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The Political Economy of Iraq's Growing Oil Power: A Crucial Phase
Sabri Zire Al-Saadi, 4/1/2010

Introduction

The very difficult circumstances of the last seven years in Iraq – which caused a tremendous human suffering, and inflicted huge material and financial loss to the Iraqis, as well as to the United States and its main ally Britain – have shown the strength of the Iraqis in bearing the burden of these damaging events, their high spirit for defending their liberties, and their determination to establish a new politically liberal and democratic state. Also, the experience of the Gulf and Middle East region – rich in oil and gas and characterized by inter-states conflicts, especially with the recent rise of Iran's ambitions as a nuclear power – confirm Iraq's strategic importance and the need for its stability.

However, its success in establishing a liberal and democratic political system depends to a large extent on Iraq's capacity for building the national economy where the private and public sectors play complementary roles in a more liberalized market for utilizing its abundant human and natural resources – especially oil and gas – for improving living standards in terms of income, consumption, public health and education services, and provision of public utilities. Also, policies and measures for market liberalization should consider the strategic importance of developing non-oil industrial sectors and diversifying national income sources.

A side issue, nonetheless relevant, is the examination of the suggested economic remedy in this article may prove useful in debating whether the objectives of the U.S. military presence in the Middle East are to maintain stability of the region, the management of the regional power balance, or as an instrument to help in the establishment of democracy and civil societies.[1]

Last year, Iraq achieved significant success in combating terrorism and limiting violence and sectarian conflict, as well as fairly improving the national reconciliation process. However, economic failure continues to prevail despite high public expenditures and the availability of financial resources. The vast majority of people are still living in hardship conditions or remain poor.

Significantly, in recent months, the government has signed new investment agreements with the oil foreign companies that aim at increasing the crude oil production from its existing rich oil fields as of 2016/2017.[2] The successful implementation of these agreements will have strategic economic and political importance far exceeding their financial outcome, just as Iraq’s history has shown in 1951 when oil revenues substantially increased as a result of the 50/50 profit sharing agreement signed with foreign oil companies, and the subsequent increase in world oil prices in 1973.[3] The impact of increasing oil production to 12 million barrels per day (b/d) and a parallel increase in exports would greatly influence the world oil and energy markets.

The aim of this article is to analyze reasonably – albeit a personal vision – the expected impact of the “targeted success” of these agreements on the economy and the likely change in the positions of the country driving forces in the coming years. It highlights that if the government continues not to have economic direction as the last seven years experienced, the “targeted” financial benefits from the new oil agreements would restrict the required far-reaching economic, social, and political development of the country.

Based on earlier conclusions, the implication of having additional oil power has two main contradictory possibilities:[4]

a. Rational utilization of the "excessive" oil revenues in building the national economy and alleviating the related social problems. This objective can only be realized by applying the economic diversification strategy that reduce the State (governments) high dependence, and consequently the people reliance, on oil exports for financing public and private expenditures and imports.

b. Or the other possibility; exploiting the oil revenues for serving the interests of small economic and social groups and the ruling political elite that lead to limiting the democratic process, and might encourage the rise of a new dictatorial regime. The structural economic crisis will then be perpetuated while the society enjoys a substantial increase of the public and private consumption.

Also, if not rationally utilized, additional huge oil power might invite the future government to engage in the power-game, or even worse to be involved in the ideological and political conflicts among the region’s countries.[5]

Features of the Political Economy

Since the establishment of modern Iraq in the early 1920’s until the end of 1960’s, the country has been a pioneer among the Middle East in enjoying a variety of liberties of the then semi-liberal regimes. Also, the experience showed that the accumulated misuse of oil revenues since the 1950’s has been a major factor behind its present problems.[6] This explains why the Iraqis have always been keen in expressing their interest and awareness of the oil wealth prosperity and adversities, especially there has been no record of fairly economic progress made by the governments for a long time.

Since 2003, the experience showed that the ruling parties and the governments have no national future vision and economic and social development programs supported by clear political commitments for dealing with the prevailing amounting problems.[7] And when the prominent politicians publicly confess that the government’s shortcoming extends beyond maintaining a stable political system to include the failure in alleviating the socio-economic problems, then the conclusion that there exist serious political, economic, and social crises becomes a nation-wide priority issue.[8]

The experience revealed that the governments and the main parties have vague understanding of the required economic policies and institutions. More important, among the ruling parties, there is no coherent vision or concrete views that outline the essential features of Iraq’s modern State; i.e. Iraq's long-term objectives and the political, economic, and social strategies, which make the task of implementing integrated economic policies extremely difficult.

In reality, insufficient recognition of Iraq’s real economic problems has been reflected by the current flawed policy that mix up between the need for liberalizing the market from the State’s intervention and the necessity to appreciate two important facts:

1. The collective interests such as the public education and health services cannot be realized by the individual and self-interests.

