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Iraqi business begins to boom

BAGHDAD, Iraq—Pepsi is rebuilding its old bottling plant. Mitsubishi is planning a new car dealership. A Kuwaiti firm envisions a $500 million hotel and shopping complex in the heart of Baghdad.

Nearly a year after bombs, tanks and looters wrought devastation on Iraq's already awful economy, the country is teeming with commerce, real and anticipated. Stores are filled with new products, foreign investors are circling, and unemployment—while painfully high—has fallen by half.

"It may not be palpable, but Iraq is booming," said Maria Khoury, chief of research for Atlas Investment Group, a Jordanian investment bank. "We're seeing a big increase in consumer goods flowing into the country."

Though still very low, Iraqi living standards are higher than at any time since the 1990 Gulf War, economists say, despite the ongoing bombings and killings. Oil revenues, which fund the government and its social safety net, are near prewar levels. The World Bank estimates that the economy will grow by 30 percent this year, after shrinking last year.

Like most things in Iraq, however, the economic picture is mixed. The economy remains marred by underlying problems, even leaving aside the security threat, which remains the biggest impediment to progress.

After years of wars, sanctions and mismanagement, Iraq's gross domestic product hovers at $1,000 per person, according to the 2004 Iraq budget—about the same as North Korea's and Mozambique's. That means most people are living hand to mouth with few luxuries.

Unemployment has dropped, but from a high of 60 percent to a still-whopping 28 percent, according to the planning ministry.

Underemployment is chronic. Iraq may have the world's best-educated taxi drivers and waiters.

"All I want is a job in my field," said Musadeq Mohammed, 28, a chemical engineer who earns $200 a month working 10-hour shifts, seven days a week waiting tables at Baghdad's popular Saj al Reef restaurant.

The consumer boom, while real, is the province of a relatively tiny elite. Iraqis who earn the typical wages of $150 per month aren't buying the 36-inch televisions and $20 boxes of Swiss chocolates found in Baghdad's Karada neighborhood.

Glistening new storefronts selling newly available mobile phone service have sprouted around Baghdad, but there are only about 300,000 wireless phones in use in a country of 25 million people, according to the Coalition Provisional Authority's figures. Mohammed, for one, can't afford the $200 upfront cost.

On Wednesday, the Pentagon finally awarded the first contracts in its $18.6 billion, U.S.-funded reconstruction program, which officials say should create hundreds of thousands of jobs for locals. The spending will fix sewage treatment plants, bridges and all manner of broken infrastructure.

But a culture clash has stymied some of the coalition's more aggressive plans for economic revival. After decades of living in a top-down, state-controlled economy that squashed individual initiative, many Iraqis are uncomfortable with free-market capitalism.

"For 35 years, (Saddam Hussein) killed the ambitions of the Iraqis," said Walid K. Issa Taha, the general manager of the Eastern Company for Commercial Agencies, which represents foreign investors. "They are used to getting salaries at the end of the month without any hard work."

The majority of Iraq's 200-odd state-owned factories are white elephants full of outdated equipment. Still, in the fall, the coalition had to abandon its notion of rapidly privatizing those enterprises after heated opposition from Iraq's Governing Council.

Iraqi politicians argued that the beleaguered populace couldn't stomach the inevitable job losses. But those factories, which employ around 500,000, can't compete with the imports flowing from Syria, Jordan and Iran, and they're bloated with redundant workers who are being paid from oil revenues.

But firing workers in a country where unsolved murders occur almost daily presents a special challenge.

"I have 30 percent more employees than I need, but I cannot get rid of them," said Salam Abd Ali, the general manager of the State Company of Leather Industries. "If I do, it could mean a death sentence for me and my family."

The same problems bedevil Iraq's government ministries, in which there are 1.1 million employees, many with little to do.

In early March, a protest by Health Ministry bureaucrats turned into what police described as a riot. The bureaucrats were furious over a plan to make some of them work as security guards at Iraq's dismal, chaotic hospitals, where doctors are routinely threatened.

The Governing Council has also resisted getting rid of a government-funded food ration system, under which the government buys food in bulk, mainly from foreign companies. The policy discourages farming and local food production. Economists say it would be far better to hand out cash assistance, but polls show Iraqis prefer to get the food.

Coalition economists also lament the failure to cut off gasoline subsidies, which allow Iraqis to fill their tanks for pennies. The artificially low prices create scarcity, resulting in long lines at government filling stations and big profits for black marketeers.

Yet the coalition authority can boast of notable successes that U.S. officials argue have laid the groundwork for Iraq's prosperity.

The most important one may have been the changeover last September to new paper money, minus Saddam's portrait. While many postwar countries suffer from hyperinflation and currency devaluation, the Iraqi dinar has gained value against the dollar since last fall.

"Iraqis would not be placing their savings in this currency and buying more of it if they didn't believe in its future," said Olin Wethington, a top coalition economic adviser.

The Coalition Provisional Authority and the Governing Council also passed a new investment law allowing 100 percent foreign ownership in most sectors. It's a rarity in the Arab world, where most countries have local partner requirements that enrich insiders while impeding business.

Last month, three foreign banks were granted licenses to open branches. Coalition officials also have helped write a commercial banking law and a central banking law, and they're working on reopening the Baghdad Stock Exchange.

With American help, the Labor Ministry has set up training centers where Iraqis are taking classes in English and computers, essential skills for employers.

Worried about bombings and assassinations, foreign companies are coming in mainly through local partners. But they are coming.

After watching hundreds of thousands of cars imported into Iraq each month since the war, Mitsubishi Motors announced in January that it would open a Baghdad dealership within two years and has already picked a site.

Because of the Gulf War and the subsequent sanctions, Pepsi had to leave Iraq in 1991 after 40 years in the country. A Baghdad distributor kept the main bottling plant going, making bootlegged products with the Pepsi name. In January, Pepsi announced a deal with that company to rebuild the factory and begin selling the real thing by June. The plant will employ up to 2,000 workers.

Then there's the Sultan Center, which operates some of Kuwait City's biggest malls. That firm is answering a request for proposals by Iraq's trade ministry seeking plans for a shimmering hotel and shopping complex, complete with a modern cinema, in Baghdad's al Monsour neighborhood.

"We think this can be open in two years," said Muthunna Darwish, the Sultan Center's Iraqi-born company representative, who is betting security will be much improved by then. "We see huge potential here."

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(c) 2004, Knight Ridder/Tribune Information Services.

PHOTOS (from KRT Photo Service, 202-383-6099): usiraq+economy

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