Psd slides

Private Sector Development in Iraq

Iraq’s current plight represents the accumulation of thirty years of socialist policies, losing wars, brutal dictatorship and crippling sanctions. As a whole, then, Iraq’s society and culture is not operating well. The Iraqi people have the means within themselves and, ultimately, within their society to recover from this devastation. This process, however, will be a gradual one much like the preceding thirty years of impoverishment.

The Private Sector Development view is different, primarily focusing on the grass-roots level, not to fix the system but to replace it. In the transformation of social values and business practices, Private Sector Development provides the catalysts for new investment, job creation, labor mobility, skills enhancement and everyday interaction.

The Private Sector Development Group (PSDG) of the Iraq Reconstruction Management Agency (IRMO) is an advisory mandate by the U.S. Embassy to assist Iraq in a long-term growth toward renewed health as a middle class country – a status it enjoyed thirty years ago.

The PSDG’s policy prescription for Iraq, as a social organism, is not radical. Most great democracies have relied upon it for their prosperity and as a guard against government encroachment upon less tangible liberties. In the case of Iraq, this seemingly tall order merely implies a fresh integration of its ancient culture of crops and commerce with contemporary notions of property, contracts and economic development.

SURVIVAL PLATFORM

ECONOMIC PLATFORM

MARKET CREATION

POLITICAL ECONOMY

WEALTH, COMPETITION

AND STABILITY

Similar to the conception put forth by Frederick Barton and Bathsheba Crocker of the Center for Strategic & International Studies, the PSDG applies the notion – originated by Abraham Maslow sixty years ago – of hierarchy of needs, in this case, social needs. The basic premise remains one of upward ascent coming when the current level of needs are largely met. In this case, the PSDG believes that threshold of ‘largely’ meeting current needs is difficult to define but becomes clear after the ascent has taken place.

SURVIVAL PLATFORM

Societies can not survive the harsh challenges of climate and adversaries if they fail to feed people, house them, and provide them certain basic services. Security is, as

always, another determinant. Security remains the single largest priority for Iraq’s survival as reports circulate about more murders at the hands of insurgents.

Nonetheless, such security questions lie beyond the scope of this policy outline.

The PSDG implicitly assumes that the current military efforts by the Coalition will succeed in defeating the insurgency outright or in empowering the Iraqis to

accomplish the same end during the next year. As physical safety returns to the homes of Iraq, trading should return to the streets and bazaars across the country.

It is the development of this mercantile culture that represents the mission of the PSDG, first by shoring up some of the ‘survival’ deficits facing Iraq and then, second, help put into place laws and policies that invite further ascent up the

hierarchy of social benefits.

SURVIVAL PLATFORM

IRAQISTRENGTHS

CRITICAL SUCCESS FACTORS

IRAQIDEFICITS

The Fertile CrescentThe Fertile Crescent FOOD Neglected Irrigation; Salinated Neglected Irrigation; Salinated SoilSoil

Domestic Production of Building Domestic Production of Building MaterialsMaterials SHELTER Overcrowded; Severe Housing Overcrowded; Severe Housing

ShortageShortage

Electricity for 12+ Hours in Electricity for 12+ Hours in CitiesCities

BASIC UTILITIES

Squalor in Urban Slums & Rural Squalor in Urban Slums & Rural AreasAreas

Limited Sewage in Large CitiesLimited Sewage in Large Cities BASICSANITATION

Sharp Decline in Health Sharp Decline in Health StandardsStandards

2nd Largest Oil Reserves in 2nd Largest Oil Reserves in WorldWorld

RAWMATERIALS

Frequent Black-outs in Large Frequent Black-outs in Large CitiesCities

IRMO PRIVATE SECTOR DEVELOPMENT:

IRAQ’s STRIDES TOWARD FREEDOM

Societies must assure the survival of the governed by:

• IRAQ has extensive farmlands, with 20-25% of its land being arable. • One in five Iraqis lives on a farm; agriculture produces 29% of the GDP.• IRAQ’s rich soil made its Fertile Crescent between the Tigris and Euphrates the bread-

basket of the Middle East.• Development of oil resources can make Iraq self-sufficient in its food. requirements

through distribution of water and mechanized farming.

WHY IS IRAQ STRUGGLING?• The old régime displaced 400,000-500,000 people by drying out the wet-lands.• Centralized planning and impoverishment from the sanctions changed Iraq from being

a grain exporter to importing half of its food requirements.• One in every five Iraqi children suffers from malnutrition.• Over two decades, agricultural productivity per capita declined by 75-85%.• Currently 60% of the people rely on subsistence rations from the government.• 40% of Iraqis have access to potable water; down from 90% in the 1980s.

Providing for the feeding and physical survival of its people, particularly its working force, over time…

Providing adequate shelter for the population, particularly in urban centers


• Through the 1970s, Iraq was viewed as a “middle income” nation providing adequate housing to its population.

