Wednesday, September 7, 2016

Poor Planning Lack Of Staff More Than Oil Dependency Reasons For Iraq’s Economic Woes

The rentier state and the Dutch Disease are two common theories used to describe the problems with Iraq’s economy. They are similar hypotheses that argue that the country’s oil dependency starves the rest of the economy and leads to authoritarianism. Bassam Yousif, an economics professor from Indiana State University had an alternative explanation pointing to bad state planning, lack of capacity in government institutions, and the decline of human capital since 1990s as the cause of the nation’s economic woes.

The Dutch Disease and the rentier state are commonly used to explain the political economy of oil dependent countries like Iraq. The Dutch Disease theory holds that a strong oil sector draws away labor, capital and raw materials from other parts of the economy. The high petroleum revenues then increase the value of the domestic currency making imports less expensive, which in turn undermines domestic production. The rentier state concept argues that governments that make large amounts of money from natural resources makes them less dependent upon taxation and the public. That gives birth to authoritarian governments because the political class feels that they control everything and are thus not accountable to the public.

Yousif posits an alternative explanation based upon the decline of the state’s capacity and human capital since the 1990s as the reason why Iraq’s economy has performed so poorly. Institutional capacity is the state’s ability to plan and carry out its policies and provide services. Human capital is the skills and experience of the population. The two are connected because when the government has a qualified staff it operates better. This is especially true in countries like Iraq where most of the revenue goes to the state making it the dominant force in the economy. According to Yousif, Iraq’s state has been in decline since the 1990s starting with the United Nations sanctions all the way to the present day preventing any kind of serious development.

The international sanctions imposed on Iraq for its 1990 invasion of Kuwait caused “irreversible” damage to Iraq’s economy according to Yousif. The government wasn’t able to maintain law and order, skilled Iraqis began leaving the country, Baghdad wasn’t able to carry out its policies, and its oil revenue collapsed. In 1990 Iraq earned $10.31 billion from the sale of oil. From 1992-96 it only averaged $531 million per year, much of which came from smuggling through Jordan and Turkey. The government responded by cutting consumption and subsidies, while printing more money that led to hyper inflation. That in turn led to a huge exodus of around 4 million Iraqis fleeing the country by 2002. That included half of the nation’s technical and skilled hospital staff and managers, and 40,000 teachers. The lack of oil money meant that the government had no funds to rebuild all the Gulf War damage. Services declined and so did the development of future generations as the health and educational sectors both collapsed. The sanctions led to a rise in crime and loss of authority by the state as it turned over power in some regions to tribes. Finally, corruption spread to all sectors of the state and society. The ability to carry out sound planning and policy and the staff to carry it out almost disappeared during this period. The economy spiraled downwards as a result.

The 2003 invasion did not reverse this negative course, but only continued it. First, deBaathification hit skilled workers and civil servants. The lack of security also continued the brain drain out of Iraq. A 2007 survey of Iraqi refugees in Jordan for example found that 46% of them had bachelor’s degrees. Violence also deterred investment in Iraq. Corruption actually expanded after the overthrow of Saddam eating away at government funds and undermining development. That meant that Iraq’s human capital was not being developed. Literacy amongst Iraqis aged 15-24 for instance declined from 2000-2009. In turn, the state didn’t have the skilled staff it needed for effective planning and implementation of its policies. The Oil Ministry didn’t have the personnel to monitor contracts, while the Electricity Ministry lacked people to supervise its budget and projects. Even when security greatly improved after the 2007 Surge, the government didn’t have the capacity to do much. In 2008 investment increased, but the state couldn’t complete many projects. It wasn’t uncommon for most of the government’s capital budget to go unspent. What most of the oil revenue went into was expanding the state payrolls by hiring more public workers as part of the ruling elite’s patronage networks. To add to that many of these new employees did nothing, and extracted more from the public with petty corruption like demanding bribes for everything. By 2012, 60% of all full time workers were civil employees. That also diverted Iraq’s increasing oil revenue away from development to keeping up with the state’s increased costs of maintaining its new workforce. Macroeconomic figures showed that Iraq’s economy was growing during this period, but that was driven by rising oil prices rather than real development. From 2004-212 per capita GDP adjusted for inflation only went from $1,305 to $1,607, and from 2007-2012 poverty barely declined. The Iraq War decreased the state’s capacity to operate effectively even more. It lost more skilled personnel, which mean that it couldn’t carry out the strategies it wanted to, and the ruling parties were more interested in using the government to stay in power than to foster development anyway.

Today the war with the Islamic State and the decline in petroleum prices have only exacerbated these long term trends. The government is running a huge deficit and almost all development projects have ceased over the last two years. Young people and professionals continue to leave the country. More importantly, the current crisis has not spurred any real reforms. The governing elite are still more interested in maintaining the status quo rather than changing it. As Yousif pointed out, in the 1970s Iraq had huge economic growth along with development of its human capital and state capacity. There were more people in school, industry was growing, life expectancy expanded, etc. This was all due to good strategizing by the bureaucracy. That was derailed by the Iran-Iraq War, and then everything fell apart with the invasion of Kuwait. The 70s provides an example of what could happen, but until the government changes its priorities these dilemmas will continue.


International Crisis Group, “Fight or Flight: The Desperate Plight of Iraq’s “Generation 2000,”” 8/8/16

Yousif, Bassam, “Iraq’s stunted growth: human and economic development in perspective,” Contemporary Arab Affairs, 3/31/16

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