BAGHDAD (Reuters) - Iraq has been crying out for foreign investment as violence has ebbed, but the decrepit and loss-making industries on offer are hostage to an army of surplus staff who could turn to militants for work if fired.
Iraq has stuffed factories and other state bodies with legions of extra workers to lure the poverty stricken away from a well-funded insurgency, which has only waned in the last 18 months after more than six years since the U.S.-led invasion.
At a state-owned electrical factory in Baghdad, a maximum of 2,500 workers are actually required, yet only a handful of the 4,370 employees on the payroll were visible in the forest of ancient looking machines in the cavernous factory halls.
Iraq hopes to entice foreign capital to such plants to rehabilitate them and turn them into profit-making ventures, but that could mean the sacking of thousands of extra staff.
"The security situation will go to pieces. The terrorists would employ them. They'd go to someone who would pay them to lay a roadside bomb," said technical services chief Haady Ali.
The U.S. military believes most Iraqis working with the insurgency do so only to earn a living, not through ideology.
Years of war and sanctions have worn down Iraqi industries, and before that decades of Soviet-style socialist economic policies under Saddam Hussein supported loss-making enterprises.
Generations of Iraqis are accustomed to a government run economy in which the state provides for all, and a deep-rooted aversion to Western-style capitalism is part of the culture.
Yet a sharp fall in oil prices from last year forced Iraq to slash its 2009 budget three times, making it unlikely to be able to support a huge public sector indefinitely.
"Privatization won't work. There won't be job safety -- the country must protect its people," said Faiq Marhoum, a worker at the factory for 37 years.
Above the factory entrance, a Saddam-era sign reads: "Those who do not work have no honor."
Due to over-staffing, the average Iraqi state employee works an average of less than two hours a day, Iraq's industry and minerals minister Fawzi al-Hariri said in a July 27 interview.
"It's easy money. They don't have to do a lot of work."
Iraq derives almost all its income from its vast oil reserves, the world's third largest, but this year's slump in oil revenues has highlighted the poor state of non-oil sectors.
Economists stress the need for a larger private sector, but with commercial and tax laws in flux and limited bank loans, cast-iron government jobs make a far more tempting offer.
"Who would want ... the private sector when they can get a free ride with the government train?" Hariri said.
In many state institutions, Iraqi workers seem to do little more than drink tea, smoke and chat, if they show up at all.
Iraq has struggled to move to a more free market economy since the 2003 invasion, and privatization laws are stuck in parliament with lawmakers largely hostile to the plan.
Therefore, Hariri has only been able to offer production sharing deals to foreign investors, with limited success.
Factory workers said it was unfair to blame them for the country's failure to keep production lines going and prevent competition from a flood of cheap goods since Saddam's ouster, when Iraq became a virtual free-for-all for importers.
Hariri said Iraq is planning to impose import controls next year, but warned Iraqis to prepare for painful economic change.
"In an ideal world, everybody wants to stay with the government. They have a job for life, no sacking ... Nobody wants change, but it's a bitter pill everyone has to swallow."
Deputy factory director Salam Saeed said thousands more angry Iraqis with no income would lead to a bitter pill indeed.
"The situation in Iraq does not allow the extra workers to be left unemployed or without a source of income ... The result is known. I don't have to tell you what will happen," he said.
(Editing by Jon Boyle)