Setting the Scene for a Better Private Sector

Setting the Scene for a Better Private Sector: Causes and Cures of Corruption in Iraq

Dr. Frank R. Gunter Professor of Economics, Lehigh University Advisory Council Member, Iraq Britain Business Council Author of The Political Economy of Iraq: Restoring Balance in a Post-Conflict Society (Second Edition, Edward Elgar Publishing, October 2021)

According to Transparency International (2021), Iraq is in the bottom 12% ranking 160th out of the 180 countries evaluated. While academics may argue that small amounts of corruption act as a “lubricant” for government activities, the large scale of corruption in Iraq undermines private and public attempts to achieve a better life for the average Iraqi.

Corruption occurs if a government official has the power to grant or withhold something of value and – contrary to laws or publicized procedures – trades this something of value for a gift or reward. Among corrupt acts, bribery gets the most attention, but corruption can also include nepotism, official theft, fraud, certain patronclient relationships, or extortion.

The correlation between corruption and per capita income adjusted for the cost of living is strongly negative. Regardless of culture or geographic location, there are no very corrupt rich countries and few honest poor countries. At the individual level, corrupt acts are inequitable.

They allow some to avoid laws, regulations, and practices that others must follow.Thus, corruption undermines the average Iraqi’s confidence that success results from individual effort, rather than from bribery or political connections. Not only does corruption in Iraq lead to slower real growth but also it worsens the distribution of income.

The poor in Iraq must pay bribes but rarely receive them. The impact of corruption also leads to an expansion of the budget deficit, reduced services for the money spent, and a waste of needed investment spending. Because of corruption, the Iraqi national government has to spend much to get little.

The burden on private businesses is substantial. In addition to increased costs for businesses, Iraqi markets for goods and services tend to be inefficient because of the uncertainty and risk associated with corrupt activities.

Firms deliberately stay inefficiently small and organize their activities in complex manners to avoid coming to the attention of those in authority who will seek payoffs. Also, since the Iraqi banking system rarely lends to firms in the informal economy, less efficient high-interest money lenders or more prosperous family members are asked to provide financing.

Finally, the widespread perception of corruption tends to discourage legitimate foreign entities from trading, lending, or investing in Iraq. Investors have to worry not only about changing market conditions but also whether various unknown officials in Baghdad will seek to block their investment in order to extract additional bribes.

Reducing corruption is critical to Iraq’s longterm economic development. But in order to develop an effective anti-corruption strategy, it is necessary to first determine the causes of corruption in Iraq.

Policy-related Causes of Corruption

There are several determinants of corruption that are more of a function of policy error and therefore can potentially be improved in a reasonable period of time.

One Dominant Natural Resource: Oil accounts for almost 99% of Iraq’s export revenues and almost two-thirds of its GDP. According to the World Bank, Iraq has the highest level of natural resource dependence in the world. The ministries in Baghdad control the massive revenues from oil exports which account for 90% of government revenue. The ministries and the associated state-owned enterprises (SOEs) are, to a great extent, welfare programs providing generous salary and benefits in return for little work, and they enjoy an independence that allows them to follow economic and social policies that block or undermine the economic liberalization goals set forth in the National Development Plans.
Lack of Market Competition: Lack of market competition is associated with corruption for at least two reasons. First, the possibility that the government may allow the creation or maintenance of monopolies tends to provide strong incentives for corruption. Second, Iraqi firms will try to influence officials to reduce or eliminate competition from imports. Since 2003, there has been little discernable progress in reducing the dominance of the SOE in the domestic economy. This dominance has been maintained both by continuing to provide large direct and indirect subsidies as well as by discouraging the private business sector. According to the World Bank’s Ease of Doing Business Report in 2020, Iraq ranks 154th out of 190 nations in starting a business, 186th in getting credit, and 181st in trading across borders. The more complex, illogical, and time-consuming the procedures are – the greater the number and size of bribes that can be extorted from businessmen.
Weak Free Press: A free press reduces the potential for corruption both by increasing the likelihood that corrupt acts will be uncovered and providing a mechanism with which public opinion against corruption can be expressed.

Iraq has made a rapid transition from an extremely restrictive media environment before 2003 to a media free for all with a sharp rise in the number of media outlets.

However, there is strong opposition to free media. Some media outlets have been constrained by a flood of lawsuits. While news organizations have been forced to suspend coverage of these issues and violence against news agencies or their employees is not rare. According to the Reporters Without Borders’ World Press Freedom Index, Iraq has dropped from 153rd to 162nd out of the 190 countries evaluated.

Large Scale Subsidies: The greater the value of the good or service controlled by the government official, the greater the value and possibly the number of bribes that can be extracted. In other words, the existence of large government subsidies leads to increased corruption since the maximum bribe is greater.

