VOL. XLVI

No 19

12-May-2003

Oil Wealth And Poverty In Iraq – Statistical Adjustment Of Government GDP Estimates (1980-2001) *

By Sabri Zire Al-Saadi**

Iraq has undergone many changes since its establishment under the British mandate in 1921-1932 and its independence in 1932, but none more radical than the removal of Saddam Husain’s ruthless regime on 9 April 2003 after a quick and decisive war led by the US and Britain, which will have a deep impact on the political, economic and social life of the Iraqis. The collapse of the dictatorial regime has already changed political circumstances in a radical way. In other aspects, the reconstruction of damaged infrastructure capacities such as electricity, water supply, roads, public buildings, schools and hospitals will stimulate economic activities. As anticipated, the country may soon witness evidence of economic growth and employment as a result of resuming oil exports and government expenditures. Indeed, the expected government’s annual revenues of $20bn have already attracted foreign interest in the economic prospects of Iraq. However, it is difficult at this stage to quantify the economic impact due to many unknown variables, including the extent of war damage and a lack of data. But it can be assumed that the change will open up opportunities for improving living standards and the quality of life. Moreover, ensuring the political stability and the economic success of the new regime will have a positive impact on the Middle East region and the world economy as a whole.

GDP is an important indicator by which the economic performance and the average level of individual income (consumption) in any country can be quantified. GDP statistics are also used as a base for future macroeconomic forecasts and sectoral development. This paper attempts to arrive at the real change in Iraq’s GDP by revising the official estimates over the period 1980-2001 and highlighting its economic, political, and social implications.

The Failure Of A Promising Iraq

Between 1980 and 2001, the total value of Iraqi oil exports amounted to about $192.2bn. Exports in the 1980s totaled about $123.8bn, and $68bn in the period 1990-2000. In 2001, the value of oil exports was estimated at about $14.8bn. However, even with such a huge inflow into public finances generated by oil rent (and not including other domestic economic activities), the Iraqi economy has experienced continuous deterioration since 1980. In terms of GDP per capita, Iraq may be classified as one of the few Least Developed Countries (LDCs)[1]. Such a conclusion obviously has important economic, political, and social implications as far as the remedies for dealing with the Iraqi crisis are concerned. Serious thought should be given to the moral legitimacy of the war reparations resulting form the 1991 Gulf war and the economic viability of commercial and financial agreements made under the previous regime, as well as privileged oil arrangements and preferential oil export deals with foreign countries and companies.

Economic Deterioration Concealed

In the past, GDP indicators were used by the United Nations, regional and international agencies, as well as foreign governments, to assess the economic progress (or rather deterioration) of Iraq and the individual welfare of its citizens.

For decades, the government of Iraq has been systematically producing and publishing GDP estimates valued in Iraqi dinars and in both current and constant prices. From 1980, however, the government stopped producing these estimates at constant prices in order to avoid exposing the high rate of inflation. Instead, additional series of GDP estimates valued in US dollars in current prices were published in the well-known annual report – The Arab Unified Economic Report. This authoritative report is prepared and edited by the Arab League, Arab Fund for Economic and Social Development (AFESD), Arab Monetary Fund and the Organization of Arab Petroleum Exporting Countries (OAPEC). Our statistical review of these published figures reveals that the Iraqi authorities deliberately concealed the deterioration of the domestic economy over the last two decades from public opinion. For this purpose, the government used the official arbitrary fixed foreign exchange rates in converting the GDP values of the non-oil sectors from Iraqi dinars to US dollars.

According to estimates published by the government, GDP in US dollars at current prices was estimated at $53,590mn in 1980, rising to $81,038mn in 2001. Consequently, GDP per capita was estimated at $3,688 in 1980, decreasing to $3,312 in 2001.However, based on the real foreign exchange rates of the Iraqi dinar – as observed in the Iraqi free (parallel) market during 1980-2001 – the government estimates of the value added of the non-oil sectors were highly overstated and had to be corrected. This correction resulted in a significant reduction in the government’s figures that changed GDP and GDP per capita drastically. Our adjusted GDP estimates in US dollars at current prices were valued at $28,368mn in 1980 and just $5,809mn in 2001. Similarly, GDP per capita in US dollars was revalued to $2,143 in 1980, falling to only $237 in 2001.

Comparison With Arab Economies

A brief comparison of Iraq’s GDP estimates with published GDP estimates of other Arab economies illustrates the extent to which the former Iraqi government covered up the failure of its economic policies. The Iraqi government’s 2001 GDP estimate of around $81bn would place Iraq in third position behind Saudi Arabia ($187bn) and Egypt ($91bn), putting it ahead of the rest of the field – including the UAE ($67.8bn), Algeria ($54.6bn), Kuwait ($32.8bn), Morocco ($33.5bn), Libya ($32.1bn), Tunisia ($20.1bn), Oman ($19.9bn), Syria ($19.2bn), Lebanon ($ 16.7bn), Qatar ($16.2bn), Sudan ($12.5bn), Yemen ($91.bn), Jordan ($8.8bn) and Bahrain ($7.9bn). 

In fact, our adjusted estimates put Iraq’s GDP for 2001 at $5.8bn, third from the bottom of the list of Arab economies, with only Djibouti ($553mn) and Mauritania ($986mn) placed lower. Furthermore, the real GDP per capita estimates for 2001 placed Iraq at the bottom of the pile at just $237. This compares with per capita GDP in the other Arab countries in ascending order as follows: Mauritania ($364), Sudan ($394), Yemen ($481), Djibouti ($816,), Syria ($1,145), Morocco ($1,146), Egypt ($1,409), Algeria ($1,661), Jordan ($1,655), Tunisia ($2,073) Lebanon ($4,399), Libya ($5,490), Saudi Arabia ($8,109), Oman ($8,314), Bahrain ($11,113), Kuwait ($14,627), Emirates ($20,602) and Qatar ($28,139). (See MEES, 7 October 2002 for year 2000 comparisons.)

Conclusions

A number of important conclusions can be derived from these estimates. First, despite its oil revenues, Iraq has experienced a continuous and major economic deterioration and as a result Iraqis have experienced severe economic hardship, especially during the 1990s. Indeed, Iraq’s per capita GDP is well below the poverty line, which is widely estimated at $360.

The second main conclusion is that Iraq must diversify its economic activities and lessen its very high dependence on the oil sector for public finance and as the main source of foreign currency. For the future, Iraq must apply three integrated sets of economic policies. First, macroeconomic, fiscal and monetary stabilization policies must be implemented in order to control inflation through the reduction of the government and balance of payments deficits. Secondly a set of economic structural reforms should be introduced that include: overhauling the banking system and financial and stock markets; privatization; foreign trade; and the flow of foreign capital. The third requirement is the implementation of a major and well-balanced public investment program. Public investment should be limited to high-priority economic (physical), social and environmental projects. 

Summary Of Government GDP Estimates Vis-a-vis Author’s Adjustments 

^[1] Though adding more criteria such as health, education, consumption of clean water, electricity, and the existence of physical infrastructure should be considered in order to classify the country as an LDC, the available limited information on these indicators may support our claim.