Digging Out: The Business of Progress in Iraq

from WBOC

By David Axe

Some 3,000 U.S. soldiers have been killed and 22,000 wounded in Iraq since President Bush declared war. Estimates of Iraqi civilian casualties run from 49,000 to more than 54,000, although our government doesn't track those figures. The cost of the campaign is running to about $8 billion a month. No one, with a few notable exceptions, believes the war is going well.

But outside Baghdad, where the term "civil war" seems as good as any to describe the situation, there are signs that some tactics do make a difference. Not cordon and search, and certainly not tanks and artillery, but a ground war fought with capital infusions and small infrastructure projects.

It's a tactic British Army Captain Stephen Morte knows well. Stationed until recently in Basra, the teeming city of 2 million in southern Iraq, where unemployment is an estimated 25%, Morte worked to defuse tension between coalition forces and the Iraqi people by offering grants to help create jobs and ease poverty. He was essentially an angel investor in fatigues. And his daily commute was one of the deadliest in the world.

On October 1, the 39-year-old rolled up on one of his latest efforts, arriving in the belly of a cramped Warrior armored personnel carrier, his rifle clutched tightly between his knees. Beside him sat wary young infantrymen whose slack faces testified to 12-hour shifts patrolling this Shiite city where Islamic militias, corrupt cops, and tribal sheiks vie for control.

The Warrior rattled to a halt, and its ramp groaned open before a sagging orphanage flanked by scaffolding and guarded by a surly Iraqi in a plastic chair, an AK-47 on his lap. The infantry scurried out and took up positions.

As Morte dismounted, though, his face softened. He removed his helmet, donned a dark-green beret, and let his rifle drop inconspicuously to his side. Fadil, a lanky Iraqi contractor, emerged from the orphanage, and the two men shook hands and exchanged greetings in Arabic and English.

"Salaam alaikum," Morte said in an atrocious accent. "How are you?"

"Alaikum salaam," came Fadil's reply. "Very well, thank you."

Compared to last summer, when Fadil first met Morte, the 39-year-old contractor was doing very well indeed. Then he was unemployed and desperate for work. On this day, thanks to a deal Morte brokered, Fadil had a $56,000 contract to rebuild this orphanage for the local government, and he employed around 40 people per day for 10,000 to 15,000 dinars apiece. That's between $7 and $10 a day--not bad by Baswari standards.

Fadil beckoned toward the orphanage, eager to show Morte his progress--and just as eager to get out of sight of informants loyal to the militias and death squads who routinely murder collaborators. As the pair began inspecting reconditioned toilets and a gaggle of laborers repainting furniture, the orphanage's imposing matron invited them to an adjacent classroom. When Morte stepped inside, 50 kids in white shirts stood at their desks and sang a song in English that began, "We are orphans, orphans, orphans," and ended in a lilting, "Thank you!"

The matron then took Morte down the hall to a room filled with desks and sewing supplies and explained through an interpreter that the staff had launched a small business providing lessons to around 100 budding seamstresses. They wanted some cash for new sewing machines. "If it provides work and if it's sustainable, it's something we could look at," Morte said. He made a few notes, then headed back to the Warrior. If he stayed too long, he might have drawn fire.

Adventure Capitalist

In his role as a civil-military cooperation officer for the Light Infantry Regiment--one of the most battle-hardened in the British Army, with roots running back to the late 17th century--Morte liaised among Iraqi reconstruction agencies, the U.S. State Department, the British Foreign Office, and Iraqi construction contractors. Drawing from a reported $80 million in State Department funds channeled to the British forces who occupy southern Iraq, Morte sought out ventures most financiers would consider risky at best. During his time in Basra, he gave small infusions of capital--microfinancing, as it's called--to 200 Iraqi entrepreneurs, who now employ around 10,000 Baswaris. Morte hoped to slowly build self-sustaining enterprises, thereby weaning the country from reliance on foreign aid and improving Iraqis' opinions of foreign forces. The ongoing objective is better security and a reduction in the unemployment that, as Morte's commanding officer, Lieutenant Colonel John Bowron, explains it, "puts people in front of a militia recruiter."

