Middle East Economic Survey

 

VOL. XLIX

No 23

4-June-2007

 

IRAQ

 

Oil, The State And Economic Policy In Iraq

 

By Misbah Kamal

 

The following article was written for MEES by Misbah Kamal, Senior Research Consultant, United Insurance Brokers Limited.  The article reflects the writer’s personal views.

 

Despite the plethora of US and Iraqi government-sponsored meetings inside Iraq, and even more outside, and the numerous documents produced on Iraq’s economy by the government’s foreign advisors and the US administration, there is insufficient understanding of the dynamics of the country’s post-2003 economy and its future direction. Recipes meant for developed stable countries are proposed for Iraq’s fractured economy.

 

The successive Iraqi governments have failed to produce an integrated long-term economic program. This is invariably blamed on violence, insecurity and Saddam-era economics. Their piecemeal economic policies, however, are not effective because of the political and sectarian infestation of most ministries concerned with reconstruction, manned by incompetent executives. But perhaps the lack of a consensual national vision (strategy and policies) explains why the acute problems of the economy persist. This view is not shared by US officials. For example, in testimony before the House Foreign Relations Subcommittee on International Organizations, Human Rights and Oversight, David Satterfield, the State Department’s senior Iraqi coordinator, asserted that “Iraq would need $4bn to help spend the $12.5bn the Iraqi government already has in its accounts.” The purpose is to build “what accountants call ‘budget execution capacity’ a top priority now for provincial reconstruction teams. Why couldn't Iraq spend these monies?  Why couldn't the oil [minister] spend the $3.5bn in his capital investment budget? Only some 6% was actually spent. The answer is not corruption.  It’s not politics.  It’s not security. It is literally the lack of mechanisms, the lack of the experience and capacity to spend funds which exist in Iraqi hands.”1

 

The shortage of “budget execution capacity” has some merit, in the sectarian context where professionals have been pushed aside or removed, but like the constantly invoked lack of security, it is a reductionist explanation.  Despite the brain drain, Iraq does not lack the human resources needed to carry out policies and daily operations. Take the oil industry as an example: “Iraq has a vast contingent of oil experts skilled in all aspects of the industry: petroleum and reservoir engineers, geologists, drillers etc, as well as engineers and scientists who deal with the overground aspects.”2

 

Evidently, the role of insecurity cannot be easily dismissed but there appears to be a dynamic inter-relationship between poor economic performance, unemployment, poverty, malnutrition, social degradation and the continuing violence and lack of security, which is enhancing the shadow economy and giving rise to new forms of organised crime. Nevertheless, attracting people to work is not difficult, as testified by the thousands who are employed by Baghdad municipality to clean roads and sites of terrorist vehicle explosions. What is lacking is job creation, which is talked about but not implemented apparently pending the miraculous emergence of the private sector to do so.

 

Centrality Of Oil Revenues

Most commentators acknowledge the centrality of oil revenues as well as the burdensome legacy of the Saddam era, the destruction and damage to utilities and public enterprises diligently wrought by the US in 1991 and its invasion in 2003 and the ongoing damage and destruction of infrastructure and the social fabric by terrorist activity and the lack of security.  However, the economic policies of Iraq’s government, or the lack of policies other than the mandatory call for privatization, condemnation of state-owned enterprises, desperation for foreign investment and the implicit belief in the “invisible hand” in directing the economy and seeking guidance form the IMF, have not attracted sufficient attention.

 

In reading the USAID’s Iraq Transition Strategy Plan (2006-2008), one is struck by the ominous absence of any reference to the petroleum sector and its revenues although USAID and its appointed consultants have assumed the role of restructuring Iraq’s economy. Instead, the strategy on the economic track is focused on expanding private sector opportunities. Under the heading Strategic Objective 2: The Economic Track – Expand Private Sector Opportunities, USAID singles out the components of this strategy: increasing access to financial services; strengthening agricultural capacity and productivity; promoting privatization and business development; advancing policy, subsidy, regulatory, and transparency reforms.3

 

In contrast, Sabri Zire al-Saadi has been advocating, in many of his published papers, the centrality of oil revenues for regenerating Iraq’s economy – but not in the demagogic sense of distributing oil revenues among the people on the Alaskan model but as part of a long-term strategic economic plan having the objective of creating the necessary conditions to diversify the economy away from total reliance on oil rent and create a proper space for private enterprise. Combining practical experience in planning and economic development and in-depth knowledge of Iraq’s economic history, he has stressed that oil policy must be an integral part of the country’s strategic economic policy.4 Instead, thanks to the ill-thought measures and mismanaged projects by successive post-2003 governments and the disappearance of massive amounts of cash from the Development Fund of Iraq managed by the US, priority has been given to a petroleum law – and not, for example the reviving of the Iraqi National Oil Company –  in isolation from economic policy.

