Transcript Economic Reconstruction During War

Economic Reconstruction During War-Time:
Academic Perspectives For Assisting Marine
Efforts at Providing Stability to Iraq


Robert Looney
Professor, National Security Affairs
Naval Postgraduate School
II Marine Expeditionary Force
Stabilization and Economic
Reconstruction Roundtable
Chapel Hill, NC -- November 1-2, 2006
Outline:
Framework for Economic Efforts In Iraq

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Main Areas of Relevant Research Undertaken at NPS.
Current Structural Obstacles to Reconstruction in Iraq.
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Post-War Economic Strategy.
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Lessons Learned From Reconstruction Efforts To-Date.
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Considerations for Future Efforts.
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Shadow Economy.
Deterioration of Social Capital.
Evolution of Insurgent/Criminal Networks.
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Economic Strategies to Combat the Insurgency.
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Guidelines for Central Role Played by the Marines.
Relevant Academic Research Undertaken
at the Naval Postgraduate School

The Size, Expansion, and Implications of Iraq’s Shadow
Economy Incorporating Theories of Corruption – The Business
of Insurgency --- Robert Looney.
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Gangs and Insurgencies, The 3G2 Model – Nicholas Haussler –
NPS Thesis.

Economic Reforms and Efforts at Reconstruction – Dynamics
of Vicious and Virtuous Circles in Iraq —Robert Looney.
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Insurgencies and the Theories of Netwar – John Arquillla.
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Civil Society in Iraq – Abbas Kadhim.
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The Use of Foreign Aid/Assistance to Combat
Terrorism/Extremism and Terrorist Recruitment – Robert
Looney.
Naval Postgraduate School
Sunni Insurgency Model
Rober t
Looney
Shadow
Economy
Model
Nicholas
Haussler
T hird
Gener ation
Gang Model
John
A rquilla
New War
Model
Development
of Iraq's
Shadow
Economy
Evolving
Complexity
of
Insurgent
and Criminal
Gangs and
their
Evolution
over time
Difficulties
of
Combating
Insurgent
Netw ork s
Link s to
Failed
Economic
Policies
Link s to the
Infor mal
Economy
Link s to
Other
Violent
Groups
3 G2 Model
A ugmented
Business of
Insurgency
Model
Vicious
Circle of
Violence
and
Economic
Decline
Strategy
T o Create
Virtuous
Circle of
Growth
and
Recovery
Experience
of Reforms
in EasternFormer
Soviet
Union
Policies to
Disrupt the
Vicious
Circle
Dynamics
of the
Shadow
Economy
Experience of
Foreign A id
A nd
A ssistance in
Combating
T er ror ism,
T er ror ist
Recruitment
Current Obstacles to Reconstruction:
Economic Conditions in Iraq
Very Mixed Picture Since April 2003 -- Some Progress But:
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Unemployment Stabilized at 30-40% -- Possibly Higher.
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Unstable/Unreliable Supply Electricity, Fuel, Water.
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95% Government Income Comes from Oil.
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Government Employs 50% Formal Labor – Not Sustainable.
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Many Households With Lower Incomes than 1980.
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Great Deterioration in Social Capital, Loss of Trust –
Corruption Rate Highest in the Middle East.
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High Crime Rate – Massive Capital Flight, Brain Drain .
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Shadow Economy Increased to 65% GDP, 80% Labor Force.
Assessment of the Postwar-Economic
Strategy
CPA and Subsequent Reform Programs Not Optimal for Iraqi Conditions.

Precludes Large Number of Iraqis from Economic Process – Lack of
Skills, Capital.
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Uncertainty Too Great for Private Investors.
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Inability to Produce Sustainable Short-Run Economic Gains Made
Reforms Easy Target for Extremist Groups – Imperialism, Conspiracy
Theories.
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Since New Institutional Structures-Reforms Not Stimulated by
Neoliberal Reforms – Vacuum – Only First Stage Reforms Completed.
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Filled by Existing Organized Groups – Religious and Criminal.
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Incomplete Reforms/Price Controls Created Profitable Black Market
Arbitrage Opportunities.
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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.
Lessons Learned To-Date--I

Reconstruction Entails Painful Trade-offs Rather than
Easy Choices – Iraqis Bypassed.