2. The public ownership of oil wealth (revenues).

At present, the following political economy features are observed:

1. The people are widely involved in public politics as have been reflected by their interest in the general and the governorates’ elections, while there is a downwards trend in the popularity of the Shiite and Sunni parties. Also, the liberal and democratic parties, including the ruling parties in Kurdistan Federal Region (KFR), are losing their popularity and effectiveness.[9]

2. The failure of the dominant parties in protecting the individual and public liberties, maintain political stability, and promoting democracy. This is also observed in KFR which has enjoyed a stable and secured situation after the occupation in April 2003.[10]

3. The early failure of the liberal national conference party, the royal constituency movement, and to a less degree al-wifaq movement reflect how Iraqis react in a sensitive way to the socially and politically privileged personalities who did not share their hardship in the past.

4. The apparent governments’ failure in providing the people’s basic needs, essential public services, reconstruction the infrastructure, and reviving the economy.

5. The increasing disparity in income and wealth between the few wealthy war and occupation beneficiaries and the prominent politicians and their privileged close supporters on one side, and the people’s majority whom living standards have been deteriorating, unemployment among active population is increasing, and more are falling into the poverty trap. The disparity also exists among the governorates.[11]

6. Lack of public services, bad housing conditions, and increasing prices of the real estate, are causing a growing social and political concern.

7. Widespread and serious financial and administrative corruption in all the government institutions, especially among the ruling political elite.[12]

8. The influence of public sector enterprises is receding, the weakness of the middle class continues, and the private sector remain small, while a wealthy small groups of traders and contractors, as well as the emergence of wealthy professional politicians are dominating the public scene.[13]

9. While unemployment rate is high, the number of employee in the government departments and public entities, including the army and the security forces, has substantially increased.[14] The problem of over-employment is particularly acute in KFR[15].

10. Neither the present government nor the main political parties have wide and effective relationships with the citizens that would help them to understand the people real problems.[16]

Iraq's National Future Vision - Unfolded

In addition to its strategic geopolitical advantages, the successful implementation of the new oil agreements would improve Iraq's opportunity to be one of the most developed countries in the Middle East, as well as being an influential, if not playing the swinging role, in affecting the policies of the “Organization of Petroleum Exporting Countries” (OPEC). Adding (6-9) million b/d to the world’s crude oil supply would drastically affect the trends and prices in the crude oil and energy markets, as well as causing a far-reaching shift in the power balance in the Middle East region.

Since the 1950's, the Iraqi regimes; the semi-liberal, the Arab nationalist, the Arab socialist, the dictatorial, and the present mixed inhomogeneous regime led by the Islamic governments dominated by the Shiite and the Sunni, have experienced, in different degrees, the adversities of high dependence on oil revenues.[17] At present, however, Iraq faces the challenge of fundamental inquest; how can the national economy be built as part of the liberal, democratic, and socially progressive State that would be pioneer in the Middle East?

The experience showed that any attempt for designing the required economic strategy and policies cannot be effective enough without a framework of national future vision in which the oil wealth considered as a strategic factor.[18] In fact, oil revenues continue to play a key role in keeping Iraq's State intact after the fall of the former dictatorial regime by financing the military and security forces, increasing public expenditures, providing public services, and even financing, directly or indirectly, the political parties and groups. Indeed, the State viability has been largely maintained during the last seven years by the revenues of producing and exporting the crude oil at the average of 1.650, 2.000, 1.750, 1.930, 2.000, 2.340, and 2.400 million b/d in the years 2003 to 2009.[19] This is why the citizens and the political parties have raised their concern and demand for increasing investments in the rehabilitation of the depleted infrastructure of the oil industry by the government. Indeed, demand for increasing oil revenues has always been a matter of necessity. Since early 1980's, the call for increasing oil production and exports escalated as a result of the devastating and costly Iraq-Iran war. The catastrophic consequences of the UN economic and trade sanctions (August 1990-April 2003) which was imposed on Iraq after the invasion of Kuwait revealed how important it is for Iraq to maintain high level of oil production and exports.[20]

After occupation, the domestic and foreign interests in oil policies have been widely varied; the rehabilitation of the infrastructure of the oil industry and maximization of oil production and exports were popular, the foreign concerns advised the privatization of the oil industry, some advocate the "fantasy" of distributing oil revenues in cash among the citizens, others suggest that rehabilitation of the industry should be done by the public enterprises, and some preferred service contracts rather than direct investment agreements with the oil foreign companies. Nevertheless, within the prevailing political economy framework, maintaining the public ownership of the all activities of the industry; i.e. exploration, extraction, exports, and industrialization have been the major concern of the people.

Significantly, however, all these views and related policy suggestions, have not tackled the problematic relationship between the way of utilizing the oil revenues and the objectives of economic strategy and the macroeconomic policies. In fact, the interests of all concerned parties were centered on the financial outcome.

At present, since the government has signed the new oil agreements with the foreign companies regardless of its cost-benefit assessment, it is essential to analyze its likely future implication in view of the country’s long-term strategies that should be guided by national future vision. The agreements have confirmed the prevailing dominant perception since 1970's that Iraq has the potential of producing up to 10 million b/d of crude oil and hence have the capacity to maintain a strategic position in the Middle East. Let us remember that Saddam Hussein and the Baath party have such ambitions in order to build a strong State of Iraq. They had a future vision for Iraq, but, unfortunately, it was wrong vision.

