One of the most fought over territories on earth, Iraqi Kurdistan had suffered at the hands of Saddam Hussein’s chemical weapons long before the appearance of the murderous Isis. Its cities are now dotted with half-completed hotels and apartments – economic prosperity is a fantasy. The perceived incompetence and greed of Kurdish leaders tarnishes their success against Isis. And bitter experience makes the Kurds suspicious that they will be used as cannon fodder and then discarded.

Hundreds of family members dressed in black were gathered this week at the Hamasur mosque in Sulaimaniyah, in eastern Kurdistan, to mourn 10 relatives who drowned when their boat capsized between Turkey and the Greek island of Samos as they tried to reach Europe.

All the dead came from Halabja, the city where up to 5,000 people were killed in a poison gas attack carried out by Saddam Hussein’s forces against the civilian population in 1988. “We only decided to go a week before we flew to Istanbul and paid a smuggler $2,500 per person to get us to Greece,” said Sardar Hama Rashid, a waiter in a restaurant whose wife and daughter were drowned on the crossing. He was tearful and looked stunned by what had happened. A relative, a retired truck driver called Omar Hama Amin, said the reason so many Iraqi Kurds were trying to get to Europe was “not because of the war but the economic disaster here”.

Iraqi Kurdistan is one of the most fought-over places on earth and the use of chemical weapons in Halabja was only one of the more atrocious massacres inflicted on its people over the past century. Mass graves filled with the bodies of men, women and children murdered by Isis have been unearthed weekly since the Kurds recaptured the city of Sinjar from Isis last November. But the initial terror when Isis attacked in August 2014 is over and the Kurds, helped by US air strikes, have retaken most of the territory they lost at that time. Isis can still launch surprise attacks, but in general it is the Kurdish Peshmerga who are slowly advancing.

Though the outside world is well informed about the savage war being fought between Isis and the Kurds, there is much less awareness of the economic calamity that has devastated the Kurdistan Regional Government (KRG) and the disputed territories it has taken from Isis and the Iraqi government. The disaster stems from three main causes: the Kurdish leadership’s quarrel, since 2014, with Baghdad over oil exports, which led to the Kurds no longer getting a share of Iraq’s oil revenue; the rise of Isis and its capture of Mosul; and the fall in the price of oil sold independently by the KRG, which is today only $21 a barrel.

Some 1.4 million Kurds out of a total population of six million work for the KRG or receive benefits from it. But over the past two years they have been paid only part of their salary or no money at all. Government expenditure is estimated to be $1.1bn a month and revenue only about $400m. The skylines of Kurdish cities are dotted with half-completed hotels and apartment buildings, their concrete shells sometimes housing displaced people and refugees.

The slogan of only a few years ago about KRG becoming “the new Dubai of the Middle East” sounds today like an absurd fantasy amid the general economic ruin. “Nobody has been paid for five or six months,” said Mr Amin, explaining why his relatives had made their disastrous effort to get to Europe. “I rent a house but there is no way I can pay for it.”

Anger runs deep at what is seen as the incompetence and greed of the Kurdish leaders. Asos Hardi, editor of the independent newspaper Awene, said: “You can feel the anger in the streets over government corruption.” When he investigated and exposed the theft of $18m three years ago, he was badly beaten up by thugs sent by the government official whom he had accused of taking the money. He said that many people blame the government for trying and failing to turn Kurdistan into an oil state independent of Baghdad. Agreeing with this, a Western oil expert said that “the KRG made a gigantic bet on a high price for oil and they have lost”.

The high expectations among Kurds in the decade after the overthrow of Saddam Hussein shattered as their standard of living collapsed even more precipitously than the Greeks after 2008, and from a much lower level. But it is primarily an economic rather than a security disaster because, paradoxically, the Iraqi Kurds are politically and militarily stronger today than they have ever been in their history – though this may not last.

This is the view of a renowned Peshmerga (Iraqi Kurdish soldier) commander, Muhammad Haji Mahmud, a large landowner in the fertile valley between Sulaimaniyah and Halabja. He is also the general secretary of the Socialist Party, and reckons that he has been in 700 fights or battles over the past 40 years of warfare in Kurdistan and has been seriously wounded six times. After Isis captured Mosul and before they attacked the Kurds, he led 1,000 Peshmerga from his party to defend Kirkuk. His son Atta was killed in the fighting.

In an interview with The Independent in his house, he says that, overall, the Kurds have gained more than they have lost in their struggle against the self-declared “Islamic State”. He lists the benefits: “We have become a regular army, rather than a guerrilla force; are supported by US and European air power; can buy weapons openly; and are praised internationally for fighting terrorism. The Syrian Kurds won the battle for Kobani and we sent 150 Peshmerga to help them. While, in Iraq, we became a safe haven for Arabs and Christians.” The KRG took advantage of the collapse of the Iraqi army in 2014 to expand its size by 40 per cent through seizing areas, often with mixed Arab-Kurdish populations, control over which had long been disputed with Baghdad.

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The danger is that these big political and territorial gains depend on the Iraqi government being weak and Isis strong, so the Kurds are courted by all as the best defence against Isis. World leaders treat the KRG as if it was a world power rather than an isolated quasi-independent statelet. “My big fear is that, once Mosul is liberated and Isis defeated, the Kurds won’t have the same value internationally,” said Mr Mahmud. He believes that, with international support, the Kurds “may keep the disputed territories, but not otherwise”.

Bitter experience has made the Kurds suspicious that, once again, they will be used as convenient cannon fodder by outside powers and then discarded when no longer needed. There is also a popular suspicion among Kurds, again rooted in harsh experience, that their leaders can justify and prolong their authoritarian misrule by presenting themselves as the patriotic defenders of their people, diverting attention from their corruption and failure to create a self-sufficient state in Kurdistan.

A striking example of just how much resentment bubbles beneath the surface, though obscured by patriotic flag-waving, is the Halabja Memorial Museum. It is a peculiarly ugly building, like a concrete circus tent, but inside there is an affecting display of photographs, household goods and children’s toys, evoking the terrible events of 16 March 1988, when the poison gas cloud enveloped the unsuspecting town.

It is not obvious to the first-time visitor, but the museum in Halabja today is in fact the second to stand on this spot. The first, more garish, folkloric and less effective than its successor, was burned out, though the concrete walls survived, during a demonstration by locals in 2006.

The remarkable destruction of what was supposedly a memorial to the mass murder of their own relatives was an expression of local outrage that Kurdish officials had repeatedly taken American and other foreign dignitaries to the museum, but had completely ignored the grim living conditions of those in Halabja who were still alive.

Ten years after the burning of the museum, the same rage is building up, not just in Halabja but across Kurdistan, against a government that provides security but is otherwise self-serving and dysfunctional