BAGHDAD, March 11 (Reuters) - International Monetary Fund (IMF) and World Bank insistence that Iraq cut industrial subsidies in return for aid has stifled economic growth and fuelled unemployment, the country's vice president said.
Vice President Tareq al-Hashemi, who heads a presidential economic committee, praised IMF and World Bank efforts to reduce Iraqi debt, but said steps to discourage subsidies for local industries had led to unemployment that could fuel instability.
Iraq, where the state set prices and restricted trade for decades, has opened its borders to a flood of cheap imports and scaled back industrial subsidies and support since U.S. forces toppled Saddam Hussein in 2003.
Unsubsidised Iraqi manufacturers and farmers now struggle to compete with cheap foreign products, some coming from countries nearby which subsidise their own industries, Hashemi said.
The lack of demand for relatively expensive Iraqi goods depresses demand for local labour, adding to the country's legions of unemployed who have proven a fertile recruiting ground for extremists in the past.
"The deterioration of domestic production has affected demand for workers, and this has had an effect on security," Hashemi told Reuters in an interview on Wednesday.
"The policy of (the World Bank and IMF) is that the economy must be 100 percent left to the private sector, and the state has no input ... Our industry is an infant one and needs support," he added, making a case for state subsidies.
Iraq is emerging from years of conflict, but the drop in violence has coincided with a drop in oil prices that has squeezed its budget -- crude sales account for almost all Iraqi income -- and laid bare the poor state of its other industries.
The IMF has worked with the Paris Club group of creditors to cancel 80 percent of the roughly $38.9 billion Iraq owed them, and the World Bank has worked on educational, health and reconstruction projects in Iraq.
The IMF and World Bank are currently working with Iraq to modernise its public financial management system, and Baghdad will soon decide whether to seek a second lending facility, or standby agreement, with the IMF.
The institutions' worldwide promotion of free markets and a more streamlined public sector has boosted growth in some cases, but critics say such reforms come at huge social cost and often do little to improve life for ordinary people.
"I'm not saying we should go back to the old economy ... Our problems are unique, and we need a unique solution. We could take a recipe between a directed economy and the free market," Hashemi said.
His call for more state control in Iraq's economy comes as Western nations pour money into their banking industries and some manufacturing sectors to safeguard homes and jobs in the wake of the global credit crisis.
Hashemi said he had called for an economic summit in Baghdad on March 22 to review Iraqi economic policy, and that IMF and World Bank representatives were invited. (Writing by Mohammed Abbas: Editing by Ron Askew)
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