 

Seeds Of Corruption

The framework for this approach was constructed by the US proconsul Paul Bremer in 2003 with his 100 or so orders, some of which were ideologically motivated. Thus, we had regulations permitting unrestricted imports and abolition of custom duty save for the 5% reconstruction levy, a flat 15% individual and corporate income tax, etc. But the mere drafting of laws is not sufficient in itself to tackle the stifled development of the economy while the rentier economy has just been operating thanks to oil revenues. Dr Saadi again: “The experience also ascertained the worry of deepening the country’s dependence on oil revenues as excessive spending of abundant oil revenues has produced nothing, but more corruption. Economic failure has encouraged (weak) politicians, incompetent officials, international organizations, and corrupted elements to rely more on foreign loans and financial assistance. This is another negative aspect of the current economic policies.”5

 

What is needed, according to Dr Saadi is a strategic national vision and an agency. Oil revenues are central for such a vision. What he is calling for is the formation of a political platform, a bloc, an agent that will work out and implement the long-term economic strategy.  The objective of this strategy is:6

 

1.    Transformation of the oil-based rentier economy into a competitive market economy by accelerating economic diversification. The low level of private saving, consumption and non-oil production and exports makes Iraq more dependent on oil revenues if the economic parameters remain as they are.

 

2.    Increasing economic growth and alleviation of unemployment, improvement in education and health     services [human development].  This requires mobilizing oil revenues, fiscal and monetary policies towards public investment as this would be the most essential element of effective aggregate demand and creating opportunities for Iraq’s nascent private sector.

 

The focus on financial changes does not achieve economic growth and development. Equally, peddling the wares of a newly learnt business culture and private initiatives is not a substitute for proper understanding of a market-based economy, and the role of the state and public and private enterprise in reconstruction and development. Changing the economic structure requires massive investment. Public investment, in the form of a huge public works program as part of an economic plan, is most important at present as private investment is negligible. Public investment, financed by oil revenues and operated by the state (government), should assume priority and it is this investment that will create the conditions for private investment.

 

Reliance on the misunderstood free market and the privatization mantra, crudely peddled by Iraq’s politicians in power, is no panacea for getting out of the current crisis-ridden economy manifested in high rate of unemployment (percentages varying from 30% to 60% or more, depending on age and gender), the prevalence of poverty and malnutrition, deterioration of basic services and declining infrastructure, material and human waste (brain drain, internal sectarian displacement, emigration and a growing refugee problem) poor investment record (national and foreign), corruption and insecurity.

 

Separating the market economy from the state is a fiction well beloved by neo-liberal doctrinaires. No such separation exists except for ideological reasons. The role of the state remains central as a stabilizing and facilitating force otherwise the Hobbesian war of all against all will be the order of the day where life is short, nasty and brutish – occupation and terrorism are underpinning the emergence of such a state in the form of a limited civil war,7 social decay and humanitarian crisis.8

 

A capitalist economic system cannot function without the state, regulation and legal restraint, public spending and monopoly of violence by the state. The obfuscation concerning the role of the state rests on undermining the state in the name of civil society and on what appears to be innocent reference to the private and public sector, praising the former and belittling the latter. 

 

Monetary Policy Obsession

Nor is the near obsession with monetary policy, as practised by the Central Bank of Iraq, helpful in kick-starting economic growth. The focusing of policy on containing inflation by raising the exchange value of the Iraqi dinar against the US dollar is not leading to the desired result, while the price of fuel has been increased with spiralling impact on the price of other goods and services. Instead of being an agent for economic development the Central Bank of Iraq has been re-modelled on a neo-liberal basis:9 focusing on its independence (meant to deny the bank any role in financing government activity, eg deficit financing), curbing inflation (bank should not be concerned with other goals such as promoting full employment, supporting industrial policy or allocating credit to sectors of special social need, such as housing) and indirect application of monetary tools (short-term interest rates).

 

Under these conditions, a bold initiative is needed on both the political and economic fronts, hinged on the willingness of democratic forces in Iraq to formulate a national vision and offer it to the people for debate and participation. This would be an open school for developing capacity and forming opinion leaders. Dr Saadi locates the agency in the liberal and social democratic parties and movements as the dominant Islamic parties do not have what he calls “scope for contemporary economics” nor are they particularly interested in social progress.  They are “exploiting the people’s discontent for promoting their vague objectives,” and keener on observing religious rites and maintaining political control than working out economic policies. The failure of the government to tackle the dire economic conditions points to the necessity of strengthening the democratic movement, articulating its alternative vision and promoting it among the people. This is not an unrealistic expectation given the fact that 12mn Iraqis braved the violence and insecurity to cast their votes in a referendum on the constitution and parliamentary elections.

 

Oil Role/Management Debate

More than ever before, the role of Iraq’s oil revenue and the management of its oil resources have become hot topics for debate. The adoption by the Council of Ministers of the Oil and Gas Bill 2007 has heightened the debate. Here, two extreme positions can be identified. One, calling for putting the bill on the statute book as it stands, is supported by vested interests at home and abroad. The US administration and its disciples in Iraq are keen on this legislation. This kind of license is denied to others, as it would be dubbed as interference in internal affairs. The other extreme position is totally opposed to the bill on the putative ground of sovereignty and defending the undefined higher interests of Iraq. This camp includes Ba΄thists and some religious elements. In truth, the conflict over the bill is political and regionally ethnic; it is a struggle for controlling resources and the US imperium is not far from the scene. The absorption of oil revenues, putting the financing of the ordinary and investment budgets aside, to serve parochial and foreign interests rather than the Iraqi economy as a whole and the entire well-being of the country is a recipe for more disintegration and future conflict.

