Iraq’s Attempt To Diversify Into Manufacturing

For decades Iraq has talked about diversifying its economy away from being dependent upon oil. Part of that has been various attempts to promote industry and manufacturing. From 2008 to 2011 there was an increase in output from this sector, but Iraq remained one of the least industrialization nations in the Middle East.

Iraq’s New 5-Year Development Plan Sets Nice Goals But Will Have Little Effect Upon Policy

Iraq just issued its new 5-year National Development Plan (NDP). Its main goal is to use the country’s vast oil wealth to diversify the economy towards agriculture, industry, and other sectors. It has the same basic goals as the previous plan. The problem is that the NDP is not a real path of action for Baghdad to follow rather it just sets broad goals for Iraq. More importantly, the government does not pay attention to it when passing legislation or making policy, which means it has no real affect upon the future of the country.

September 2013, Iraq’s latest National Development Plan (NDP) was announced. Its main focus is upon diversifying the economy away from oil dependence. Deputy Premier Hussein Shahristani said that the country would use its oil revenues to build up industry. The NDP also emphasizes developing building and services, agriculture, education, transportation and communication, and energy. In farming for example, it wants Iraq to reduce imports and move towards self-sufficiency. It calls for wheat production to be expanded to 6 million tons and barley to 1.2 million tons by 2017. By doing so, it hopes to alleviate some of the differences between rural and urban areas. These goals are to be achieved by $357 billion in investment over the next five years. That would be just over 50% of predicted oil revenues during that same time period. Since Iraq is the most oil dependent country in the world, developing other industries is a necessity. Other sectors of the economy have witnessed a drastic decline since 2003 due to some ill conceived policies implemented by the Americans and Iraqis. Dependence upon petroleum also has wide ranging effects upon politics and society such as breaking the social contract between the public and the government, decreasing the competiveness of other industries, and causing corruption. The NDP recognizes these negatives that derive from the natural resource curse, and advocates for an alternative path for the country to follow.

The problem for Iraq is if the new NDP suffers the same fate as the previous one. The old development plan set out the same broad goals to diversify the economy. The issue is that neither includes a real plan for the government to follow. Instead it just sets a possible direction for the country with some broad benchmarks to reach. More importantly, the government does not base its laws or policies upon the NDP. Each development plan therefore, is simply a recommendation for what Baghdad should do, not what it actually does. For example, the NDPs have called for a huge increase in public investment, yet each budget traditionally commits 60-70% of its funds to salaries and pensions. The 2013 budget only sets aside 38% of its money for investment. Another issue is that Iraq’s politicians only think short-term. They have control of a huge amount of money each year, and want to use it to expand their own base via large patronage networks. That means more government jobs and increasing the role of state-owned enterprises even though that means less money for Iraq’s development. There are few incentives for Baghdad to change its ways, which is another reason why the NDPs are never followed.

Iraq’s economy is in desperate need of diversification. Last year the United States Agency for International Development (USAID) warned that the country was at a crossroad. It could choose to develop its other industries or become even more dependent upon oil. So far, it has followed the latter. That was despite the fact that the previous 5-year development plan called for moving away from the energy sector. That’s because the NDP is put together by the Planning Ministry, but then rarely followed up with any specific policies that could help achieve its goals. Even if it was made official policy there’s no reason for politicians to follow it. The huge revenues that oil generates allow politicians to increase the public sector by funding more and more government jobs to hand out to their followers, and leaves plenty leftover to steal as well. There is little inducement therefore to change, and to make the Development Plan a reality. The country will suffer the consequences as its future will be determined by an oil industry that it has little control over, and politicians who only think about their own selfish goals.

SOURCES

Al-Salhy, Suadad, “Iraq budget battle opens new front in Kurdish feud,” Reuters, 2/15/13

Salman, Raheem, “Iraq five-year plan will attempt to diversify economy,” Reuters, 9/19/13

Tijara Provincial Economic Growth Program, “Assessment of Current and Anticipated Economic Priority In Iraq,” United States Agency for International Development, 10/4/12

Behind Iraq’s Impressive GDP Growth Rate

Iraq’s economy is noteworthy for its contradictions. Many experts believe that it will be one of the fastest growing economies in the world over the next few years. That’s mostly because of its tremendous oil and natural gas wealth that fuels the entire nation. On the other hand, unemployment, underemployment, and poverty are relatively high. The Gross Domestic Product (GDP) is a perfect example of a figure that appears to show the promise of the country, but upon further inspection shows the large structural problems within Iraq.

Iraq’s economy is expected to expand tremendously over the next few years. The Central Bank of Iraq thinks that the GDP will grow 9.4% from 2012-2016. That would be up from 5-6% growth in 2011. The World Bank said that the GDP would grow 12.6% in 2012, and 10.2% in 2013, while the International Monetary Fund (IMF) predicted 11.1% in 2012, and 13.5% in 2013. The Central Bank stated that it thought the GDP would go from approximately $170 billion in 2011 to $360 billion by 2015. All of this is due to the expected development of the oil and gas industry. It contributes 59% of GDP, and 63% of real GDP. Foreign energy companies working to boost production and exports, new infrastructure slowly coming on line, and continued high prices for Iraqi crude are the major reasons why the Central Bank, the World Bank, and the IMF all have rosy views of Iraq’s economy. The country also needs massive investment in nearly everything after years of wars and sanctions. That adds further avenues for the expansion of the economy.

