Red Tape, Corruption Stifle Iraq's Economy

FALLUJAH, Iraq -- Imad Talib al-Obeidi ticks off 18 places he had to visit to start his bottled water plant: the police, the environment directorate, the health directorate, the city council and the district council, for starters.

He's one of the relatively few Iraqi businessmen stubborn enough to play by the rules.

Iraq is the country of bribes," al-Obeidi said. "Our main problem is the hostile attitude by government employees in the offices because they show no cooperation, and if you do not pay bribes they will put obstacles in your way."

The U.S.-led invasion eight years ago provided an opportunity to liberate Iraqis not only from Saddam Hussein's oppression, but also from a command-and-control economy dependent on oil revenues. But when the last U.S. troops withdraw from Iraq by the end of the year, they will leave behind a nation in which widespread corruption, bureaucratic hurdles and electricity shortages continue to stifle the economy.

A 2010 World Bank report listed Iraq as 174th out of 183 countries when it came to the ease of starting a business. Transparency International, which monitors perceptions of corruption, ranked Iraq 175 out of 178 countries in 2010; only Afghanistan, Myanmar and Somalia fared worse.

Oil revenues make up roughly 95 percent of Iraq's budget, and the economic focus since the fall of Saddam has been on boosting the oil output and enticing foreign investors to exploit the oil fields. But graft and red tape remain challenges for them too: Even supposedly easy tasks, such as obtaining a visa, are difficult.

Nevertheless, experts say small business development can provide more jobs than big oil projects can. And by making their own goods, small businesses help a country become more competitive, self-sufficient and entrepreneurial -- rather than relying on imports. These intangible qualities may far outlast the country's oil wealth.

"There is an absolute need for a country's businesses to become competitive," said Abdulwahab Alkebsi, from the Washington-based Center for International Private Enterprise. "That's the area that can improve the quality of life for Iraqis."

Prime Minister Nouri al-Maliki's spokesman, Ali al-Moussawi, said the government is trying to minimize bureaucracy and fight corruption but that such reforms take time to implement. He said the government approved a law two years ago that was designed to encourage foreign investment and has also been giving loans to people in the agriculture sector.

Small and medium enterprises make up only about 6 to 8 percent of Iraq's gross domestic product, estimates Sherwan Anwar Mustafa, managing director for the USAID-funded Iraqi Company for Financing SME's.

In the U.S. by contrast, small businesses employ about half of all American workers and make up more than half of the non-farm gross domestic product, according to the federal government's Small Business Administration.

Al-Obeidi said he once spent two months going from office to office in the Anbar Province Environment Directorate to get a piece of paper saying that his plant in the city of Fallujah was for commercial and not residential use.

He even had to convince the police and Mukhabarat -- akin to the FBI -- that he wasn't going to poison anyone. They must have been won over because he says some of his regular clients now are police officers.

He said he could have avoided the whole process with a $20 bribe, but stubbornness made him persist through legal channels.

The difficulty in registering means many Iraqi business owners instead operate off the books. A recent survey by the Center for International Private Enterprise of 900 businesses across Iraq found that 55 percent were unregistered. That means they don't pay taxes and aren't necessarily following the most stringent of regulations.

In Fallujah, Suhaib Munim owns a small yogurt factory that operates without a license.

"We gave someone a $1,000 bribe to obtain these permissions in a faster way and to ignore the faults in the health measures in the place. My place lacks health measures such as ceramic tiles which should be covering the walls and the floor, but this would cost me a huge amount of money," acknowledged Munim.

When it's hot, Munim and his employees lounge barefoot in the refrigerator unit alongside the cooling yogurt -- a likely violation of health regulations.

He said if the Anbar province health officials knew where his office was located, they would close him down. But like many business owners used to Iraq's lax regulation enforcement, he had no hesitancy in talking to a foreign journalist.

Now that he'd like to expand, he's running into a typical problem for unregistered businesses. It's hard to get a bank loan to buy property. It's also difficult to acquire property from the government, the biggest landowner the country, in which to build a new factory.

Alkebsi said often the emphasis is on shutting down such businesses instead of helping them become legal.

The deputy governor of Anbar province downplayed the registration problem and said it should take only a week to 10 days to get the necessary approvals to open a business. He said it is Iraqi citizens who are encouraging corruption by offering to pay the bribes.

Al-Obeidi, who employs 30 workers, said he may close his bottled water plant in two years if the economic situation in Fallujah doesn't improve. He might then run into another problem.

About the only thing harder than opening a business in Iraq appears to be closing one. Business owners who go under have to prove they've paid all their taxes, legal fees, workers' paychecks and debts.