Dr Saadi is an economic adviser, a former UN employee who worked in a number of Arab countries as a chief technical advisor, a macroeconomist and an investment programmer. He has held senior economic planning and policy posts in Iraq.

Oil Wealth And Socio-Economic Challenges

No one can reject any proposal aiming at improving the living standard of the Iraqis, especially for the 23% of the nation who are living below the poverty line and for easing the hardship of the 8% unemployed plus 15% underemployed of the economically active population.¹ But no one should ignore the fact that Iraq is living only on oil revenues, ie the foreign currency from oil exports that constitute about 98% of total exports and finance government expenditures which dominate aggregate demand, the engine of economic growth. Nevertheless, the task of lessening the high dependence on the oil sector that has been deepening over six decades is a hard one.

For escaping the oil hostage trap, however, government economic policy cannot rely on market forces and a private sector that lacks financial, innovative, and entrepreneurial capacity. Mainly the escape must come from increasing public investment in market oriented state corporations, with the objective of expanding the non-oil industrial production capacities.² In addition, to promote economic growth and stability the state should apply in parallel an economic diversification strategy, which must be guided by overall long term socio-economic development strategy, and to be implemented through medium and short term effective macroeconomic policies. These strategic state goals can only be achieved by visionary leaders with strong political will and commitment.

At present, some Iraqi political groups have renewed the proposal of distributing “part” of oil revenues in cash or in-kind through the current food ration system,³ on the assumption it would help to improve living standards. Is it a constructive proposal or an attempt, on the part of the dominant political parties and the government, to regain some of the faded credibility of the ruling authority and hide its economic failure in rebuilding the infrastructure and preventing the widespread corruption after the fall of the former dictatorial regime? If officially adopted, the move marks a serious economic and fiscal policy departure that necessitates public debate to question whether it helps improve living standards or leads to more waste of oil wealth.

Oil Revenues And Causes Of Economic Failure

Whom should we blame for the current economic stagnation and messy economic policies and measures? This is a viable, persistent, and arguable question that has policy implications in addition to its historical significance. In reply, a glance at past experience would not only help to identify the roots of the existing economic problems, but also highlights the awareness of the “oil rent dependence risk” by the policy makers during the 1950s, 1960s and 1970s.⁴ At present, three groups of views are widely expressed. Post-war officials refer to many factors: the terrorist attacks; the legacy of economic erosion and corrupted institutions of the former regime; the foreign political intervention; and a lack of finance for investment. Others cite inefficient management of the national economy, political instability, the security problem, incapacity of the government institutions, weakness of the banks and financial services, the collapse of public enterprises, lack of entrepreneurial initiatives and business activities, and lack of physical infrastructure as being behind the economic mess. Some also say Iraq has no serious problems and its economic future is bright as long it has oil wealth, and they refer to the “success” of the oil-rentier economies in the Gulf region as a model.

However, for thoughtful policy makers, the “relative importance” of each cause should be assessed in order to find out the required remedy. In practice, it is not helpful to merely point out a wide range of factors behind the prevailing problems. Instead, the role and dynamics of each factor should be identified through a comprehensive and consistent qualitative and/or quantitative analysis that helps to identify the economic policy priorities.

Iraq’s experience shows that the existing acute economic problems are not only the result of the hasty, inconsistent, and irrelevant economic liberalization policies undertaken by the occupation authorities, especially by the famous occupation governor Bremer’s “orders”, and their corrupted practices for the reconstruction of the damaged infrastructure and the provision of electricity and clean water.⁵ There were also the legacies of the last four decades in which the roots of these problems have grown under economic policies and the notorious UN sanctions imposed on Iraq since 1990. In Iraq, the serious socio-economic development efforts began in 1951 as a result of a substantial increase of oil revenues that provided finance for the expansion of public education, health, and social services through the ordinary annual budget, as well as the construction of a number of physical infrastructure and oil refining industry projects through the “development programs” during the 1950s.⁶

Since then, the seeds of increasing the economy’s dependence on oil exports (revenues) have been growing strong roots through the successive increase of government expenditures, especially investment in public sector enterprises during the 1970s. Ironically, while the then Ba'th regime highlights the necessity to reduce the likely risk of high dependence on oil exports in the early 1970s, the risk became real by the end of the decade.⁷ In fact, the call for reducing the dependence on oil has been initiated in the early years of the 1960s, but the successive governments have failed to restrain the fall deeper into the oil hostage trap. It was the result of the exorbitant government spending of the excessive oil revenues vis-à-vis the existing limited physical, institutional and technological capacities, a lack of skilled labor, as well as the restricted and weak role of the private sector.

