Wednesday, February 3, 2010

Will Average Iraqis Benefit From The Country’s Oil Wealth?

As reported before, there are high expectations amongst many Iraqis that the new wave of oil deals signed at the end of 2009 will greatly increase the country’s wealth. At the same time there are questions about whether the money will trickle down to the average Iraqi.

One major problem is that oil is not a labor-intensive industry. Despite providing 90% of the government’s revenue and being the driving force behind the economy, U.S. statistics show that petroleum only employs 2% of the workforce. Any new jobs that might emerge will come from the construction necessary to improve Iraq’s infrastructure for the new oil exploration and shipping. What other countries have done is to create unnecessary governments jobs with their oil wealth to make up for high unemployment. The Iraqi state is already known for this as it is the largest employer in the country.

One economist interviewed by The National warned that increased oil exports could distort the economy. He said that a large increase of oil money would make it cheaper for the government to buy products rather than invest in services and the general infrastructure. The extra funds will also increase the value of the Iraqi dinar and make imports cheaper. The country is already awash in cheap products from Iran, Turkey, China, and others as many tariffs were removed after the U.S. invasion, and this has had a huge negative impact upon domestic producers and businesses.

If these problems are to be avoided, the government must intervene and invest in diversifying the economy. There are several problems with this however. First, 99% of the foreign investment in Iraq goes to the oil and gas industry, something that’s unlikely to change anytime soon. The government therefore, will largely be on its own if it wants to move the economy beyond the energy business, and it may not have the know-how or capacity to do that. Second, Iraq is still ranked as one of the most corrupt countries in the world. The oil deals will concentrate even more power and money in the hands of the bureaucracy who are already known to be unresponsive to the needs of the public. Corruption could become worse as a result, diverting money away from development. To its credit, Baghdad is trying to become more open in its dealings. The first two rounds of oil bids were televised and the contracts made public. The government also joined the Extractive Industries Transparency Initiative in January 2010 that requires members to disclose their taxes, royalties, production, etc., that involve their petroleum industry. Iraq could become even more dependent upon oil in the future, or use the added profits to grow the rest of the economy. Very few countries have been able to do the latter however, so the odds are against Iraq.

SOURCES

Fordham, Alice, “Will oil wealth trickle down?” The National, 1/15/10

Rasheed, Ahmed, “Corruption-plagued Iraq joins oil transparency group,” Reuters, 1/10/10

7 comments:

Don Cox said...

Iraqis will probably see the oil wealth in the form of free electricity and low taxes.

One industry that ought to be supported is agriculture.

Joel Wing said...

Electricity is already heavily subsidized in Iraq and I'm not sure individuals even pay income taxes, plus there are few tariffs.

Farming should be supported, but has been in steady decline since the 1970s. The government has been talking about diversifying the economy since the Baathist first came into power, but oil has always held the dominant position, and Iraq is even more dependent upon it today than ever before. The government has a real uphill battle to change that.

AndrewSshi said...

Joel, wasn't the date industry actually pretty big during the later sanction years for ease of transport? I know it took an enormous hit because Diyala was kind of a center of the insurgency for the last few years, but that seems to be a logical place for folks to start, especially because date farming seems to me to be something that's fairly labor-intensive.

Joel Wing said...

From what I've read, Iraq became dependent upon food imports in the 1980s during the Iran-Iraq War, but was still self-sufficient and an exporter of fruits and vegetables. After the Gulf War and sanctions, those two were hit hard, and the last I heard Iraq is now a large importer of both as well and has been flooded with cheap imports, and a few countries have surpased Iraq in dates production.

I'll have to go through my notes, but there was an article last year just on the dates industry and it said it had been largely disrupted by the war.

Joel Wing said...

Andrew,

Here's the article on the date industry in Iraq:

Williams, Timothy, “Idle Iraqi Date Farm Show Decline of Economy,” New York Times, 8/15/09

It says Iraq use to produce 75% of world's dates, but now is behind Saudi Arabia, Egypt, and Iran

In 2008 Iraq produced 281,000 tons of dates, half of amount produced in mid-1980s

The number of date palms in Iraq went from 33 mil in 1950 to 9 mil today

Factories that process dates went from 150 before war to 6 now

Joel Wing said...

Andrew,

The Agriculture Ministry just announced that the country was exporting dates for the first time in years. They're giving massive loans to farmers to help them out, $320 per ton.

AndrewSshi said...

Thanks for the information, Joel!

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