Ömer Özkizilcik writes for EA:

With their offensive in mid-October, the Iraqi army and the allied Hashdi Shabi militias have taken much of the territory disputed between the Kurdish Regional Government and Baghdad. The Iraqi central government, supported by the militias, has expanded its control over Kirkuk, Sinjar, Syria-Iraqi border crossings, and oilfields.

But even if the offensive had not been pursued, even if the KRG continued to control the controversial areas, an independent KRG will not survive. Popular opinion in northern Iraq might have spoken out in favor of independence, but reality is a harsher judge. Iraqi Kurds can only live under an umbrella of a unity in which the economy is assured.

The private sector in northern Iraq is weak. About 75% of all workers in northern Iraq are civil servants, which makes the state too large and prevents KRG from increasing its economic power. The Kurdish autonomous region in northern Iraq has also been unable to increase its tax collection capacity and the private sector is heavily dependent on public spending. This combination of low tax collection capacity and high government spending fuels high levels of public debt which will make KRG dependent on foreign loans, which in turn will be linked to political demands.

With the tax issue, excessive subsidies, and the dominance of the public sector, a minimal private sector, patronage, and allegations of corruption, the KRG is a classic example of a rent-seeking state. Without an autonomous economic structure and institutional order, the KRG will find it difficult to manage its own population and refugees on its territory. All of this is compounded by the KRG’s dependence on imports, which accounts for about 80 to 90% of goods.

Tourism would be a major source of income for an independent KRG, but it would not be enough to provide a sustainable economy. In 2013, around 3 million tourists visited the KRG, but this number fell sharply due to the Islamic State’s threat. Even if tourist revenues had not been restricted, reaching a target of $1.5 billion in 2015 from $650 million in 2012, this is only a small portion of a state budget that was $10 billion in 2013.

The KRG finds itself in a “natural resource trap” where oil revenues, providing 90% of KRG funds, have prevented diversification of industry. Non-oil production is limited, agriculture is restricted, and banks are underdeveloped.

That trap leads to dependence on Turkey, particularly with the suspension of payments by Baghdad that are 80% of KRG income. About 85% of Kurdish oil exports are sent via Turkey, with approximately 600,000 barrels of oil per day transported to the Turkish port of Ceyhan.

The construction sector in KRG is also heavily dependent on Turkey, with many buildings, roads, and other infrastructure built by Turkish companies. As Turkish President Recep Tayyip Erdoğan has warned, “It will be over when we close the oil taps, all [their] income will disappear, and they won’t be able to find food when our trucks stop driving to northern Iraq.”

The four largest investors (United Arab Emirates, Lebanon, Turkey, and the United Kingdom) account for more than 90% of the investments made by KRG over the last 10 years. Turkey dominates KRG with around 1500 out of the active 3,000 companies, and the UAE, Lebanon, Great Britain, the US, and Germany each have about 100 companies

The weak economy is further shaken by the new security problem. Surrounded by potential enemies, the KRG already has problems in paying for its Peshmerga forces, and it now has to conclude defence agreements without linkage to the future of the Iraqi central government. The impetus of the ISIS threat is now reduced.

The dream of an independent Kurdistan has been dispelled by the attack of the Iraqi army and the Hashdi Shabi militias on disputed areas in northern Iraq — but the dream was never economically sustainable. Whether or not KRG officials understand it yet, Iraqi Kurdistan must always be part of a larger political and economic system.