Monday, May 21, 2007

Steve DeAngelis of ERMB has been posting from (and about) Kurdistan in Iraq the past week while on a visit for Enterra Solutions. Collectively, Steve's posts provide in- depth, on-site, analysis of Kurdistan's present and future prospects with an emphasis on regional and global economic integration, security and systemic resilience; here they are in chronological order:

1. An Overview of Kurdistan

2. Resilience in Kurdistan

3. 3 days in Iraq from the Syrian/Turkish border to the Iranian border

4. Lessons from the Edge of Globalization: 3 days in Iraq from the Syrian/Turkish Border to the Iranian Border

5. Security in Kurdistan

(There were also several other Iraq-related posts "Interagency Feuding Over Iraq Reconstruction" and " Coffee for the Troops")

It would be difficult for me to briefly summarize in a mere paragraph what DeAngelis has impressively written about Kurdistan being on the " Edge of Globalization" in roughly 6000 words. Therefore, I'm going to pick out a number of select excerpts that give the feel of the sum of Steve's observations, followed by my commentary:

"We then headed further west to the border crossing checkpoint with Turkey. We entered a small U.S. military post on the border and saw how this border is managed. Completely full trucks, stretching for miles into Turkey loaded with any product you can imagine are seeking to deliver their products to buyers in Iraq. However, on the opposite side of the border another story unfolds. There is a two week wait (yes, I said two weeks!) for trucks coming from Iraq to cross into Turkey. Along the road are makeshift housing facilities equipped with satellite dishes that drivers can use during their two-week wait along a dusty and dirty road that moves trucks from one holding pen to another as they creep up to the border inspection stations in Iraq and then to their equivalent inspection stations in Turkey....

I'd be curious to know how much of this Turkish inefficiency is explicable due to legitimate security issues with the PKK, how much is due to local corruption, understaffing and incompetence and how much is calculated policy on the part of Ankara to choke Kurdish economic growth.

....Virtually all of the trucks crossing back into Turkey from Iraq are completely empty. If there were robust manufacturing and other commercial business operations in Iraq, these trucks would be full of products to be sold in Turkey and to the rest of the world as they transit through Turkey’s ports. The only kind of trucks that do cross fully loaded are 3,000 gallon tankers filled with Iraqi oil destined for a Turkish power generation facility just over the border. The electricity produced by the plant is sold back to the Iraqi’s at western market rates. What this obviously says is that Iraq has the raw materials but does not possess the production capability to turn oil into electricity and as such pays a tremendous financial and strategic price for this lack of capacity. The net result of this border crossing reality is a Current Account trade imbalance of almost 100% between Turkey and Iraq"

Steve is correct that this ad hoc mercantilist trade scenario is problematic for Kurdistan. Historically, nations that are raw commodity exporters, regardless whether it was cotton, rubber, oil, strategic minerals or foodstuffs end up in a unfavorable position vis-a-vis value-added production trading partners or merchant capital states. This applies whether we are discussing Ptolemaic Egypt and ancient Rome or the Gulf states today and the Core.

One caveat on the negative trade balance issue for Kurdistan would be the financial flows of Black Globalization. Lacking orderly markets and effective governance, ordinary Iraqis rely upon the black market for access to desired luxuries as well as necessities such as medicines or spare parts for machinery. Controlling a long border with Turkey, Iran ans Syria gives Kurdish actors the ability to become middlemen in the flow of goods and money which does not show up on the legal balance sheet. Ultimately, Barzani and Talabani's regional Kurdish government must bring this trade above ground and normalize the economic relationships ( include taxes and customs duties).

"The Peshmerga welcomed U.S. forces and fought side-by-side with them in the effort to overthrow Saddam Hussein. It is estimated that there are between 80,000 and 100,000 active Peshmerga in Kurdistan. As the attached picture of a Peshmerga soldier taken near Dohuk shows (click to enlarge), the Peshmerga are a modern and well-equipped fighting force. The Peshmerga also allow women to serve. This tradition began when the Peshmerga were a guerilla force fighting to make the Kurdish area of Iraq a safe haven. Women also fought alongside coalition forces at the beginning of the current conflict. The attached picture shows female Peshmerga celebrating the fall of Kirkuk. "

The Peshmerga have been a coherent military force(s) far longer than I have been alive. Or Steve Deangelis for that matter. Or probably any of my readers. (The ferocious and mercurial Mustafa Barzani, sire of Massoud Barzani, the Kurdish president and KPD chieftain, was once the darling of American conservatives who hated Henry Kissinger. And long before that, tribal lord Barzani was the protege of... Joseph Stalin ! History has made the Kurds the ultimate realists). Former CIA field operative in Kurdistan Robert Baer put the Peshmerga fighting credibly toe to toe with Saddam Hussein's best Republican Guard divisions during the 1990's. That ain't hay folks. Even in the 1990's decline the Republican Guard was heavily armed and well-trained, despite being hamstrung by Saddam's increasing paranoia.

The Peshmerga are perfectly suited for 4GW warfare as they combine tight military discipline, clan networks and strong primary loyalties with concurrent conventional and guerilla warfare skills. They also benefit from American patronage and a leadership that has proven unusually adept at presenting an image and engaging in politics in the international arena.