The symptoms of the hidden economic structural crisis became apparent during the 1980s immediately after the war broke with Iran (1980-88). The introduction of austerity measures then, aimed at cutting expenditures on public services and utilities, freeing foreign trade in essential consumer goods, and the privatization of some public enterprises, had little impact in offsetting the damaging effects of the continuous increase of government expenditures. The structural crisis exploded immediately after the unprecedented UN sanctions, which halted oil exports for seven years.⁸ During this period (August 1990 – May 2003), Iraq experienced extremely difficult economic, social, and political problems. By the end of 2002 GDP per head was estimated at $225, the lowest for five decades,⁹ unemployment and poverty were at historical highs, the basic needs such as electricity and clean water were in short supply, public health and education services fast deteriorated in quality and quantity, and the physical infrastructure in general and oil industry infrastructure in particular were badly damaged. It was the catastrophic consequences of the sudden and sharp fall of oil exports (revenues) coupled with the application of the then chaotic economic, fiscal, and monetary policies and measures.

During the 1950s, while the government observed free market economy principles, they allocated 70% of the oil revenues to finance a number of public infrastructure projects through the “development programs” and the remaining 30% was allocated to finance the annual budgets, ie the government current expenditures. The expansionary fiscal policy was in line with the continuous increase of oil revenues, but the monetary policy was conservative and the interest rate instrument was ineffective. Foreign trade was free and there was no exceptional government intervention in private sector activities. During that period, the essential economic infrastructure and the market institutions were lacking and the private sector activities were small, but they were promising too. Since the early 1960s, fiscal policy has radically changed through reducing the share of investment from oil revenues to 50%, which was allocated for public projects through the “annual investment programs” that were linked to the “five-year development plans.” The remaining 50% of oil revenues was allocated to government current expenditures. At the same time, investment in public sector enterprises had increased and so had production capacities, though with little financial return and low productivity. The change was a result of the adoption of the then popular socialist ideas.

In the 1970s, the application of the vague “Arab Socialist” ideology by the Ba'th party regime benefited greatly from the abundant oil revenues and as a result enhanced the “hidden economic crisis” due to the limited expansion of non-oil economic activities. Nevertheless, the government expenditures led to substantial increases in private consumption including subsidized imports during the period (1974-1980). The increase of oil revenues, especially after the nationalization of foreign oil companies, has encouraged the government to increase even more its spending and imports. But since the existing physical and institutional absorptive capacities were limited, the high increase of the aggregate demand created inflationary pressure that eventually resulted in successive imbalances between price rise and profit rise on one side, and the actual low financial returns of public enterprise and the limited private investment on the other. The imbalances also generated the gap between the wages rise and the higher profit margins. In addition to these imbalances, the then government’s biased socio-political policies in allocating oil revenues among regions, cities, social groups, and even among individuals have widened the distribution gap in income and wealth as well as in the provision of public services.¹⁰

Oil Fortune For Economic Diversification Remedy

At this stage, Iraq needs not only increasing the value added of oil, but equally essential, expanding non-oil industrial production capacity, improving living standards, promoting social progress, maintaining “just” distribution of public wealth, sustaining political stability, and encouraging democratic practices. In addition, by appreciating the environmental and natural resources development and considering the interests of subsequent generations, especially in regard to the depletion of crude oil and natural gas resources, the call for “sustainable development” is more appropriate than to focus the efforts on only economic growth and stability. Unlike the guidance of economic efficiency criteria for the allocation of the tax payers’ money through government fiscal policy, oil revenues – which finance the government expenditures that dominate aggregate demand (the engine of economic growth), employment, and social development – are owned by all “Iraqis” regardless of their individual income and wealth.

