Iraq, but Exact Extent is Difficult to Separate From Other Factors. Conditions have been Building for Years.

Economic Conditions in Iraq – pre-War

In 1970s Set to Dominate Middle East – Possessed Oil Industrialization, Agriculture and Large Population – by 2000.

Oil Sector at Least 75% GDP.

Distorted Pricing System – Wide Spread Inefficiency and Waste, Stagnant Agricultural Sector.

50% Population Under 24 Years of Age.

Widespread Unemployment -- Up to 50%.

60% Population Dependent on Food Rations.

Macroeconomic Imbalances – High Inflation.

Shadow Economy At Least 35% GDP -- Large Criminal Economy/Corruption

Economic Conditions in Iraq -- Postwar

Very Mixed Picture Since April 2003 -- Some Recovery But:

Unemployment Stabilized at 30-40% -- Possibly Higher.

Unstable/Unreliable Supply Electricity, Fuel, Water.

95% Government Income Comes from Oil.

Government Employs 50% Formal Labor – Not Sustainable.

Many Households With Lower Incomes than 1980.

Great Deterioration in Social Capital, Loss of Trust – Corruption Rate Highest in the Middle East.

High Crime Rate – Massive Capital Flight, Brain Drain .

Shadow Economy Increased to 65% GDP, 80% Labor Force.

Alternative Views of the Iraqi Economy

Post-War Economy Not Pure Case –Complication for Policy: Transition Economy – Establishment of a Market System,

Openness to Trade and Integration into Global Economy.

Failed State – Restoration of Government Services, Law and Order, Open Trade Regime, Resolve Group Grievances and Halt Economic Decline.

Rentier Economy – Diversification from Oil, Counter Authoritarian Tendencies – Oil Funds.

Post Conflict Economy – Restoration Social/Physical Capital. Achieve Stability before Initiating Economic Reforms.

Failed Take-Off Economy – Increased Economic Freedom – Improved Regulatory Institutions – Anti-Corruption.

Post-War Development Strategy

Based Largely on Transition Economy (Shock Therapy). Extreme Version of Neoliberal Reform Package.

Open Economy, Low Taxes, Economy Open to Foreign Private Investment.

Intent to Wipe Slate Clean and Start New Economy.

Macroeconomic Stability– Independent Central Bank But Government Largely Passive in Dealing With Economy.

Strategy Intended to Have High Job Creation Through Rapid Private Sector Investment and Expanded Output, FDI a Key Ingredient. Profitable Imbalances Created by Massive Reconstruction Projects.

Strategy Intent—Create Porter-Type Mechanisms of Private Sector Induced

Reforms

Two Way Pressure to

I mprove Productivity

and Government

Services

Market, I nstitutional

Reforms

Sophistication of Company

Operations and Strategy

Quality of the Business

Environment

Responsive, Reformist,

I nterventionist State

Increased Competition

Market Liberalization

Economic Growth

Taxes, Government

Revenues

Assessment of the Neoliberal Reforms

Reform Program Not Optimal for Iraqi Conditions.

Precludes Large Number of Iraqis from Economic Process – Lack of Skills, Capital.

Uncertainty Too Great for Private Investors.

Approach Not Flexible Enough to Adapt to Shocks or Adverse Developments – Government Not Responsive To Clear Needs.

Trade Liberalization Not Likely to Induce Further Economic or Governance Reforms.

Inability to Produce Short-Run Economic Gains Made Reforms Easy Target for Extremist Groups – Imperialism, Conspiracy Theories.

Reform Assessment (contd.) Since New Institutional Structures-Reforms Not Stimulated by

Neoliberal Reforms – Vacuum.

Filled by Existing Organized Groups – Religious and Criminal.

Incomplete Reforms/Price Controls Created Profitable Black Market Arbitrage Opportunities.

Result-Economic Strategy has Created More Favorable Environment for Extremists and Criminals to Exploit than for Private Investors to Thrive and Contribute to the Recovery.

System is Unstable and Could Easily Revert to a Vicious Circle of Violence and Poverty.

Much Internal Opposition to the Current Economic System and Few Supporters – Alienation.

Unfortunately, New National Development Strategy (NDS) – Appears to be Continuation of Top-Down, Neoliberal Reforms/Privatizations.

Iraqi OppositionTo Neoliberal Reforms

Influential Intellectuals Who View Neoliberal Reforms as Extreme and Detrimental to Economy at this Time –Point to Failures of Similar Reforms in Other Countries – Cite Credible Alternatives.

Entrepreneurs Who Fear Foreign Competition. Speculators, Corrupt Officials Profiting From Black Market Arbitrage on Administered Priced Goods.

Religious Leaders Who See Reforms as Part of War on Islam.

Problem – Outside of a Few Technocrats and Merchants, Little Popular or Influential Support for Reforms – Neoliberal Reforms Seen as Imposed With No Input From Iraqis.

The Same Reforms that were Implemented With Some Success by the Transition Countries as a Sign of Their New Independence are Seen by Iraqis as Products of the Country’s Occupation – Has Helped Extremist Group’s Credibility.

