April, 2003

The Economy of Iraq: From Sanctions to War

Maghawri Shalabi Ali

Iraq enjoys the fundamentals for a strong and growing economy: it has the second largest oil reserves in the world, its oil is of a high quality and is cheaply accessible; it has good water resources, agricultural land, a strong industrial base and a large, young labour force, estimated at 4.5 million in 1989.[1] However, the economic policies of the Iraqi regime have been unable to make good use of these resources, and much has been wasted in the pursuit of ideologically motivated and propaganda-oriented projects with little impact in terms of development. Two successive wars and the economic sanctions imposed on Iraq for the past 12 years have also had a debilitating effect on the economy.

The economic policies of the Iraqi government:

1- The agricultural policy: The Iraqi government has not placed a high priority on the development of this sector, nor its labour force or technological base. It has rather pursued a disastrous policy of dam building on the Tigris and Euphrates rivers without proper consultation and coordination with Syria and Turkey, which share their waters. This has provoked countermeasures on their part that have produced a catastrophic situation for Iraq, whose water resources are now 5,8 billion cubic metres short of its needs. Growing problems in this sector have resulted in Iraq losing 29 per cent of the agricultural land it cultivated before the war with Iran, and a decline in its productivity. Productivity per hectare in 2002 was estimated at 284 kg in Iraq, 1,654 kg in Syria, 2,063 kg in Iran and 2,122 kg in Pakistan.[2]

2- The industrial policy: The government has put its major investments in military industries, in addition to the large sums allocated to the importation of military technology. Basic industries aimed at civilian needs, completely nationalised in 1964, have suffered due to lack of investment. Iraq therefore has had to rely on importation to cover its domestic needs.

3- Foreign trade: The oil sector remains the only significant source of Iraqi exports. Iraq maintains protectionist trade policies. The government officially takes an anti-globalisation stance, and has branded the World Trade Organisation a tool for the service of US and capitalist interests. This has effectively isolated Iraq and the Iraqi market from the impact of international competition and from participating in international trade.[3]

4- Monetary policy: The purchasing power of the Iraqi dinar suffered a massive decline following the Gulf War. This resulted in deep structural damage to the balance of payments, investment policies and income distribution. In 2000, the Iraqi government asked the UN to price Iraqi oil in euros rather than dollars, which resulted in some losses.

Before the war with Iran, the official rate of exchange was more than three dollars to the dinar. In the beginning of 2003, the Iraqi central bank maintained the fiction that the dollar equalled 0.3109 dinars, while in fact it was being exchanged at 2,000 dinars. Just prior to the US assault in March 2003, the dollar shot up to 3,100 dinars. This illustrates the complete lack of control on the part of the government over the exchange rate and the Iraqi economy.[4]

The impact of sanctions on the Iraqi economy:

Some studies argue that the Iraqi economy has lost, due to wars and sanctions, more than $812 billion. A glance at some major indices reveals the devastating impact:

1980 ------ 1990 ------ 1995 ------ 2000 ------ 2002

Gross national product -in billions of US dollars-
53 ------ 77 ------- 13 --------- 32 ------ 32.6

Agricultural exports -in millions of US dollars-
64 60 8 7 -

Population -in millions-
13.2 18.9 20.5 23.6 24.4

Adult illiteracy rates
5% - 50.6% 56% 57%

Sources: The World Fact Book 2002;
The Arab Monetary Fund - Arab States: Economic Indices, Abu Dhabi 1998-2002;
The Unified Arab Economic Report, 1998-2002.

These indices show decline in GNP due to deterioration in the mining sector as well as the banking system and other service and industrial sectors. The oil-for-food programme and changes in international oil prices had a profound effect on the Iraqi economy, as much of the funds were spent on the running of the programme, as well as reparations, rather than on necessary public expenditure within Iraq.

