The fight in northern Iraq turns to economy

The fight in Kurdistan turns to the economy in a premonition of the struggles the rest of the country will have in years to come.

A market in Erbil, Iraq, hums with activity as the region comes alive after the end of Saddam Hussein's regime.

Twice in the past three years Bayar Mohammed, a 21-year-old university student from the northern region of Iraq known as Kurdistan, has hiked over the Mateen Mountains with a smuggler into Turkey in the hopes of sneaking into Europe and finding a better life. And twice he has been arrested by Turkish police in Istanbul and sent home. "People all want to find a job in Europe," he says, drinking tea in front of New City Mall, one of the few places for young people to get together in the capital city of Erbil. "There is no life in Kurdistan. There are no jobs, there isn't anywhere to go, even to waste time." The trip over the mountains costs about US$700 (Dh2,572) and another $5,000 to $12,000 is needed to get to places such as Greece or the UK. These are huge costs for average Kurds, many of whom live on much less than $1,000 a month, but according to Mr Mohammed the trip is well worth it for his family, and he is planning to try again. His desire to leave his homeland is a testament to the challenges that the area faces in the aftermath of Saddam Hussein's oppressive regime. For decades, the region was subjugated by Baathist forces and prevented from building even basic infrastructure. Now, the region has the trappings of autonomy: an army, a flag and the ability to run its own affairs while remaining a part of the Iraqi federal system. But despite oil revenues beginning to flow into the coffers, investments into its infrastructure and construction projects sprouting across the three governorates of Kurdistan, it is becoming clear that an economic struggle will be long and -arduous. Dealing with corruption, a nearly non-existent banking system and underemployment have become the signature issues in Kurdistan. When stability eventually spreads to the rest of Iraq, the region's plight will serve as a forewarning of the economic difficulties the nation will face in the years to come. "We fought for decades just to be Kurds," says Hiwa Rauf, a board member of Asiacell - the country's second-largest telecommunications company - and businessman in Sulimaniyah. "Now we have to fight in the economy sector." Mr Rauf says that Kurdistan is undergoing the pains of building an economic and democratic system from the ground up. "We need more transparency," he says. "This is the big problem here. There is no organised system. There is a lack of experience, a lack of professionals. We are growing from nothing. What do you expect?" He says that Iraqi regions to the south, despite a longer history of bureaucracy in Baghdad, will have similar troubles in evolving into a modern economy. "The same problems we face in Kurdistan, we will face in Iraq." Suddenly flooded with oil money and some foreign investment, Kurdistan is rapidly becoming a study of extreme contrasts. Beside the warren of shops and stalls in the souk in central Erbil is a $1bn shopping mall, which has so far completed only the first phase of five and introduced the city's first escalators. Along the road to American Village, a replica of a US suburb on the outskirts of the capital, drivers see shanty towns without modern sewerage. And while electricity supply is constant at places such as the Erbil International Hotel, most residents in the country only have eight hours of power supply a day. Generators hum on every block, puffing out diesel fumes. "One of the main issues with the new Kurdistan is inequality," says Denise Natali, an American political science professor at the University of Kurdistan. "For 60 years, you had a society that struggled, but everyone was equal. In 2003, Hussein is overturned and literally this is a big juncture. Millions and billions are injected into the region. Once equal and poor, now some people had villas and five cars." This inequality could create discontent among the population, she says. "When young people get unhappy, traditionally there can be some big problems for a -society." For its part, the Kurdistan Regional Government (KRG), headed by a former soldier and legendary political figure, Massoud Barzani, has a plan - and it is based in part on the model of Dubai, which officials see as a prime example of oil wealth used intelligently to develop a country. The masterplan for Erbil, for example, envisions that the city will become a logistics hub for its neighbours, Syria, Iran and Turkey. "There are provisions for something like Jebel Ali Free Zone in Dubai," says Nabil Haddad, the director of operations for Dar al-Handasah, a design consultancy that developed the masterplan. Some of the major property projects, too, are modelled after projects in Dubai. Mr Haddad is working on Tarin Hills, a $15bn project by Damac Properties just outside Erbil. The planned development is expected to include sport facilities, parks, a commercial area and enough housing for about 50,000 people. A Damac spokesman says the project is in the design phase. Earlier this month, Al Maabar International, a group made up of major Abu Dhabi property development companies, announced a $10bn project at the site of a former military base in Baghdad. The 1,250 hectare project will have its own healthcare centres, hotels, mosques, parks, housing and offices. Several five-star hotels are also under construction, which along with the suburb-like developments and high-end housing are meant for use by a growing number of expatriate workers in the country to manage oil exploration projects, as well as construction and industry businesses. "This is a country where there were no construction projects for more than 30 years," Mr Haddad says. "The only things that were built were Hussein's palaces and a good road network, so he could send his army anywhere he wanted fast... Now there is a big movement to build." The UAE has emerged as not only an economic model, but the largest source of foreign direct investment for Kurdistan, and lately a major investor into Iraq as a whole. Sheikh Mohammed bin Zayed, Crown Prince of Abu Dhabi, visited Baghdad earlier this month in what observers said was a series of visits from Arab leaders intended to help stabilise the country. "The UAE is the number one country for Iraq right now," says Mohammed Amin Baban, a senior economic adviser for strategic investment issues to the prime minister of the KRG, Nechirvan Barzani. Beyond direct investment, Mr Baban says Dubai is an example of how a government can work with the private sector to build a country's economy. "We don't want to just be a government spending money, we want a healthy private sector," he says. "We have all the elements of success: earth, good water supply and a labour force. We just need to plan." At the end of last month, direct investment in the region had reached $7.18bn, according to the KRG Board of Investment. That number is still only a fraction of what Kurdistan needs to become a major economic force, says Herish Mohammed, the chairman of the KRG's board of investment. Despite its relative security, the country still has only basic infrastructure and lacks a fluid banking system. Businessmen say these issues deter many companies interested in getting in on the reconstruction. "Banking is a big problem for investors," says Mr Rauf. "This is one of the main reasons people tell me they don't want to come here yet." Kurds have had their savings seized on multiple occasions by the Baath Party during Arabisation drives, leading to a wide distrust of banks. Most people keep their savings at home. Steel safes are big sellers at the central souk in Erbil. While banks are working to increase trust, bring ATM machines to the country and start offering loans and credit, one somewhat more extraordinary strategy to get more Kurdish money flowing in the economy is the setting up of a stock exchange in Erbil. "There is no bank trust here, but we think that people might be interested in investing in some of the companies here, which have better reputations than the banks," says Abdullah Abdulraheem, the head of a committee developing the exchange and an economic adviser to the KRG's council of ministers. "We need to change the whole idea of people, of how an economy works." The initial approvals to set up as an independent exchange were received earlier this month. It will operate under the umbrella and guidelines of the Iraq Stock Exchange in Baghdad. Mr Abdulraheem says 10 companies, including Korek, Salahuddin and Bilad Islamic Bank, will be the major shareholders of the exchange, which will have start-up capital of 10bn Iraqi dinars (Dh32.2m). The exchange will be 80 per cent owned by the 10 companies, 10 per cent owned by the KRG and 10 per cent owned by the public. Those 10 companies will also be the first to go public in a move that Mr Abdulraheem hopes will give foreign investors a new way to invest without having to directly finance projects. The exchange could also prove a risky proposition, says Shwan Taha, a former fund manager for Templeton Asset Management and Soros Fund Management, who has set up a company called Melak Investments to invest in Iraq. "I am sure the persons responsible for establishing this exchange are well aware of the pitfalls of this endeavour," he says. "The region lacks the necessary building blocks for a successful exchange, namely a good banking sector and good corporate governance. And unless these blocks are in place, we will end up with a small market characterised by short boom-and-bust cycles, which could ultimately endanger the region's fragile economy." The KRG's strategy for development has been to sell Kurdistan as the ideal headquarters for working