Implications for Extremism Attracting Large Numbers of Recruits Requires: (a) Lack of

State Capacity, (b) a “Mobilizing Belief”, and (c) Appropriate Agitators.

Iraq has all Three Plus Several Other Home-Grown Factors – Some are Attracted to Extremist Groups for the Money. Extremist Groups Appeal to Disgruntled Former Ba’athists, Republican Guards, Anti-Shia Sentiment. Moral Vacuum left by Corruption in Government and the Breakdown of Trust and Deterioration of Social Capital – Fine Line Between Criminals and Many Extremist Recruits.

Socio-Economic Improvement Can Stem Extremism in Large Segments of the Population, but Development Strategy Must be Such that the Average Iraqi has a Stake in Making the System Work and the Opportunity to Contribute to that End.

Need to Alter Approach to Development From Current Top Down to Bottom Up – More Inclusive, More Input from Iraqis. Currently, Trickle Down Won’t Work in Iraq – Corruption, Little Short-Term Impact, Market Failures.

Iraq: Factors Contributing to Extremist Recruitment

Organized Crime,

Criminal Activity

Terrorism,Increased Terrorist

Recruitment

Corruption,Weak State,

Political Gridlock

Failed Expect-ations

Modern-ization

Suppressed Violence

Associated with Rural

Urban Transition

Ba'athists Excluded

from Previous Privileges

Outside Agitatorsal-Qada/

other fanatic groups

Demography-Youth Bulge

Defective Education/

Skills

Oil Rents Fungible

into Terrorist Activities

Little Private Sector

Investment or Economic

Activity

Humiliation/Resentment

Over Occupation

High Unemployment

Rates

Former Iraqi Military

Religious Extremism

Neoliberal Economic Policies

Inability Of Government to Respond

to Crisis

Sunni Fears of Exclusion/

Marginalization

New Development Strategy: Historical Lessons

Lessons for Iraq From Developing Country Experiences:

Growth Spurts Associated With a Narrow Range of Reforms.

Policy Reforms Associated With Successful Growth Have Elements of Orthodox with Unorthodox Policies/Institutions.

Institutional Innovations Do Not Travel Well – Need Home Grown Strategy Building on Local Strengths.

Sustaining Growth More Difficult than Igniting It –Requires Extensive Institutional Reform.

New Development Strategy: General Principles

Bottom-Up Orientation Focused on Iraqi Population.

Shift From Neoliberal to New Institutional Strategy Shown to be Successful in Transition Countries -- Focus is on Overcoming Limited Number of Critical Constraints to Development.

Creation of Institutional Underpinnings of Markets Needed for Strong Entrepreneurial Development.

Build on Established Institutions/Programs to Prevent Further Economic Disruption and Social Unrest.

Strategy Must be Comprehensive Integrating Community Development, Project Selection, Sectorial Development, and Macroeconomic Stability.

Sequencing of Activities to Generate a Virtuous Circle with Winners Interested in Advancing Reform Process.

New Focus: Social Capital

Social Capital Represents Networks of Relationships that Bind People Together—Deteriorated Significantly Under Saddam and Under Great Stress Today.

Trust a Key Element of Social Capital. In Iraq Ascribed Trust – Kinship Groups and Family

Members.

Process Based Trust – Individuals That Have Known Each Other for Some Time – Key Element in Business Networks

Extended Trust – Transactions Between Individuals With Only Limited Information About Counterparts Attributes.

New Focus: Social Capital (contd.)

In Iraq Today, Most Networks Ascribed Trust, With Some Process Based and Fewer Extended – Extended Critical for Market Development.

Deterioration in Social Capital May Explain Some of the Problems Encountered by the Neoliberal Reforms

– Lack of Response to Price Movements – Limited Growth of Markets and Exchange – Largely Local Market Development Rather

than Regional or National.

Key Components – Immediate Implementation

Starts With Focus on Community Development – Local Communities Set Development Priorities, Draw-Up Budgets, Participate in Implementation – Social Capital Development.

Builds on Integrating Successful Programs -- Commander Emergency Response Program (CERP), Local Governance Project (LGP), and Office of Transition Initiatives (OTI).

CERP Scope Would Broaden to Include Funding Private Sector SMEs – Clear Goals --Projects Focused on Job Creation.

Dual Track Strategy focused on SME Industries in Informal Economy.

Private Sector Needs Official Support. Set Initial Tariffs for Protection at Uniform 10-15% to be Phased out over 5 years.

Key Components- Implementation Medium Term

Direct Distribution of % Oil Revenues – Broad Based Domestic Demand.

Allows Phasing Out of Corruption Plagued Subsidy Programs.

Development Bank Allocated % Oil Revenues – To Fund Dual Track Strategy – Private Sector SME Start-Ups as Well as Larger Private Industries Until Commercial Banks Sound.

Oil Stabilization Fund to Achieve Macroeconomic/Fiscal Stability.

Focus on Expediting Improved Property Rights/Rule of Law – Critical for Private Sector Development.