• Iraq has industrial capacity in cement, bricks and other construction materials.• The housing ministry of Iraq’s housing ministry has recently established a $50

million pilot program to assist in construction and mortgage financing.

WHY IS IRAQ STRUGGLING?• Iraq’s housing agency found that the previous régime made no serious

investment in the nation’s housing stock.• Estimates of the housing shortage range from 1.4-2.5 million, or a 50-90%

expansion of the current, often dilapidated, housing stock.• The current government views urban overcrowding and squalor to be at

“dangerously high” levels.• Refugees and Iraqis displaced by the former régime are creating an excess

strain on already limited housing stock in the Northern and Southern regions.• Housing construction as a percent of GDP declined from 6.5% in the late

1980s to 0.5% in the mid-1990s.


Guaranteeing the widespread availability basic sanitation and utilities • Iraq has produced electricity for urban centers since the 1950s or 1960s; it had

continual electricity available to more than 80% of the urban population. • Iraq had provided sewage for its cities through the 1970s.• Oil revenues had made much of this possible elevating Iraq to a status of a

‘middle class’ nation by the mid-1970s.

WHY IS IRAQ STRUGGLING?• Two unsuccessful military adventures and the 2003 invasion caused property

damage of roughly $500 billion of which $250 billion was infrastructure.• The ratio of electrical capacity to peak demand fell from 1.8x in the late 1980s to

current levels of 0.5x.• 85-90% of people in six large urban centers (i.e., 40-50% of the population) cite

electricity shortage as the largest problem and a leading source of unrest.• Sewage now reaches only one in four homes across Iraq; 40% of Iraq’s water

supply is lost due to pipe leakage.• 75% of raw sewage is dumped directly into an already salinated river system .


Developing Raw Materials to the Greatest Advantage for the Greatest Number

• Iraq has produced electricity for urban centers since the 1950s or 1960s; it had continual electricity available to more than 80% of the urban population.

• Iraq, as stated earlier, has rich, arable soil and an extensive irrigation system.• Iraq was diversifying its economy successfully in the 1970s.

WHY IS IRAQ STRUGGLING?• Oil prices crashed in the mid-1980s while state-owned enterprises (SOEs)

failed to remain globally competitive by functioning as domestic monopolies.• At the time of the oil price plummet, the former régime was only at the mid-

point of a debilitating eight-year war with Iran.• Sanctions and centralized control of money and resources undercut the

maintenance of the physical plant leaving Iraqis a little as 700 kilowatts per capita of electricity (versus 12,700 in the United States).

• Other natural resources (e.g., agriculture), and the means to develop them (e.g., irrigation maintenance), have been neglected for fifteen years.

HOW can PRIVATE SECTOR DEVELOPMENT HELP REDRESS

THESE SHORTFALLS? 1.Move forward with agrarian reform by converting rents by share-croppers into mortgage payments to purchase the land over the next ten years.

2.Provide micro-loans or seasonal credit to these small farmers to buy equipment to increase their productivity and applying international aid through matching grants to stimulate a multiplier effect.

3.Extend credit to small and middle-market enterprises (SMEs) to set up purchasing and distribution partnerships among rural craftsmen as well rural land-owners and farmers.

4.Lay the groundwork for rural business centers to re-invest in reading, writing and business skills as well as to finance their expansion and versatility across rural Iraq to contain migration into over-crowded cities.

5.Create enterprise zones and trade schools in the cities to support social investment in the rebuilding of the electrical grid and the construction of urban sewage and water facilities.

ASSESSING SURVIVAL:WHAT are IRAQ’s THRESHOLDS of SUCCESS?

“There was in fact never any sort of investment in the housing sector in Iraq since the early 1980s ...due to the involvement of former governments in military warfare rather than ... setting out the infrastructure in a proper manner." – Omar Al-Damluji, Ministry of Construction and Housing; July 2004

Factor Benchmark Measurement Recent Estimate Success Threshold

Food • growth in annual produce per capita

• percentage of people dependent on food rations

• 3.4% decline

• 60% (2004)

• exceeding 5%

• < 30% of population

Shelter • number of housing starts • est. 1,000 • > 5% of existing

Basic Utilities • kilowatts per capita• access to drinking water

• 1,225 kWH • 40% of people

• > 2,000 for 85% of Iraq• > 90% of population

Basic Sanitation • number of water filtration plants repaired or completed

• one or two • > 5 plants per year

Raw Materials • irrigation canals repaired • unknown • > 10% of existing

The fault-line between less-developed countries with the potential to emerge into middle income status and, perhaps, future prosperity and those other nations that

remain chronically poor is the ability to construct an economic platform.

This platform – built on infrastructure, education and dependable (if modest) health care – must endure the peaks and troughs of global business cycles and capital flows. Otherwise, it will remain struggling to transcend survival needs.

As the PSDG works with the U.S. Embassy, Coalition partners, international donors and, most importantly, Iraqi business leaders to shore up some lingering

survival deficits, it is facilitating the private sector’s contribution to the Economic Platform through programs designed to reward business risk-taking.