"Another new friend, Subbas Sircar, who is the regional vice president of AIG for the Middle east, Mediterranean and South Asia, had an interesting morning meeting with local bankers. They are seeking to expand and strengthen local banks as I discussed earlier. This group craved exposure to current international banking best practices, core banking information technology and know-how that would allow them to connect to the global banking industry as well as the training and education that would allow staff members to raise themselves up to a minimal level of maturity so they can foster commerce in their region. This experience with bankers in Sulaimaniyah and in Erbil, along with the telecommunications companies seeking the same capability in their industry, are proof positive of the need for Development-in-a-Box™."

I think Steve is identifying a critical tipping point for Kurdistan. Leapfrogging the bazaari mentality to create a financial structure that inspires enough confidence to attract and sustain legitimate foreign investment and diversify Kurdish reliance on Turkish capital and American aid would be a milestone. This probably would not mean " best practices" in the sense of Chase Manhattan so much as " best enough practices" relative to the region. " Good enough" is what gets a healthy level of local economic growth going. " Best" can wait for the day the Republic of Kurdistan applies for admission to the WTO and the EU.

Today, Kurdistan is a nation with a virtual state shepherding its interests. More than Hezbollah in Southern Lebanon, the regional government in Kurdistan is less than Taiwan. But like Taipei, the Barzani-Talabani regional government seeks to negotiate or leverage de jure status and the full sovereignty of statehood over the virulent objections of a powerful neighbor and a nervous American patron. Economic development and integration with other global power centers ( EU, China, India, Japan, Russia) will be the key for the Kurds to create a scenario where Ankara can swallow - however bitterly, even with with ironclad security guarantees - Kurdish independence, because it will be in Turkey's economic best interests to do so.


"Kurdistan Rebalancing the Middle-East" and "Iraq Travel Guide" by Chirol

"The Kurdistan Problem: Part I ", "The Kurdistan Problem: Part II", "The Kurdistan Problem: Part III" by midtowing at ProgressiveHistorians

"Response to Virtual Nations Will Shape World Order or Disorder" by Adrienne Redd

"The Rise of the Virtual StateWealth and Power in the Coming Century" by Richard Rosecrance

"Market-state vs. Virtual State" by John Robb

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I've read Baer's account of Northern Iraq. Very interesting, but depressing at the same time.
A very good post by you, and a very good series by Steve.
I'm going to subtly agree and unsubtly disagree with one point.

"This probably would not mean " best practices" in the sense of Chase Manhattan so much as " best enough practices" relative to the region. " Good enough" is what gets a healthy level of local economic growth going." Sadly not all local economic growth actually leads to health.

"" Best" can wait for the day the Republic of Kurdistan applies for admission to the WTO and the EU."

This seems to assume that the WTO and EU practices would be appropriate to a region ridden with conflict and ethnic tensions and now primarily depending on a black economy built wholly on clan or interpersonal trust. Let's not pretend that the choice is between an abstract rules-based regime such as the WTO or EU apply, and a black market economy in which personality and clan relations define all contracts and dispute resolution. An arbitrary path from one to the other could well run into the same problems as the US banking system which has kept its opaque cliques, overly empowered its fulltime managers, and firewalled itself completely from the values of stakeholders.

Given the need to curtail certain types of socially destructive trade (such as weapons or drugs) and the long history of ethical micro-venture capital in Muslim countries (its traditional banking system), it may make more sense to give them EXACTLY what they want:

"This group craved exposure to current international banking best practices, core banking information technology and know-how that would allow them to connect to the global banking industry as well as the training and education that would allow staff members to raise themselves up to a minimal level of maturity so they can foster commerce in their region." This is EXACTLY what they need: "current international banking best practices" in the form of scenario discipline, risk-as-regret measurement and representative effective boards, and "core banking information technology" that calculates expected value based on explicit formulae reconciling many scenarios, including those that violate popular opinion. Read Ron Dembo on this, and read the Basel II Accords. Modern best practices are easily understood and applied by diligent educated people, and a high school education is sufficient to learn to apply these techniques. It is not suitable to write the software, but that can be bought.

Where I subtly agree is in "leapfrogging the bazaari mentality to create a financial structure". However the goal is not to inspire mere "confidence" but actual local resilience. The "legitimate foreign investment" is most likely to flood in from other Muslim countries, and these are most likely to recognize the value of a system that reconciles the old practices of investment based on explicit shared values without debt interest assurances, and the new practices of explicit scenario weighting and regret measurement. In other words, modern banking best practices resemble traditional Islamic economics more than they resemble Chase Manhattan.

Given that profitable but chaos-making influences like arms deals and transport-centric industries unconcerned with what or who they move around would be subject to two extra layers of scrutiny (the investors' values, the scenarios by which investors could lose) in a modern robust banking practices regime, it seems unwise to try to emulate the pre-scenario-analysis pre-ethical-screen practices of the WTO, IMF and most US banks. A volatile region requires more care and thought put into each investment, though it requires it quickly (thus the software assist).

In this case, the Kurds know best, and should get the training and tools to implement a modern risk management regime, which would be effective at reducing not just the risks to direct foreign investors but to everyone in that region and the larger world affeced by it. To foster this general longer-term rational risk-management thinking and reconcile it with traditional thinking about Islamic economics has profound peacemaking potential.

Not least in countries where civil society is stunted and would see a way to influence major decisions by means other than suicide bombs. If you can sit on bank boards, input scenario analysis and vote on values that determine investment strategy, why would you engage in violent insurgencies? If Muhammad would approve of the banking system, why not invest as opposed to insurge? If nothing else this would end the debate about overt Western influence
if both The Economist and the Qu'ran agreed that the banking system did not encourage vices.
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