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.
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