On the Verge of Collapse

February 8, 2012Iraqby Isam al Khafaji

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Iraq: Mixed Opportunities, Messy Outlook? (Part I: The Road To Entrapment)
Iraq: Mixed Opportunities, Messy Outlook? (Part I: The Road To Entrapment)

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By the end of the Iran-Iraq war in 1988, Iraq’s GDP per capita was $1765, compared to its peak of $4200 in 1979. The toll of the war also put additional strains on the Iraqi economy as more and more of its workforce were drawn to the frontlines of battle. In 1981, the ratio of armed forces to the total workforce was only 12 percent, but by 1988, this figure jumped to 21.3 percent.

To compensate for that drainage, Iraq imported large numbers of Egyptian workers to perform jobs in the agricultural and construction sectors. But, what the government failed to predict was that the imported workforce would place more pressure on Iraq’s foreign exchange reserves in the form of remittance.

According to Abbas Al-Nasrawi, who wrote Iraq’s Burden: Oil, Sanctions and Underdevelopment, “Iraq was becoming like an Athenian society of citizen-warriors and slave-workers”. Due to these developments the Iraqi dinar lost some 65 percent of its value against the US dollar, plummeting from 3.12 in 1979 to 2.8 in 1987 and to 0.33 in October 1989, thus causing a serious deterioration in Iraqi finances as the value of imports appreciated significantly.

Not surprisingly, Iraq’s foreign reserved would be depleted by the end of Iran-Iraq war; and the country soon found themselves $110 billion in debt. Many experts and observers have linked Iraq’s dismal economic situation in 1988 with the decision to invade Kuwait in 1990 – first to profit from the latter’s oil export facilities and wealth, and second to escape the pressures of finding jobs for a million or so decommissioned soldiers after the end of the Iran-Iraq war at a time when the country had lost the means to provide them with decent living condition.

Still, whether Saddam Hussein could have anticipated the disasters that would befall his country following his reckless adventure remains for the historians to discuss. What we do know is that the invasion would ultimately lead to Iraq being subjugated to the harshest sanctions ever imposed on a country in history.

The UN embargo on Iraq underwent two major stages: one from 1990 when no exports or imports were allowed because of the regime’s intransigent demands that the sanctions must be lifted altogether, and the second from 1996 until the fall of Saddam Hussein when the “Oil for Food Program” was implemented.

The total amounts of oil exports under the second program reached $64 billion, of which 30 percent was withheld from the Iraqis by the UN Compensation Commission for war reparations. Another 15 percent then was spent under UN supervision in the autonomous Kurdistan region, while the remaining 55 percent was in the form of authorized imports by the Iraqi government. A few additional billion flowed into the regime’s coffers through smuggling oil.

Consequently, both oil and non-oil outputs struggled. By the end of the first gulf war, Iraq’s oil output had fall by 95 percent as compared to 1989. Non-oil output fell by 72 percent. Agriculture fell by 18 percent, while public services and trade dropped by 84 percent, with construction declining by 79 percent. Electricity also suffered by 57 percent compared to its 1989 output.

A period of hyperinflation soon ensued from 1990-1995, though the economy managed to return to a more stable course from 1995 onwards. Price increases stabilized at an average annual rate of 10 percent in 1995-2002 compared to 237 percent in 1990-1995. This was closely associated with similar changes in the market rate of exchange. In the period 1999-2002, non-oil output grew by 9 percent annually. Leaders in growth were construction, manufacturing, and electricity. Still by 2002, the non-oil output was only 40 percent of its level in 1989. In addition, GDP per capita was only 43 percent of its 1989 level.

Related: Iraq Economic Statistics and Indicators

Related: Iraq Economic Forecast

A Sequence of Disastrous Events

As one can already tell, the sequence of disastrous events, which the Iraqis suffered from 1980 onwards, were so interrelated that it would be very hard to single out which of these had more effect. The country’s perennial structural problem of almost total dependence on oil eclipsed all productive economic activities, except construction, and it led to the rise of authoritarianism and the tremendous growth in the state tentacles to pervade all aspects of the public space. This in turn was at the heart of militarizing the country, which led to three consecutive wars, the virtual collapse of the economy and the disruption of the social fabric of society.

Were Iraq less dependent on oil proceeds, the impact of the sanctions could have been mitigated thru its domestic food and basic manufacturing activities. However, one might venture to say that the suffocating sanctions were the hardest to hit Iraq.

By Isam al Khafaji

Isam al Khafaji is a special advisor and consultant on the social and economic affairs of the Middle East. After being forced to leave teaching at Iraqi universities in the late 1970s, he proceeded to become a senior expert for the UNDP for launching Syria’s first Human Development report in 2000, and an advisor to the World Bank on issues of political reform in the Middle East in 2001. In 2002, he actively joined the US State Department’s workshops on the “Future of Iraq” and later served as an advisor to the Coalition Provisional Authority in Baghdad until July 2003 when he resigned in protest at the US policies in handling Iraq.

In Part II of Isam al Khafaji’s exclusive feature for EconomyWatch.com, al Khafaji will explore the impact of the US –led invasion on the Iraqi economy, as well as discuss the future for the Iraqi Economy.

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