The implication of this fact is clear: that the priorities for the allocation of oil revenues are bound to be different from the liberalized macroeconomic policies in developing countries. For Iraq, it is extremely important that the central government, and only the central government, should control the oil wealth and maintain the conduct of the following responsibilities:

• Ensuring the rational and institutional utilization of oil wealth by applying well-defined criteria.

• Increasing public investment in the infrastructure projects and high technology industries in the form of corporations that operate free from political influence and have the initiative, innovation and entrepreneurial skill to fit the free market conditions.

• Practicing democracy that includes the “just” distribution of income and public wealth among all citizens through the annual budget and the public investment projects.

The country’s experience showed that neither the mummified policies of the highly centralized and comprehensive socio-economic development planning and the dominance of rigid public enterprises of the totalitarian former regime, nor the current loose application of the panacea economic reforms and policies of the International Monetary Fund (IMF) and the World Bank, which are strongly backed by US political influence, are relevant to deal with the existing acute economic and social problems. Specifically, the post-Saddam inhomogeneous governments, which are flying blind with the application of non-conditional liberalization policies, have miserably failed to maintain the minimum conditions for economic and social development despite of the availability of abundant financial and foreign currency resources.

The apparent socio-economic and political failure of the government cannot be remedied by distributing part of the oil revenues among the citizens. In Iraq’s reality, there is no room for bribery-like measures or economic liberalization cover-up claims to replace the state responsibility for rebuilding the economy by using oil wealth mainly in expanding non-oil industrial production capacities in the form of market-oriented state-owned corporations, as the main part of the urgently required long term economic diversification strategy.

1. Central Statistical Organization and Information Technology, ‘Iraq Knowledge Network Survey’, Iraqi Ministry of Planning and Development Cooperation of Iraq, January 2011.
2. Central Bank of Iraq, Annual Economic Reports for the years 2007-10.
3. The “fantasy” of distributing oil revenues in cash among the Iraqis initiated immediately after the occupation in 2003 by some foreign concerns which were interested in the privatization of oil industry. The recent similar move by parliament groups that have different motives is still under political consideration. See Almada newspaper, 15 February 2012.
4. For details of the oil dependence issue and the associated growth indicators over this period, see: S Z al-Saadi, ‘Al-Tajribah al-iqtiṣādīyah fī al-Irāq: Al-nafṭ wa-al-dīmuqrāṭīyah wa-al-sūq fī al-mashrūe al-iqtiṣādī al-waṭanī, 1951-2006’, (Arabic); ‘The Economic Experience of Modern Iraq: Oil, Democracy, the Market, and the National Economic Project (1951-2006)’, Dar al-Meda, Baghdad, Damascus, and Beirut 2009.
5. An earlier assessment of those policies was given in: S Z al-Saadi, ‘Iraq’s Post-War Economy: A Critical Review’, MEES, 5 April 2004.
6. Detailed discussions on these policies were given in ‘The Economic Experience of Modern Iraq: Oil, Democracy, the Market, and the National Economic Project (1951-2006)’, Dar al-Meda, Baghdad, Damascus, and Beirut 2009.
7. In 1972, the long term planning commission at the then Ministry of Planning proposed the economic future objectives based on the likely impact of unavailable or reduced oil revenues. But by the end of that decade, dependence on oil revenues has increased. Ibid.
8. As the massive deterioration of the living standards worsened, the UN Security Council established the famous ‘oil for food program’ under which oil exports resumed in 1997.
9. It was estimated that real GDP per head was in 2002 valued at $225, compared with $2,143 in 1980. See S Z al-Saadi, ‘Oil Wealth and Poverty in Iraq: Statistical Adjustment of Government GDP Estimates (1980-2002)’, MEES, 18 April 2005.

10.  Aspects of the socio-economic disparities and corruption are given in: Central Statistical Organization and Information Technology, ‘Iraq Knowledge Network Survey’, Iraqi Ministry of Planning and Development Cooperation, January 2011.