Kurdistan’s Road to Independence: Building a New Economic Structure

By Tara Shwan

As the people of the Kurdistan Region prepare to head to the polls on September 25, 2017, in a historical referendum on Kurdistan's independence, we compare the economies of Iraq with other nations and ask, “What economic structure would a sovereign Kurdistan take?"

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Kurdistan’s Independence Referendum from an Economic Point of View

By Tara Shwan

This is not a political opinion, but an economic point of view. Some people in the Kurdistan Region oppose the proposed referendum for independence just because it's adopted by a certain party, while others argue that this isn't the right time for a serious step like that as the Region is suffering from severe economic crisis.

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Good Governance of Natural Resources for Economic Growth

By Paiman Ramazan Ahmad

Kaufmann et al (1999) defined "governance as the traditions and institutions that determine how authority is exercised in a country." Based on available literature including thoughts of neo-institutional scholars including, Douglass North and MancurOlsan, a positive relationship between the quality of institutions, governance structures, and economic growth is found.

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In recent steps in Kurdistan Region (KR) which is called the step before being a country. It is difficult to have a definite definition for Kurdistan Region Government (KRG); is it governance or management?. The recent government is treating (persons) in the proper way and it has a path dependency or/and indulgence or/and as a defector tolerance to managing.

However, governance should be set the right procedures for ensuring those issues are done in a proper way and there should be a strong strategy that saves the sovereignty of the country. So, how do we know planning or/and making policies? Is it an expert professional process that does some planning or/and decision making? Or is it an organized process in the wide cycle of knowledge and implementation?

Some believe, the planning or/and making policies are an expert and scientific job and it is professional process, and society does not relate to that.

In contrast, there are beliefs that the plan is continuity of politic, politic decision, social need and interesting of individual, society, and the society movement power, therefore the representative of these institutions have to participate in it. It means the policy is the implementation of the acceptable goals in terms of politics, society and economics, not it just adjusted in the terms of expert and technical. So, it shows the invisible issue and design a plan by all invisible issues that have impact on the economic situation and its development.

Currently in KR there is no long-term industrial policy (as much as say for 20-25 year plans). In addition to this, the flow of industrial investment resources is subject to major uncertainty and highly irregular. It should be noted that in 2008-2009 such policy and strategy measures are proposed, but no statistics in whatever form were available, which make it rather difficult, and not impossible to give some recommendations.

As the strategic challenges, facing the industry sector includes:

  • Poor competitiveness of locally produced industrial products.
  • Insufficient local and foreign investments in manufacturing industries (MI‘s).
  • Failure of present laws to provide proper legal environment to support the industrial sector (IS).
  • Inadequate performance by Standardization and Quality Control Commission.
  • Declined banking system in respect of supporting the development of the sector.
  • Huge numbers of industrial public sector workers, obsolete production lines, lack of sufficient to treat (persons) with path dependency or consideration because as sociologist ―Max Weber‖ said the modern state institutions are increasingly based on rational-legal authority and it is impersonal.
  • Awareness with regard to quality of the goods and services offered.
  • Limited training and skill development of its workers. It must be by affirmation say what is required is a strong industry facing the threats and challenges of the current economic markets in KR.

Before delving into the elements of the MI‘s and its growth in Kurdistan region/ Iraq, it would be advisable to define KR and its geographical location, in the closest context relevant.

The KR is the southern part of the greater Kurdistan which is a roughly defined geo-cultural region where the Kurds form a prominent majority population, which was built about 6,000 years ago. In majority it is the mountainous area with natural borders, located between the width degrees of 34.15° and 37.22° with longitude degrees of 40.20° and 46.20°.

Kurds concentrated on priority in northern and north-eastern Iraq: Erbil, Sulaymaniy, Dahuk, Kirkuk, and Sinjar and Akre of Nineveh province. As well as in the areas of (Khanaqin and Mandali) of Diyala province, and areas of (Badra and Jassan) of Wasit province (Lorestan Minor), they also spread in the Lores in the cities of Amara and Kut. But the KRs‘ border (current administrative), bordered to Turkey from the north, in the east with Iran, from the North West with Syria, and from the south and west with of administrative Iraqi federal provinces (Mosul and Kirkuk, Tikrit and Diyala).

