Tuesday, December 2, 2008

Iraq’s Troubled Economy

In the second half of 2008, there began to be reports about Iraq’ improving economy. After having been flat in 2007, the International Monetary Fund (IMF) predicted that Iraq’s economy would grow 7% in 2008. Some saw an improving future. Most of this was due to the skyrocketing price of oil that was occurring at the time, before it dropped. The Special Inspector General for Iraq Reconstruction said that even the non-petroleum sectors of the economy grew in the first half of 2008 however, except for farming that was hit by a drought. These macroeconomic numbers however hide the deep-seated problems the country is facing.

Oil Industry

The biggest issue with Iraq’s economy is that it is based upon a single primary product, oil, which is not labor intensive. Petroleum dominates Iraq. 94% of the country’s 2009 budget will come from oil according to the Ministry of Finance. The industry accounts for 65% of Gross Domestic Product (GDP) in 2008. The amount of money it generates for the country has also steadily increased. In 2005, oil earned over $22 billion. By 2008 it is estimated to garner $65 billion. While bringing in large amounts of cash, the industry does not require many workers. Only 2% of the workforce is involved in petroleum. This creates a predicament for the nation, as its major industry cannot provide any relief for unemployment and undermployment, which stands at around 60%.

Farming

Farming is one of the largest employers in the country, but has run into major problems since the invasion. 6% of GDP comes from farming in 2008, but it accounts for 27% of the workforce. Agriculture predominates in Wasit, 40% of the workforce, Salahddin, 35% of the workforce, Babil, 34% of the workforce, and Diyala, 30% of the workforce. Since 2003 this sector has fallen on hard times. One major cause was the move towards a free market initiated by the Coalition Provisional Authority (CPA). Under CPA Law No. 80, farming subsidies were ended, which led to many farms going under, unemployment, and migration to the cities. Rising fuel prices and shortages also limits the use of water pumps to irrigate fields. That has led to cheap foreign food imports flooding the Iraqi market from the United Arab Emirates, Saudi Arabia, Syria, China, India, and Iran. The government also runs a massive food ration system, which distorts prices. In 2008, the country was also hit by one of the worst droughts in years. As a result, wheat production dropped 27%, and barley 60%. The country will have to import millions of tons of farm products to make up for this shortfall.

Industry

Iraqi industry also suffered under the Coalition Provisional Authority. The CPA shut down much of the country’s large manufacturing plants, which were owned by the government, leading to more out of work Iraqis. By 2008 it accounted for only 2% of GDP. The Pentagon eventually began a plan to re-open these factories by encouraging foreign investment, and promising markets in the United States for their products. This policy ran into problems, as many foreign firms were unwilling to be involved in Iraq because of the violence and instability. The U.S. company that the Defense Department hired to run the program also came under investigation for mismanagement and abuses. By August 2007, only 9 factories had re-opened, less than 5% of the total. By the summer of 2008, the Ministry of Industry and Minerals initiated its own privatization program. Like the American one, Baghdad fared no better in attracting foreign investors. Another large barrier to industrial growth is the fact that Iraq has no tariffs on imported manufactured goods. Like farming, this has led to cheap foreign imports, especially from Iran, taking over much of Iraq’s market. This is causing more Iraqi businesses to close, and increasing unemployment.

Retail, Service and Construction Business

After oil, retail, wholesale, and service businesses are the second largest part of Iraq’s economy. Together they account for 20% of GDP. Like other Iraqi businesses, however, this sector has major issues. Violence of course, has been an inhibitor. A lot of companies have security guards to protect them. Even with attacks declining, there are still plenty of checkpoints and security operations that have strangled trade and delivery of goods. Power shortages are also a problem. Many businesses have invested in their own generators to make up for the shortages, but fuel is in short supply and therefore expensive. All of these together have increased costs, and made Iraqi products less competitive, leading to more imports. Because supply is so shoddy within the country however, some Iraqi companies have been able to hang on to their market share. There has also been a large increase in spending by Iraqis, especially for consumer goods since 2003, which accounts for the increase in this sector. It’s just that many of the products sold are not Iraqi.

On the positive side, many new Iraqi firms were able to develop thanks to the massive influx of American and international dollars for reconstruction. The U.S. has increasingly turned to giving contracts directly to Iraqi businesses for this line of work. In June 2008 it was reported that 3,500 Iraqi companies had been awarded $1.6 billion in construction business by the U.S. The Americans are ending their rebuilding effort however, so Iraqi companies will now have to turn to Baghdad for new funding.

Conclusion

Iraq has seen massive dislocations since 2003. Before the U.S. invasion, the economy was dominated by the state sector. Afterwards, the Americans started a privatization policy, which was badly planned and implemented. The result was thousands of Iraqis, especially professionals, were left out of work as many businesses closed. It should be no wonder than that a recent poll found 65.9% of Iraqis living below the international poverty level. Today private businesses and farms suffer from high costs, and cheap imports with little to no protective trade barriers. As a result, oil is an even larger part of the overall GDP, even though it provides few jobs. Even that has run into problems as the international price for crude has nosedived because of the world recession. Ironically, the government is still the largest employer in the country, despite the U.S. effort. 37% of households work in the public field, while salaries and pensions took up 20.4% of the 2007 budget. It is unlikely that Iraq will be able to fix any of these problems, and balance its economy any time soon. Baghdad has proven just as incompetent if not worse than the CPA in managing and planning. Grand announcements are usually made with little follow up. That will mean continued unemployment and poverty for a majority of Iraqis, with oil being the main industry keeping the economy going.

SOURCES

Alsumaria, “Iraq plan to reduce government jobs by 75%,” 11/10/08

Aswat al-Iraq, “Imported products subvert Iraqi economy,” 2/24/08

Davis, Eric, “Rebuilding a Non-Sectarianism in Iraq,” Strategic Insights, December 2007

Department of Defense, “Measuring Stability and Security in Iraq,” September 2008

Fairweather, Jack, “Business wanes as Baghdad takes over,” Financial Times, 6/4/08
- “Iraqi state enterprises warily reopen,” Financial Times, 6/16/08

Fifield, Anna, “Iraqis exist on margins of positive picture,” Financial Times, 10/21/08

Gunter, Frank, “Economic Development During Conflict: The Petraeus-Crocker Congressional Testimonies,” Strategic Insights, December 2007

Janabi, Ahmed, “Iraqis forced to abandon farming,” Al Jazeera, 5/11/08

Al-Jumaili, Hazem, “Iranian goods most popular in Iraq,” Azzaman, 9/7/08

Middle East Online, “Iraqi professionals forced to take small jobs,” 2/21/08

Rasheed, Ahmed and Ryan, Missy, “Iraq’s farm sector crumbling as drought bites,” Reuters, 10/24/08

Sachet, Khalid Hantoush, “Results of the Field Survey For Needs and Opinions of The Poor in Iraq,” Iraqi Al Amal Association and University of Baghdad, September 2008

Special Inspector General for Iraq Reconstruction, “Quarterly Report to the United States Congress,” 10/30/08

World Food Programme, “Comprehensive Food Security & Vulnerability Analysis: Iraq,” November 2008

Yacoub, Sameer, “United Arab Emirates to name ambassador to Baghdad,” Associated Press, 6/5/08

Xinhua, “Iraqi Factories Fight to Survive Turbulence,” 11/23/08

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