By Sabri Zire Al-Saadi

Mr 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.

Deep Economic, Social And Political Trap

For decades, the Iraqis have agonized over political oppression, restricted liberties, economic difficulties and a lack of social welfare. Since the occupation on 9 April 2003, Iraq has been plunged into a vicious circle involving economic failure, the misuse of oil wealth and political disturbances as well as the endurance of enormous human suffering from the savage terrorist attacks and insecurity. The result is a mounting social discontent, which is an alarming phenomenon warning of the potential for a nationwide storm. Although it is very hard to predict the tipping point for such a storm of extraordinary social upheaval or even the rise of revolutionary movements, it is possible to identify and assess the size and impact of the factors behind the prevailing restlessness among the majority of the people. One of the main causes of Iraq’s problems is the unconditional and unproductive use of oil revenues by the governments.

In the past, misuse of the oil fortune was a basic factor behind the rise and fall of Saddam’s dictatorial regime, which produced the catastrophic political, economic and social crises that resulted in foreign occupation of the country, foreign intervention in domestic affairs and the penetration of foreign terrorists and extremism in society. At present, the misuse of oil earnings has also been a basic factor behind the current interwoven political mess, the economic deterioration, the terrorist attacks and security problems that caused the prevailing social miseries. In both periods, the growing seeds of widespread corruption were also rooted in the misallocation of the “exorbitant” government spending of oil revenues. Significantly, the main common factor of the past and present experience is the misuse of public oil wealth.

While liberties were heavily restricted during Saddam’s era, the regained precious freedom and the hoped for democracy of the post-war period have been mitigated by the reckless and backward policies of the dominant political parties, which broke the promises made to the voters in the two successful general elections that showed the citizens deep belief in democracy. The rise in political and economic problems and the deterioration of living standards have been dealt with by the governments through the use of oil revenues as an instrument to extinguish ‘bush fires’, but will harm the socio-economic development prospects of Iraq in the longer run. Specifically, if the misuse of oil revenues continues through the current inconsistent, partial and unproductive economic policies and measures, the existing costly and painful economic, political and social trap becomes wider and deeper.

The Economic Irony

There are two distinguishing ironical aspects that characterize the existing chronic economic problems, ie the prevailing economic failure vis-à-vis the oil wealth potentialities, which can be summarized as follows:

• The sluggish economic growth, especially of non-oil industrial activities, the destruction of basic production capacities such as electricity, clean water, and public utilities, the lack of physical infrastructure, high unemployment, and the risk of hidden inflation.

• The availability of oil revenues that provide enough funding and foreign currency for financing the required investment for building the infrastructure and public services projects, as well as for maintaining a high level of demand, which are both necessary for the expansion of production capacities, ie economic growth.

The calamity of the existing economic irony can be confirmed by the prevailing dangerous political instability, widespread corruption, social upheaval and the increasing dependence on oil exports not only to run the state’s basic functions, but also to maintain the level of effective aggregate demand at a level necessary for restraining the economic deterioration. These well-known facts constitute the perfect conditions for nationwide social, political, and economic unrest.

The Failure Of US And IMF Economic Reforms

Unfortunately, since the fall of the former regime, the shaky situation has been maintained by the application of reckless “economic shock therapy” followed by IMF economic reforms that sustained the economic mess. These hasty, poorly considered packages of policies were first imposed in 2003 by the US occupation authority on the hope of rebuilding the economy on a free market basis. They were extraordinarily radical and unfitting and their application has damaged the country’s economic prospects in the short and medium term. Since then, with little modification, the IMF and World Bank continue to push further for the same unrealistic policies by adopting their usual “economic reforms prescription” through the macroeconomic fiscal policy and the “independent” monetary policy, regardless of the main features of the economy and the state of the country’s overall development.

In particular, they ignore the fact that it is not sufficient to support the private sector by dealing with the existing free market failure in a developing rentier economy like Iraq. Their theoretical abstract thinking has missed the fact that in Iraq government economic intervention is, at this stage, imperative for rebuilding the physical and social infrastructure and expanding the production capacities within the framework of the economic diversification strategy. They also show little awareness of the actuality that the public ownership of oil wealth necessitates that government fiscal policy should give priority to the reduction of the existing huge disparities in income and wealth among individuals and regions in addition to the main objectives of increasing economic growth, improving living standards and lessening the economy’s reliance on oil exports. It is the US and IMF economic strategy and reforms in Iraq that deepen the rooted acute economic, social, and political problems.