In an administrative point of view, the KR was under the Iraqi mandate throughout the best part of 19th century, but it is separated as a political region in 1992. From the first article of the draft constitution of KR/ Iraq came: ((Kurdistan Region is regions of Federal Republic of Iraq, and its political system is a parliamentary republic democratically pluralistic)), and Erbil city is the capital of KR. With regard to the administrative units which formed the region, it was subject to many changes and amendments, as well as the border and area of these units at from time to time on the basis of the policies pursued by various central governments towards the KR.

Kurdistan is a pluralistic society, with a sharp diverse economic position backed up by religious diversity (Moslem, predominantly Sunni Muslim also some Shia, Sufi, Yazidism, Christianity, Judaism, Yarsan,..etc), and different languages and dialects. However, following racial riots in 1991 after the Kurdish revolution in Kurdistan, which the Kurdish people controlled the north of Iraq that called Kurdistan Region, the Kurdistan authorities formulated social-economic policies based on affirmative action and exceptional sensitivity to income distribution.

As a result of the existence of the KR in a geographical area that has an international contact with Iran, Turkey and Syria, and internal contact with Iraqi federal provinces, and the consequences of its trade-economic relations, social-cultural, historical and political by virtue of the elements of nature and neighbourhood. All pillar elements that contribute in enabling KR to establish good business and political relations at the level of political parties or KRG with its neighbouring countries taking into account its common interests.

Some of these relationships go back to earlier decades when repression and persecution practiced by the Iraqi governments over the past decades, and which led to the exodus of millions the Kurdish people of KR to Iran and Turkey in 1974 and also 1991. By virtue of the political situation experienced in Iraq and also in Kurdistan and the formation of regional government to manage Kurdistan and contact with its neighbouring countries, KR has been focusing on building economic relations with the need of the local market to products, accessories and materials need from these countries to perpetuate the needs of the KRs‘ citizens of those substances in the economy. Then, the KRG facilitated the issues of building the commercial bonds to create a common ground of understanding with the neighbouring countries, yet, KRG‘s flexibility towards the issues of relations between them and their neighbours, those countries did not help too much to establish relations in an official political nature. This lack of official and political relationship stems from fears that Kurds in these countries may incline to KRs‘ experience which has achieved much tangible success on the economic, urban and commercial scales.

What makes the geographic location of KR more important and highly strategic is the rapid development of the Eastern Asian economies and the deterioration of security in Iraq and Syria (Shia controlled), and the on-going religious tension and divisiveness in the Gulf states (majority Sony controlled), especially that which has impacts of the Iranian intervention (Shia led) on the region, and also increasing the risk and threat of Iran on Israel, and Turkey as a powerful Sunni in the Islamic monde.

The industrial researches are suffered from taking an important place in each country, because it is being the cornerstone of economic-social evolution and development. The degree of development of this sector is one of the main criteria and indicators for the development of countries and/or its under-development. In particular the potential of its development and configured is the highest among the other sectors, also the sector qualified to attract and accommodate modern technology, which leads to raise the level of productivity and thereby it increases its contribution in the economic growth of the country.

The MI‘s sector as a leader sector is a wider and branched sector, it includes those industries that require the introduction of manufacturing operations by mechanical, chemical, natural and different structural means to change its nature, shape and makes it suitable for new uses, and contributes directly in the construction of the industrial base that could be relied on in future. It plays an important role in advancing in the development and accelerates in the process of structural change of the production and the economies of these countries. In another word, the industry is manufacturing of raw material by new approach on its natural situation which was not in a position to benefit them only to a limited extent to the new image adjusted to its needs.

It is known that the industry requires the availability of a range of main constituent in KR which wants to enter the industrial activity and the most important constituent that could be referred to is the raw materials, dynamics power, labour, capital, transportation and market..etc.

