Defense Skirts State in Reviving Iraqi Industry

By Rajiv Chandrasekaran
Washington Post Staff Writer
Monday, May 14, 2007

Paul Brinkley, a deputy undersecretary of defense, has been called a Stalinist by U.S. diplomats in Iraq. One has accused him of helping insurgents build better bombs. The State Department has even taken the unusual step of enlisting the CIA to dispute the validity of Brinkley's work.

His transgression? To begin reopening dozens of government-owned factories in Iraq.

Brinkley and his colleagues at the Pentagon believe that rehabilitating shuttered, state-run enterprises could reduce violence by employing tens of thousands of Iraqis. Officials at State counter that the initiative is antithetical to free-market reforms the United States should promote in Iraq.

The bureaucratic knife fight over the best way to revive Iraq's moribund economy illustrates how the two principal players in the reconstruction of Iraq -- the departments of Defense and State -- remain at odds over basic economic and political measures. The bickering has hamstrung initiatives to promote stability four years after Saddam Hussein's fall.

Under pressure from Congress to demonstrate progress on the ground, the military often favors immediate solutions aimed at quelling violence. That has prompted objections from some at State who question the long-term consequences of that expeditious approach.

In recent months, the two departments have squabbled over the degree to which Iraqi farmers should be aided by subsidies and tariffs. They also remain at odds over State's desire to deploy reconstruction teams to two Shiite-dominated provinces in central Iraq. Defense officials are balking at providing robust security for the teams, preferring to deploy as many troops as possible in Baghdad. State contends that well-protected American civilians in those provinces will build relationships with future Shiite leaders.

"There has been a surprising degree of venom and hostility" between the departments, said a senior U.S. government official involved in Iraq policy.

The dispute between State and Brinkley has become so pitched that he has effectively stopped working with the U.S. Embassy and is setting up his office elsewhere in Baghdad's fortified Green Zone.

"We tend to not deal with them very often," Brinkley said of embassy officials. "We have our own mission, and we do our own thing."

Although the embassy's chargé d'affaires, Daniel Speckhard, said Brinkley "has the support of the embassy," Brinkley travels to factories without embassy personnel in tow and holds his own meetings with Iraqi trade, commercial and banking officials. He has also organized trips for U.S. business executives to Iraq and has encouraged deals between Iraqi state-owned firms and U.S. corporations.

Brinkley, who was interviewed in Washington, said he expects several factories to reopen this summer. By year's end, he envisions Wal-Mart stores selling made-in-Baghdad leather jackets and other U.S. retailers stocking Iraqi loafers, hand-stitched carpets and pinstripe suits.

Disagreements among Americans about how to deal with Iraq's government-run businesses began shortly after U.S. forces arrived in Baghdad in April 2003. The first U.S. adviser to Iraq's Ministry of Industry and Minerals, retired ambassador Timothy Carney, wanted to reopen many of the country's 192 state-owned factories, which, according to the World Bank, employed more than 500,000 people before the war.

But the U.S. occupation administrator, L. Paul Bremer, deemed that to be bad economic policy. Many factories had produced substandard goods before the war and had since been looted. Fixing them would cost hundreds of millions of dollars. Bremer wanted private investors to buy the factories, even as workers continued to be paid to stave off hardship.

But the hoped-for private investors never arrived. Factories remained shuttered, and the Iraqi government whittled down the payroll subsidies. Some former workers found new jobs. Others, U.S. military officials believe, joined the insurgency.

In the early months of the occupation, the State Department wanted to resuscitate the state-owned enterprises; the Pentagon's civilian leadership, dominated by neoconservatives, rejected the idea of supporting government-run industry. By last year, the positions had been reversed. Military commanders began arguing to restart the factories, even as a new crew of embassy economists, some of whom had been scarred by dealings with state-run firms in Eastern Europe, disagreed. Because State was now running the show in the Green Zone, its opposition carried the day.

Then Brinkley arrived in Baghdad.

Brinkley, a balding 40-year-old who speaks in rapid-fire sentences, had joined the Defense Department as a political appointee in 2005 after serving as an executive at JDS Uniphase Corp. At the Silicon Valley manufacturer of fiber-optic equipment, he had helped the company acquire a factory in China that had been run by the government. The experience, Brinkley said, convinced him that "state-owned enterprises can provide jobs, and turn a profit and lift hundreds of millions of people out of poverty."