High Hopes and Lofty Promises no Substitute for Sound
Planning and Prudent Expectations.
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Control Expectations at Realistic Levels.
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Economic Reconstruction Depends Upon Adequate
Security; Yet Security Depends on Successful
Reconstruction – Need to Make Iraqis Feel Secure.
Reconstruction Requires Coordination of Short-Term
Initiatives and Long-Term Structural Reforms. Need to
Build on Short-Term Successes to Complete More
Difficult Long-Term Transformations – Momentum Key.
Lessons Learned To-Date--II

Don’t Over-Rely on Market Forces in a Conflict Setting.
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Ongoing Reforms Require Empowered Owners.
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Broad Based Participation Critical for Maintaining
Reform Momentum, But Requires Overcoming
Centralization Tendencies.
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Overcoming and Controlling Corruption is Extremely
Difficult.
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For Any Actions, Develop Several Contingency Plans.
Considerations For Future
Economic Efforts in Iraq - I
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Earlier Economic Efforts Often Failed in Part
Because They Were Not Capable of Adjusting
to the Growing Insurgency/Criminal Network
Threat.
At This Point in Time The U.S. Government
Unlikely to Commit the Added Personnel and
Financial Resources to Completely Reconstruct
a Failed Economy of 25 Million People.
First Priority is to Use Aid Money as a Tool to
Bring About Stability, Not Long/Medium Term
Growth.
Considerations For Future
Economic Efforts in Iraq - II
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Security Situation Precludes Activities Aid Agencies
Would Normally Fund, Organize and Administer –
Implies a Major Role for the Marines.
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Current Security Situation/Shrinking Budgets Dictate a
Bottom Up Rather than a Top-Down Approach.
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Critical To Address Three Interrelated Areas Not Dealt
With in Initial Development Efforts:
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(1) Growth of The Informal/Shadow Economy,
(2) Deterioration in Social Capital, and
(3) Expansion of the Insurgency/Criminal Gangs.
Constraints on Future Economic
Efforts: The Shadow Economy
Educational
Cur riculum
Bias T ow ards
Public Sector
Employment
Private Sector
Under development
Expanded
Child Labor
Expanded
Infor mal/
Shadow
Economy
Constraints
on Private,
Formal
Sector
Expansion
OverExpansion
of Public
Sector
High Birth
Rates
Constraints
on Public
Sector
Expenditur es
Demographic
Youth Bulge
Post 1 9 8 6
falling oil
revenuessanctions
Uncertainty/
Insurgency
Effects on
Investment
Increased
Unemployment
Increased
Economic
Pressure on
Women
Expansion
of Criminal
A ctivities/
Netw ork s
Economic
Collapse/
Retr enchment
of State
Declining
Social
Capital
Under
Baathist
Centralized
Control
Decline in
Social
Capital,
T rust
Declining
Rule of Law,
Increased
Cor ruption
Constraints on Future Economic
Efforts: Social Capital
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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
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Ascribed Trust – Kinship Groups and Family Members.
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Process Based Trust – Individuals That Have Known Each
Other for Some Time – Key Element in Business Networks.
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Extended Trust – Transactions Between Individuals With
Only Limited Information About Counterparts Attributes.
In Iraq Today, Most Networks Ascribed Trust, With Some
Process Based and Fewer Extended – Improvements Critical
for Market Development.
Will Take Long Time to Restore Trust, Social Capital, Best
Methods – Community Development/Programs, Stability.
Constraints on Future Economic Efforts:
Insurgent/Criminal Network Evolution -- I
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Key Elements in 3G2 Gang Model. Fits Conditions in Iraq –
Existence of Violent Networks in Context of A State
Constrained by Minimal Capacity, Poor Economic Performance
and Significant Social, Political and Economic Disparities.
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Groups Heavily Engaged in Informal and Criminal Activities at
the Local Level.
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Groups Expand Their Economic and Political Strength Relative
to the State Through Corruption and Intimidation.
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Gangs/Insurgents Have Expanded In Iraq Due To Vacuum
Created by State Retrenchment, Corruption/Incompetence.
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Gangs/Insurgents Increasingly Turn To Criminal Activities in
