Kurdistan and Stability

Stephen DeAngelis

June 27, 2007

A New York Times article by Kirk Semple caught my eye with its first sentence: “It is a measure of soaring Kurdish optimism that government officials here talk seriously about one day challenging Dubai as the Middle East’s main transportation and business hub.” [“Pointing to Stability, Kurds in Iraq Lure Investors,” 27 June 2007]. This optimism should come as no surprise to readers of this blog. I appreciate the Kurds optimism and for aiming high. Semple highlights many of the same things I have written about:

“The Kurdistan Regional Government is betting that it can, investing $325 million in a modern terminal at the Erbil International Airport to handle, officials hope, millions of passengers a year, and a three-mile runway that will be big enough for the new double-decker Airbus A380. ‘We’re not saying Kurdistan is heaven,’ said Herish Muharam, chairman of the Kurdish government’s Board of Investment. ‘But we’re telling investors that Kurdistan can be that heaven.’ As the rest of Iraq has plunged into a downward spiral, Kurdistan has enjoyed relative political stability and suffered limited violence, in part owing to a sectarian and political homogeneity lacking elsewhere in the country. The Kurdish region has enjoyed de facto autonomy since 1991, when the American military established a no-flight zone there, a status formalized by the new Iraqi Constitution. Although many Kurds would prefer to secede, Kurdistan, with a population of about 4.2 million, has its own army and virtually total control of its territory. Kurdistan’s rising fortunes have been nowhere more apparent than in the wave of building and investment that has swept the region in the past four years. Iraqis and foreigners alike have poured in billions of dollars, defiantly wagering that the region will remain relatively peaceful, even as the rest of Iraq slips deeper into civil war.”

The Kurds have caught the same vision that has driven Singapore, Dubai, and Shanghai to excel in the global economy. Semple points out that Kurdistan’s infrastructure still falls short of supporting the services required to sustain economic growth and improve the quality of life for all its citizens. On the other hand, he notes that private investment and construction is booming.

“Kurdistan’s rising fortunes have been nowhere more apparent than in the wave of building and investment that has swept the region in the past four years. Iraqis and foreigners alike have poured in billions of dollars, defiantly wagering that the region will remain relatively peaceful, even as the rest of Iraq slips deeper into civil war. Where explosions and bomb-scarred buildings have been a defining symbol elsewhere in Iraq, construction cranes are now a common feature on the Kurdish landscape, tugging hotels, shopping centers and office and housing complexes from the ground. While public infrastructure is still suffering from chronic underinvestment, the regional government has approved more than $4 billion worth of mostly private development projects since August, when the Board of Investment was created. Billions of dollars worth of other projects were already under way. Much of the money is coming from overseas, including the United States, Europe, the Persian Gulf countries, Iran and Turkey, officials say. The Kurdistan government has placed special emphasis on attracting investors from the United States and Britain, unleashing a slick advertising campaign in English called ‘The Other Iraq,’ which includes television commercials featuring romantic shots of Kurdistan’s mountains and waving, cherubic children. ‘It’s spectacular, it’s joyful,’ intones a narrator in one 30-second spot. ‘It’s not a dream. It’s the other Iraq.’ The government has also hired lobbyists in Washington to help promote its development agenda, urging the State Department to change its travel warning for Iraq to distinguish Kurdistan from the rest of the country. Iraqi officials regard the travel warning as an impediment to investment and tourism.”

Kurdistan may be taking a page from Macedonia’s book — a country that has also mounted an aggressive campaign looking for investors. In ads it runs in publications like BusinessWeek, Macedonia talks about the incentives it is offering businesses (no corporate tax for 10 years, then a flat 10 percent rate; 5 percent flat rate income tax for 5, then 10 percent thereafter; no value added tax or customs duties for export production; free connection to utilities; great access to transportation systems; training costs for workers; building subsidies; attractive land leases, etc.). The ads also talk about its educated and affordable work force. These governments have learned that foreign direct investment, not official development aid, is the key to economic growth. They understand that private/public partnerships can build necessary infrastructure faster than the public sector alone. They realize that good public services are fostered by a population that is gainfully employed.

As I pointed out in an earlier post, much of the current boom in Kurdistan is aimed at the wealthy, often leaving poorer citizens in the same substandard conditions they lived in before Saddam Hussein was overthrown. The trickle down effect may have started, but the operative word is “trickle.” It needs to become a steady and increasing flow. Semple writes:

“Contractors have been clearing savanna and brush here in the capital of Kurdistan to build suburban residential complexes that go by names like English Village Five. One development — Dream City, advertised as ‘the most elegant square kilometer in Iraq’ — will include about 1,200 houses priced $180,000 to $700,000, as well as three schools, a supermarket, a restaurant, recreation areas, a casino and a mosque, according to Amer Ibrahim, the project’s manager and architect. The principal partner in the Dream City project is also building an American-style megamall and four office towers downtown. It is a few blocks away from the ancient citadel, one of the oldest continuously inhabited sites in the world. Several luxury hotels are under construction, including one by the Kempinski hotel chain. A joint venture by Austrian, Turkish and Kurdish investors is developing a 500-bed hospital. There is even talk of a Burger King franchise and a ski resort. Asked about the most compelling ideas circulating in the investor community here, Mr. Ibrahim responded, ‘Everything, everything, everything.’ He went on: ‘There’s a big lack of everything. There are no services, no infrastructure.’ For all the shiny new construction in Kurdistan, there are glaring deficiencies in the public sector. Kurdistan’s residents who rely on the public system receive at most about three hours of electricity a day, although many businesses and affluent people have their own generators. Not all areas of the region have access to clean drinking water, and the health care and education sectors are anemic. There are no wastewater treatment plants and sewer systems are inadequate: even a moderate rainfall turns the streets into foul rivers.”

One of the reasons that I push Development-in-a-Box™ is because it promotes the adoption of standards and best practices — helping eliminate corruption and waste. Stemple notes that the initial surge of investment in Kurdistan failed because it lacked such an approach.

“In the immediate aftermath of the 2003 American invasion, Kurdistan’s officials were so desperate for any kind of investment that they signed off on numerous projects with only limited concern for the essential needs of the population. ‘The government built like mad,’ said Douglas Layton, director of the Erbil office of the Kurdistan Development Corporation, a public-private partnership promoting investment in the region. ‘There was no master plan.’ To make matters worse, government graft went unchecked. ‘The corruption was happening because of the rushing we were doing in nearly everything in a limited amount of time,’ Mr. Muharam, of the Board of Investment, said in an interview here in May. ‘It caused misuse, lack of transparency.’ Many projects foundered for lack of capital. Erbil, for instance, is dotted with half-finished buildings, roadways and overpasses. The government is now implementing a more transparent contracting system and is trying to rectify the imbalance between public and private sector development. Mr. Muharam said the government was also trying to strengthen the banking system and insurance laws to provide a more attractive environment for investors.”

One sign of a good leadership is that mistakes are acknowledged and changes made. Kurd leadership has acknowledged past mistakes and is looking for a better way forward.

“The government passed an investment law last year that offers generous incentives to outside investors, including the right of full ownership of property, tax and customs duty exemptions, repatriation of earnings and partnerships. The government has also been providing free land to developers to stimulate construction. Officials and investors argue that Kurdistan offers the opportunity for businesses to establish a foothold with an eye toward a more peaceful future when development in the rest of Iraq will be possible.”

That, of course, is the big question. Can Kurdistan keep the civil war raging to south from spilling over into its streets? Leaders there are betting they can.