These fundamental policies pursued by the PSDG include small business (including micro-) loans, setting up various business zones and privatization of ailing state-

owned enterprises (SOEs).

ECONOMIC PLATFORM

IRAQISTRENGTHS


CHALENGES forIRAQ

National Highway System; National Highway System; Extensive Oil PipelinesExtensive Oil Pipelines

PHYSICAL INFRASTRUCTURE

Highways Unsafe; Pipelines Highways Unsafe; Pipelines Easily TargetedEasily Targeted

Expanding Telephone IndustryExpanding Telephone Industry COMMUNICATIONS INFRASTRUCTURE

Repair Damages from War and Repair Damages from War and 13 Years of Sanctions13 Years of Sanctions

Recent 80% Debt Forgiveness Recent 80% Debt Forgiveness by OECDby OECD FISCAL SOLVENCY Lack of Electronic Banking; low Lack of Electronic Banking; low

Penetration of TelecommPenetration of Telecomm

Small-to-Medium Businesses to Small-to-Medium Businesses to Provide TrainingProvide Training BASIC HEALTH CARE Sharp Decline in Health Sharp Decline in Health

StandardsStandards

Traditional Emphasis on the Traditional Emphasis on the SciencesSciences

FUNCTIONING EDUCATION SYSTEM

Stagnant Rates of Literacy over Stagnant Rates of Literacy over 20 Years; Roughly 60%20 Years; Roughly 60%



ECONOMIC PLATFORM

Societies erect economic platforms to grow from survival into continuity by: Maintaining a fully functioning multi-modal transportation system supporting cities with modern infrastructures

• Iraq has a national highway system with 90% of its roads being paved. • Iraq has one major port – Umm Qasr – onto the Persian Gulf.• Baghdad and other large cities have constructed airports.• The oil pipeline system functions and neglected piping can be easily repaired.

WHAT CHALLENGES HURT IRAQ’s PLATFORM?• Highways remain unsafe with most of the roads & 1,200 bridges in disrepair.• Infrastructural / sewage problems have created humanitarian emergencies in

poorer sections of the large cities and in certain cities generally .• Capital formation rates fell by 90% under former régime’s planning and wars.• Iraq has one of the least developed transportation systems among petroleum

exporting countries, lagging that of Iran.• Only 35-40% of the commercial air and rail fleets were operational in 2003.

Societies erect economic platforms to grow from survival into continuity by: Building and maintaining a nationwide electronic communications and financial system

• Iraq has a national telephone system in place. • Iraq has cell-phone companies growing in the leading metro areas.• Iraq has television and radio stations for information dissemination.• Satellite television, telephone and inter-net connectivity is spreading.• The Central Bank of Iraq has wire-transfer capability with other central banks.

WHAT CHALLENGES HURT IRAQ’s PLATFORM?• Iraqi has the fewest land-line phones relative to its population of oil-rich nations in

the region with fourteen people for each telephone line.• The telephone and cell-phone systems do not connect the country .• The financial system lacks electronic funds transfer capability deterring cross-border

investments and preventing the free circulation of money and capital within the economy to create wealth from trading and commerce .

• The credit markets have yet to institute lending practices like those used in industrialized nations .

Societies erect economic platforms to grow from survival into continuity by:

Attaining and maintaining government fiscal solvency to assure a tax climate sympathetic to business investors over the long-term

• 80% of the $40 billion of foreign debt to OECD countries will be released.

WHAT CHALLENGES HURT IRAQ’s PLATFORM?• The remaining $80-85 billion of debt is owed to Arab governments and banks

less inclined to forgive so much.• Current vulture-market bond pricing implies at least 50-60% write-off of the

remaining debt.• Iraq holds 40% of the outstanding and a majority of the inter-governmental debt

of all Middle East countries.• Current external debt to GDP is 400-500% versus 75% for the U.S.A.; 60% for

the E.U.; 85% for “heavily indebted poor countries” (per the IMF); and 53% for developing countries (per the World Bank).

• After restructuring, will range from $40-50 billion, or 150-200% of GDP; this would represent roughly two years’ of petroleum production for repayment


Providing basic health-care to reduce infant mortality and avoid fatalities from curable disease

• Iraq had a history of universal health care, extending coverage to 90-95% of the population in the 1970s.

• In the 1970s, Iraq had one of the lowest infant mortality rates in the region and the longest life expectancy.

• Since the recent war, Iraq has re-built 175 primary care facilities, renovated 1,200 clinics and re-trained 3,200 doctors and nurses.

WHAT CHALLENGES HURT IRAQ’s PLATFORM?• Two-thirds of the hospitals are unusable while the balance is largely obsolete since

only 4% of the hospitals were repaired.• Iraq has endured a sharp increase in infant mortality, particularly since the first Gulf

War, with a present rate that is 2½ times that of the region.• Iraq’s 20% rate of child nutrition rivals the rates of the poorest countries .• Iraq’s life expectancy declined by 10% to sixty-one years in the 1990s. • Physicians continue to leave the country due to fears of being kidnapped.


