Download U.S. State Department Workshop, Socio

Socio-Economic Strategies to
Combat Islamic Extremism in Iraq


Robert Looney
Professor, National Security Affairs
Naval Postgraduate School
U.S. State Department Workshop
on Countering Islamic Extremism
Arlington, VA July 22, 2005
Outline:
Countering the Pull of Extremism in Iraq

Focus on The Factors Contributing to the Pull of Islamic
Extremism in Iraq -- Socio-Economic Perspective.

Economic Conditions in Iraq: pre-War/post-War

Alternative Views of the Iraqi Economy.
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The Post War Economic Development Strategy.

Implications for Extremism.
Components of a Comprehensive Development Strategy
to Restore Growth and Lessen Pull of Extremism in Iraq.
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Final Issues.
Factors Underlying Pull of Extremism
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Spectrum of Factors Across Different Extremist Groups –
Affecting Disaffected Youth.
Palestine Issues, U.S. Support of Israel, “War Against Islam”
The West’s “Cultural Aggression” Socio-Economic Deprivation,
Exclusion from Political Process, Dislocation in Transition to
Modernity, Globalization.
Common Element – Thwarted Expectations for a Better Life,
Humiliation, Treatment as “Second Class” by Governments and
Others. They are inspired by al-Qaida Type Ideology.
Some Elements -- the Occupation, Perceived U.S. Intentions in
Iraq, the Mistreatment of Iraqis, Anti-Shia Sentiment and
Sunni Fears of Exclusion Bring a Unique Mix to Iraq –
Numerous Iraqis Join the Insurgency Rather Than Extremists.
Still, Socio-Economic Factors are Contributing to Extremist
Recruitment in Iraq, but Exact Extent is Difficult to Separate
From Other Factors. Conditions have been Building for Years.
Economic Conditions in Iraq – pre-War

In 1970s Set to Dominate Middle East – Possessed Oil
Industrialization, Agriculture and Large Population – by 2000.
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Oil Sector at Least 75% GDP.
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Distorted Pricing System – Wide Spread Inefficiency and
Waste, Stagnant Agricultural Sector.
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50% Population Under 24 Years of Age.
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Widespread Unemployment -- Up to 50%.
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60% Population Dependent on Food Rations.
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Macroeconomic Imbalances – High Inflation.
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Shadow Economy At Least 35% GDP -- Large Criminal
Economy/Corruption
Economic Conditions in Iraq -- Postwar
Very Mixed Picture Since April 2003 -- Some Recovery 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.
Alternative Views of the Iraqi Economy
Post-War Economy Not Pure Case –Complication for Policy:
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Transition Economy – Establishment of a Market System,
Openness to Trade and Integration into Global Economy.
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Failed State – Restoration of Government Services, Law and
Order, Open Trade Regime, Resolve Group Grievances and Halt
Economic Decline.

Rentier Economy – Diversification from Oil, Counter
Authoritarian Tendencies – Oil Funds.
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Post Conflict Economy – Restoration Social/Physical Capital.
Achieve Stability before Initiating Economic Reforms.
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Failed Take-Off Economy – Increased Economic Freedom –
Improved Regulatory Institutions – Anti-Corruption.
Post-War Development Strategy
Based Largely on Transition Economy (Shock Therapy).

Extreme Version of Neoliberal Reform Package.
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Open Economy, Low Taxes, Economy Open to Foreign Private
Investment.
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Intent to Wipe Slate Clean and Start New Economy.
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Macroeconomic Stability– Independent Central Bank But
Government Largely Passive in Dealing With Economy.
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Strategy Intended to Have High Job Creation Through Rapid
Private Sector Investment and Expanded Output, FDI a Key
Ingredient. Profitable Imbalances Created by Massive
Reconstruction Projects.
Strategy Intent—Create Porter-Type
Mechanisms of Private Sector Induced Reforms
Taxes,
Government
Revenues
Economic
Growth
Sophistication
of Company
Operations and
Strategy
Increased
Competition
Market
Liberalization
Two Way
Pressure to
Improve
Productivity
and
Government
Services
Market,
Institutiona l
Reforms
Quality of the
Business
Environment
Responsive ,
Reformist,
Interventionist
State
Assessment of the Neoliberal Reforms
Reform Program Not Optimal for Iraqi Conditions.
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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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Approach Not Flexible Enough to Adapt to Shocks or Adverse
Developments – Government Not Responsive To Clear Needs.
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Trade Liberalization Not Likely to Induce Further Economic or
Governance Reforms.
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Inability to Produce Short-Run Economic Gains Made Reforms
Easy Target for Extremist Groups – Imperialism, Conspiracy
Theories.
Reform Assessment (contd.)
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Since New Institutional Structures-Reforms Not Stimulated by
Neoliberal Reforms – Vacuum.
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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.
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System is Unstable and Could Easily Revert to a Vicious Circle of
Violence and Poverty.