Since 2003, the GDP has steadily gone up with only one small dip. In 2002, before the U.S. invasion, GDP stood at $20.5 billion. It then dropped to $13.6 billion, because of the war, but then quickly recovered to $25.8 billion in 2004, $31.4 billion in 2005, $45.1 billion in 2006, $57.0 billion in 2007, $86.6 billion in 2008, then declining to $65.2 billion in 2009 because of the world recession, before rebounding to $82.2 billion in 2010. All of this growth was based upon the oil industry. As exports increased, so did the GDP. When exports jumped from an average of 790,000 barrels a day in 2003 for instance, to 1.47 million in 2004, the GDP went up +46.5%. Likewise, when there was only marginal expansion of exports such as from 2006 to 2007, there was a slow down in GDP growth going from +5.9% to +4.1% respectively.

Year	GDP	Per Capita GDP	Real GDP Change	Oil Exports (Mil/Bar/Day)
2002	$20.5 bil	$802	-7.8%	1.3
2003	$13.6 bil	$518	-41.4%	0.79
2004	$25.8 bil	$951	+46.5%	1.47
2005	$31.4 bil	$1,124	+3.7%	1.36
2006	$45.1 bil	$1,568	+5.9%	1.50
2007	$57.0 bil	$1,926	+4.1%	1.66
2008	$86.6 bil	$2,845	+9.5%	1.84
2009	$65.2 bil	$2,087	+4.2%	1.90
2010	$82.2 bil	$2,564	+0.8%	1.89
2011	$170 bil est.	$5,342 est.	+5.6% est.	2.16
2012	$128.1 bil est.	$3,808 est.	+12.6% est.	2.41

The aggregate numbers for Iraq’s Gross Domestic Product hide the large inequalities within the country. First, oil and gas are capital-intensive industries that provide little employment for Iraqis. Only 1% of the workforce is employed in the energy sector. Instead, oil revenues are distributed throughout society through the government. In 2012, it was one of the largest public employers in the world providing 60% of full time work. That percentage was higher in the Kurdistan Regional Government. As oil has expanded, so has the number of government workers going from 28% in 2005 to 43% in 2008 of the entire workforce. The vast majority of these workers do little to no real work. For example, former Planning Minister Ali Baban said in 2010 that 70% of public employees were unproductive. In comparison, agriculture and manufacturing have declined since 2003 due to the repeal of tariffs by the Coalition Provisional Authority, the lack of reliable electricity, and the inability to compete with foreign products, which are heavily subsidized, such as Western wheat and barely. Even with that huge expansion, unemployment is still officially at 11%. Not only that, but those families that do not have a relative in the government are more likely to fall into poverty, because they lack a steady income and pensions. It is one reason why the government poverty rate is still high at 17%. That doesn’t mean private employment hasn’t grown in recent years, but again, that’s largely due to outsourcing by the government. That too has problems as many employers look towards foreign workers, because of their cheap wages, and to make up for the loss of domestic professionals due to a massive brain drain that has happened since the 1990s. Finally, the government is not helping the situation. It is pushing the oil industry as the means to expand the economy, and despite its many promises to diversify and privatize, it is enlarging the state sector instead. These many problems are what the GDP numbers do not reveal. Yes, the figures for Iraq’s economy are going up dramatically, but that does not mean that they are actually helping the majority of the population. If the end result of Baghdad’s policy is the hope for families to have a relative in the public sector who does little actual work that does not make a productive society.

Iraq’s GDP is just one example of where the numbers do not reflect the full reality of what is going on in the country. The expansion of the oil and gas industry with the help of foreign energy companies is driving economic growth. That is benefiting the entire population, but not as much as the figures would have one believe. Money is trickling down, but through the inefficient government with public sector jobs and contracts for private companies. This has given rise to increasing wages, but the vast majority of government workers do nothing, and Baghdad is using its oil revenue to expand the state rather than diversify the economy, which would do a much better job of raising the standard of living for all Iraqis. Until these structural problems are addressed, Iraq will have a fast growing economy, while still dealing with massive disparities.