The government subsidizes many essential goods and services such as water, electricity, fuel, or food. A poorly paid customs official or border guard could easily double his annual income by accepting a cash bribe to turn a blind eye to some diversions.

Weak Legal Sanctions: There are weak disincentives to accepting a bribe. In Iraq, although laws may call for severe punishment for bribery, the chances of being caught and convicted are low.

While the number of investigations has increased substantially; it is still extremely unlikely that a corrupt act will be discovered, investigated, prosecuted, adjudicated, and 8 punished.

Due to corrupt justice officials, many suspects are notified of their potential arrest in time to flee the country with their ill-gotten gains. While these officials may be convicted in absentia, the odds that they will be punished, or their corrupt gains recovered are very low.

Inadequate Public Sector Salaries: A more controversial possible cause of corruption is that inadequate public sector salaries motivate government employees to seek and accept bribes.

Immediately after 2003, civil servants were seriously underpaid. However, as a result of a series of salary increases, the typical government employee is now better compensated than a worker in the private sector. Combined with benefits, protection against dismissal, a less intense pace of work; government employment is eagerly sought after. However, once anyone has obtained a government position, the financial rewards for advancement in Iraq tend to be meager. The existence of generous compensation for entry-level positions combined with meager raises for seniority provides strong incentives for accepting bribes.

New employees are expected to “purchase” their entry into government employment by bribing senior officials. The payment is usually some combination of an initial bribe and a monthly cash “contribution” to one’s supervisor. Of course, each level of management is expected to make a “contribution” to the next most senior level of management.

As a result, the actual paycheck received by many senior members of the bureaucracy may account for only a small fraction of their compensation. Many seek bureaucratic advancement primarily to increase their ability to extract larger bribes.

Reducing Corruption

There has been some progress in Iraq’s war against corruption. The Commission of Integrity reports increased prosecutions and recoveries of misappropriated funds. This progress has been reflected in a gradual improvement in Iraq’s Transparency International corruption rankings. What Iraq needs is an integrated anti-corruption strategy and the political will to execute it.

Political Will and Good Governance are Needed for Effective Corruption Control: One simple way that officials can demonstrate commitment to fighting corruption is by personally abiding by anti-corruption regulations such as accurately reporting personal financial assets.

Achieving 100% reporting of personal financial assets should be an absolute requirement. In addition, officials should also be required to document in detail the sources of their financial, real estate, and other assets

Rely on a Single Anti-Corruption Agency (ACA) Instead of Many ACAs for Effective Corruption Control: Iraq’s multiple ACAs diffuse responsibility and resources and therefore retard the fight against corruption.

One possible solution would be to reduce anti-corruption efforts to three organizations. Because of their important continuity and international roles, preserve an independent Federal Board of Supreme Audit (FBSA) and Central Bank Monetary Laundering Reporting Office.

Make all of the other ACAs part of the Commission of Integrity (CoI) with all of their budget and personnel decisions controlled by the CoI’s Director.

Importance of Cultural Values in Minimizing Corruption: The Commission of Integrity appears to be making a serious attempt to change the culture of corruption.

It has begun distributing anti-corruption messages to Iraqi newspapers, television, and radio programs. In addition, anticorruption material has been prepared for children in kindergarten, primary, and secondary schools.

Adequate Salaries are Necessary, but Insufficient for Effective Corruption Control: It is probably political suicide for the government to attempt to reduce public sector wages to the level of those in the small private sector with similar skills and responsibilities.

A more politically realistic approach would be to hold the line on public sector wages and benefits and wait for inflation—about 3% in 2020—to gradually reduce the real value of government employment to levels competitive to those in the private sector

Constant Vigilance is Needed for Sustained Success in Corruption Control: If a society is not constantly fighting corruption in accordance with a well-planned strategy, then corruption will get worse. And every failed anti-corruption policy in Iraq since 2003 has led to increased public cynicism making eventual success more difficult.

Conclusion

There are several options that could be adopted to speed up the process of rationalizing Iraq’s incredibly complicated commercial code.

First, instead of changing regulations one at a time, Iraq could adopt the best practices commercial code that has been developed by the World Bank.

A second option would be for the Iraqi government rapidly to rationalize its regulations by substituting the existing commercial code of an Islamic Arab neighbor such as the United Arab Emirates (UAE).

While far from perfect, the regulatory environment of the UAE is much friendlier to its private sector.

A third option that has received less attention is to revitalize the “free zones” a form of special economic zone (SEZ). A SEZ is a geographic area within a country where the rules of business are different from those that exist in the rest of the country. In the Free Zone Law of 1998, Iraq authorized such zones, but this law is inconsistent with modern SEZ management practices.

However, a revised Free Zone Law might provide a viable transition route to a more rational regulatory environment in Iraq.