the Shadow/Informal Economy – Tendency For Violence to
Increase Over Resources.
Constraints on Future Economic Efforts:
Insurgent/Criminal Network Evolution- II
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Given Current Setting in Iraq – Networks Should Continue To
Expand Through Violence.
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Tendency to Capture Sectors of the Growing Informal And
Criminal Economies Will Increase.
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Local Criminal/Insurgent Enclaves States May Evolve.
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Armed Groups Will Function as the de-Facto Governments
Within These Enclaves.
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Locally –Oriented Armed Groups Can Be Expected to Expand
from Street to Sub-National Level, Evolving From Mutually
Protective groups into Prominent Political and Economic
Actors.
Strategy To Combat These Developments – (1) Reduce Size of
Informal/Shadow Economy – (2) Open the Legitimate Political
Sphere.
New Development Strategy: General Principles
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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.
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Build on Established Institutions/Programs to Prevent Further
Economic Disruption and Social Unrest.
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Strategy Must be Focused at the Community Level to Assist in
Developing Social Capital – Trust, Support Networks.
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Sequencing of Activities to Generate a Virtuous Circle with
Winners Interested in Advancing Reform Process.
Key Components –
Immediate Implementation
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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.
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Dual Track Strategy focused on New SME Industries in the
Formal Economy.
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Private Sector Needs Official Support. Grants to Start-up
Micro-Credit Financial Institutions.
Guidelines for Marine Economic
and Reconstruction Activities - I
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The Marines Have A Key Role in This Strategy:
Develop A Two-Tier Strategy To (1) Assist Local
Community-Based Economic Development – Formal
Sector Activity, While (2) Reducing The Size of The
Informal/Shadow Economy. Projects and Activities Need
to Be Evaluated in Terms of their Contribution to These
Two Goals – Economic Rates of Return Secondary.
Select Projects/Activities that Are Capable of Initiating
a Virtuous Circle – Creating External Linkages and
Effects that Stimulate Follow on Activity.
Specific Guidelines:
Treat Aid and Economic Development As Short Term
Operational Necessities Until Sufficient Security Exists
for Longer Term Activities.
Guidelines for Marine Economic
and Reconstruction Activities - II
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Specific Guidelines (contd):
Give Top Priority to Local Jobs, Local Services and Efforts with
Immediate Visibility and Targeted Impact on the Local
Populace.
Focus on Sustaining and Expanding Key Sources of
Government Revenue.
Do Not Attempt Ambitious Efforts to Restructure
Infrastructure Unless These Can be Managed and
Implemented at the Local Level.
Let Local Governments Take the Lead and Make Their Own
Mistakes.
Guidelines for Marine Economic
and Reconstruction Activities - III
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Specific Guidelines (contd):
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Do Not Rely on or Use US Contractors or Other Outside
Contractors Unless Absolutely Necessary.
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Provide US, Allied, or Local Military Security or Do Not
Attempt the Effort.
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Accept the Fact that Some Level of Waste and
Corruption is Inevitable and that Meeting Urgent Needs
on Local Terms Has the Higher Priority.
Iraq: Reconstruction
Induced Virtuous Circle
New
D ev elopme nt
Str ate gy
Expanded
Number of
Formal
Economy
SM Es
D ual T rack
D ev elopme nt
-- Small
Business,
C ontract
Informal
Improve d
Se curity
Expanded
Supply -Grow th of
the Formal
Economy
Expanded
Focused
A id-Grant
P rograms at
Local L ev el
Employ me nt
Focused
Shor t-Run
P rograms
C ommunity
D ev elopme nt
P roje ct D esign
and
Impleme ntation
Incre ase d
Entre pre ne ur ship
Virtuous
Circle of
Growth,
Reform and
Institutional
Development
P ressur es
for F ur the r
Mark et
Reforms/
Effe ctive
Regulation
Reduce d
C orr uption
D ev elopme nt
Extende d
T rust
Network s
Expanded
D emand -D omestic
Mark et
D ee pe ning
of Economic
Reforms/
Gov ernance
Institutions
Reduce d
Mark etBase d
C orr uption
P hase out
Subsidies,
food, oil,
ele ctricity