Al-Sudani’s socialist realisation, Iraq’s Economic Reality and lessons from other Socialist States

Prime Minister Al-Sudani recently made an admission: Iraq can no longer sustain its policy of widespread government employment. The apparently new revelation comes amid growing economic pressures from lower oil prices and is a turning point in the Iraqi government’s understanding that a state-controlled economy, heavy in bureaucracy and public sector employment, cannot guarantee sustainable growth or prosperity.

This moment mirrors the experience of many former socialist states, Historically, socialist governments in countries such as China and Vietnam began their journey with centralised economies, characterised by government control over industry, agriculture, and commerce. These nations, much like Iraq today, soon discovered that total reliance on government-driven employment and a state-dominated economy was unsustainable.

China's major pivot came in the late 1970s when Deng Xiaoping initiated a series of economic reforms that allowed for more private enterprise, foreign investment, and a degree of market-driven competition. Deng’s realisation was simple: for China to grow, it had to embrace some degree of capitalism and allow private sector involvement to drive innovation, efficiency, and economic expansion. Vietnam followed a similar path in the 1980s with reforms, that helped private businesses to flourish alongside state enterprises. Both countries retained their socialist frameworks but made pragmatic adjustments that opened the door for a thriving private sector, fueling economic growth and lifting millions out of poverty.

Iraq, which has long relied on oil revenues and government appointments, faces a similar crossroads today. The Prime Minister’s speech suggests a growing understanding within the government that economic diversification and private sector growth are necessary to reduce the country’s dependency on oil and the bloated public sector. However, Iraq’s journey toward such reforms is hindered by a much deeper issue that extends beyond just policy: corruption and bureaucracy.

While Al-Sudani’s call for economic diversification is a step in the right direction, it sidesteps one of the most profound barriers to Iraq’s economic growth: rampant corruption and an inefficient bureaucratic system. Iraq has long struggled with deeply embedded corruption that undermines both public institutions and the private sector. Transparency International consistently ranks Iraq among the most corrupt countries in the world, and the World Bank has cited the country’s bureaucracy as a major impediment to private business operations.

The level of corruption in Iraq dissuades many foreign and domestic businesses from investing in the country. Bribery, nepotism, and extortion are commonplace in interactions with government officials, making it exceedingly difficult for businesses to navigate the regulatory landscape without paying illegal fees. This environment creates significant risks for businesses, reducing their willingness to invest in new ventures, and driving them to other countries with more business-friendly conditions.

Comparatively, Iraq's neighboring Gulf states, such as the UAE and Qatar, have developed robust, streamlined bureaucracies that encourage foreign investment and entrepreneurship. These nations have positioned themselves as global business hubs by creating environments free from the constant threat of government interference or corruption. They have built legal frameworks that protect property rights, established efficient processes for setting up businesses, and offer incentives that make it easier for private businesses to thrive.

In contrast, companies in Iraq face unpredictable taxes, arbitrary rule changes, and frequent delays caused by a convoluted bureaucracy that requires “gifts” or bribes to function efficiently. It’s no wonder that many investors prefer to set up operations in nearby Gulf states that offer a more transparent and predictable business climate. The barriers presented by corruption and inefficient governance are major contributors to Iraq’s economic stagnation, even more so than its dependency on oil or government employment.

If Iraq is to replicate the successes of others in balancing state control with private sector growth, it must address more vigorously the elephant in the room: corruption and bureaucracy. Without total reform in these areas, any attempts to diversify the economy or encourage private investment will be futile.

The first step in achieving this is to improve governance and accountability. Al-Sudani and his government must prioritise anti-corruption efforts that involve transparency, stronger oversight mechanisms, and an independent judiciary capable of holding officials accountable. Further, Iraq must streamline its regulatory environment, reducing the number of permits, licenses, and fees required to start and operate a business, while eliminating the need for bribes to get basic services.

Iraq can take lessons from its neighbours by developing free zones or special economic regions where businesses can operate with minimal bureaucracy, tax incentives, and protections from corrupt practices. This would attract foreign investors while encouraging local entrepreneurs.

Ultimately, while Al-Sudani’s acknowledgment of the limitations of a socialist model is an positive shift in policy, Iraq's long-term economic success will depend on addressing the structural and cultural problems of corruption, nepotism and bureaucracy that have stifled private enterprise for years.

Only by creating an environment where businesses feel secure and confident will Iraq be able to transition from a state-driven economy to one that is driven by the innovation and energy of its private sector.