Diversifying Kurdistan

Striking a balance between free and fair trade in Iraqi Kurdistan

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Turkish products dominate supermarket shelves in the Iraqi Kurdistan town of Dahuk

Iraqi Kurdistan’s continued over-reliance on oil wealth helps the Kurdistan Regional Government (KRG) dominate employment in the province by creating large numbers of unproductive city-based public sector jobs. Not diversifying away from oil thus leads to many short and long-term problems, but the irony is that Kurdistan — unlike some other economies in the Middle East — has a lot more going for it, including abundant water and agricultural resources, which remain largely unexploited.

Hoping to tap these riches the KRG’s plan for agriculture was launched in 2009, and officials of the province have been receiving experts, funders and business delegations from Europe, America and elsewhere with an interest in Kurdistan’s agricultural potential. The first investment in the sector thus far has been by the United States-based private equity firm The Marshall Fund in the village of Harir, which put $6 million into the development of a tomato paste and fruit processing plant that had been defunct since 2003. Coming on stream last year, the project is doing fine, but remains a miniscule success when measured against the $10.5 billion in agricultural investment and infrastructure that the strategy calls for.

In fact, manufacturing and industrial processing in Kurdistan has recently been characterized by disinvestment. Unable to compete with imports, 170 factories (about 10 percent of the province’s total number) closed down last year, according to publicly cited figures from the KRG Ministry of Trade. In the bad old days of the 20th century, the reaction to such news would have been to impose high protective tariffs, but that time is now gone. With Iraq negotiating entry into the World Trade Organization (WTO), it will eventually lower existing trade barriers. This is basically good, as tariff protection often leads to the emergence of inefficient industries. The other problem is that the KRG, though enjoying considerable autonomy, is not sovereign and so cannot decree limits on importing foreign products into the market apart from the restrictions imposed by the central government in Baghdad.

Yet, something needs to be done, as many of Kurdistan’s factories remain vulnerable to foreign competition and are in danger of closing, threatening the jobs of the manufacturing sector’s 13,000 or so employees. The KRG has to support domestic producers, but this should not be done with subsidies, which become complicated under the WTO rules that will sooner or later apply to Iraq. One answer is to make manufacturing more efficient through reliance on local raw materials, including some of the province’s agricultural wealth. That doesn’t mean that any crop grown in Kurdistan can and should be processed through manufacturing, but it is also true to say that positive example set by the Harir project could be replicated in many areas.

Another way for Kurdish manufacturing to compete is through higher productivity brought about by better machines and management, especially those coming through Turkey — the province’s most powerful industrial neighbor, which politically is no longer hostile to things Kurdish. The ironic thing about such a scenario is that it is mainly Turkish products that are overwhelming local manufacturers in the market of Iraqi Kurdistan. But the policy of the KRG seems to be that if you can’t beat the Turks, then join them. Some Turkish exporters have figured out that they can do even better by setting up their factories in the province itself, partnering with Kurds. This would end up giving Turkish products an even greater competitive edge, while employing Kurdish workers and other local resources.     

That is one of the messages brought by Turkish business delegations that are increasingly coming to Iraqi Kurdistan, including the latest arrival in the KRG capital Erbil in mid-January. With a focus on discussing investment in the Erbil area (the manufacturing center of Kurdistan) the high-level delegation included senior members of the Turkish Chamber of Industry and Commerce, as well several company owners. For their part, the province’s officials responded enthusiastically by offering support to Turkish companies willing to develop business in the region under the KRG investment law, which in some respects is more favorable than the regulations that apply in the rest of Iraq. This would also allow Turkish firms to supply central and southern Iraq in addition to Kurdistan, and even to export back into Turkey.

Whatever happens in the case of individual products in this respect, combining the strengths of Turkish industry with advantages offered by Iraqi Kurdistan seems to be a winning combination, which profits both sides and brings them closer politically, while also helping the KRG shed its dependence on oil revenue. 

Riad al-Khouri is senior economist at the William Davidson Institute of the University of Michigan in Ann Arbor, and dean of the business school at the Lebanese French University in Erbil

Riad Al-Khouri is Middle East director of GeoEconomica GmbH