Promoting universal literacy to make the labor market educated and teachable

• Iraq’s education system graduates high numbers of primary school teachers.• Iraq has a tradition of an educated citizenry; in the 1970s, Iraq’s universities

were centers of learning for the Middle East.• Small, often tribal, businesses provide apprenticeship for key employment.• Prior to the previous régime, Iraq had the highest literacy rate in the region.

WHAT CHALLENGES HURT IRAQ’s PLATFORM?• Iraq now has one of the worst literacy rates in the region at 40-50%; women’s

literacy is half of men’s, effectively removing a large part of the work-force.• The former régime slashed funding per student 90-95% over the past decade.• The grade school enrollment rate is 75% while the high school rate is 47%. • 50% of Iraqi children drop out of school by age 12; 16% finish high school.• The sanctions accelerated educational poverty with one book available for every

3-4 children in critical subjects and 80% of the schools falling apart

HOW can PRIVATE SECTOR DEVELOPMENT HELP REDRESS THESE CHALLENGES?

1. Use the proceeds of oil sales, assets of liquidated SOEs and left-over DFI funds for immediate repair and up-grade of the national highway system.

2. Establish Free Trade Zones to aid reconstruction of airports & port facilities.

3. Create market centers and enterprise zones to support local enterprise.

4. Establish a national private credit market for SMEs.

5. Create incentives for small businesses to provide internships and skill enhancements for returning high-school students.

6. Apply DFI funds and international donor assistance to the repair and reconstruction of the hospital and communications systems.

7. Implement electronic funds transfer in privately owned, solvent banks and separate sovereign debt and obsolete SOE assets into two defunct state banks.

8. Automate trading and settlement systems of the domestic capital markets to attract international investors with transparent markets.

COMPLETING CONSTRUCTION of an ECONOMIC PLATFORM:

WHAT SHOULD be IRAQ’s THRESHOLDS of SUCCESS?

“Iraq has two strong advantages as it attempts to achieve sustainable growth over the medium term: its natural endowment of oil resources and its human capital, which reflects a long tradition of education, scientific skills, trading skills and entrepreneurial spirit” – UN/World Bank Joint Needs Assessment; October 2003.

*connectivity percentage = proportion of population with a cell-phone, land-line telephone or inter-net connection


Physical Infrastructure

• kilowatts per capita • RR & paved roads to borders

• literacy rate • 10.9x

• 2,500 kWH per capita • > 30.0x

Communications Infrastructure

• connectivity percentage • cash settlement period

• 8.9% of people • 14-21 days

• > 50% connection rate • < 5 days at urban banks

Fiscal Solvency • debt to GDP • subsidies to GDP

• 400-500% • 45-50%

• < 75% • < 10%

Basic Health Care

• patients per physician • mortality of children under 5

• 10,000 • 131 per 1,000

• < 5,000 • < 25 per 1,000

Education System

• text-books per student • literacy rate

• 0.3 per student • 40-50%

• > 3 books per student • > 90%

MARKET CREATION

While each leap up the levels of poverty or prosperity have their thresholds of success – similar to what Barton and Crocker labeled the ‘tipping point’ – this Market Creation stratum is the threshold to a nation’s rise into middle class

living standards. Most poorer nations never cross this line.

Iraq managed to do so in 1973 – at least in the eyes of the World Bank – for a brief few years. The country failed to sustain this status for two reasons. First, high oil prices obscured inefficiencies inherent in price controls and centralized

economic planning. Second, in the context of state-controlled allocation of resources, the government skewed expenditures toward militarism and toward

its inner circle.

Today, Iraq is a nation blessed with resources and cursed by its recent history. The PSDG’s mission remains one re-focussing people’s energies and enterprise

toward the growth of basic industries, the employment of unused human resources as well as the generation and spending of disposable income.



MARKET CREATION

IRAQISTRENGTHS


IRAQ’sCONSTRAINTS

New Laws to Encourage New Laws to Encourage InvestmentsInvestments INVESTMENT INCENTIVES International Investors ExcludedInternational Investors Excluded

Mercantile Culture & TraditionMercantile Culture & Tradition ENTERPRISE FORMATION Deficit in Skilled LaborDeficit in Skilled Labor

New Laws to Encourage New Laws to Encourage InvestmentsInvestments

COMMERCE & MERCHANDISING

Government Corruption Inhibited Government Corruption Inhibited Market PricingMarket Pricing

Small-to-Medium Businesses Small-to-Medium Businesses Surviving Old RSurviving Old Régimeégime CAPITAL MARKETS State-owned Enterprises State-owned Enterprises

Strangle-hold on CapitalStrangle-hold on Capital

IRAQ Property Commission IRAQ Property Commission CreatedCreated PROPERTY RIGHTS Absence of Property Protections Absence of Property Protections

for Decadesfor Decades

Societies encourage the formation or investment of fresh capital to create markets by: Decentralizing the economy through structural reform & investment incentives

• Iraq’s natural resources provide the wealth to diversify its economy through tax incentives for small businesses investment and training new employees.