Growing Oil Power

Iraqi views have been different in assessing the financial and economic cost-benefit and legality of these agreements; while some views were preferable,[21] others question its legality[22] or highlight the negative implication of having foreign companies controlling the oil wealth, and there is a question whether the “targeted” increase of public financial resources has urgent economic need. Such differences are similar to those views hindering the approval of the proposed “oil and gas law 2007” which was authorized by the government but rejected by the parliament,[23] as well as the views that deny the tendency of the government of KFR to dispute the centralization of public oil purse and allocation.

According to these agreements, crude oil production will be increased to an average of 12 million b/d as from 2016.[24] I.e. the new investment will add 9 million b/d to the present production of 2.4 million b/d. Such new reality would radically change the future trends in the energy markets by adding about 38% to the OPEC oil supply in 2016 and 18% in 2030.[25] As for the world oil demand, the expected exports' increase of about 9 million b/d, shall constitute about 9.4% and 8.5% of the estimated world's demand in 2016 and 2030 respectively.[26] But most important, it puts Iraq at a new historical economic and political transfer stage ample with contradicting possibilities similar, if not more radical, to the 1970's period. In particular, the direction and effectiveness of the economic policies of the coming governments might be affected.

In spite of the skeptical views that reduce the high expectation of the “targeted” increase of oil production due to the country’s limited export capacities,[27] or casting doubts on the economic viability and the risk of producing more than 6 million b/d,[28] the psychological impact of the new oil agreements starts to influence the domestic political economy, and also the region where some observers refer to the likely change of the political and economic power balance among the Middle East countries in favor of Iraq.[29]

Undoubtedly, the expected increase of crude oil production to 12 million b/d is a new strategic factor that will reshape the future of Iraq’s State.

The immediate and likely longer-term effects of these agreements on the present economic and political reality, and its adversity if the required radical changes are not carried out in due time, can be perceived as follows:  

1. The principle of giving priority to the economic strategy and policies leading the oil policy has already been violated. In fact, neither there is a well-defined economic strategy and policies, nor the new oil agreements considered the prevailing economic conditions.[30] Such a situation would sustain the government’s short-term economic approach and most probably relax the efforts for dealing with the chronic structural economic problems.

2. It is expected that the governments and public enterprises expenditures would increase substantially, especially for financing the physical, social, and environmental infrastructure projects, and consequently accelerate the process of contracting hastily with the foreign companies for their implementation. Such situation highlights that the existing problem of the State’s limited administrative absorptive capacities would be worsened.

3. The availability of “excessive” oil revenues would provide the coming governments with the opportunity for concealing their failure in dealing with the existing socio-economic problems. This expectation is based on the inefficient economic management of the country on one side, and the political parties’ tendency for gaining popular support by promising the continuation of the current wrong-medication, morally subdued, and financially costly the “food ration system”, as well as the provision of the oil products at subsidized low prices on the other.[31]

4. As the oil economic and political power grows, the demand of the citizens and the liberal reforms groups for the rationalization of the public spending would be increased; i.e. the issue of likely “exorbitant” public spending of the “excessive” oil revenues would rule the political economy activities.

5. Given the seven years lax governance of the country, the efforts for increasing the capacities and efficiency of the government’s economic, financial and monetary departments and public agencies, as well as the tasks of re-evaluation of the public enterprises would be relaxed even more.

6. As a result of high public expectation of speedy economic recovery, the reliance on the government expenditures would be increased, and the demand for economic liberalization would be amounted.

7. On the foreign policy, the confidence in the State having a higher bargaining political, financial, economic, and military power vis-à-vis the neighbour countries, shall increase significantly.

Economic Growth and Investment Conditions

At present, it is unfortunate that there is a perception among most of the politicians, and the public too, assumes that the abundant oil revenues are sufficient requirement for raising economic growth and improving the living standards. Oil revenues, however, are necessary, but they are not sufficient for increasing production, productivity, and employment, as well as indigenizing the modern industries and advanced technologies. In reality, the existence of market distortions; namely, lack of physical infrastructure, shortage of skill labor, immobile labor force and other factors of production, the price and in-kind income subsidies, institutional barriers, and some social values and traditions, reduces substantially the practical value of such trouble-free optimistic suggestion.

Given the existence of market failure conditions, the prevailing main economic facts and issues can be generally identified as follows: 

1. Sluggish non-oil production, high unemployment, low level of individual income and consumption, low level of investment and exports, especially non-oil products, and high dependence on oil revenues for financing the government expenditures and imports. Non-oil revenues of the government’s annual budget are insignificant. Against these realities, the World Bank’s estimation of the macroeconomic indicators showed that GDP grew in real terms by 4.6% during the period 2004-2009 and the growth rate is expected to be 5.8% in 2010 and 6.8% in 2014.[32] Regardless how realistic these office-desk simple arithmetic estimations are, they failed to show how much the oil and non-oil sectors contribute to GDP in the past and the future.