At least that's the plan. As a strategy for defusing an ongoing conflict and supporting reconstruction, microfinance is nothing if not experimental. It has been only in the past couple of years that the concept has "gotten a level of visibility" as a major development tool, says Shari Berenbach, executive director of the Calvert Foundation, an investment organization in Maryland that funds some microfinance lenders. And it was only with the awarding of the 2006 Nobel Peace Prize to Muhammad Yunus, founder of the Grameen Bank in Bangladesh, the world's most successful microfinance institution, that the idea became anything like a household word.
Morte believed he could help build self-sustaining enterprises, thereby weaning the country from reliance on foreign aid and improving Iraqis' opinion of foreign forces.Still, microfinance has hardly been a secret in international circles. It has been used in developing countries for decades. And it's a powerful model: Grameen, for example, made its first loan in 1976; 30 years later, it lends upward of $50 million a month to 6.6 million clients--less than $10 a head--and enjoys repayment rates better than 98%. "During an eight-year period, among the poorest in Bangladesh with no credit service of any type, only 4% pulled themselves above the poverty line," according to a report from the Global Development Research Center (GDRC). "But with individuals and families with credit from Grameen Bank, more than 48% rose above the poverty line."

Reflecting that success, the global microfinance portfolio has been growing at 30% annually, the GDRC says, and today there are an estimated 13 million borrowers worldwide, with $7 billion in outstanding loans. (Unlike the old-school not-for-profit/charity lending scheme, the term "microfinance" tends to imply set interest rates and repayment schedules. Some firms keep the interest as revenue; others plow it back into their pool of available capital.)

Aside from some halting efforts in Afghanistan, however, microfinance has rarely been tested in places as dangerous as Iraq. Just 2% of all microfinance has been directed toward Iraq and the region, estimates Isobel Coleman, of the Council on Foreign Relations. And as a percentage of the total postwar reconstruction budget--most of it poured into billion-dollar contracts to firms such as Bechtel and Halliburton (NYSE:HAL) --microfinance funds scarcely register. "Microfinance operations are small scale and long term and not particularly exciting," explains Robert Templer, director of the Asia Program at the International Crisis Group, a nonprofit based in Brussels. "They don't involve great returns to foreign companies that want contracts to build things."

Not that the American taxpayer has been getting a great return on the rest of the $25 billion the government has spent on rebuilding Iraq. Thousands of temporary generators still provide much of Basra's power, and many people throughout the country drink untreated water, if they have access to running water at all. Meanwhile, attacks and neglect have quickly ruined much of what has been built. Baghdad's Kerkh sewage plant, reconstructed at a cost of nearly $6 million, was abandoned in 2004 after insurgents threatened its technicians. That is just one example among thousands. Even successful improvement projects have been subject to sabotage and violence, leading many contractors to devote as much as 22% of their budgets to security. Fadil himself employs an armed guard because thieves have been known to slip in and nab orphans to sell on the black market.

"It is unclear how U.S. efforts are helping Iraqi people obtain clean water, reliable electricity, or competent health care," reads a 2005 report by the United States Government Accountability Office. "Measuring the outcomes of U.S. efforts is needed to determine how they are having a positive impact on the daily lives of the Iraqi people."

Frederick Barton, from the Center for Strategic and International Studies in Washington, DC, says the reconstruction of Iraq has all but ground to a halt. "There's not really new money coming in," he says. "We made a huge assumption that things would get safer and undertook huge projects vulnerable to sabotage. It might have been different if we'd attempted smaller projects in communities."

A Narrow Window

The British military certainly deserves some credit for recently bringing microfinance to the vanguard of the coalition's strategy. But CHF International, a Maryland-based nonprofit, launched the first microfinance program in Iraq in the summer of 2003 and has been quietly working at it, often alone, ever since. CHF operates in crowded marketplaces and on sweltering streets lined with struggling small businesses. Taking money from private investors and the United States Agency for International Development (USAID), the federal agency responsible for nonmilitary aid worldwide, its people work at great risk. They reach even lower than the military financiers do, to the foundation of the Iraqi economy--individual butchers, tailors, barbers, and seamstresses. "Iraqis are entrepreneurial people," says Elissa McCarter, a CHF director in the Washington area. "With access to [finance], they are able to generate a stream of income to support themselves and their families, and, to a certain degree, increase employment for others as businesses grow."

Since May 31, 2006, CHF's Access to Credit Services Initiative has lent more than $43 million to more than 16,000 people in south and south-central Iraq. Kadija Al-Salam, a nurse in the town of Mukaradeeb, is one them. Neighbors often asked Al-Salam (not her real name) to help deliver their babies, and she decided to open a clinic so she could do more. She received a small loan from ACSI to increase the number of available beds to three and to purchase new equipment.

Acknowledging CHF's success and microfinance's potential, James Baker's Iraq Study Group--the brain trust exploring new options in Iraq--recently consulted with Richard Hill, the firm's director of strategic initiatives and analysis. As a rule, though, microfinance is designed to foster slow, incremental improvement in a relatively stable environment. "Not a day goes by that our operations are not negatively affected by the security situation," McCarter says. "Violence leads to work stoppages both for our clients and for our own operations due to curfews, road closures, destruction of client businesses, deaths, bank closures, etc." CHF now relies almost entirely on locally hired staff in Basra; Westerners are just too vulnerable to murder and kidnapping. Even McCarter concedes that the company's efforts are only "scratching the surface" of the problem.