The industrial development (ID) and its commercial movement in KR could be divided into differential periods:

First phase: Before 1991; KR had suffered from multiple economic problems aggravated from wars and destruction in long previous years.

Second phase: The economic situation after the Kurdish revolution in 1991 and it continued until the fall down of Baath regime in 2003. The development period pre-2003 is characterized by a lack of financial resources. The KR had suffered from two blockades, firstly it was part of its geographical location as a part of the State of Iraq, and the second blockade imposed on local management by the central government in Baghdad. The economic situation arrived that the three provinces of Erbil, Sulaimany and Dohuk suffered from a major crisis in the shortage or lack of required service such as electricity, safe drinking water, poor health services and lack of basic materials to the needs of citizens in their daily lives.

One of most the important events in this stage when the central government tried after abolishing the Iraqi Swiss Dinar and issuing a new currency in attempt to put the pressure on the young Kurdish management that it got recently (from the tops of mountains and stripped them uniforms to try a new experience in civilian rule) in an attempt by the Iraqi State to withdraw the Iraqi Swiss Dinar, which was available in KR in very large scale due to Kurds who have controlled the most commercial outlets between Iraq and the outside world being represented by Iran, Turkey and Syria.

This alarmed the political leadership in Baghdad and lost control on commercial imports of Iraq, and the Kurdish side's response declared approving the cancelled currency as the official currency to deal with trading in their influential areas. The acceptance of suppliers and businessman for dealing with trading by cancelling currency which was more surprising and spontaneous process linked the cancelled currency to the USD. In the period from 1992-2003 the KRG revenue was limited to what was collected from taxes and customs duties on imports from outside of the region. These revenues were not exceeding to 1.5 billion USD annually at best.

Third phase: It was the period after the fall down of Baath regime in 2003; In contrast to before 2003, the economy has rapidly been modernized by the inflow of oil revenues and the promotion of private sector (PS), capital investment and FDI development. Government market intervention is minimal and the economy has become open and liberal, and the PS has operated effectively. The inflation and wages increased and the corruption expansion have deteriorated the competitiveness and development of local IP. After the fall down of the former regime in 2003, the KR began to receive its share of oil revenues from the central government, this share would amount to 17% of total Iraqi revenue. The interest of the KR in the defoliation of the former regime is not limited to oil revenues on their importance, but also it is a threat to other areas of the economy. Before, the Baath regime had applied the principle of state control over the wholesale of imported materials. It has limited import a large number of imported materials in the hands of the Iraqi state in Baghdad. This action led to the on-going abstraction of KR of the important sources for accumulation of capital and operating, thereby the businessmen and owners of capital in the KR has been deprived of this important source for achieving the profit.

The removal of central control over the wholesale trade of imported materials led to stop the financial leaks and to strengthen the inflationary of expenditure within the KR and this has supported the economic activity and increased the recovery of the economy and employment within the KR.

Methodologies of the economic experience in KR have been recognised in the face of the political-social-economic crisis that Iraq swept after 2003 on methodologies for many other DCs. In the time, Iraq suffered from multi crisis and most Arab countries left their economies in the nets of IMF and could move with the objectives of globalisation economic. KR adopted the method of self-solutions to overcome the crisis especially political crisis, and has made progressed of tangible results in development construction, thereby, has succeeded in attracting a wide range flows of investment companies, as it has proved directory applied in this experiment that developing nations could plan its path in economic advancement and adoption of the established rules on solid foundations before the storms of crisis, and it is possible to overcome these crisis by inflationary investment approach based on the rationality and seriousness. So, KR has to open its economy to international reality in the effective movement based on give and take interests or mutual interests, which the Kurdish economy has seen tangible and remarkable developments after.

Therefore, KR showed the process of economic openness to the world. The suffering of KR from the economic problems exacerbated under conditions of war and the suffering of devastation during the long past years led to the pursuit of seriousness and persistence to build the region‘s infrastructure for the ED process.

