The latest Economist has an interesting piece on Iraq’s growing private sector, which may have all the potential in the world, but is untested, and also exists on shaky political and social ground. “Under Saddam Hussein’s dictatorship, the state controlled everything from interest rates to jobs at the bloated state-owned enterprises (SOEs) that dominated the economy.” However, since the regime’s fall, production in many of these enterprises has fallen to 10% of capacity or less. The task now is “to find companies and investors to put capital and know-how into Iraq’s SOEs and private firms” and get the economy running again.

The scheme has already notched up a few successes. Take Iskandiriyah, a manufacturing town. The Task Force arrived in late 2006 to restart the many factories once run by two SOEs there. Today they are producing machine parts, trailers and machinery for the oil industry. Case New Holland, a maker of construction equipment owned by Italy’s Fiat, began assembling farm tractors in 2007. In total around 5,000 Iraqis are back at work in Iskandiriyah’s two SOEs. The town is considered stable.

The Task Force also helps smaller investors put capital to work in Iraq. Consider the Marshall Fund’s $6m investment in the Harir tomato-paste factory, for example. Iraq imports $100m of tomato paste a year, even as its tomato farmers let their excess harvest rot on the vine, because Iraq has no way to turn tomatoes into cans of paste. The Marshall Fund’s investment in a tomato-processing plant not only gives factory workers a job, but gives tomato farmers a bigger market and shopkeepers a locally made product. “And because we expect to make a solid return—it’s a win, win, win, win,” says [Dan Rice, founder of the Marshall Fund, a private-equity fund that makes only non-oil investments in smallish firms in Iraq, along with Wayne Culbreth and Andrew Eberhart].

The piece mentions that in 2008, foreign companies invested $910m in private Iraqi joint-ventures. That number is bound to be affected by the global credit crisis, though perhaps by not as much as some might suspect. What draws investors to a situation like Iraq is high-yields and the perception that a first-move in such an illiquid market will pay handsome dividends in the future. Especially as the Republic continues to settles outstanding debt with creditor governments, its bonds may look enticing. That said, the country’s economy is still largely dependent on oil revenues, which have dropped appreciably during the global crisis, and there will likely exist an appreciable lag period until foreign donors can ignite the private sector and Iraq. Yet there is growing cause for optimism. This past week, for example, Reuters reported that “Islamic banks in the Gulf and Asia are starting to position themselves in Iraq to enable them to penetrate the relatively untouched market once the security situation improves.”

“It is simply a function of the political and military situation,” Boston Consulting partner and managing director Knut Storholm told the Reuters Islamic banking and finance summit in Dubai, citing a spike in interest among banks in the Gulf and Asia. “In the last 12 to 15 months there have been decisions made about opening representative offices in Iraq. The strategy is to be able to have established a presence in the country, so the moment the country starts to grow again you are on the ground,” Storholm said.