• The Iraq Stock Exchange opened in mid-2004 to be regulated by a securities commission free of government interference to foster open markets.

• The Government has appointed committees to facilitate privatization of State-owned Enterprises (SOEs), to promote private sector development and to plot out a planning strategy aimed at promoting employment growth .

WHAT CONSTRAINTS INHIBIT FREE MARKET CAPITALISM IN IRAQ? • Less than 50% of the SOEs operate at all; most others operate at 50% of regular

capacity creating under-employment for 22% of the workforce.• Central planning failed to sustain expansion after the oil-price crash, leaving a legacy of

make-work jobs compounding a 25-35% unemployment rate.• Roughly 70% of jobless remains out of work for at least four months.• Members of old régime routinely raided the capital of corporations through coerced

transactions and ownership on the former Baghdad Stock Exchange.

Societies encourage the formation or investment of fresh capital to create markets by: Creating incentives for enterprise formation and investments in start-up and re-structuring businesses • Iraq’s historical prosperity was traditionally rooted in individual enterprise in agriculture

and commerce; 45% of the 1997 work-force was self-employed.• Iraq had a diversifying economy supporting a secular society until the 1980s.• Prior to 1980, Iraq had one of the most advanced banking systems of any country in the

Middle East. • Two-thirds of Iraq’s business leaders believe recently passed legislation by the CPA and

the interim government will improve their business prospects.

WHAT CONSTRAINTS INHIBIT FREE MARKET CAPITALISM IN IRAQ? • The two largest state institutions control 90% of the assets of the banking system but have

succumbed to asset quality problems from loan portfolios subsidizing bankrupt SOEs.• SOEs provide little opportunity for new businesses to compete but only contribute at most

one-eighth to the GDP.• About one-third of work-force has a full-time position in private sector.

Societies encourage the formation or investment of fresh capital to create markets by: Decentralizing trading regulations / policies and respecting property rights • Under the direction of the Coalition Provisional Authority, Iraq initiated

structural economic reforms designed to do away with centralized planning and to allow people to build an economic stake in the larger society.

• 80% of the $40 billion of foreign debt to OECD countries will be released.• The Law of Administration for the State of Iraq for the Transitional Period, as

decreed by the Coalition Provisional Authority on March 8, 2004, explicitly protects an unchallenged right to private property to encourage long-term private investments and the mobility of labor and capital within the country.

WHAT CONSTRAINTS INHIBIT FREE MARKET CAPITALISM IN IRAQ? • The former régime was socialist and did not recognize private property; it used its

police powers to confiscate the possessions of political opponents.• Much of the educated, enterprising segment of the population left the country, hid

away from the régime or died from the repression.• The remaining $80-85 billion of debt is owed to Arab governments and banks

less inclined to forgive so much; market pricing implies a 50-60% write-off.

HOW can PRIVATE SECTOR DEVELOPMENT HELP REDRESS THESE CONSTRAINTS?

1. Legislate explicit protections of private property going-forward, including protections for creditors’ enforcement and stockholders’ ownership rights.

2. Establish a national business alliance to focus popular attention and societal resources on the business sector and enterprise formation.

3. Set up a credit registry to publish the financials and payment histories of publicly-listed companies and SOEs.

4. Promote international investments through joint ventures or the Iraqi capital markets by automated trading, electronic funds transfer and accounting transparency.

5. Encourage foreign direct investment through tax liberalization.

6. Establish a network of business centers, initially targeting ten industries, to expedite SMEs and family businesses borrowing under micro-loan programs to service incoming multi-nationals and the Iraqis who work for them.

7. Resolve quickly and fairly competing claims to property titles.

MEASURING PROGRESS in MARKET CREATION?

WHAT CAN be IRAQ’s THRESHOLDS of SUCCESS?

“The right to private property shall be protected, and no one may be prevented from disposing of his property except within the limits of law…Each Iraqi citizen shall have the full and unfettered right to own real property in all parts of Iraq without restriction.”The Law of Administration for the State of Iraq for the Transitional Period; CPA decree of March 8, 2004: Article 16, paragraphs (B) and (C)


Investment Incentives

• SOE subsidies share of GDP • number of SOEs

• 16-19% • 291

• < 10% • < 51

Enterprise Formation

• manufacturing share of GDP• companies listed on licensed securities exchanges

• < 10%

• 64

• > 25%

• at least 200

Commerce and Markets

• committed credit to small businesses

• number of commercial zones*

• $186 million

• One

• $500 million

• Ten

Property Rights • average settlement period of property claims • 12-18 months • at most 6 months

*commercial zones encompass economic trade zones and enterprise / industrial development zones

POLITICAL ECONOMY

While few nations reach middle class status, only a handful enjoy the prosperity of G-7 or OECD countries. The last

climb to national wealth requires a third platform. The first addresses food, the second focusses on basic social necessities.

