Thursday, January 15, 2009

Iraq’s Closed Factories

The head of the Iraqi Union of Industries recently said that 90% of the country’s industries had closed since 2003. He claimed that 36,000 small and medium sized companies had gone out of business for a variety of reasons. Those included cheap imports, the lack of tariffs, electricity shortages, banks not giving out loans, and skilled workers leaving for other countries. While he didn’t mention it, the violence in the country also played a role.

Iraq’s factories have been endangered since the Coalition Provisional Authority (CPA) tried to privatize the economy. The leaders and administrators of the CPA believed in a rapid privatization program for Iraq. They had ideological reasons working for a conservative Republican administration, and also believed crash courses in capitalism were successful in Eastern Europe after the fall of the Iron Curtain. In September 2003 the CPA announced its plan. This came as a shock to Iraqis and the Governing Council as they had never been consulted. At the time there were about 200 hundred state-owned businesses. None of them could operate on their own however. Some had no money, the looting after the invasion had destroyed some, while others had aging and out of date equipment. Just as important, there were no buyers for any of them. The plan proved so unpopular that in November the CPA canceled its plan. Instead of helping these struggling businesses however, the U.S. simply ignored them believing the market would determine whether they should stay in business or not. The result was most of them closed, and around 500,000 Iraqis were laid off. In the process, important businesses for reconstruction and transportation went under such as the railroad, fertilizer and cement industries.

The lack of security, services, and protectionist barriers has also hampered business. Military operations, attacks by insurgents, checkpoints, roadblocks, etc. have all strangled trade and commerce in Iraq. Many companies had to hire security guards to protect themselves. The supply of electricity has also been inconsistent forcing businesses to buy their own personal generators. Fuel costs have also skyrocketed since the invasion, meaning more bills. All three have added costs to Iraqi goods, which make them less competitive in the world market. Iraq also has few tariffs on manufactured goods, which has led to a flood of cheap foreign imports. All of these together have led to factories shutting down.

During the Surge, the Pentagon and Baghdad both tried and failed to revive Iraq’s industries. The Defense Department appropriated $50 million for the project, believing that the jobs created would help decrease the draw of the insurgency. Baghdad contributed $400 million as well. The military hoped that they could get American companies to buy the Iraqi manufactured goods, but they found no takers. Only around twenty factories were re-opened, the initiative got caught in a bureaucratic struggle between the State and Defense Departments, and the U.S. officials in charge of the project came under investigation for mismanagement and waste. Later, the Ministry of Minerals and Industry planned to sell off engineering, construction, textile, chemical, petrochemical, food and medicine plants to foreign investors, but found no bidders.

Before the invasion, Iraq was already a poor country because of the Iran-Iraq War, the Gulf War, and international sanctions. After 2003 Iraq ran into a slew of new problems including a failed privatization program by the Americans, cheap imports, lack of electricity and fuel, and a security vacuum. All contributed to the closing of the vast majority of the country’s factories, which were major employers, and largely unsustainable without state support. As reported before, the entire economy has suffered under these conditions. Iraq has a 60% unemployment/underemployment rate as a result. Some of these factories were doomed, but others could’ve been better managed and kept in business for the rebuilding that lay ahead. Firing hundreds of thousands of workers also did not help the country in anyway. The problem that lies ahead is reviving Iraq’s industries, which face massive structural problems beginning with the lack of tariffs and foreign investment.

For more see:

Iraq’s Troubled Economy


Aswat al-Iraq, “Imported products subvert Iraqi economy,” 2/24/08

Fairweather, Jack, “Iraqi state enterprises warily reopen,” Financial Times, 6/16/08

Gunter, Frank, “Economic Development During Conflict: The Petraeus-Crocker Congressional Testimonies,” Strategic Insights, December 2007

Henderson, Anne Ellen, “The Coalition Provisional Authority’s Experience with Economic Reconstruction in Iraq: Lessons Identified,” United States Institute of Peace, April 2005

Iraq Directory, “More than 90% of Iraqi industries are halted,” 1/10/09

Looney, Robert, “Half Full of Half Empty? An Assessment of the Crocker Report on Iraqi Economic Conditions,” Strategic Insights, December 2007

Al-Sadawi, Ahmad, “Iranian products win the market,” Niqash, 6/13/08

Special Inspector General for Iraq Reconstruction, “Quarterly and Semiannual Report to the United States Congress,” 7/30/08
- “Quarterly Report to the United States Congress,” 10/30/08

White, Josh, “U.S. Falters In Bid to Boost Iraqi Business,” Washington Post, 8/24/07

Yacoub, Sameer, “United Arab Emirates to name ambassador to Baghdad,” Associated Press, 6/5/08

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