2. Increasing disparities between the few "new wealthy” groups and the majority of people with low income and living standards which create social discontent among them.

3. The structural economic problems constitute the main challenge facing the nation. The challenge needs a strong political will, administrative skill, and persuasive public debate in order to compromise the need for efficient utilization of oil revenues and the reduction of dependence on crude oil exports by the expansion of production capacities in industry, agriculture, and services to increase their contribution to GDP and exports. The economic criteria for assessing the performance in meeting this challenge are; the expansion of the production capacities of the non-oil economic sectors, especially industry and agriculture, that would increase their share to GDP by at least 80 percent, increasing the share of non-oil exports to total exports to at least 70 percent, increasing the non-oil revenues of the government annual budgets to at least 50 percent of total public expenditures, and increasing the contribution of private sector to 70 percent of GDP[33].

4. The total government expenditures, which were documented by the International and Monitoring Board for Iraq (IAMB) and the Development Fund for Iraq (DFI) amounted to $178,276,134 million during the period (13th May 2003- 31 July 2009). And total public oil revenues were amounted to $169,472,004 million during the same period. Oil revenues constituted 90.58 percent of the total received cash during this period.[34] Also, Iraq total foreign reserves reached $49.530 billion in 17th December 2009, including 2.692 billion gold assets and SDR.[35] It is also expected that oil revenues will be increased in 2010 due to expected increase of the crude oil exports volume and its prices. This would eventually lead to a parallel increase in government expenditures as well as in the country's foreign currency reserves.

5. In pursuing its economic policies, the governments relied on the annual "three years rolling" budget that has to be revised annually. The new system, which is a copy of the US budget system and implemented since 2003, was based on the principle of reducing the State’s economic role in favour of promoting the investment activities of the private sector in a free market. It replaced the former two-tier system which was applied since the 1950’s; i.e. the annual budget for financing the government and public expenditures, and the second, the economic and social development plan and programmes which were prepared for financing the economic (physical) and social public infrastructure projects. The implementations of those plans were regulated by the execution of annual investment programs. As the actual experience showed, the new system misidentified the relevancy of the country’s prevailing salient economic and social features and the domestic market conditions.

6. Iraq's new experience has been characterized by the absence of clear governments' economic policies and the limited role of the professional indigenous economists in the decision-making processes. Coupled with the political centralization of the country’s governance and the dominant economic and political role of the oil revenues, active economic problem-solving and strategic thinking have been lacking.[36]

While it is always possible to shed doubt on the practical value of the given views and propositions in this paper, Iraq's economic experience during the three decades before 1980 confirm that it is possible to apply them by Iraqi institutions and professionals with their available expertise provided that there are political commitments and strong will to undertake the required change and modernization.[37]

To increase economic growth and employment as well as improving the living standards, government efforts should be intensified to increase public and private, indigenous and foreign, investment. Most of oil revenues should be allocated to the domestic public investment. However, these efforts as represented by the actual public investment expenditures and the issued of the “investment law” have very limited impact. The “investment law”, even if modified to cope with the more liberalized investment regulations applied in the region’s countries, would not be effective in increasing domestic investment and indigenizing the foreign investment. The reason simply is that there exists insufficient infrastructure for big investments.

Following the widely practiced investment promotion conferences in the oil-rentier economies in the Gulf region, Iraq arranged many similar conferences with the collaboration of the U.S., the WB and the IMF, in the last seven years to attract foreign investment in utilizing the available opportunities in industry, agriculture, trade, housing, transport and communication, financial and personal services sectors. However, the outcome was not successful. It is obvious that Iraq has many attractive investment opportunities, but their utilization is still restricted not only by the unsettled government economic policies, but also by the lack of the physical infrastructure and skill labor as well as the existing institutional barriers. Unfortunately, those constraints cannot be removed in the short-term, especially for the indigenizing foreign investment in industry.

For Iraq, it is necessary to distinguish between the foreign contractors companies that have advance technology needed for building the required public physical infrastructure and the expansion of the production of electricity and construction materials in the public sector enterprises, and the foreign companies that have the potential in indigenizing modern industries, advance financial services, advance agriculture production technology, and other productive economic activities. The first group of foreign companies needs no particular incentives in order to work as long as the State has enough financial resources to finance the public projects. The second group, which is more important for building the national economy and sustaining economic growth, needs careful and longer-term economic, institutional, legal, and spatial preparations to attract them. Otherwise, foreign investment would be very limited to financial investment and real estate or in the owning the public strategic industries when privatized.

Lack of Institutional Economic Policies

In Iraq, effective economic policies cannot be achieved without prior knowledge of the State economic strategy that requires at least two conditions: 

i. Understanding the dynamics of Iraq’s oil-rentier economy under imperfect market conditions.

ii. Political commitment to the objectives of the State's future vision.