SOURCES

Adel, Shaymaa, “Iraq reports plunge in poverty and unemployment levels,” Azzaman, 5/5/13

Cordesman, Anthony, “The Changing Situation in Iraq: A Progress Report,” Center for Strategic and International Studies, 4/4/09

Dunia Frontier Consultants, “2011 Year in Review, Foreign Commercial Activity In Iraq,” March 2012

Inter-Agency Information and Analysis Unit, “Iraq Labour Force Analysis 2003-2008,” United Nations Office for the Coordination of Humanitarian Affairs, January 2009

O’Hanlon, Michael and Campbell, Jason, “Iraq Index,” Brookings Institution, July 2012

Peel, Michael, “Iraq faces uphill battle to rebuild,” Financial Times, 5/9/12

Reuters, “Iraq sees at least 9.4 percent GDP growth to 2016: central bank,” 2/19/12

Tijara Provincial Economic Growth Program, “Assessment of Current and Anticipated Economic Priority In Iraq,” United States Agency for International Development, 10/4/12

Yousif, Bassam, “Aspiration and Reality in Iraq’s Post-Sanctions Economy,” Middle East Repot, Spring 2013

- “The economy of Iraq since 2003-a follow-up,” Indiana State University Economics Department, August 2012

Iraq’s Closed Factories

The head of the Iraqi Union of Industries recently said that 90% of the country’s industries had closed since 2003. He claimed that 36,000 small and medium sized companies had gone out of business for a variety of reasons. Those included cheap imports, the lack of tariffs, electricity shortages, banks not giving out loans, and skilled workers leaving for other countries. While he didn’t mention it, the violence in the country also played a role.

Iraq’s factories have been endangered since the Coalition Provisional Authority (CPA) tried to privatize the economy. The leaders and administrators of the CPA believed in a rapid privatization program for Iraq. They had ideological reasons working for a conservative Republican administration, and also believed crash courses in capitalism were successful in Eastern Europe after the fall of the Iron Curtain. In September 2003 the CPA announced its plan. This came as a shock to Iraqis and the Governing Council as they had never been consulted. At the time there were about 200 hundred state-owned businesses. None of them could operate on their own however. Some had no money, the looting after the invasion had destroyed some, while others had aging and out of date equipment. Just as important, there were no buyers for any of them. The plan proved so unpopular that in November the CPA canceled its plan. Instead of helping these struggling businesses however, the U.S. simply ignored them believing the market would determine whether they should stay in business or not. The result was most of them closed, and around 500,000 Iraqis were laid off. In the process, important businesses for reconstruction and transportation went under such as the railroad, fertilizer and cement industries.

The lack of security, services, and protectionist barriers has also hampered business. Military operations, attacks by insurgents, checkpoints, roadblocks, etc. have all strangled trade and commerce in Iraq. Many companies had to hire security guards to protect themselves. The supply of electricity has also been inconsistent forcing businesses to buy their own personal generators. Fuel costs have also skyrocketed since the invasion, meaning more bills. All three have added costs to Iraqi goods, which make them less competitive in the world market. Iraq also has few tariffs on manufactured goods, which has led to a flood of cheap foreign imports. All of these together have led to factories shutting down.

During the Surge, the Pentagon and Baghdad both tried and failed to revive Iraq’s industries. The Defense Department appropriated $50 million for the project, believing that the jobs created would help decrease the draw of the insurgency. Baghdad contributed $400 million as well. The military hoped that they could get American companies to buy the Iraqi manufactured goods, but they found no takers. Only around twenty factories were re-opened, the initiative got caught in a bureaucratic struggle between the State and Defense Departments, and the U.S. officials in charge of the project came under investigation for mismanagement and waste. Later, the Ministry of Minerals and Industry planned to sell off engineering, construction, textile, chemical, petrochemical, food and medicine plants to foreign investors, but found no bidders.

Before the invasion, Iraq was already a poor country because of the Iran-Iraq War, the Gulf War, and international sanctions. After 2003 Iraq ran into a slew of new problems including a failed privatization program by the Americans, cheap imports, lack of electricity and fuel, and a security vacuum. All contributed to the closing of the vast majority of the country’s factories, which were major employers, and largely unsustainable without state support. As reported before, the entire economy has suffered under these conditions. Iraq has a 60% unemployment/underemployment rate as a result. Some of these factories were doomed, but others could’ve been better managed and kept in business for the rebuilding that lay ahead. Firing hundreds of thousands of workers also did not help the country in anyway. The problem that lies ahead is reviving Iraq’s industries, which face massive structural problems beginning with the lack of tariffs and foreign investment.

For more see:

Iraq’s Troubled Economy

SOURCES

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

Fairweather, Jack, “Iraqi state enterprises warily reopen,” Financial Times, 6/16/08

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

Henderson, Anne Ellen, “The Coalition Provisional Authority’s Experience with Economic Reconstruction in Iraq: Lessons Identified,” United States Institute of Peace, April 2005

Iraq Directory, “More than 90% of Iraqi industries are halted,” 1/10/09

Looney, Robert, “Half Full of Half Empty? An Assessment of the Crocker Report on Iraqi Economic Conditions,” Strategic Insights, December 2007

Al-Sadawi, Ahmad, “Iranian products win the market,” Niqash, 6/13/08

Special Inspector General for Iraq Reconstruction, “Quarterly and Semiannual Report to the United States Congress,” 7/30/08
- “Quarterly Report to the United States Congress,” 10/30/08

White, Josh, “U.S. Falters In Bid to Boost Iraqi Business,” Washington Post, 8/24/07

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

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