Indeed, it's possible, given the pace of deterioration in Baghdad, that microfinance is simply too little too late. "It's [best] in that initial period after a conflict where you've got goodwill and general acceptance of new ideas," says the International Crisis Group's Templer, who has studied microfinance in conflict zones such as Afghanistan. "It all diminishes very rapidly. If you don't seize the moment, you miss an opportunity."

But Basra isn't Baghdad. The violence here represents a power struggle between Shiite factions rather than the seeds of a Sunni--Shiite civil war. So while to a pessimist, even the most successful Baswari finance operation is irrelevant as long as Baghdad burns, to an optimist, this is the soil in which microfinance might take root and eventually spread.

20,000 Jobs ... and Counting

Morte is one of those optimists. Back in his office after visiting the orphanage, Morte grabbed an envelope stuffed with $30,000 and headed to a decaying park at the edge of the base. There, three Iraqis waited: the son of a dominant Baswari tribal leader, the son's business partner, and an interpreter.

Some months earlier, Morte's commander, Bowron, had resolved to strengthen the British presence in their neighborhood, Qarmat Ali, one of the most dangerous in Basra. But knowing that a frontal assault would have sparked a general uprising, he'd decided to retake Qarmat Ali with a little cash. So he sent Morte out to find the sheik's son and offer him the chance to bid on a contract to rebuild curbs in the town on behalf of the local government--work that required a dozen laborers per day.

With every payment Morte subsequently rendered, he sensed a change. In October, Morte mentioned to the sheik's son, almost casually, that the British Army was thinking of returning to Qarmat Ali: "Will we be welcomed?"

The son touched his chest in a sign of respect. Yes, he said. "The sheiks of the area are very happy, because you've done good work here."

Morte smiled and made a note. The Brits have had their failures, as in a doomed attempt to outfit some entrepreneurs with garbage trucks (acres of accumulated trash often spontaneously combust in the brutal heat), which ended when the collectors couldn't keep the complex trucks running. But Morte saw some initiatives that he was confident would have staying power. A group of his fellow soldiers, for example, has set in motion a plan to revive an entire sector of the Basra economy with an $8 million program--paid for mostly with U.S. money--to plant 140,000 date palms. With luck, the scheme would begin to reverse the damage done by Saddam Hussein, who, while facing rebellion from Shiite tribesmen, diverted the Tigris and Euphrates rivers, drying up 90% of southern Iraq's arable land and forcing many date farmers into poverty. The program could provide long-term employment for 2,000 Baswari farmers and 8,000 laborers, two-thirds of whom were recently unemployed.

And, despite the British Army's announcement in late November that it'll likely begin a drawdown of its forces in Iraq, there seems to be a larger momentum. USAID recently set aside $17 million in seed money for microfinance programs, plus an additional $250,000 to set up a nongovernmental, Iraqi-run organization to provide loans and business opportunities, as well as assistance in training employees. All told, roughly 20,000 Baswaris owe their livelihoods to microfinance efforts--and that number could double in the next couple of years. If the incoming investment were to grow substantially, the totals likely would as well.

Going forward, Morte realizes that most of the programs on the ground in Basra still rely on cash from outside. And he doesn't know exactly where the next pile of it will come from. Maybe Baghdad will pony up. Maybe regional investments from Kuwait and the Emirates will finally start flowing. But that is all above his pay grade. At the time, all he could do was keep his contractors working, with the hope of spawning a few self-sustaining businesses in the process.

After paying the sheik's son and posing a few gently probing questions about Qarmat Ali, Morte returned to his office. He spent a few minutes considering a map of the city dotted with more than 200 colored pins marking the projects he had put together since coming to Iraq. He was scheduled to rotate out of the country in just a month, and he had plenty to do to ensure a smooth transition for the contractors he was keeping in business. His hope, he said, was that they would outgrow the need for the British Army or American money.

With a sigh, Morte turned to his desk where a stack of applications from prospective contractors waited. Scouting, networking, checking references--his was almost the same routine that occupied any financier in the United States or Great Britain.

Then a mortar barrage rocked the base, killing one soldier and reminding Morte that here, the stakes are far higher.

David Axe is the military editor of Defense Technology International magazine, and a regular contributor to Popular Science, C-SPAN, and The Washington Times. His book, Army 101, was published in December (University of South Carolina Press). This was his seventh trip to Iraq since the start of the war.