The bedrock for this third platform, however, depends upon more abstract needs of intellectual freedom, enrichment and

mobility. That is to say: the population – not the food supply or the infrastructure – underlies success in Political Economy.

Political Economy successfully pursued rests on a well educated populace, at all stratums, capable of making

independent judgements on everyday issues like employment or economic opportunities, spending disposable income and

resolving disputes that arise in the course of business.

The PSDG’s policy preference lies more toward creating policies that give people a stake – through working and home-

ownership – in Iraq’s democracy and market economy.

POLITICAL ECONOMY



IRAQISTRENGTHS


IRAQ’s‘To-do’ LIST

The Shari’aThe Shari’a

(Islamic Law)(Islamic Law)PEACEFUL CONFLICT

RESOLUTION International Investors ExcludedInternational Investors Excluded

Tradition of Scholarship for Tradition of Scholarship for Fourteen CenturiesFourteen Centuries ADVANCED EDUCATION Government Corruption Inhibited Government Corruption Inhibited

Market PricingMarket Pricing

Middle Class-in-Exile Living in Middle Class-in-Exile Living in Developed CountriesDeveloped Countries

MOBILE LABOR State-owned Enterprises State-owned Enterprises Strangle-hold on CapitalStrangle-hold on Capital

Tribal Affiliations Create Tribal Affiliations Create Apprentice TrainingApprentice Training CONTINUING EDUCATION Absence of Property Protections Absence of Property Protections

for Decadesfor Decades

Societies foster growth throughout the population by: Advancing the skills of the labor market through the encouragement of higher education and the nationwide availability of continuing education

• Baghdad was a center of learning in the Islamic world for centuries.• Iraq had some of the region’s leading universities a generation ago.• Iraq’s universities emphasized usable skills like engineering and science into their curricula.

WHAT MUST IRAQ DO TO EVOLVE INTO A FREE MARKET SOCIETY? • Re-assert a tradition of scholarship against and over the anti-intellectual climate fostered by the former socialist régime.

• Through proliferation of business centers, eliminate the skills deficit of a working population overlooked by war, exile, emigration and unemployment.

• Invite the educated and skilled Iraqis to return from overseas to lead their compatriots into private sector activity through their examples.

• Create incentives to re-populate the existing 250+ trade schools for focussed training in sustainable, labor-intensive crafts like carpentry.

• Promote academic freedoms within the schools through extensive exchange programs with Western universities and skill-based core curricula.

Societies foster growth throughout the population by:

Reducing frictions against labor market and social mobility to enable entrepreneurs to hire skilled workers from a pool of applicants nationwide

• Small businesses create the great majority of new jobs, up-wards of 75%.• Three-quarters of Iraqi businesses employ fewer than 25 people.• Through its traditions in agriculture and mercantilism, Iraq has a cultural disposition toward entrepreneurial activity.

• There has been a generation of Iraqi entrepreneurs, potentially loyal to their homeland and living overseas, in free market economies.

• Laws have been revised in favor of freer markets and fewer restrictions.• A $200 million program for subsidizing residential mortgages is in place.

WHAT MUST IRAQ DO TO EVOLVE INTO A FREE MARKET SOCIETY? • Improve and supplement existing housing stock with 1.5 million new homes.• Create tax-incentives to enable construction companies to train new masons, electricians and other skilled workers to re-build Iraq’s housing stock.

• Reconcile Islamic and OECD banking practices market through consistent and intelligible fee structures applied universally by Iraqi banks.

• Overcome continuing resentments resulting from forced migrations, wrongful expropriations by implementing property rights and redressing past wrongs.

HOW can PRIVATE SECTOR DEVELOPMENT ACCELERATE THESE ACCOMPLISHMENTS?

1. Create a credit market for construction and mortgages with start-up capacity provided by remaining DFI funds, future oil revenues and the support of international donors. An estimated $12 billion of fresh capital – six times the asset-size of the Iraqi credit market – will flow into Iraq during 2005.

2. Create industrial enterprise zones throughout the country that extend tax and other incentives – including investment tax credit for re-training unemployed people – to empower SMEs to grow faster and create new jobs.

3. Enable business centers to teach new labor / computer skills to under-or-unemployed Iraqis

4. Implement payment voucher systems to prevent gaming of the state-administered salaries until electronic funds transfer renders payment of cash wages obsolete.

5. Create independent courts based on Islamic precedent to resolve conflicts and reinforce an equality of opportunity for all regardless of religious affiliation, ethnic heritage, primary language, gender or tribal origin.

REALIZING the BENEFITS of STRONGER POLITICAL ECONOMY:

WHAT SHALL be IRAQ’s THRESHOLD of SUCCESS?