Much Internal Opposition to the Current Economic System and Few
Supporters – Alienation.
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Unfortunately, New National Development Strategy (NDS) – Appears
to be Continuation of Top-Down, Neoliberal Reforms/Privatizations.
Iraqi Opposition
To Neoliberal Reforms
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Influential Intellectuals Who View Neoliberal Reforms as
Extreme and Detrimental to Economy at this Time –Point to
Failures of Similar Reforms in Other Countries – Cite Credible
Alternatives.
Entrepreneurs Who Fear Foreign Competition. Speculators,
Corrupt Officials Profiting From Black Market Arbitrage on
Administered Priced Goods.
Religious Leaders Who See Reforms as Part of War on Islam.
Problem – Outside of a Few Technocrats and Merchants, Little
Popular or Influential Support for Reforms – Neoliberal
Reforms Seen as Imposed With No Input From Iraqis.
The Same Reforms that were Implemented With Some Success
by the Transition Countries as a Sign of Their New
Independence are Seen by Iraqis as Products of the Country’s
Occupation – Has Helped Extremist Group’s Credibility.
Implications for Extremism
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Attracting Large Numbers of Recruits Requires: (a) Lack of
State Capacity, (b) a “Mobilizing Belief”, and (c) Appropriate
Agitators.
Iraq has all Three Plus Several Other Home-Grown Factors –
Some are Attracted to Extremist Groups for the Money.
Extremist Groups Appeal to Disgruntled Former Ba’athists,
Republican Guards, Anti-Shia Sentiment. Moral Vacuum left by
Corruption in Government and the Breakdown of Trust and
Deterioration of Social Capital – Fine Line Between Criminals
and Many Extremist Recruits.
Socio-Economic Improvement Can Stem Extremism in Large
Segments of the Population, but Development Strategy Must
be Such that the Average Iraqi has a Stake in Making the
System Work and the Opportunity to Contribute to that End.
Need to Alter Approach to Development From Current Top
Down to Bottom Up – More Inclusive, More Input from Iraqis.
Currently, Trickle Down Won’t Work in Iraq – Corruption, Little
Short-Term Impact, Market Failures.
Iraq: Factors Contributing to Extremist Recruitment
Neoliberal
Economic
Policies
Little
Private
Sector
Investm ent
or Economic
Activity
Defective
Education/
Skills
Dem ographyYouth Bulge
Ba'athists
Excluded
from
Previous
Privileges
Former Iraqi
Military
Corruption,
Weak State,
Political
Gridlock
Outside
Agitators
al-Qada/
other
fanatic
groups
Inability Of
Government
to Respond
to Crisis
Hum iliation/
Resentment
Over
Occupation
High
Unem ploym ent
Rates
Failed
Expectations
Modernization
Suppressed
Violence
Associated
with Rural
Urban
Transition
Organized
Crime,
Criminal
Activity
Religious
Extrem ism
Oil Rents
Fungible
into
Terrorist
Activities
Sunni Fears of
Exclusion/
Marginalization
Terrorism,
Increased
Terrorist
Recruitment
New Development Strategy: Historical Lessons

Lessons for Iraq From Developing Country Experiences:
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Growth Spurts Associated With a Narrow Range of
Reforms.

Policy Reforms Associated With Successful Growth Have
Elements of Orthodox with Unorthodox
Policies/Institutions.

Institutional Innovations Do Not Travel Well – Need
Home Grown Strategy Building on Local Strengths.

Sustaining Growth More Difficult than Igniting It –
Requires Extensive Institutional Reform.
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.
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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 Comprehensive Integrating Community
Development, Project Selection, Sectorial Development, and
Macroeconomic Stability.
Sequencing of Activities to Generate a Virtuous Circle with
Winners Interested in Advancing Reform Process.
New Focus: 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