If these conditions are not satisfied, the government claims of being capable in dealing with the mounting economic problems are worthless. Unfortunately, this is the case where neither the government's economic advisors nor the politicians have enough knowledge to define their economic strategy and policies. The lack of the government oil policy has also prevailed.[38] Moreover, there is no coherent national vision on the objectives of the targeted modern State of Iraq. In this respect, one should mention that while such perception and knowledge are part of the government's responsibilities, the citizens are only interested in their economic and welfare conditions. The private sector, though always interested in knowing how the economy works, is not responsible for the economy’s efficiency or dealing with its existing problems.

Evidently, there is no significant difference between the absence of the concept of economic policies during 1920s, 1930s, and 1940s on one side, and the chaotic management of the national economy in the last seven years on the other. In the early times, there have been general governments' statements in which some financial measures and a limited number of public development projects were included and presented in the annual budget and in separate public works programs covering a number of years. In the last few years, however, many new laws have been approved and many government's documents, statements, and promises have been issued, but they were either ineffective or incoherent and impractical. In reality, there were many unrelated financial decisions and measures applied within the framework of the annual budget with a rigid monetary policy.[39] In practice, the government frequently made statements promoting the role of the private sector which proved to have no solid base to materialize. In addition, there is no effective coordination between the economic, financial, and monetary institutions.

Also, the fiscal policy that encourages non-productive expenditures on the pretext of economic expansion and increasing employment in the government departments and public agencies, as well as the rigid "independent" monetary policy that suppose to maintain economic stability; controlling inflation and the fixed exchange rate of the Iraqi Dinar vis-à-vis $US, both of them are irrelevant. These policies were wrong simply because the government expenditures constitute the major share of the aggregate effective demand that generate the consumption and investment and their multipliers, and ultimately stimulate economic growth.

As for the monetary policy, the effects of the interest rates and the bank credits are very limited, while the exchange rates regime is basically determined by the availability of the foreign currency from the crude oil exports which are enough to maintain the required imports. As a matter of fact, the rigidity of the foreign exchange regime contribute to the hidden economic structural problem; i.e. sustaining the economy dependence on oil revenues.[40] As for the increase of the foreign currency reserves, the monetary policy has nothing to do with it. The practice showed that once the annual budget expenditures are determined by the government ministries and agencies, the IDF that is still under the international control, allocates the required money for it. Also, since the total budget allocations exceeded the actual expenditures; i.e. the absorptive economic and institutional capacities are limited, the surplus balance of oil revenues and actual expenditures were added to the foreign currency reserves. Hence, against the actual practice, there is an urgent need for close coordination between the fiscal policy and the monetary policy rather than the false claim that the independent monetary policy helps to curb inflation and stabilize the exchange rates and accumulate the country's foreign currency reserves. One aspect of the monetary policy dilemma was publicly exposed in the suggestion that Iraq has to have a new “foreign currency budget” in which lower and upper limits of the foreign currency reserves have to be annually determined and certain amounts of it should be allocated to the private sector.[41]

In addition, the authorities followed the ill-advised economic reform policy of the IMF that encourage the unconditional and hasty economic liberalization and borrowing foreign loans – while the country has huge reserves – instead of adopting the strategy for economic diversification and gradual market liberalization coupled with the application of moderate social welfare program.

On the reconstruction of the public physical, social, and environmental infrastructure, the government failure is apparent.

As for the oil policy, after settling the major issues of investment in the industry by the new oil agreements, it shall continue to perform two main usual tasks: 

i. Maintain the oil exports at preferable prices. This function provides adequate estimates of the annual oil revenues, but adds nothing to the economic policies.

ii. Increasing efforts for the industrialization of the crude oil; the petrochemicals, oil refining, and oil products.

The Economic, Social, and Political Driving Forces

An attempt to assess the likely future change of positions of the driving economic, social, and political forces by traditional social class analysis is not fully applicable. The Iraqi case is simpler. Out of the total population, there are about 24 percent of poor people and the majority of the rest can be classified as lower middle class in term of income, consumption, education, housing, and other criteria. Most of those people have the purpose to link with the dominant political power hoping for improving their daily living conditions. Also, the economic and financial interests of the private companies and business individuals and communities as well as of political parties rely substantially on the government and public expenditures. The State, on the other side, depends heavily on oil revenues in running its normal functions. The people contribute nothing to the public finance; i.e. different forms of taxes, and, therefore, the pressure on the governments from the tax-payers is nil. Hence, the ruling authority plays the key role in influencing the country's economic and political activities, but not the social class or the groups of traders, the contractors, the industrialists, the rich farmers, or the business men. In Iraq, the major power is the oil wealth, which has been held and used by the ruling authority.

However, there is also the social power of the Shiite religious establishment, represented by the Grand Ayatollah Ali Sistani that exerts its important influence on the dominant Shiite communities. Significantly, the establishment is financially independent from government expenditures. Thus, it has the power to shape the future political events.

It is not a new experience that the high increase or the sharp decrease of oil revenues had a huge impact, mostly negative, on the social values and traditions of the oil-rentier countries. Similar change has happened in other oil-rentier society earlier.[42] In Iraq’s case, when oil revenues suddenly and sharply dropped, it led to the catastrophic deterioration in the living standards and changed some of the good values and traditions of the society during the period (1990-2003).[43] During the last seven years, the negative impacts of the wastefulness of public expenditures financed by the high increase of oil revenues have magnified the corruption and accelerated the deterioration of the civil service and political ethics to the extent it became apparent phenomenon.