“Iraqi perception [of political economy] is also mixed. Iraqis seem eager for their own institutions to be in the lead, but…are desperate for a strong leader. Yet they…are overwhelmingly in favor of the protection of most civil rights that underpin democracies.”– Center for Strategic & International Studies; September 2004


Peaceful Conflict Resolution

• percentage of Iraqi property claims settled

• Iraqis murdered by insurgents

• 0.6% • 15,000 last 12 months

• > 50%

• < 100 per year

Advanced / Continuing Education

• university enrollment percent* • enrollments in vocational and technical schools

• average level of schooling

• 14%

• 66,000

• 8 years

• 40%

• 200,000

• 12 years

Mobile Labor• Percentage of work-force in the private sector • 36% • >70%

* percentage of population in the ‘university’ age bracket (e.g., 18-24) enrolled in university

The fewer than twenty wealthy countries share critical success factors. Such factors tend to be

oriented towards people and not régimes. These common values include free-trade, permanent (though occasionally interrupted) job growth,

material plenty and cultural enrichment.

For Iraq, it will be many years, if ever, before its people enjoys these advantages. Nevertheless, firm in a belief that Iraq will ascend to such strength, the PSDG’s policies encourage the return of well-off ex-

patriates or their monies and efficient markets.

WEALTH, COMPETITION & STABILITY

WEALTH, COMPETITION & STABILITY



IRAQISTRENGTHS


IRAQ’sHURDLES

Permanent Property Laws Permanent Property Laws Passed by CoalitionPassed by Coalition FREE & OPEN TRADE Closed EconomyClosed Economy

Attracting New Business Attracting New Business Investment from DiasporaInvestment from Diaspora JOB CREATION 40-60% Under-or-Unemployment 40-60% Under-or-Unemployment

RateRate

Expanding Network of Health Expanding Network of Health ClinicsClinics HEALTH MAINTENANCE Lack of Disposable IncomeLack of Disposable Income

Free Trade Zone EstablishedFree Trade Zone Established CONSUMERISM & CULTURAL GROWTH

Totalitarian Culture of Totalitarian Culture of

HesitancyHesitancy

Ideal societies achieve stable growth with opportunities for all citizens by: Encouraging globalism to leverage the advantages and skills innate to the society and its culture• Iraq’s mercantile history has left it with a legacy of trading, building markets and fostering competition.

• 86% of Iraq’s business leaders favor foreign investment in the country.• Global markets for oil and agricultural produce enable Iraq to negotiate favorable treaties and trade terms.

• The number of popular periodicals published is up 30x since 2002 to 175.

WHAT HURDLES WILL IRAQ SURMOUNT TO BECOME AN IDEAL ISLAMIC STATE?

• Uneven distribution of income, opportunity and property.• Atrophied distribution channels from years of sanctions and low oil prices.• The inefficiencies of a planned, closed economy that has recently skewed resources away from consumption with disposable income toward militarism.

• The absence of foreign capital due to the resistance to its entrance by the SOEs and the recently ended economic sanctions.

Ideal societies achieve stable growth with opportunities for all citizens by: Accenting the creation of new jobs to re-tool under-trained and unskilled laborers as well as to absorb the next generation entering the labor market • Iraq has a middle class in exile, ready to return and pass on its skills through renewed SME activity.

• The micro-lending and business training programs enable family businesses and farms to ratchet up their competitiveness efficiently and inexpensively.


• Education deficits, especially among poor Shi’ites and against women.• The lack of franchising opportunities available to Western companies interested in investing in Iraq.

• Dismantling the SOEs, primarily through rapid liquidation of usable assets to place them into hands of private businessmen, to lift their burden upon the commercial sector.

• Establishing a consumer credit base in a country where less than a half of the households have checking accounts.

Ideal societies achieve stable growth with opportunities for all citizens by:

Providing adequate health-care for citizens of all ages to maintain a vital culture, labor market and business climate • Iraq had the most advanced health care system in the Middle East – and one

comparable with many advanced countries – prior to the deposed régime.• Iraq is busy applying unused DFI funds to refurbish hospitals and to build a

system of clinics.• Health care provision has already increased 26x since 2002.


• Veterans of three disastrous wars are disabled and facing lack of proper public care, draining family resources.

• Iraq had one of the few declining national life expectancy rates over the past decade – declining to the level of the Sudan – due to declining health care and worsening nutritional imbalances.

• Health care providers of Iraqi origin remaining outside the country have little incentive to return since hospitals are soft targets for insurgents; 1,000 doctors have fled the country in the past few months alone.

Ideal societies achieve stable growth with opportunities for all citizens by:

Encouraging cultural growth and consumerism in a demand-driven economy• Iraq is reforming its tax laws to favor investment for the creation of future

disposable income.• Iraq is supporting businesses through micro-lending & mid-market banking.• Business centers and economic trade zones provide the opportunity for older

unemployed workers to re-train and apply those new skills.• 75% of Iraq’s businesses sell consumer products.• Stewardship of Babylon is reverting to Iraq as the 1st step toward re-building the

tourist industry to spark marketing / servicing opportunities for SMEs.