 

What is advocated here runs counter to the role that the yet-to-be-formed democratic bloc wishes to play. External initiatives, starting with the US invasion, have been the cause of the dire state of the economy. Future initiatives will be more of the same – discussed ad nausea, but without tangible results. There remains the role of external forces and the question of US activities within Iraq as a dependent state with impaired sovereignty and a weak state at that. Iraq as it exists now is destined to fall under the influence of external forces of the advanced industrialized countries. This will come through international financial institutions, foreign loans and assistance, multinational corporations, commodity markets and other vehicles that serve their economic interests.

 

The involvement of international financial institutions and the US imperium is and will be advocated on various grounds by local vested interests. Already the groups behind these interests are benignly and apologetically talking about the mistakes of the US occupation (the invasion is not questioned on legal or any other grounds) and the process of transforming Iraq in line with US prescriptions. The US defines what Iraq’s economic priorities should be. Here is how the US Undersecretary of Commerce outlined the “Economic Priorities” in Iraq10:

The US and the international financial institutions are trying, directly or indirectly, to transform the economy on the ideological basis of neo-liberalism. The outcome of this attempt is yet to be seen as the post-2003 period remains, to date, a hybrid rudderless coterie of dilapidated structures and poorly operating entities.

 

Lack Of Planning

Planning, in one form or another, has been a feature of the economy; but today it is met with abhorrence on ideological grounds although post-conflict conditions require planning, at least in the form of indicative planning, at the macro-economic level and not command and control from the top. Such a plan should assign a defined role for oil revenue — to be used to move the economy away from excessive reliance on it. These days we see an obsession with presenting detailed recommendations to do this or that in endless meetings and seminars mostly outside Iraq.  Such an approach would be appropriate for a corporation and not for directing the economy; it is not a substitute for strategic and policy formulation.

 

Also the government and parliament are failing to monitor the performance of the economy. The political parties are no better in this regard. In the much talked about transformation of the economy away from the putative domination of the public sector, as though that is indeed the case or the declared policy of the present government, the facilitating role of the state in development is forgotten. The dynamics of economic development require accumulation and the creation of an economic surplus. To achieve that, individuals must have the freedom and capacity to interact — to be able to exercise their basic human rights and enjoy their entitlement to health, learning, peace and security and protection of their personal and property rights. To date, the Iraqi state, weakened by the ancien regime, 13 years of a comprehensive UN sanctions regime and its almost complete destruction by the US invasion and occupation can hardly deliver the social goods expected from a modern state.

 

 

 

Notes:

 

1.   “Iraq Reforms Needed To Free Up Cash,” The New York Sun, 30 March 2007, quoted by Iraq Updates http://www.iraqupdates.com/p_articles.php?refid=DH-S-02-04-2007&article=16036

2.   Ghazi Sabir-Ali, “The New Iraqi Oil Law,” MEES, 26 March 2007.

3.   USAID, Iraq Transition Strategy Plan (2006-2008), March 2006 http://www.usaid.gov/iraq/pdf/USAID_Strategy.pdf

4.   Sabri Zire al-Saadi, “Liberalization Strategy For Iraq's Oil-Hostage Economy: Alternative To Oil Power Dominance And Neo-Liberal Subordinate Economic Policy” (in two parts) MEES, 16 October 2006 and 23 October 2006.

5.   Al-Saadi, “Iraq Needs a Radical Change in Economic Strategy, and Political Commitment to National Criteria for Oil Wealth Utilization,” Strategic Insight,” Volume VI, Issue 1, January 2006.

6.   Al-Saadi, “Liberalization Strategy for Iraq's Oil-Hostage Economy: Alternative to Oil Power Dominance and Neo-Liberal Subordinate Economic Policy” op.cit.

7.   Anthony H. Cordesman, Iraqi Force Development and the Challenge of Civil War, Center for Strategic and International Studies, Washington, March 28, 2007.  http://www.csis.org/media/csis/pubs/070328_iraqiforces.pdf

8.   International Committee of the Red Cross (ICRC), Civilians without protection: The ever-worsening humanitarian crisis in Iraq, 11 April 2007. http://www.reliefweb.int/rw/RWB.NSF/db900SID/ACIO-726AWF/$File/Full_Report.pdf

9.  Gerald Epstein, “Central Banks as Agents of Economic Development,” Political Economy Research Institute, University of Massachusetts Amherst, September 2005. 

 http://www.peri.umass.edu/Publication.236+M5d9a4547bec.0.html

10. http://www.csis.org/media/csis/events/070301_lavin_presentation.pdf