The oil-for-food programme made available $58 billion to Iraq, of which it has actually received only $34 billion. Twenty-five per cent of this amount was spent on reparations to Kuwait and nationals of other countries affected by the Gulf War; 0.8% financed the international weapons inspections; 2.2% financed the UN's administration of the programme, and 13% went for food and medicine to Kurdish areas in north Iraq. Only 59% was spent on areas under the control of the Iraqi government. The annual per capita share of these funds designated for food and medications came to $120.[5]

Living conditions in Iraq on the eve of the US attack:

1- The daily calorie intake of Iraqi citizens fell from 3,120 calories/day in 1989 to 1,300 calories/day in 1999.[6] Malnutrition and related diseases are widespread. The situation following the suspension of the oil-for-food programme in March 2003 is dire.

2- Prices of basic commodities on the open market in Iraq are prohibitive, rising sharply just before the US assault as people began to hoard in preparation for the war.

3- Conditions in the health sector as a whole are poor due to shortages in medications, medical supplies and equipment. For example, in the 1980s, the Iraqi government imported medical supplies to the tune of $500 million a year. Under the sanctions, it could only import $50 million worth up to the end of 2002. Between 1989 and 2000 there was an increase of 1,800% in contagious respiratory diseases, and of 1,224% in intestinal infections, according to Iraqi health ministry data from September 2002.

4- There is a severe deterioration in all public utilities: 25% of water in Iraq has become contaminated and the per capita share of potable water has decreased by 40%; electricity is unavailable for an average of three hours a day; and 62% of Iraqi schools are in an unacceptable condition -according to a UN secretary-general report-.

5- Unemployment is rampant and wages are low. The average monthly wage of an Iraqi worker hardly covers the price of two kilograms of meat, at March 2003 prices.

The future of the Iraqi economy:

In the best case scenario, with the US quickly achieving the overthrow of Saddam Hussein and establishing some form of stable government, the Iraqi economy may be spared further devastation. However, the longer the war, the more damage will occur to the infrastructure and the environment, especially as the result of burning oil wells or in the case of the use of chemical or biological weapons. The ensuing destruction will leave the Iraqi people one of the poorest in the world for years to come, as the economy will need massive investment to be resuscitated. The worst case scenario would be the combination of a long and destructive war in Iraq, with the spreading of hostilities and instability to other countries in the region. This will mean that both the US and neighbouring countries will not devote much effort to the economic rehabilitation of Iraq as they will be occupied elsewhere.

It is possible to outline the major losses to the Iraqi economy whichever scenario takes place:

1- Major destruction of buildings, facilities and the infrastructure of the economy, with the exception of the oil sector. The US will be keen to protect the oil to finance the post-war era.

2- Complete devaluation of the Iraqi currency.

3- There is likely to be serious loss of human life, which some international organisations estimate at half a million and many more injured. It is expected that there will be serious humanitarian problems, a large number of refugees and a potential outbreak of epidemic diseases such as cholera.

4- The Iraqi economy would suffer if the country were to be divided into smaller entities.
The US is likely to maintain a presence in Iraq for an extended period. During this time, it will regulate the economy with the priority of recouping its own losses - rehabilitating the oil sector and working it at maximum capacity to ensure a regular and cheap supply of oil, as well as ensuring that Iraq will continue to pay the war reparations and foreign debts still outstanding. The reconstruction of Iraq will be financed by oil revenues, the US likely employing the remnants of the Iraqi army in this respect. Some neighbouring and western countries have also expressed willingness to participate in these efforts.

Endnotes:
1- Dr. Hassan Al-Jenabi: Despotism and Development in Iraq, Iraqi Future Affairs Institute, September 2001, p. 2.
2- Dr. Rashid Al-Zalimi: Towards a Solution to Agricultural Problems, Iraqi Future Affairs Institute, September 2001.
3- Dr. Najeh Al-Obeidi: The Iraqi Economy and the Challenges of Globalisation, Iraqi Future Affairs Institute, September 2001.
4- Dr. Najeh Al-Obeidi: The Dinar between the Dollar and the Euro: Monetary Policy and Inflation in Iraq, Iraqi Future Affairs Institute, November 2001.
5- Tim Niblock: 'Pariah States' and Sanctions in the Middle East: Iraq, Libya, Sudan. The Centre for Arab Unity Studies, Beirut, July 2001.
6- UNICEF Child and Maternal Mortality Survey, Preliminary report, July 1999.