Brinkley's initial mission last summer was to simplify Defense Department contracting to give Iraqi firms a better chance of providing goods and services to the U.S. military. While he was in Iraq , Lt. Gen. Peter W. Chiarelli, then the top field commander, urged him to visit a bus and truck factory south of Baghdad that had a modern assembly line, talented managers and skilled employees. All but 75 of 10,000 employees had been laid off because the Iraqi government, the factory's principal prewar customer, was no longer buying the vehicles. Many furloughed workers had joined the insurgency, the factory manager told Brinkley.

"It was clear that the approach we as the United States government had taken toward state-owned enterprises was a mistake," Brinkley said. "We were pretty direct and vocal about it."

The U.S. Agency for International Development estimates that nearly half of Iraqis are unemployed or work fewer than 15 hours a week, but those figures do not include hundreds of thousands who once worked for state-owned enterprises and continue to collect about 40 percent of their original salaries. If they are counted, Brinkley believes, the true figure for unemployed and underemployed Iraqis may approach 70 percent.

Brinkley took his concerns to Gordon England, the deputy secretary of defense, and proposed rehabilitating factories that seemed salvageable.

After touring more than 50 facilities, Brinkley's team deemed about 20 worthy of repair, including factories that made car parts, textiles, leather goods, fertilizer and hand-woven rugs.

But when Brinkley, who exudes a hard-charging intensity, revealed his plans to officials at the embassy in Baghdad last fall, they bristled.

"Their reaction was, 'Why is the DOD in this space?' " he recalled. "What I was proposing represented a 180-degree shift from their policy -- and it generated full-throated feedback."

Brinkley said embassy staffers called him a Stalinist bent on restoring a command economy. Another told him that if he rehabilitated factories, Iraqis "are going to use those machines to make more complicated weapons to kill our troops with."

Two embassy staff members confirmed Brinkley's depiction of the tension but blame him for the rupture. "Here was this guy who parachuted in from Washington who thought he had all of the answers and that we were just a bunch of idiots sitting around in the Green Zone," said one of the staff members, who spoke on the condition of anonymity because he is not authorized to discuss the matter. "Had he bothered to think about all of the reasons why pouring money into these factories is a bad idea?"

Embassy officials warned Brinkley that if he opened factories in Sunni areas first, he risked angering Shiites. Moreover, the electricity needed by production lines would mean less for residences. Would people really be happier, embassy officials asked, if they had jobs but less power at home?

The embassy's in-house think tank, the Joint Strategic Planning and Assessment Office, also joined the fray, issuing an internal memorandum declaring that "trying to give these enterprises a new lease on life will make Iraqis poorer without reducing the violence." The memo, written by an economist from the Rand Corp. working on contract for the embassy, added that "resuscitating state-owned enterprises is a bad idea."

State asked the CIA to assess the link between employment and attacks on U.S. forces in Iraq, two U.S. government officials said. The CIA's subsequent regression analysis found no statistically significant tie between the two phenomena, the officials said. The CIA also told State that the vast majority of insurgents questioned by U.S. interrogators in Iraq claimed to be employed, one official said.

Brinkley said he felt stung by the opposition, but he took heart from the support of England and other Pentagon officials. He also countered with an analysis from the military's Joint Warfare Analysis Center, which asserted that a slight increase in job satisfaction among Iraqis led to as much as a 30 percent decline in attacks on coalition forces, according to a U.S. official familiar with its contents who supports Brinkley's efforts.

Embassy opposition was not Brinkley's only problem. His plan to have Iraq's Finance Ministry pay for repairs at the factories ran counter to Bremer's edict, issued in 2004, that prevents the Iraqi Central Bank from funding state-owned enterprises. Brinkley arranged for two Iraqi banks to provide $5.6 million in loans to six factories, and he plans to announce a second round of loans totaling about $20 million.

The White House was enthused enough about Brinkley's initiative to ask Congress earlier this year for $100 million to underwrite his efforts. Congressional appropriators scaled that back to $50 million, but Brinkley believes even the lower amount would still put about 100,000 Iraqis back to work.

His team working on state-owned enterprises has grown to more than 60 people. He is also expanding his mission to focus on improvements to Iraq's agriculture and communications sectors.

Despite persistent violence and the slow pace of reconciliation among Iraqi leaders, Brinkley said, he continues to believe the United States can help stabilize Iraq.

"We still have a chance," he said. "But we have to understand that we're not going to see the sort of security improvements or political compromises we want without meaningful economic development."

As his profile has risen in Washington, his critics in Baghdad have become less strident. But, he added, he still does not "have people from the embassy jumping onboard to help."

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