Incentives to Reverse the Brain Drain -- Entrepreneurs.

Anti-Corruption Efforts to Facilitate Private Sector Expansion.

New Development Strategy: Outcomes

Potential Through Creation of Balanced Supply/Demand Growth to Expand Employment, Incomes, and Iraqi Inclusion in the Formal Economy.

Virtuous Circle With Feedbacks from Economic Progress to Further Reforms and Sustained Growth.

Job-Oriented Community Development Strategy Has Potential to Marginalize Extremists by Strengthening Indigenous Democratic Processes That Generate Economic Prosperity.

Building of Social Capital Networks Creates Trust Between Different Tribes, Ethnic Groups and Regions. Increased Exchanges Between Diverse Groups Solidified National Markets

Net Effect: Creation of an Environment of Hope and Success for the Average Iraqi.

Iraq: Policy Induced Virtuous Circle

Community Development Project Design

and Implementation

Increased Entrepreneurship

Dual Track Development

InformalEconomy Focused Credit

Expanded Number of

SMEs

DevelopmentStrategies/

Policies

Expanded Focused

Aid-Grant Programs at Local Level

Deepening of Economic Reforms/

Governance Institutions

Oil Fund for Public

Distribution

Development Extended

Trust Networks

Pressures for Further

Market Reforms/Effective

Regulation

Reduced Corruption

Phase out Subsidies, food, oil, electricity

Reduced Market-Based

Corruption

Expanded Demand --Domestic Market

Expanded Supply -- Growth of

the Economy

Improved Stability in

Government Expenditures

Through Creation of

Oil Fund

Iraq: Expanded Virtuous Circle

Community Development

CERP, LGP and OTI

Coordinated Efforts

Expanded Social Capital

Dual Track Development

Strategy

Expanded Domestic Market

Expanded Number of

SMEs

Expanded Employment

Creation

Improved Project

Selection, Completion

Rate

Expanded Domestic

Demand and Economic Growth

DevelopmentStrategies/

Policies

Impacts/Linkages

Market/Employment

Effects

Increased Investment Technology

Transfer

Increased Domestic Multiplier

Shift from Strict

Neoliberal Reform

Package to Institut-ionalst

Evolutionary Approach

Oil Fund for Public

Distribution

Virtuous Circle of

Growth and Opportunity Reducing the

Pull of Extremist Groups

Development Extended

Trust Networks

Greater Public Participation

in Development

Process

Pressures for Further

Neoliberal-Institutional

Reforms

Reduced Corruption

Pressures to Reduce

Corruption

Phase out Subsidies, food, oil, electricity

Reduced Market-Based

Corruption

Expanded and Focused Aid/ Grant Programs

Strengthen Rule of Law

Improve Macroeconomic

Stability

Broadened CERP Lending

Responsibilities

Implications for Extremist Recruitment

Within Iraq – Improved Economy Likely to Lessen Attractiveness of Extremist Message to Those Currently Frustrated by Thwarted Expectations of A Better Life –Foot Soldier Recruits. It Would Also Weaken the Non-Extremist Component of the Insurgency.

Trust-Based Development Strategy Helps Resolve Ethnic Grievances and Tensions, Integrate Markets – Helps Negate Spread of False Rumors – Extremist Recruitment Tool.

For those Motivated More by Religious Fervor or Fear of Modernization/Globalization – Lesser Impact.

Biggest Gains May Be Reducing Recruitment Outside of Iraq – Vitalized Economy Speeds U.S. Withdrawal form Iraq. Calls into Question Extremist Claims of U.S. Imperialism or the Waging of War on Islam.

Critical Intangibles The Extent to Which the New Constitution Unites The Various

Ethnic and Regional Groups.

Speed and Degree to Which Trust Can be Restored, Iraqi Firms Can Take Over Many Activities from Foreign Firms..

The Extent To Which Improved Economic Performance Can Undermine the Insurgency.

Ability to Integrate CERP, LGP, and OTI and Perhaps New Programs into Community-Based Development Strategy.

The Degree and Extent to Which Average Iraqis View Free Markets as a Opportunity to Create a Better Standard of Living rather than a Threat Imposed by Outside Interests.

Most Importantly, The Extent to Which the Iraqi Government Can Evolve into a Developmental State – A Democratic Version of the 1970s Regime.

Contrasting Views of The Iraqi Economy

“If I Am Permitted to Dream, Iraq Will Develop into the Japan of the Middle East.” Talib al-Tabatie, Chairman, Iraq Stock Exchange

“It Seems that Many Iraqis do not Understand…why a Market Economy Can Make the Poor People Much Better off Than They Ever Were When Saddam Controlled the Oil Wealth and Doled out Perks to the Iraqis Like a Stern Parent Rewards Small Children for Being Seen and Not Heard.” Ronald Rotunda – George Mason University Foundation Professor of Law.

“We Want to Go Back to the Old Healthy Management of the 1970s.: Thamir Ghadhban – Oil Minister, Iraqi Interim Government