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Thursday, March 05, 2009

Currency Appreciation and the Iraqi Insurgency

I had already linked to this paper (props to IPE at UNC for making me aware of its existence) a few days ago and only got around to truly reading it this morning. Amazing paper. Seriously. Read it! It might very well have no validity, or its underlying thesis might be accurate yet have had no true impact or not a big one, in any case its impact is not measurable. But fascinating concept

The authors argue that the decline in insurgency activity in Iraq (measured by for example the number of American and Iraqi (solider and civilian) deaths) has been accompanied by a strong appreciation of the Iraqi and that the two are in fact linked. Why? The underlying assumption is that the civilian population will be willing to aid (if passively as in not aiding the counter-insurgency forces) an insurgency if they accrue a net benefit through its activities. The insurgents need to provide social welfare to civilians in effect (see Hamas or Hezbollah as examples of organizations that have perfectioned this mixture of guerrilla warfare and social welfare provider). In order for them do this efficiently (and provide a net benefit to the population) the insurgent group needs to receive financial assistance from abroad. If it were to finance itself domestically some kind of a tax needs to be raised and considering the costs of running an organization and the efficiency losses accompanied through the raising of taxes (and even more so of taxes not enforceable through a true government) no net benefit would accrue to the population.

If this is taken for granted, and the argument seems intellectually sound, then the increase in real value of the Iraqi Dinar versus the Dollar (and the Saudi currency which is pegged to the Dollar) had a direct (and negative) impact on the insurgency's capacity to buy hearts and minds in Iraq. This especially in a country where a large number of insurgents simply became such in order to provide for a living for themselves and their families. For the authors this was not a result that the US (or the Iraqi government) expected and had tried to achieve, but simply an accidental by-product of the currency appreciation due to the lift of sanctions and the massive inflow of cash through the American occupying forces.

Evidently it seems preposterous to argue that this was the only reason for the diminution in insurgent activities. The surge, changes in strategic thinking (the Awakening Councils) and tactical measures on the ground (the US forces realizing that peace-making is different from war-making) played important roles. But the thesis of the paper seems valid, important and relevant for a variety of other conflicts as well. Definitely some food for thought.

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