Honk! The quiet progress of Iraq.

You can tell things are changing in Iraq by the traffic. Thousands of families have bought used cars from abroad - clogging city streets and boosting smog. Many Iraqi families have been able to afford the cars - and move from poverty to middle-class respectability - because the government has doubled the salary of its million or so workers.

It's a sign that, despite the daily mayhem caused by the insurgency, Iraq's economy is quietly gearing up from its war-time low in 2003. How quickly it's picking up speed - and whether the momentum is adequate to dampen the insurgency by providing jobs for idle Iraqi men - is hotly contested. What's clear is that oil alone won't turn the tide: Small business and manufacturing need to revive.

Iraq's economy has expanded 40 to 50 percent this year from war-depressed 2003, says Alan Larson, undersecretary for economics in the US State Department. He predicts double-digit growth in 2005.

Rapid growth after a war is nothing unusual. What's key is whether it's sustainable.

The economy "is not as catastrophic as one might read from the newspapers," says an international expert who requested anonymity. "People are going about their lives. There is reconstruction at the household level. There is a lot of activity going on."

Others are less optimistic.

Remove the output in the Kurdish areas of Iraq, where the insurgency has not disrupted production, and the national growth figures would be dramatically lower, maintains David Phillips, a senior fellow in New York at the Council on Foreign Relations.

"Petty" business, trading in goods and services, has been revived, says Mr. Phillips, who was a State Department adviser to its Future of Iraq project before resigning in protest because of the administration's Iraq policy. But because of the uncertainties in Iraq, he wonders if foreign investors will pour in money.

Phillips sees unemployment in Iraq at around 50 percent, up to 80 percent if under-employment is included.

Official numbers put unemployment at about 25 percent.

"We are in need of creating jobs," admits Hilal Aboud al-Bayati, economic adviser to interim Prime Minister Iyad Allawi. He says the government is giving Iraqi contractors several smaller projects for roads, sewage, and water supply that should create more jobs.

The speed of growth is crucial. Economic progress is "too slow" to reduce unemployment enough to have much impact on the insurgency problem, says Michael O'Hanlon, an economist at the Brookings Institution in Washington. Outside the oil sector, "not much is being produced."

Under Saddam Hussein, Iraq's economy was an extreme form of socialism. For example, the 61 major companies under the Ministry of Industry accounted for 90 percent of the nation's industrial production.

Because of Iraq's technological isolation for more than a decade and war and looting damage, many state-owned firms have not fared well since the occupation opened up the Iraqi economy to foreign competition. "Most have been destroyed or crippled," says Dr. Bayati.

Their plight hasn't been helped by Iraq's standard 5 percent tariff, which has thrown the doors open to imports for Iraqi consumers but has done little to protect domestic industry.

In the next few weeks, the interim government hopes to classify these state-owned companies in three ways, Al-Bayati says. Some will be sold to the private sector, and some partly privatized. Others will remain owned by the government.

Subsidies will also be cut. The public pays about 1 cent a liter for gasoline (4 cents a gallon), which costs the government 30 or 40 cents to deliver. The monthly subsidy has risen $80 million to $200 million. That subsidy will be cut to "about zero," Bayati says.

The government, he notes, is also working to cut the cost of a food basket provided to every Iraqi family - a system stemming from the international sanctions against Iraq in the 1990s. Instead, the government will give money, rather than actual food, to the poor in Iraq - and not to the 30 percent or so of better-off families able to afford their own food.

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