The Economic Role Of The State

Apart from the market’s deficiency in maintaining just distribution of income and wealth, it is common knowledge that in free market economies, the private sector mobilizes and allocates efficiently the available resources, ie generates maximum economic growth, whereas the excessive intervention of the state in the macro- and microeconomic activities reduces the economic efficiency. However, at this time of increasing globalization and under the extraordinary national and international macroeconomic events, namely the recent global financial crisis and the world economic recession (2008-09), the governments in many developed and developing countries have widely and quickly intervened in the macroeconomic activities and financially supported many major international banks, financial corporations and indigenous major industries that are responsible for causing the crisis through their bad and irrational decisions, in order to save their national and the international economic and financial systems from complete collapse. Hence, in view of lessons derived from this costly experience, it is absolutely wrong for the policy makers and economic advisors insisting on pushing further the implementation of unconditional economic liberalization policy in Iraq. The claim that justifies the current macroeconomic policies, especially fiscal and monetary, on the assumption that they would increase economic growth and improve economic competitiveness, is false.

In Iraq, for increasing economic growth and improving productivity, it is necessary to increase public investment and realize a sufficient degree of economic diversification that ensures economic stability against the risk of domestic and international market uncertainty, promotes diffusion of technologies, and provides flexibility regarding inter-industry linkages, trade, labor market and other factors of production. The economic policy should aim mainly at expanding the non-oil production capacities by utilizing oil revenues. At this stage, the government intervention and facilities and public sector initiatives should lead and encourage the indigenous private sector, which is small and lacks entrepreneurship skills, and provide the infrastructure for promoting the foreign direct investment to indigenize high technology industries. In normal circumstances, economic growth can be achieved by balancing upwards consumers’ demand with production, through market forces with the instruments of conservative fiscal policy and independent monetary policy. In Iraq, however, in addition to the prevailing market imperfections, public oil revenues add an important component to the factors and the dynamics of the market forces, necessitating wider intervention by the state for maximizing economic growth.

Urgent Need For Radical Economic Strategy Change

At present, in addition to the political instability and security problems, Iraq is facing many economic and social challenges: sluggish economic growth; high unemployment; widespread poverty; wide disparities in income and wealth; corruption; and a lack of public education, health and social services. For dealing with these challenges, Iraq needs a strong and visionary political leadership that could inspire the people for hard and productive work.

It is understandable, though displeasing, that the government and the dominant political parties put all their hope on the expected future increase of oil revenues in order to release the pressure arising from the unstable socio-political and economic situation, whereas no serious attempts have been made to rationalize their policies. Unfortunately, this is a continuation of the same old political and economic practices that have led the country nowhere. Instead, aided with rational utilization of oil revenues, Iraq in the future needs radical economic change, namely a new economic strategy that has to be guided by an inspiring future vision of a liberal and democratic country. The economic policies, especially the fiscal and monetary, should be redesigned to aim not only to increase economic growth and maintain stability but also, equally importantly, to pursue an economic diversification strategy whereby the state would actively intervene in increasing public investment and influence the pattern of private investment by providing certain incentives. In addition, the fiscal policy should also play an active role in reducing the gaps in income and wealth among the citizens and regions.

In practice, the application of the suggested economic strategy and policies, especially the public investment priorities, needs major institutional change to government economic and financial departments, the private sector and market institutions, and the reevaluation of public enterprises within a well-prepared privatization program. Also, the effective application of the required change needs political stability, maintaining law and order, empowering the legal system and ensuring security of the individual and property.

The Storm Gathers Momentum

As the heavy gray clouds of economic, social, political and security problems gather momentum over the country – and if the clouds burst, the resulting thunderstorm could cause a destructive flood like that in the time of Gilgamesh, or such devastation as followed the fall of Saddam’s dictatorial regime – it is time for the ruling authorities and the dominant political parties, especially the religious, to rethink and urgently change their narrow-minded policies and abandon their self-interested practices, to participate actively in establishing a liberal, democratic and prosperous Iraq.