throughout Iraq, a country with reserves of about 112 billion barrels of oil, according to the US Energy Information Administration. With Kurdistan damaged severely by years of sanctions, a dysfunctional political economic system under Hussein, a costly war with Iran in the 1980s and the US invasion in 2003, many corporations are now looking for ways to get in on the rebuilding of its economy - a process that will involve many billions of dollars in spending. "When we talk to people, we tell them that maybe there are four million or five million people in Kurdistan, but this is the gateway to the 30 million people of Iraq," says Herish Mohammed. "Here it is safe and we are already building the things that the rest of Iraq will take years to build, like offices and a bigger airport. It is safe." There is an undertone of self-defence to some of its economic moves, such as in agriculture, which the government says is its next big focus. While Kurdistan is allowed to administer the region how it sees fit, officials say that there is always a worry that a new government will try to curb Kurdish influence in the new Iraq. Mr Mohammed says the five-year plan for agriculture is to become self-sufficient and then to begin exporting to countries in the region. Kurdistan has historically been a producer of tomatoes, cucumbers, apples and up to 80 varieties of grapes. The hills and mountains are covered with small farms and fruit trees, but during Hussein's destruction of villages, many people fled their farms for the three main cities. The government is aiming to spread people back out to the villages and farms using incentives and encouraging foreign companies to link up with locals. Kurdistan is also moving ahead with its energy sector, while Baghdad drags its feet on a central oil-sharing law for the country. Kurdistan has an estimated 22 billion barrels of untapped oil, according to the US Energy Information Administration. More than a dozen international firms have signed deals for exploration and extraction with the government. The Sharjah-based energy affiliates Crescent Petroleum and Dana Gas are spending $650m to develop two Kurdistan gasfields, a pipeline and a gas processing plant in an integrated gas and electricity development project. The gas will supply two power stations that are in the final stages of construction and will provide the region's first new generating capacity in 50 years. Crescent and Dana also plan soon to launch a "Gas City" project in Kurdistan to attract investment in gas-intensive industries such as petrochemicals and ceramics. Any oil or gas extracted from Kurdistan will be shared with the rest of the country, as will the oil from the "super giant" oilfields in the south. Kurdistan gets 17 per cent of petrochemical revenue, which is roughly equivalent to its share of the country's population. Tourism, too, is a growth sector. "We want to be the destination for Iraqis from all over the country," says Ayad Abdulhalim, the chairman of the Duhok Chamber of Commerce and Industry. "We have mountains and a cooler climate. It is a big draw for people from the south. It is safer and the weather is nice." He says tourist companies are setting up and hotels are being built. Still, employment remains a critical issue. Many Kurds work either for the regional military, known as peshmerga, or for one of the two main political parties, the Kurdistan Democratic Party (KDP), headed up by Mr Barzani, or the Patriotic Union of Kurdistan, led by the Iraqi president Jalal Talabani. "When I graduated from forestry school, there were no jobs so I work for the KDP," says Botan Mahmod Mohmed, a 27-year-old living in the village of Amedi, a breathtaking place built on top of a mountain about 17km from the Turkish border. "Many people work for the party here. Maybe with new buildings and tourists, it will get better." Some of the few construction jobs and other menial labour positions are taken up, in part, by labourers from the Philippines and other countries with people willing to work for low wages. But fearing unrest from citizens, the government has reined in the practice. It still exists in odd situations, such as the airport, where if you hire a car from Hello Taxi, you are often driven by a Filipino driver to the edge of the airport and then transferred to a car driven by a Kurdish driver to your destination. "We are at a very strange time now - we have much work to do," says a peshmerga leader, sitting in his office at a base in the hills above Erbil. A picture of Mustafa Barzani, the legendary peshmerga fighter and Kurdish leader, hangs above his desk. "We don't know if there will be trouble at our borders," he says. "The old generation is trying to get ready for the new country. The young people have televisions now - they see how the world is in other places. It messes up their heads? The future depends on how we can bring these two together." [e-mail]