Hence, it is most likely that the expected increase of oil revenues would lead to a wide and deep change in the power position and influence of the political, economic, and social driving forces, especially the ruling parties and the civil society’s organizations. Indeed, such changes have already appeared in KFR as a result of the increase of the region government’s oil revenues and spending.

The perception is that the following main developments would arise as a result of the new oil agreements: 

1. More dominance of the ruling authority.

2. Growing role of the private sector, especially in construction (contractors) and related industries, small and medium industries, and few corporation companies. However, profit and income taxes remain insignificant.

3. Receding importance of the public sector in manufacturing industries, agriculture, and services enterprises, but it shall retain significant role in financing and running the strategic infrastructure projects.

4. Increasing influence of the financiers, the industrialists, the traders, the rich farmers, and the professionals in the financial services sector.

5. Increasing role of the banks, the financial market, the insurance companies, and the financial services.

6. Increasing importance of the middle class in the political, economic, culture, and scientific activities.

7. Rising role of the private entrepreneurship, technology, and the management efficiency of the companies and enterprises.

8. The importance of social security and welfare system would be increased to maintain the benefits of the unemployed, elderly, pensioners, and poor people.

Remarkably, the dynamics and the outcome crisis of the "anticipated exorbitant" government spending of the "excessive" oil revenues in the oil-rentier economies have similarity with the widening divergence of the unlimited banks credits flow in the financial system and the flow of products and commodities in the production system in the developed economies that caused the recent global financial crisis.[44]

Conclusions

Oil has been, and will continue to be, a major driving force in shaping the political economy of Iraq. The “targeted” excessive and fast increase of oil revenues from the new oil agreements would either open the space for the regime to establish a new system that maintain individual and public liberties, liberalizing the economy and domestic politics from the high dependence on them, providing the basic services and material needs to the citizens, or the other possibility; deepening the prevailing overall crisis that is tied with the “silky ribbon” restrictions of "exorbitant" increase of consumption financed mainly by the “excessive” oil revenues.

Iraq must, therefore, seize immediately this new strategic development by taking the following policies and measures; 

1. Pursuing the process of economic liberalization gradually in parallel with the performance made in increasing the share of non-oil industrial and economic activities to GDP, public revenues, and exports.

2. Politically, the ruling parties and the civil communities must embark on a nation-wide public debate on the objectives of the "national future vision" and to give rise to a strong, visionary, unified, and popular liberal leadership. The weakness and indecisiveness of the coalition governments’ experience should be concluded.

3. Institutionally, the government should initiate radical changes in the functions, the organization, and the interrelationships of the State’s economic, financial, and monetary departments and institutions, as well as its social development agencies. The need is apparent for the Ministry of Finance and the Central Bank of Iraq. Also, the "Iraqi Council for Reconstruction and Development" should be established as an independent entity in order to assume the tasks of identifying and implementing a comprehensive program for the construction of the infrastructure priority projects, and coordinate the efforts of the KFG and other Governorates. The tasks of the Ministry of Planning and International Cooperation should be redefined to assume the responsibility of designing "Iraq's future vision", the "long-term economic strategy", the "sectoral development strategies", the "economic reform program", and advice on the "macroeconomic policies". Also, a highly qualified unit should be established and attached to the Prime Minister Office in order to implement the "privatization program" that should include a comprehensive re-evaluation and rehabilitation of the public enterprises.

4. Most important, all these political and institutional and technical requirements should be coupled with a binding State’s Law in which 40% of total oil revenues in the years 2011-2015, and at least 70% in 2016 and onward, must be annually allocated to finance public investments in building and modernizing the country’s physical, social, and environmental projects.

If the coming governments continue to be without economic direction and fail in utilizing the “targeted” additional oil power for performing the required economic tasks in due time, the risk of enveloping Iraq’s bright future for a long time is real.

References

1. James Russell raises this question in his discussion on the aims of the US’s strategy in the Gulf and Middle East region. See, James A. Russell, "Extended Deterrence, Security Guarantees, and Nuclear weapons: U.S. strategic and Policy Conundrums in the Gulf," Strategic Insights 8, no. 5 (December 2009).

2. Details of these agreements and an argument on its likely implication on OPEC was given in: Ruba Husari, "The Rush for Oil: Iraq's Oil Capacity Potential and Regional Geopolitics", MEES 52, no. 45 (9 November 2009).

3. A historical assessment of the economic impact of the oil revenues was given in: Sabri Zire Al-Saadi, "al-tajruba al-iqtisadiya fi al-iraq al-hadeeth: al-naft, wa aldimouqratiya, wa al-mashroea al-iqtisadi al-watani (1950-2006)”, (the economic experience of modern iraq: oil, democracy, and the national economic project (1950-2006)), Dar-Almada Publishers, Baghdad, Damascus, and Beirut, January, 2009.

