Ten years ago when the statue of Saddam Hussein fell at Firdous square in Baghdad, George Bush and Tony Blair were banking on the country serving as template for change in the Arab world, a litmus test that could according to them eventually redraw the balance of power in the region and pave the way for greater democracy.
The former Iraqi regime fell, Saddam Hussein had no connection to the 9/11 attacks or weapons of mass destruction (which for Washington and London were grounds for the invasion) and was tried and executed. Elections took place, however the country is hardly the beacon of democracy that Bush and Blair claimed it would be. The de-Baathfication and disbanding of the Iraqi army set in motion a flawed process that not only sowed the seeds of militancy and attracted al-Qaeda sympathisers and agents, but more importantly polarised the political landscape of the country. It also set off bloody sectarian fighting pitting Sunnis against Shi'as and the targeting of minorities.
“Iraqi officials purged the nation of the Baath Party through a sweeping, unfair process that contributed to destabilising the country, with many lasting impacts,” says David Tolbert, president of the New York based International Center for Transitional Justice.
To date, nearly 200,000 people have lost their lives in the violence (the vast majority of whom are Iraqi civilians) and about 1.6m Iraqis were internally displaced. The conflict has cost the US just over $800bn and when looking at the total bottom line, which takes into account costs for veterans of the war, the amount will exceed $2.2 trillion, according to a study by Brown University’s Watson Institute for International Studies.
“At the end of the day you have to ask yourself was it legitimate to go in? And if it was about regime change, I’m afraid that doesn’t make it legal,” John Prescott, deputy prime minister under Blair said this month.
The impetus for change in the Arab world would come eight years later from a poor street vendor in Tunisia who would spark a wave of protests across the region after setting himself on fire. His death would not only end the 23-year rule of Tunisia’s long-term dictator Zine El Abidine Ben Ali but instigate revolts that toppled Egypt’s Hosni Mubarak and Libya’s Muammar Gaddafi, and forced Yemen’s president Ali Abdullah Saleh to step down after 33 years in power. After two years of unabated violence, the regime of Syria’s Bashar Al Assad’s is also teetering on collapse.
In Iraq, Saddam Hussein may be gone but the country remains in crisis from a political perspective, says Peter Harling of the International Crisis Group.
“Those who regret the previous era either don’t know or want to forget what it was really like,” he says. “An unbearable standstill has been replaced by a somewhat different, but equally appalling status quo. One would have hoped so much suffering would have served a better purpose.”
A public showdown with a Sunni deputy and former finance minister, sidelined by Shi'a Prime Minister Nouri Al Maliki has polarised the political landscape and renewed sectarian tensions which threaten the country’s stability. Opposition to Maliki’s rule has increased from both Sunnis and Kurds in the northern part of the country.
“There has been a lot of domestic political opposition to him in recent weeks and months,” says Edward Bell, an analyst at the Economist Intelligence Unit. “There have been protests by disenfranchised Sunni Muslims protesting that they are actively marginalised, and that de-Baathication laws persecuted them disproportionality.”
Maliki is also facing opposition within parliament. Lawmakers approved a bill that would limit prime ministerial terms. That had support from regular opposition figures as well as other figures who had at times been more supportive of him than Sunni opponents.
The stage is also set for 2013 to see more disputes and disagreements between the central government in Baghdad and the semi-autonomous Kurdistan Regional Government (KRG). The central government is pushing ahead with laws that the KRG is not happy with, a move that is likely to heighten political tensions between the two blocs.
“A big way to resolve tensions would be if there was some clarity about the development of a hydrocarbons law that clearly allocated what proportion of funding from oil revenues was sent to the KRG,” says Bell. “The fact that there is still no hydrocarbons law means that there is considerable uncertainty overhanging the development of the sector.”
In early March, the Iraqi parliament passed a $118.5bn budget that didn’t meet the demands of the Kurdistan regional government for higher payments to the oil companies operating in its territories. The budget allocated about $644m for the oil companies ,whereas the KRG has asked for $3.5bn, which would also cover outstanding export fees.
The tussle between the northern Kurdistan region and government in Baghdad raises investor concerns for international companies, and appears to indicate that the environment, from a legal and business operating point of view, is not the best. Exxon is trying to find a buyer for its stake in the West Qurna oil project and looking at buyers from China or potentially Russia.
Still, Kurdish-controlled northern Iraq is “showing that as a separate region within Iraq it’s been quite successful and the more successful it is the more it will grate Maliki’s government and the rest of Iraq,” says Bell.
Externally, the violence in Syria may also have an impact on the country with thousands of refugees who had left the country in 2003 coming back to Iraq. It’s a challenge to be able to accommodate the influx.
“The bigger concern is whether the unrest in Syria, where you have Sunni protesters fighting against an Alawite-Shi'a regime gets reflected in Iraq itself and if the tensions that already exist in Iraq get worse or blown up by what’s happening in Syria. That’s a major risk across Iraq and a real concern,” says Bell.
In contrast to the prickly political terrain, Iraq’s economy has, in large part due to a ramp up in its oil production, been growing. The country’s $130bn GDP will continue to expand as production continues to increase. Oil production has increased 40 percent from pre-war 2003 levels.
“Despite a difficult security and political environment, Iraq managed to maintain macroeconomic stability over the past two years,” the International Monetary Fund said in a report this month. “On the back of rising oil production and robust non-oil activity, economic growth has remained strong.”
GDP growth was about 8 percent in 2012 and is forecast to expand 9 percent in 2013, as oil production increases from about 3 million barrels a day (mbpd) last year to 3.3mbpd in 2013, according to the IMF. That will make the country the fastest growing member of OPEC over the next five years in terms of adding production, according to the EIU. GDP is going to grow by an average of 9 percent for the next five years as oil production ramps up.
An increase in revenue from higher oil production has also helped the Central Bank of Iraq grow its foreign currency reserves to $70bn last year while the Development Fund for Iraq (DFI) has amassed $18bn.
Though the economy has picked up, GDP per capita remains low at $5,500 in 2011 and unemployment is estimated to be about 16 percent.
“Iraq will need to address serious medium-term challenges in order to be able to create the conditions for high and sustainable growth that is necessary to improve the living standards of its people,” the IMF says in its report this month. “The economy continues to suffer from severe structural weaknesses such as a small non-oil sector, high unemployment, public sector dominance, and a weak business environment. In this context, we discussed the role of economic policies in leveraging Iraq’s potential and creating an enabling environment.”
Water and electricity remain concerns for the government and could prompt more political pressure. Electricity is an acute case because of the need to have a lot of air conditioning running in the summer months. That’s where you see more and more interest in developing the potential for Iraq’s gas for domestic electricity generation.
Operation “shock and awe” hasn’t brought peace to the Iraq. The country remains unstable, and that inevitably will delay and hamper the development of services and the banking industry if there isn’t a clear relative stable terrorist-free environment. If that scenario plays out and if Iraq’s economy continues on the trajectory that it is now the country could be on a better footing than it is now.
“There is potential for Iraq to be a major regional economic power,” says Bell. “When there are OPEC meetings it’s now being a discussion between Iraq and Saudi Arabia over prices and production levels whereas for a long time it was between Iran and Saudi Arabia. The fact that Iraq has emerged as a much more economic power in the region has potential to reshape investor interest in the Middle East more broadly than just looking at the traditional markets of the Gulf.”
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