The impact of the insurgents and criminal elements in Iraq may have significant consequences beyond their direct actions. By creating an unstable security situation while at the same time increasing the profitability of the hawala system, their actions are retarding the development of the formal banking system.

The current wave of crime and insurgent activity creates, and is in turn supported by, an increasingly sophisticated criminal economy. Despite the many problems, there are encouraging signs that progress is being made against the insurgency.

The key is to get economic growth moving, allowing the authorities the breathing space to jump-start the reform process. If the lessening of insurgency activity allows the often postponed massive infrastructure reconstruction projects to finally begin, this would have a major impact on the economy. As the shadow economy contracts, increased transparency makes official corruption more difficult. Losing its political accommodations, a crime-based insurgency would lessen, as more Iraqis would have a real stake in moving the reform process along.

There is another, less pleasant alternative. Even if the insurgency lessens, if unemployment remains high, then the shadow economy and the criminal infrastructure that nourishes it will continue to grow. So we neglect the economic roots of the Iraqi insurgency at our peril.