It is clear that the process of ED in the light of economic openness needs to necessity of the presence of the appropriate investment climate, which leads to the issuance of an investment law that regulates and facilitates the work of investment in general and foreign private for the wide and quick stepping in achieving the goals of the ED in the KR.

After 2003 albeit the volume of production has increased but due to inelastic demands the demand curve has decreased on local products in contrast to the increase of the demand of foreign goods. KR has a relatively suitable investment climate in terms of providing stable security and the abundance of labour and fertile land for agricultural and mineral water, in addition to the work program of the amalgamation of government with providing the opportunities for domestic and foreign investment in accordance with legal and constitutional safeguards, as well as the opening of international airport in Erbil, Sulaimany and a lot of international exhibitions where the Kurdish specialists take the initiative approve of a new investment law through that makes clear the concept of foreign investment and openness of the investment fields and the formation of (the Investment Board in KR), where it has the power to do all legal necessary actions for the implementation of the Investment Law No.4 for the year 2006.

The most important events in KR after fall down of Baath regime in 2003 are:

First: The abolition of the double economic blockade on KR.

Second: It got a quantum leap in revenue in KRG, which provided an opportunity to allocate a larger sum to the process of ED.

Third: The opening of markets and the abolition of restricting laws for businessman and the movement of capital, it has also been achieving stability in the exchange rate of the national currency and returned some banks to engage in their activities.

Fourth: It gives an importance to the activities of the PS, and government of the region has developed mechanisms to facilitate the activities of the PS, and facilitates the participation of the PS in all aspects of economic processes.

Fifth: The issuing of the Investment Law No. 4 of 2006 to encourage the PS.

Sixth: Kurdish oil export by the Kurds to global markets in 1, June 2009, and the development of border crossings and which make them international, and the development of economic relations with neighbouring countries, especially with Turkey, has been major economic events during the years after 2009.

Seventh: The direct role of government to manage the economy, to create a favourable climate to economic activity, and focuses of supporting investment by building the economic-social infrastructure and the necessary institutions services for the process of economic growth.

In addition to the high production costs with the low level of quality in local industries, lead to consumer‘s reluctance and attract to foreign goods in more quality and less price. So, due to Kurdish consumer oriented of the imported goods, thereby the domestic demand year after year the rate of domestic production comes to decrease relatively to the trade sector which becomes active (just in one sector which is importing sector and that makes imbalance of trading in KR). In fact comparing the KR situation with other countries is difficult due to complex economic-social and political situation, but it is not unique. it started according to it to interpret, analyse and the studies of industrial economic reality in the KR note that the KR economic is completely different with disaster staring in the Iraq's economy.

As it could be seen that even KR is just 17% of Iraqi budget and destruction of KR in sector before 2003, while KR is developed several times more than Iraq in terms of investment in general (infrastructure, as the sector of education, building, contracting, tourism, agriculture, industrial, electricity and water in terms of the availability, transport, communications and security). As it is seen in recent years due to geographic location of KR, the rapid political changing in Middle East has positive impact on the economics of KR. The change and development have been seen in KR, from plans to strategy studies, encouraging the local and foreign investments, and other efforts for ED where it is a new phenomenon for KR. Being in its first steps, the government is obliged to take caution and to control the continuity and completion of the projects.

The ED thoughts provide a minimum of these infrastructures and put them with moderate price in disposal of investors. Therefore, those productive investments could directly produce competitive costs. It falls within the need to provide the infrastructure competencies, technical elements, private banks, stock markets and securities. It is important that prices of factors of production such as electricity, water, communications, and land rents are as low as possible to encourage investors and provides investment costs.

However, there are a set of obstacles for which constraint the development process of this sector. Some of these obstacles reasons return to KRG procedures‘, like:

  • Non-definition of the tax, the multiplicity of fees.
  • High volume routine.
  • Weakness of services and the scarcity of electricity.

Reference: Dr. Razzaq Othman Mustafa, Developing Economy, Evaluation of Manufacturing Industrial and a model for industrial development for a case of Kurdistan Regon-Iraq, PhD Thesis, EHESS, Paris-France, 2014. PP 1-11.