The vulnerability of Kurdistan’s economy to volatility in the international markets was painfully revealed by last year’s fall in oil prices. Now, almost a year and a half later, it has become abundantly clear that Kurdistan’s dependence on the export of a single commodity as the main driver for its GDP is both economically undesirable and fiscally unsustainable. With the oil price hitting its lowest point in ten years, and no reason to suspect a turn for the better any time soon, the KRG finds itself in desperate need to come up with a comprehensive policy for diversifying its economy and increasing production in the private sector.
This situation is not unique to the KRG and many governments of oil-rich countries currently find themselves in the same position. In addition, history is laden with examples of governments attempting to steer their economies away from resource dependence by developing and implementing large-scale economic diversification strategies. Naturally, some have been more successful than others but all efforts, successful or not, can provide important lessons learned to those pursuing a similar objective.
For example, in Chile, a country home to about 38% of the world’s copper reserves, the government succeeded in steering its economy away from a single commodity and added important alternatives such as wine, timber, fruit and salmon to its main exports, reducing the country’s vulnerability to price fluctuations in the international markets. Historically, Malaysia was heavily dependent on the export of rubber and tin, but through a sustained governmental strategy was able to diversify its agricultural output by including palm oil as a major export product. Moreover, the country has made impressive progress in developing a competitive manufacturing sector, particularly in higher added-value products such as industrial electronics. By the early 2000’s, this manufacturing sector produced over 30% of Malaysia’s total GDP. Finally, Indonesia has a long history in government-led industrialisation, enabling it to reduce its earlier dependence on primary commodities in mining and agriculture.
While the KRG can benefit from the experiences of these countries, it has to establish its own model for recovery in accordance with its unique set of natural resources, economic potential and geopolitics. Nonetheless, the KRG should identify parallels with existing cases and actively seek to get technical assistance from leading experts experienced in implementing such economic reform plans. This should move beyond the mere diagnosis of the infamous ‘Dutch Disease’ and the consequential loss of competitiveness in agricultural and manufacturing sectors. No one needs to explain to Kurdistan the detrimental effects of oil-dependency on the rest of the economy, or the extent of the damage done by the multiple external shocks. But, understanding the problem is one thing and taking meaningful steps to solve it is another.
There are a wide variety of policy-tools available to governments to enhance private sector diversity ranging from tax breaks, subsidies, public procurement and investment, to deregulation, reducing restrictions on investment, import-substituting policies, promoting public-private partnerships and increasing assistance to small- and medium businesses. Some of these tools require an allocation of funds that currently may be out of reach for the government. Others, however, are financially more feasible such as promoting public-private partnerships, implementing import tariffs and facilitating a better investment climate by increasing transparency and improving institutional oversight.
The need for a sustained and comprehensive approach to private sector development in Kurdistan has revealed itself beyond any doubt. Ultimately, what has worked in some countries may not work in Kurdistan and a successful policy-mix should always be tailored to realities on the ground. Nonetheless, the KRG would benefit from an outward-looking approach which draws inspiration from other countries further along in their process of economic reform. These countries can provide valuable counsel and serve as beacons along the KRG’s own path to private sector diversification.
First published in issue 10 of Kurdistan Review by Invest in Group.