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How Iraq can build a robust economy

Sunday, March 6, 2011;

The big idea: The unmet challenge of economic development lies at the heart of our world's most pressing social issues.

The scenario: Thinking about growth may seem a luxury in Iraq, a nation beset by war and deep in the throes of political change, but the path to rising living standards runs directly through how firms, large and small, domestic and foreign, play a constructive role in rebuilding the Iraqi economy.

For most MBAs, the phrase 'global business opportunity' conjures China or India, but most of the tough challenges faced by firms occur in places more like Iraq than in the BRIC economies. In nations like Iraq, one can readily appreciate the foundations of economic growth and productive commercial activity, largely by their absence. So, how can firms and their managers best create jobs and incomes for Iraqi people in the long run?

One irony of development is what economists call the 'resource curse.' Countries with abundant, extractable, nonrenewable resources such as oil and gas too often are dependent on that single economic sector. They lack competitiveness in other sectors. Power is entrenched in controlling the vital sector. And that power is wielded in ways that strangle internal investment and productive risk taking. Consequently, the incentives to build human capital and to create new firms to challenge incumbents or serve new markets are weak. Such are the conditions in Iraq.

The resolution: While efforts are underway to create a more diversified economy, the nation must channel its natural resource abundance into economically and socially valuable institutional change. The heart of the Iraqi economy is oil, which represents more than 90 percent of all exports from Iraq and generates 70 percent of GDP. Iraq has the fourth-largest proven oil reserves in the world -115 billion barrels - though this estimate is decades old. Many believe that Iraq may have at least another 100 billion barrels of reserve. Yet, Iraq's volume of oil exports rank only 14th or so worldwide. Sagging infrastructure, inadequate electricity supplies and lack of investment constrain field development and the generation of revenue and jobs that could spark more rapid growth. Iraq exported just over 1.9 million barrels of crude oil a day in 2010, or 23 barrels annually per person - well under its target of 25 to 30 barrels.

The lesson: The financial capital needed to increase export capacity is critical to fund what is most needed in Iraq: infrastructure services, schools, hospitals and better housing. But what can lead Iraq's economy toward robust and sustainable growth? Macroeconomic stability, a precondition of growth, is emerging. Inflation is in single digits, and the Iraqi dinar's crawling peg to the U.S. dollar has delivered steadiness to the banking and price systems.

Still, challenges persist. More than 40 percent of the population is under age 14. Male life expectancy is over 60. High jobless rates and a limited role for women in the labor force mean that big production increases are unlikely. Security concerns and an inchoate democracy make the risk of investments high. But the economy has improved and, at times, grown rapidly in recent years.

The future of Iraq's economy can be bettered through greater commitments to economically productive institutions and by firms willing to invest wisely while the future remains highly uncertain.

- Peter L. Rodriguez

Rodriguez is associate professor of business administration, associate dean for international affairs, and director of the Center for Global Initiatives at the Darden School of Business at the University of Virginia.

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