Economic Changes in Iraq

An oil rig drilling a well at sunrise near Midland, Texas

 

In 2003, as a result of the US intervention against the Saddam regime, real GDP growth collapsed by 40 percent, increasing, from that time, at rate of 6-8 percent per year. This early trend has, however, witnessed a drastic reduction during the economic crisis of 2008-9 and the drop in oil prices in 2009 and in 2014-2015. The results of the initial fall in GDP growth followed the US intervention against Saddam Hussein in 2003 can be explained by the amenities of war and the resulting civil conflict, as well as by the associated collapse of oil production and exports. A situation of low oil prices occurred in 2009 (set approximately at 60 US$ per barrel) and in 2015, creating serious difficulties for policy-makers in financing social welfare and reconstruction programs. Despite efforts at structural adjustments, the country remains in all its parts an oil-based economy with well-known problems related to bureaucratic and political mismanagement. I described this: oil-led state-captured capitalism. In 2012, the oil revenues of Iraq accounted to approximately 80-90 percent of total revenues, whilst taxes amounted to only 2 percent (World Bank 2014, pp. 5-8). As Huntington (1991) has correctly emphasized, this has posed serious problems in terms of democratization and system stability, as the lower the level of taxation, the lower are the chances of citizens to ask for genuine representation. In the words of the author, ‘no taxation without representation’ and ‘no representation without taxation’ is possible (Huntington 1991, p. 65). In absence of a clear involvement of citizens in financing their own democracy, electoral requests become easily a gift of the political elites to ‘their’ citizens (Diamond 2008).

The significant increase in oil prices and oil production over the past years has significantly improved the chances for redistributive policies. Between 2004 and 2012, oil production and exports have grown from 2 million barrels per day to 3 million barrels per day. This increase in production has been sustained by the past increase in oil price cycles, which have helped to support the recovery of the Iraq’s economy (World Bank 2014). How will the situation be in the future due to vulnerabilities to low oil price cycles is still unclear.

As it happens to every country subjected to war, Iraq witnessed an initial drastic drop in GDP and a massive loss in employment (see Przeworski 1991). In 2012, overall unemployment rates corresponded to 18 percent and youth unemployment to 30 percent. At the same time, women unemployment was close to 30 percent. Though oil production and exports remain important sources for the Iraq’s economy, they have, so far, not contributed much to increase overall employment rates. Approximately 58 percent of the employed persons in Iraq work in services, 23 percent in the agriculture and the remaining 18 percent in the industry (World Bank 2014, p. 10). Due to the presence of a large number of employed citizens in the service sector, Iraq labor market continues to be subjected to a high dependence on state bureaucracy, exacerbating the system of clienteles (World Bank 2014, p. 18). This form of state paternalism, which has been exacerbated by the Saddam regime, has been accompanied by the adoption of the pay scale in 2004 that has raised the salaries of government employees exponentially, constituting an unsustainable burden for the state budget. The salaries of government employees are, in fact, between four and five times higher than the ones in the private sector, contributing to state capture, false loyalty to the regime, and clientelism. The presence of an extremely high wage bill is another problem affecting the Iraq’s labor market and the Iraqis industrial sector, more in general (World Bank 2014, pp. 23-25).

In 2014, the Al-Maliki government decided to sign new contracts with international companies and,  by so doing, attempted to break the monopoly of the state-led national oil companies: the North Oil Company and The South Oil Company. The aim of these decisions was to diversify and to denationalize oil production and distribution, and, at the same time, to increase the production at 12 million barrel per day. This liberalization strategy has been implemented by the KRG in a more determined way, speeding up the process of trade barriers removal and international involvement, with the goal of increasing oil exploration and extraction (World Bank 2014, p. 12). Revenues from oil and gas go directly into the Development Fund for Iraq, but the Fund has so far proved to be ineffective to meet the country’s real development aspirations (World Bank 2014, p. 19)[1]. As Collier (2007) has correctly emphasized, the presence of oil and gas has often the consequence of increasing internal battles and conflicts for the acquisition of resources and power (see also Justino 2010; World Bank 2014, pp. 19-20).

 

 

[1] The price of oil is set by the State Oil Marketing Organization and it is usually based on the Saudi price. For reasons of prudence, the planning forecasts of Iraq’s authorities are set at approximately 60-70 US$ per barrel.

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