4. The conclusion has been mentioned in my writings over the last two decades; e.g. Sabri Zire Al-Saadi, "The Economic Revival of Iraq," MEES 46, no. 35 (1 September 2003); "Success Conditions for Iraq’s Oil- Rentier Economy: Special Theory of Economic- Rent and Free Market Efficiency, Strategic Insights 6, no. 6 (December 2007); “Liberalization Strategy for Iraq’s Oil-Hostage Economy: Alternative to Oil Power Dominance and Neo-Liberal Subordinate Economic Policy”, Part 1&2, MEES 49, nos. 42 & 43 (16 and 23 October 2006), “al-tajruba al-iqtisadiya fi al-iraq al-hadeeth (1950-2006), (the economic experience of modern iraq (1950-2006),” Op. Cit.

5. See, Sabri Zire Al-Saadi, "Oil Power and Adversity in Iraq’s Experience: Case History of the Middle East,” Strategic Insights 7, No. 2 (April 2008), republished in Arabic in "al-mustaqbal al-arabi", a monthly journal issued by the Centre of Arab Unity Studies, Beirut, Lebanon, no. 255, September 2008. Also republished in an Arabic collection of essays, “Iraq under Occupation,” issued by the Centre of Arab Unity Studies, Beirut, Lebanon, October 2008.

6. See, "al-tajruba al-iqtisadiya fi al-iraq al-hadeeth (1950-2006): the economic experience of modern iraq (1950-2006)," Op. Cit.

7. See: Sabri Zire Al-Saadi, "Iraq's National Vision, Economic Strategy, and Policies," Strategic Insights 5, No. 3 (March 2006), and also “Iraq Needs a Radical Change in Economic Strategy, and a Political Commitment to National Criteria for Oil Wealth Utilization,” Strategic Insights 6, no. 1 (January 2007).

8. E.g., Iraqi Vice President, Dr. Adel Abdul Mahdi, also one of the leaders of the ruling “Iraqi Islamic Supreme Council,” was quoted in an interview with the well-known Arab electronic journal “Elaph” on 28th of December 2009, as saying, “the failure includes improving the services, security setbacks – especially recently – high disguised and real unemployment, continuous economic deterioration in real sectors; agriculture, industry, infrastructure, electricity and water, housing, militarization of the society, politicized the military, unclear (political) partnerships and institutions, disrespect of the law … this needs urgent reform of the perception and practices."

9. Many Iraqi writers have continuously raised their concerns about these problems in the media.

10. E.g., Dr. Kadhim Habib, a veteran Iraqi politician and economist and a well-known Kurdish rights supporter who has long had close relations with the Kurdish leaders and people, addressed those alarming negative developments in many published and unpublished letters. The latest one, sent to Dr. Barham Salih, the Prime Minister of the KFG, was dated 21 January 2010.

11. An interesting recent assessment of the deterioration of the socio-economic indicators was made by Dr. Ahmed Ibrahi Al-Ali, in which the following indicators were mentioned: in 2007, 24 percent of total population estimated at about 30 million - and about 30.8 million in 2009 - are below poverty line, only 26 percent of total population are economically effective, 32 percent of the population spend less than ID 100,000.0 ($83.0) a month per person, 38.2 percent spend more than 100,000.0 and less than ID180,000.0 ($83.0-150.0), while 29.2 percent spend more than ID180,000.0 ($150.0) per person per month. The overall average was estimated at ID145,800.0 ($121.5). The average individual spending in KFR is almost twice the average in the rest of the country. See, Ahmed Ibrahim Al-Ali, "maeishat al-usra wa rafah al-am fi thaoue al-masih al-iqtisadi wa al-ijtimaie lil-iraq" (the family living and general welfare in view of the economic and social survey of Iraq"), paper in private circulation, Baghdad, 2009.

12. Ample corruption cases have been reported in the daily media by "the integrity committee of the parliament." According to the Transparency International, Iraq’s Corruption Perceptions Index of 2009 has put the country at the bottom rank of 176 among the 180 countries. See: www.transparency.org.

13. E.g., it was reported that the annual salary of a member of the parliament is about $300,000, while the average annual salary of a university graduate in the civil service is about $4000.

14. In a press release published in Al-Sabah newspaper on May 26, 2009, Mr. Baqir Jabur Al-Zubaidi, the Minister of Finance, said “ the state is responsible for financing more than 20 million citizens including 1.25 million families entitled to the salary of the social safety net, about 2.5 million employees in the civil services, and 2 million retirees. In all, the state allocated $45 billion in the annual budget of 2009.”

15. Unconfirmed estimate; note that the number of the government employees was more 25 percent of total population of the region.

16. All the prominent politicians are isolated from direct contacts with the ordinary people. They are either living within the highly protected "green zone" neighborhood, or under the protection of heavily-armed security guards elsewhere.

17. See, "al-tajruba al-iqtisadiya fi al-iraq al-hadeeth (1950-2006): the economic experience of modern iraq (1950-2006)," Op Cit.

