Iraq is in the middle of a financial crisis. The nation’s economy is dependent upon oil and with the collapse of prices for that commodity the government has gone broke and is borrowing huge amounts of money and going through its foreign reserves to sustain itself. Even when Iraq was flush with cash when petroleum prices were above $100 a barrel analysts pointed out structural problems with the economy. To help explain Iraq’s predicament and some historical background is Indiana State University’s Economics Professor Bassam Yousif.
1. There have been two popular and related theories to explain the economy of Iraq, one is the Dutch Disease and the other is the rentier state, both based upon Iraq’s oil dependency. How do those two theories explain Iraq and what is your opinion of them?
These are influential theories and can be useful in understanding Iraq’s developmental trajectory if applied in a specific as opposed to all-encompassing way. Often though, there is a tendency to explain everything that occurs in an oil economy by resorting to these theories. The Dutch disease refers to the—very real but sometimes exaggerated—negative effects on economic growth that can result from increased oil income. These effects if not countered (through investment, education and training, in particular) can end up diminishing growth and innovation in key productive sectors, such as agriculture and manufacturing. But the ill-effects are often exaggerated, and can be offset by investment and training. Nevertheless, the Dutch disease can explain to some extent how the rapid rise in oil revenues in the post 2003 period has worked to reduce the agricultural output, although there are other factors that are involved.
Rentier state theory emphasizes the negative effects of oil on a nation’s polity. Government income from oil precludes the need to tax and enhances the state’s ability to both bribe and repress its population. The result is (a stable and sometimes durable) authoritarianism. Ironically, the original formulation was applied to Iran to explain how oil allowed the Shah to create a durable dictatorship. In contrast, modern contributions to rentier state theory actually emphasize the importance of context and contingency, and are generally critical of the mechanical application of the theory. In reference to Iraq, the formulaic application of rentierism does not explain why, for example, the monarchy was apparently unable to solidify its power in the 1950s, in the context of rapidly rising oil revenues.
2. You went through Iraq’s recent economic development starting with the 1970s when the country was experiencing widespread economic growth and human development. Why was that decade so successful?
Actually, the point that I make is that viewed in terms of economic development and its associated institutions, the 1970s were not as wonderful as is commonly believed. True, in terms of conventional measures, economic growth was high; rising oil revenues were invested in machinery, ports, roads, schools and hospitals—that is, in people. But growth and development would have been even more impressive if there had been less politicization of the economy. In the 1970s, decisions about who gets promoted or not in the public sector increasingly became about political allegiance and connections and the Ba’thi leadership took direct over control of the planning process. This occurred well before 1980 and so cannot be blamed on exigent circumstances of war (with Iran). So while economic resources were marshalled into investment, on the important issue of issue of promoting pro-growth institutions, performance was wanting.
3. The Iran-Iraq War of the 1980s put an end to the hopes of the 70s and retarded the economy. What happened in that decade?
Development was put on hold. National defense and political survival for the regime became the priority (as opposed to political mobilization and monopolization which came earlier). The government borrowed heavily from foreign capital markets to buttress consumption and pay for the war. Some investment occurred but it came second to the first priority of national defense.
4. You believe that despite the growth of Iraq’s GDP after 2003 there were still major problems with the economy. What were your concerns?
Basically, I don’t see a recovery from war and economic sanctions. GDP can be a very misleading indicator. Anytime the price of oil goes up, as it did for 10 years after 2003 (with a temporary decline in 2008-9), GDP rises.
It is true that Iraq is free to import and export goods and services, and there is generally control over inflation. But if one looks at Iraq’s institutions and its people, the country looks as depleted as ever. Investment in physical and human capital has proved difficult. Disproportionately educated and skilled people have left in droves: this in itself is a form of disinvestment and also complicates the task of reconstruction. Investment and reconstruction are themselves made much more difficult by the financial crunch. The oil price collapse has resulted in pressure to curtail public expenditures and resulted in deficit spending. The problem is not the deficit spending per se, but that the deficit spending is being utilized to pay for rising public payroll and security as opposed to education and investment. While it is understandable that this is a priority, spending on security, unlike investment, does not generate income in future.
5. The 1970s showed that Iraq even with a state run economy could orchestrate growth and development with sound government planning and building capacity. One of the main complaints you hear about the current government is that the ruling parties lack economic knowledge and usually base decisions like creating the budget on political factors. What is your view of government planning and strategy and is there hope that Iraq can return to another period like the 1970s?
There has been a general tendency over the last few decades to downplay the successes of development planning or strategic government interventions: failures are always pointed out, while successes are never acknowledged. Like any other economic strategy, planning has its advantages and disadvantages, but there is no guarantee a priori that the outcomes on balance would be negative. It depends on the aims of the strategy and how it is implemented.
In Iraq, regulation and intervention was almost certainly excessive during the 1970s, as even the regime recognized. But planning, which, incidentally, was not a Ba’thi invention and has been practiced in Iraq since the 1950s, achieved quite a lot in terms of economic and human development, including one of the best education and health structures (for its time in the 1970s and 1980s) in the Arab world and rapid capital formation. The gains might have been even greater and the drawbacks curtailed had there been time to improve and reform the planning process, vis-à-vis reducing costly and excessive regulation and taking a longer-term view of development. However, this did not happen as the state and development became increasingly politicalized and the country was plunged into conflict. So Iraq’s present economic difficulties are not the result of the fact in that planning has historically been prominent, as some have argued, but the result of actions that have led to long-term decline in the country’s institutions.
Can Iraq today use planning and as it did in the 1970s. I don’t think so, for the following reasons: 1) there is much less acceptance of development planning today in Iraq (and outside) in comparison with the 1950s and 1960s and the political system does not appear to have aided in coming together around a specific economic strategy. Even if there were such acceptance, 2) the required development institutions are lacking, most basically, property rights are insecure and the state does not even control all of its territory. Also, 3) human capabilities, especially in the public sector, has been denuded over the last 30 years. Finally, 4) there are legal impediments. For example, with respect to natural resources, it is not even clear who has the right to which resource.
The government and political parties, to be fair, are doing the best they can for themselves, as one might expect. I think that it is fair to blame them for being self-serving, corrupt or whatever else. However, it is easy to overlook the fact that they are working with severely depleted human and national capabilities. I am not saying at all that they are blameless or not self-interested, but what they are able to accomplish is severely restricted by Iraq’s recent history.