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.
New Focus: Social Capital (contd.)
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In Iraq Today, Most Networks Ascribed Trust,
With Some Process Based and Fewer Extended
– Extended Critical for Market Development.
Deterioration in Social Capital May Explain
Some of the Problems Encountered by the
Neoliberal Reforms
– Lack of Response to Price Movements
– Limited Growth of Markets and Exchange
– Largely Local Market Development Rather
than Regional or National.
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 SME Industries in Informal
Economy.
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Private Sector Needs Official Support. Set Initial Tariffs for
Protection at Uniform 10-15% to be Phased out over 5 years.
Key Components- Implementation
Medium Term
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Direct Distribution of % Oil Revenues – Broad Based Domestic
Demand.
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Allows Phasing Out of Corruption Plagued Subsidy Programs.
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Development Bank Allocated % Oil Revenues – To Fund Dual
Track Strategy – Private Sector SME Start-Ups as Well as
Larger Private Industries Until Commercial Banks Sound.
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Oil Stabilization Fund to Achieve Macroeconomic/Fiscal
Stability.
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Focus on Expediting Improved Property Rights/Rule of Law –
Critical for Private Sector Development.
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Incentives to Reverse the Brain Drain -- Entrepreneurs.
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Anti-Corruption Efforts to Facilitate Private Sector Expansion.
New Development Strategy: Outcomes
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Potential Through Creation of Balanced Supply/Demand
Growth to Expand Employment, Incomes, and Iraqi Inclusion
in the Formal Economy.
Virtuous Circle With Feedbacks from Economic Progress to
Further Reforms and Sustained Growth.
Job-Oriented Community Development Strategy Has Potential
to Marginalize Extremists by Strengthening Indigenous
Democratic Processes That Generate Economic Prosperity.
Building of Social Capital Networks Creates Trust Between
Different Tribes, Ethnic Groups and Regions. Increased
Exchanges Between Diverse Groups Solidified National
Markets
Net Effect: Creation of an Environment of Hope and Success
for the Average Iraqi.
Iraq: Policy Induced Virtuous Circle
Development
St rat egies/
Policies
Communit y
Development
Project Design
and
Implement at ion
Dual Track
Development
Expanded
Number of
SMEs
Increased
Ent repreneurship
Expanded
Supply -Growt h of
t he
Economy
Expanded
Focused
Aid-Grant
Programs at
Local Level
Informal
Economy
Focused
Credit
Oil Fund for
Public
Dist ribut ion
Improved
St abilit y in
Government
Expendit ures
Through
Creat ion of
Oil Fund
Pressures
for Furt her
Market
Reforms/
Effect ive
Regulat ion
Reduced
Corrupt ion
Development
Ext ended
Trust
Net works
Expanded
Demand -Domest ic
Market
Deepening
of Economic
Reforms/
Governance
Inst it ut ions
Reduced
Market Based
Corrupt ion
Phase out
Subsidies,
food, oil,
elect ricit y
Iraq: Expanded Virtuous Circle
Dev elopm ent
Strategies/
Policies
Commu nity
Dev elopm ent
CERP, L GP
and OTI
Coordinated
Efforts
Shift fro m
Strict
Neoliberal
Ref orm
Package to
I nstitutionalst
Ev olutionary
Approach
Expanded
and F ocused
Aid/ Gra nt
Program s
Dual Track
Dev elopm ent
Strategy
Broadened CER P
L ending
Responsibilities
Strengthen
Rule of L aw
I mpacts/
L inkages
I mprov ed
Project
Selectio n,
Completion
Rate
Market/
Employ ment
Effects
Expanded
Dom estic
Dem and and
Economic
Growth
Expanded
Social
Capital
Pressures to
Reduce
Corruption
Expanded
Employ ment
Creation
Greater Public
Participation
in
Dev elopm ent
Process
Pressures for
F urther
NeoliberalI nstitutional
Ref orms
Reduced
Corruption
Expanded
Num ber of
SMEs
I ncreased
I nv estm ent
Technology
Transfer
Virtuous
Circle of
Growth and
Opportunity
Reducing the
Pull of
Extrem ist
Groups
Dev elopm ent
Extended
Trust
Networks
Expanded
Dom estic
Market
I ncreased
Dom estic
Multiplier
I mprov e
Macroeconom ic
Stability
Oil F und for
Public
Distribution
Phase o ut
Subsidies,
food, oil,
electricity
Reduced
MarketBased
Corruption
Implications for Extremist Recruitment
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Within Iraq – Improved Economy Likely to Lessen
Attractiveness of Extremist Message to Those Currently
Frustrated by Thwarted Expectations of A Better Life –Foot
Soldier Recruits. It Would Also Weaken the Non-Extremist
Component of the Insurgency.
Trust-Based Development Strategy Helps Resolve Ethnic
Grievances and Tensions, Integrate Markets – Helps Negate
Spread of False Rumors – Extremist Recruitment Tool.
For those Motivated More by Religious Fervor or Fear of
Modernization/Globalization – Lesser Impact.
Biggest Gains May Be Reducing Recruitment Outside of Iraq –
Vitalized Economy Speeds U.S. Withdrawal form Iraq. Calls
into Question Extremist Claims of U.S. Imperialism or the
Waging of War on Islam.
Critical Intangibles

The Extent to Which the New Constitution Unites The Various
Ethnic and Regional Groups.

Speed and Degree to Which Trust Can be Restored, Iraqi Firms
Can Take Over Many Activities from Foreign Firms..

The Extent To Which Improved Economic Performance Can
Undermine the Insurgency.

Ability to Integrate CERP, LGP, and OTI and Perhaps New
Programs into Community-Based Development Strategy.


The Degree and Extent to Which Average Iraqis View Free
Markets as a Opportunity to Create a Better Standard of Living
rather than a Threat Imposed by Outside Interests.
Most Importantly, The Extent to Which the Iraqi Government
Can Evolve into a Developmental State – A Democratic Version
of the 1970s Regime.
Contrasting Views
of The Iraqi Economy

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“If I Am Permitted to Dream, Iraq Will Develop into the
Japan of the Middle East.” Talib al-Tabatie, Chairman,
Iraq Stock Exchange
“It Seems that Many Iraqis do not Understand…why a
Market Economy Can Make the Poor People Much Better
off Than They Ever Were When Saddam Controlled the
Oil Wealth and Doled out Perks to the Iraqis Like a Stern
Parent Rewards Small Children for Being Seen and Not
Heard.” Ronald Rotunda – George Mason University
Foundation Professor of Law.
“We Want to Go Back to the Old Healthy Management of
the 1970s.: Thamir Ghadhban – Oil Minister, Iraqi
Interim Government