18. See: "Success Conditions for Iraq’s Oil- Rentier Economy,” Op. Cit.

19. See, MEES estimates, OPEC crude oil production for the period April 2003- October 2009, www.mees.com.

20. See Sabri Zire Al-Saadi, "Oil Wealth and Poverty in Iraq: Statistical Adjustment of Government GDP Estimates (1980-2001)," MEES 46, No. 19 (12 May 2003).

21. See: Ali Hussein, “Is Iraq’s Oil Production Increase Necessary?” MEES 52, no.51/52(21/28 December 2009).

22. See: Ahmed Mousa Jiyad, “The Legality of Iraqi Oil Contracts Remains Questionable,” MEES 52, no. 2, 11 January 2010.

23. E.g., See: “Open Letter to Iraqi Parliament on Hydrocarbon Law” signed by 108 Iraqi oil professionals and legal and financial advisors, MEES 50, no. 30 (23 July 2007); also, Tariq Shafiq, “Iraq’s Petroleum Law: Politicized Management vis-à-vis Optimal Resource Management,” MEES 50, no.18 (30 April 2007); and, Sabri Zire Al-Saadi, “Iraq’s Vicious Circles of Economic Priorities Distortion, Misuse of Oil Wealth, and Political Weakness,” MEES 50, no.16 (16 April 2007).

24. See, "The Rush for Oil," Op. Cit.

25. According to OPEC estimates, the oil supply from OPEC countries shall increase from 38.1 million b/d in 2015 to 49.6 million b/d in 2030. See: OPEC, "World Oil Outlook 2009," 2009.

26. See: International Energy Agency, "The World Energy Outlook 2009," 2009.

27. See: Issam Al-Chalabi, "Iraq's Oil Export Outlets," MEES 52, no.48 (30 November 2009).

28. See, Fadhil Chalabi, "Iraq Capacity Expansion Relative to World oil Market Trends," MEES 52, no. 51/52 (21/28 December 2009).

29. On the role of oil in the politics of Middle East countries, see: “Oil Power and Adversity in Iraq’s Experience,” Op. Cit.

30. On the aspects of the oil policy, see; Walid Khadduri, "Iraq Oil Development: Lack of Direction and Decision – Making,” MEES 51, no.34 (25 August 2009).

31. See footnote 14 above.

32. See World Bank, “World Development Report 2010,” 2009.

33. In actual practice, the economic diversification performance’s criteria should not be limited to the given macroeconomic indicators that serve only the purpose of this article. The analysis must include the structure of the economy, especially the inter-industry, the trade components, and public finance. For the given macroeconomic indicators, see: “Liberalization Strategy for Iraq’s Oil-Hostage Economy,” Op. Cit., and: “Success Conditions for Iraq’s Oil - Rentier Economy,” Op. Cit.

34. See: IAMB DFI audit reports for the years 2003, 2004, 2005, 2006, 2007, 2008, and 2009, www.iamb.info.

35. See: Central Bank of Iraq, www.cbi.iq.

36. On the role of Iraqi economists in government development planning institutions, see: "al-tajruba al-iqtisadiya fi al-iraq al-hadeeth: the economic experience of modern iraq," Op. Cit.

37. A detailed assessment of the Iraqi economic development planning efforts during the last six decades was given in: "al-tajruba al-iqtisadiya fi al-iraq al-hadeeth (1950-2006)" ("the economic experience in modern iraq (1950-2006))," Op. Cit.

38. See: "Iraq Oil Development: Lack of Direction and Decision – Making,” Op. Cit.

39. An earlier assessment was given in: Sabri Zire Al-Saadi, “Oil and Foreign Exchange Regime in Iraq,” MEES 47, no. 36 (6 September 2004).

40. See: “Oil and Foreign Exchange Regime in Iraq,” Op. Cit.

41. See: Ahmed Ibrahi Al-Ali, Deputy Governor of the CBI; the proposal was published in Al-Sabah Newspaper, 9 December 2009.

42. The following pioneer assessment of such influence on the then human values and the good traditions of Saudi Arabia’s society was given in 1954 by the journalist, adventure traveler, and writer Muhammad Asad (Leopold Weiss), “The Arabia depicted in the following pages no longer exists. Its solitude and integrity have crumbled under a strong gush of oil and the gold that the oil has brought. Its great simplicity has vanished and, with it, much that was humanly unique. It is with the pain one feels for something precious, now irretrievably lost, that I remember that last, long desert trek, when we rode, rode, two men on two dromedaries, through swimming light…” See: Muhammad Asad, The Road to Mecca (London: The Muslim Academic Trust Edition, 1998).

43. See: “Oil and Foreign Exchange Regime in Iraq,” Op. Cit.

44. See: Sabri Zire Al-Saadi, “The Global Financial and Economic Crises and the Hidden Crisis of Oil-Rentier Economies: Back to Basics,” Strategic Insights 8, no.1 (January 2009), and "Crucial Challenges to Global and Oil-Rentier Economies," Contemporary Arab Affairs 2, no. 2 (April 2009) issued by the Centre of Arab Unity Studies and published by Routledge: Taylor & Francis Group Ltd., London.

 


 
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