hird, corruption is rampant. One senior Iraqi official estimated that
official corruption costs Iraq $5-7 billion per year. Notable steps
have been taken: Iraq has a functioning audit board and inspectors
general in the ministries, and senior leaders including the Prime
Minister have identified rooting out corruption as a national
priority. But too many political leaders still pursue their personal,
sectarian, or party interests. There are still no examples of senior
officials who have been brought before a court of law and convicted on
corruption charges.

Fourth, capacity is inadequate. Most of Iraq's technocratic class was
pushed out of the government as part of de-Baathification. Other
skilled Iraqis have fled the country as violence has risen. Too often,
Iraq's elected representatives treat the ministries as political
spoils. Many ministries can do little more than pay salaries, spending
as little as 10-15 percent of their capital budget. They lack
technical expertise and suffer from corruption, inefficiency, a
banking system that does not permit the transfer of moneys, extensive
red tape put in place in part to deter corruption, and a Ministry of
Finance reluctant to disburse funds.

Fifth, the judiciary is weak. Much has been done to establish an Iraqi
judiciary, including a supreme court, and Iraq has some dedicated
judges. But criminal investigations are conducted by magistrates, and
they are too few and inadequately trained to perform this function.
Intimidation of the Iraqi judiciary has been ruthless. As one senior
U.S. official said to us, "We can protect judges, but not their
families, their extended families, their friends." Many Iraqis feel
that crime not only is unpunished, it is rewarded.

3. Economics

There has been some economic progress in Iraq, and Iraq has tremendous
potential for growth. But economic development is hobbled by
insecurity, corruption, lack of investment, dilapidated
infrastructure, and uncertainty. As one U.S. official observed to us,
Iraq's economy has been badly shocked and is dysfunctional after
suffering decades of problems: Iraq had a police state economy in the
1970s, a war economy in the 1980s, and a sanctions economy in the
1990s. Immediate and long-term growth depends predominantly on the oil
sector.

Economic Performance

There are some encouraging signs. Currency reserves are stable and
growing at $12 billion. Consumer imports of computers, cell phones,