Samuel Huntington, co-founder of Foreign Policy and renowned expert on processes of democratisation, once wrote that the principle of ‘no taxation without representation’ was a political demand, whereas the slogan ‘no representation without taxation’ is more in line with the political reality of many countries in the modern world. What Huntington observed was that without taxation, there is little incentive for citizens to demand representation. The Kurdistan Region underlines this point and shows how difficult it is for a full democracy to take shape under the cloak of oil-led economic development.

Taxation has played a pivotal role in the historic development of democracy. In England, the principle of ‘no taxation without representation’ became the rallying cry for the Commons in the late seventeenth century during their Glorious Revolution against the monarchy. The signing of the Bill of Rights in 1689 finally produced a parliament strong enough to constrain the power of the executive. It incentivised political participation and imposed accountability on the Crown, as it now had to solicit the approval of Parliament before going to war, raise taxes or cover other major expenditures. Taxation became based on consent rather than coercion and England’s war with France in the following years proved that people didn’t mind paying more taxes so long as they got a say in what that money was spent on. During the war, England was able to accrue up to 30% of its GDP in tax revenue versus only 12% in absolutist France, giving England a decisive advantage. Consequently, England was the first to combine a Rule of Law, bureaucracy and accountability into one state package. The combination of these three elements produced a state so powerful and conducive to economic growth that it quickly came to serve as a model to be replicated around the world, most notably in the United States.

“It is difficult to conceive how a healthy democracy can establish itself in an economic system where so much depends on ties with the government.”

There is thus an important connection between state funding and state formation, where the level of economic dependence of the state shapes governmental behaviour and determines state-society relations. In that sense, the KRG is different from most other democracies because it relies on oil revenue for over 90% of its budget. These ‘external rents’ are accrued directly by the government, enabling it to fund itself without resorting to taxation of its citizens. The dependence of the state shifts from citizens to international markets, creating a disconnect between society and government which disrupts democratic processes. Normally, the income of the state is dependent on that of its people. In the Kurdistan Region however, the situation is reversed and the income of the people is dependent on that of the KRG. Rather than being extracted from the domestic economy, almost the entire government budget enters the domestic economy only after first passing through the KRG, and the only way citizens can gain access to these rents is through governmental institutions. This gives the KRG an overly central and powerful role in the economy, where its main function is to distribute the oil wealth.

This gives rise to the KRG’s vast network of cronyism and patronage. In the KRG, job creation and civil-servant appointments have become objectives in themselves as governmental pay-checks constitute a vehicle of distribution, quite void of bearing any relation to actual production needs. With over 50% of the labour force employed by the government and over one million people on the government pay-roll, it can be estimated that the income of nearly every family in Kurdistan is to some degree affected by the government. Moreover, even important private sectors such as construction, are heavily reliant on public contracts.

It is difficult to conceive how a healthy democracy can establish itself in an economic system where so much depends on ties with the government. When being critical of the government means one risks a serious loss of income, and loyalty brings quick rewards, the rational choice for individuals is naturally to become co-opted and take advantage of the system, rather than to oppose it. Needless to say, a social contract which enables the KRG to escape accountability in return for providing a salary and services is fundamentally at odds with Kurdistan’s democratic aspirations. Indeed, at this year’s MERI Forum the KRG leadership implicitly recognized this by lamenting weak parliamentary powers and a lack of comprehensive policy development by political parties.

When the oil price falls from over 100$ a barrel to just over 40$, and Baghdad suspends budget payments, KRG’s immense network of patronage begins to shake. Revenues from 2013 to 2014 dropped by more than 50%, while expenses such as salaries, subsidies and services are largely fixed. With no means of diversifying revenue, this quickly led to an 8 trillion Iraqi Dinar deficit in 2014. Consequently, salaries could not be paid and power cuts increase while the KRG struggles to defend its territory and provide services for the influx of IDPs and refugees.

“A social contract which enables the KRG to escape accountability in return for providing a salary and services is fundamentally at odds with Kurdistan’s democratic aspirations.”

So how should the KRG combat the current fiscal crisis? As an immediate step, the KRG must stop the expansion of its patronage network and freeze all hiring in the public sector. With over 700.000 employees, there should be more than sufficient room for internal movement of personnel to cover any vacancies currently outstanding. Secondly, the KRG should increase its efficiency by enacting strong measures against surplus personnel. This means making redundancies and cutting allowances where appropriate. Thirdly, more cuts in subsidies are necessary to align expenditure with revenue. Previous research by MERI shows that people, including IDPs, are willing to pay for services such as electricity if it improves delivery. In addition to these measures, the KRG needs to start laying the groundwork for an infrastructure capable of gathering enough information on the private sector as to improve policy development and extractive capacities for the future. For example, regulating the labour market in the private sector so that fewer people are informally employed.

“Taxation would give birth to a new social contract between government and society more in line with the democratic values which the KRG proclaims to hold dear.”

Ultimately, a structural solution for KRG’s fiscal and democratic deficiencies should be based on revenue diversification. The KRG needs a stable, recurrent source of income in addition to its one-off gains from oil sales. Taxation in the form of commodity-tax, private property or income tax could provide the bulk of KRG’s budget while presenting the government with a constant incentive to increase production in the private sector. Most importantly, taxation would give birth to a new social contract between government and society more in line with the democratic values which the KRG proclaims to hold dear.

* * * * *

About MERI: The Middle East Research Institute is Iraq’s leading policy-research institute and think tank. It is an independent, entirely grant-funded not-for-profit organisation, based in Erbil, Kurdistan Region. Its mission is to contribute to the process of nation-building, state-building and democratisation via engagement, research, analysis and policy debates.

MERI’s main objectives include promoting and developing human rights, good governance, the rule of law and social and economic prosperity. MERI conduct high impact, high quality research (including purpose-based field work) and has published extensively in areas of: human rights, government reform, international politics, national security, ISIS, refugees, IDPs, minority rights (Christians, Yezidis, Turkmen, Shabaks, Sabi mandeans), Baghdad-Erbil relations, Hashd Al-Shabi, Peshmarga, violence against women, civil society. MERI engages policy- and decision-makers, the civil society and general public via publication, focused group discussions and conferences (MERI Forum).