• A lack of opportunity for young people to start their own businesses, build homes and gain a stake in society.

• The absence of disposable income due to wage suppression by SOE over-paying employees, the blight of the sanctions and the crash of oil prices.

• Death & kidnapping threats and crimes deter successful Iraqis from returning.

HOW can PRIVATE SECTOR DEVELOPMENT HELP REDRESS THESE CHALLENGES?

1. Creation of efficiently operating credit and capital markets though automation and transparency of accounting statements as well as application of the lending principles of industrialized nations.

2. Redistribution of income through elevating salaries of workers commensurate with their increase in skills and in line with rates paid globally.

3. Engendering an attitude of optimism among the critical mass of returning ex-patriates and home-grown entrepreneurs to empower them to generate the employment activity required to put disposable income into the pockets of an emerging middle class.

4. Rewarding those businessmen willing to enter under-resourced areas, train uneducated people and make businesses profitable in a manner consistent with Islamic law.

5. Establishing private ratings agencies for consumer credit profiles and also profiles for all businesses, large or small.

SUSTAINING the IDEALS of LIBERTY & ENTERPRISE:

WHAT WILL be IRAQ’s THRESHOLD of SUCCESS?

“There is no substitute for free markets. Markets allocate resources much more efficiently than politicians. So our strategic goal…is to set in motion policies which will have the effect of reallocating people and resources from state enterprises to the more productive private firms.”– Ambassador L. Paul Bremer; June 2003.

*defined as the yield spread of Iraq over U.S. 90-day treasury bills; measures perceived business / credit risk of Iraq** amount spent on merchandise imports used as proxy for disposable income.


Free and Open Trade

• Country-risk premium (S&P sovereign ratimg equiv.)

• 500 basis points (B- / CCC+)

• < 125 basis points (BBB / invt grade)

Jobs Growth • jobs created by U.S. funded reconstruction efforts

• percent of businesses adding employees

• 15,000

• 32%

• > 50,000

• > 50%

Health Maintenance

• average male mortality • children being vaccinated

• 61 years • 37-49% (est.)

• at least 70 years • > 90%

Consumerism • disposable income to GDP • private to total consumption**

• 40% • 45%

• > 50% • > 67%

Cultural Growth • recovery of looted artifacts • businesses employing women

• 10-15% • 43%%

• > 35% • > 75%

ConclusionPrimarily a bottom’s up approach through:• Micro & SME loans• Business Centers• Enterprise / Industrial Development Zones• Re-training / re-mobilizing the Labor Market

BUT…Top-down support essential by:• Eradicating Insurgents to Allow Inflow of

Humanitarian Relief and Economic Aid totaling $25-68 billion over next five years

• Laws for Land Reform & Tax Incentives• Infrastructure Repair / Transportation Up-grade• Free Trade Zones / International Investment

Resources to Coordinate1. International Donor Assistance (e.g., World Bank)2. Oil Revenues, Remaining DFI Funds & Frozen Assets3. Oil Sales Contracts at $30-35 / Barrel for Purchases by the U.S., India, China for Strategic Petroleum Reserves4. Multi-lateral Financing Loans to rebuild Ports / Airports5. Volunteers and Aid Workers to train Bankers and Merchants willing to Service the Rural Areas6. OPIC-led Re-insurance Syndicate for Sovereign Risk Insurance to Encourage Foreign Direct Investment7. Advisors on Tax Relief & Investment Incentives8. Multi-national Corporate Partners for Micro Finance as well as SME Lending and Other Joint Initiatives.

Means of Implementation; QUESTION:

HOW DOES a COUNTRY that has been TIGHTLY CONTROLLED through DICTATORSHIP in a COMMAND ECONOMY ACCELERATE its own de-CENTRALIZATION?

ANSWER

Establishment of a Private Sector Leadership Council and Delegate Emergency Authority

•To propose fast-tracked legislation of interest to the middle class and private sector•To initiate reforms in tax incentives, trade barriers and unregulated markets•To negotiate trade treaties with primary import / export partners•To disburse funds to start-up pilot business centers•To re-negotiate unresolved sovereign debt questions•To propose SOEs for liquidation and pension reform

MEMBERSIP of Council

•Majority from the Private Sector•Chaired by Deputy Prime Minister•No Ministries Represented on Council•Ten Observers on a Rotating Basis to Include:

1. Permanent Delegates from the Largest & Smallest Tribes2. Governor of One of the Five Poorest Provinces3. One of the Mayors of Mosul, Baghdad or Basra4. Senior Commander of the MNF-I5. Permanent Delegate from the UNDP6. Two Representatives from Donor Governments7. Two Executives from Large Corporate Donors

Government & Nonprofit

Psd slides