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Battling unemployment in Iraqi Kurdistan:

How entrepreneurship can fix some of the problems

   

Kurdish Herald Vol. 2 Issue 1, February 2010 -

by Aryan Pedawi

 

Unofficial estimates place the unemployment rate in Iraqi Kurdistan right around a daunting 50%, where most people would conclude that the glass is half empty. Highlighting more economic weakness, the U.S. Department of State’s latest Human Rights Report on Iraq cited that the national minimum wage in Iraq is under 10,500 dinars per day for skilled workers and under 5,250 dinars per day for unskilled workers. At the time of the 2008 report, this translated to roughly $7.00 and $3.50 per day, respectively, with the average worker earning a meager salary of approximately 1.875 million dinars ($1,250) a year.

 

The notion that Iraqi Kurdistan is, at the moment, economically weak is not in dispute, but the policies being suggested to fix this problem are. Some say that the government should do more to help the working class earn a wage that provides a reasonable standard of living, while others say that government action would only deepen the structural instability. But there is too much talk over what the government can do and not enough talk over what the market can do.

 

Iraqi dinars. Photo Courtesy Raving Barwari © Kurdish Herald 2010

 

To the Kurdistan Regional Government’s credit, they have done a lot to motivate and pave the way for businesses to create branches in the region, but they have ignored a principal component of a country’s economic machine: entrepreneurship. It is not enough to promote policies that encourage already established businesses to expand their operations into Iraqi Kurdistan when there is an abundance of innovation and ingenuity within the region’s own borders that goes largely ignored and unutilized. The developed world has learned the hard way that one of the most effective methods of increasing employment is to allow people to employ themselves to do work in areas where they have the market-determined ability, and Iraqi Kurdistan has all of the ingredients for this recipe. The government has the responsibility of ensuring that the right economic policies are put in place to help these individuals get the most important thing they need to start their businesses: capital.

 

But doing so is easier said than done. In today’s credit-tight global economy, only those with the best credit scores get the consideration for the scarce, available capital. This creates a cycle where the only people getting the money needed to invest in new profit-generating ventures are the ones who have already created successful businesses before; the same socioeconomic situation that led to the Carnegies and the Rockefellers of America’s past. It’s a barrier for the up-and-coming businessperson who is seeking a small loan to get the equipment they need to start their own barbershop, repair shop, or plumbing service, and inevitably pulls us in the direction of a rich-or-poor system, where the middle class is virtually non-existent. To reverse this, capital needs to be more equitably distributed, but in a way where it is used in a productive and non-wasteful manner.

 

But up until just recently, the lending that banks had been doing was minimal compared to what was needed to jumpstart the economy. The widespread fear that the global recession had instilled into financial institutions made them wary of extending credit to anyone, good credit score or not.


New buildings seem to be going up on a daily basis in the Iraqi Kurdistan capital of Erbil.

Photo Courtesy Raving Barwari © Kurdish Herald 2010

 

This creates a classic supply chain problem: what needs to be done to get money to the banks, and how does one begin to motivate them to start giving it out in the form of loans like they’re supposed to? This is a multi-faceted issue, and even some of the most thoughtful solutions to this conundrum fall apart because of the difficulty involved in forecasting the behavior of individuals. Take the U.S. recovery policy, for example: keep the interest rate at essentially 0%, making borrowing incredibly attractive to credit-seeking individuals and institutions, and rejuvenate the banks’ reserves through open market operations and the Treasury Asset Relief Program, which removed bad debt from the banks’ balance sheets and appropriated money to financial institutions that needed it. Sounds good, right? The problem is that banks were too afraid to lend out this money because of legitimate concerns that they could not reasonably expect to be paid back in a timely matter (or at all). What had been observed was that these institutions were essentially hoarding money, and only recently has it started to flow through the U.S. economy, making the recovery sluggish in pace.

 

The beauty of the market is that, sooner or later, the irrefutable laws of supply and demand will kick in. With low interest rates, capital is in huge demand. Investing in property, plant, and equipment is expensive, and a bulk of the funding is done through the acquisition of loans. With a large number of people seeking to borrow money, banks begin to recognize the profit potential from loaning, the gridlock comes to an end, and people who want loans can start looking again.


But not every person who wants a loan can get one, and the proportion of people who cannot get them happens to be concentrated on the poorest segment of the population. This is where microfinance can be of assistance. Microfinance involves extending the access to financial services to low-income and poverty-level individuals through lending and saving programs designed to fit their needs. The idea proved its viability when Muhammad Yunus used this banking philosophy to start Grameen Bank in Bangladesh, which gave small loans, called microloans, to those deemed unworthy of credit by some of the bigger banks in the area. Grameen is now a multi-million dollar company, and Yunus has been awarded the Nobel Peace Prize for the work he has done to eradicate poverty through the use of the free market.


As mentioned earlier, microfinance is not limited to giving out loans. The concept of microsaving, in which people in low-income and poverty-level brackets can invest their money into a special kind of savings account that pays higher-than average returns, is a branch of microfinance that is being explored by existing microfinance institutions and some of the bigger banks that see potential in this growing market. Many, such as Yale University economics professor Dean Karlan, prefer microsaving to microlending on the basis that the saver reaps the benefits of the interest rate, whereas the borrower is the party that is burdened by having to pay for the interest rate.


An unintended, but positive, byproduct of microfinance is the observed effect it has on the family structure. When implemented in Bangladesh, a majority of the loans went to women. Because these women were now earning money for the family, they had more of a say in household decisions. The World Bank found that women who were working because of microfinance programs like those offered by Grameen Bank were less likely to be the victims of domestic abuse. The circulation of this news led to more and more women seeking microloans, furthering economic growth and producing socially important results.


That brings me to the point: some of the most tremendous creations and reforms of our time – be it in the sciences, the arts, or the structure of our society – were the product of individual genius, not of government craftsmanship. People in Kurdistan can achieve important social goals without having to go through Erbil or Baghdad, and it’s time that they started realizing this. The return of Kurds from the Diaspora brought a wealth of human capital to the region. These individuals are well-educated, well-travelled, and well-meaning. They have all come back to make a lasting difference in a region where self-governance has been long overdue and where the chains that have so long-restricted the productive capacity of the region’s inhabitants have been lifted.

 

But where is Kurdistan’s Muhummad Yunus? For Kurdistan, change is knocking at the door. Kurdistan just needs to be willing to welcome it in.

 

Nobel Peace Prize Laureate Professor Muhammad Yunus. Getty Images.

 

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