Major Obstacles in the Economic Development of Iraq - Essay Example

Major Obstacles in the Economic Development of Iraq Major changes have occurred in Iraq in the past 30 years but poor management by the leaders in the country, the effects of war and the foreign economic sanctions can be considered to be the greatest hindrance for the development of Iraq. Thirty years of economic destruction has left the country devastated. Iraq is very rich in the energy sector and it also benefits from having amongst the lowest production costs in the world (Grose, 2012). However, obstacles in the economic development are many and include a tenuous political system, concerns about security and societal stability, rampant corruption, outdated infrastructure, insufficient essential services, skilled labor shortages, and outdated commercial laws (Index Mundi, 2013). All of these factors have continued to stifle growth even in the non-oil private sectors. In fact, if the situation does not improve and if Iraq fails to overcome the obstacles in its path, the world economy may suffer, according to the International Energy Agency (IEA), an independent organization that was founded during the Arab oil embargo in the 1970s (Grose, 2012). The country is currently undergoing widespread uncoordinated institutional change. The pre-war socialist structure is turning into a market economy but the progress and planning is uneven (Gunter, 2012). However, the obstacles to the economic growth of Iraq is linked to its past and a review of the past occurrences would help evaluate the obstacles to economic development. Iraq has been suffering for decades as a result of long war with Iran (1980-88), two Gulf wars with the United States (1991 and 2003), and almost a decade of harsh international sanctions between these two wars which resulted on economic toll. Prior to this, the British forces had invaded Iraq in 1918 but a rebellion in June 1920 against the colonial power resulted in a new political project for the country when a new Iraqi cabinet was formed under the leadership of Faisal (Alnasrawi, 2000). The early nationalists continued to be under the patronage of Britain and France. The colonial power created a new class of landowners aimed at harnessing backing for the monarchy. However, the social classes had undergone major changes by the time the World War II came to an end. Saddam Hussein assumed offices as the President of Iraq and as the Chairman of Revolutionary Command Council in 1979. Following this, the Iran-Iraq war from 1980-88 severely devastated the economy of Iraq (Infoplease, 2013). While the country took pride in having the largest military establishment in the Gulf region, Iraq was left with huge debts and opposition from the Kurdish from the northern provinces of Iraq. Covert action from the US such as support for a Kurdish rebellion in Northern Iraq and supplies of arms to Iran during the Iraq-Iran war changed Saddam’s perception of the world and Brands (2011) argues that perhaps that led Saddam towards conspiratorial thinking. Covert initiatives from the US occurred at a time of great vulnerability for Iraq which posed a threat to its government. US aid during the 1970s helped sustain a separatist movement against the Baathist regime. In the 1980s, the US empowered Iran in trying to ouster the Saddam government in Iraq. Such covert actions led to a hostile perception of the United States as far as Saddam was concerned (Brands, 2011). The government used weapons of mass destruction on civilian targets, which only worsened the situation. Iraq was expelled from Kuwait in 1991 by a US led coalition under the UN’s resolution. Whenever the Kurds from the north and the Shi’a Muslims from the south rebelled, the government retaliated by killing thousands. The UN Security Council prevailed upon Iraq to surrender its weapons of mass destruction for UN inspections. Another US led coalition in 2003 ended the regime of Saddam Hussein, thereby bringing to an end decades of defiance of UN Security Council resolutions (Infoplease, 2013). A Coalition Provision Authority (CPA) helped in transitional administration of Iraq. Throughout the political history of Iraq wars, coups, seizure of power, suppression, dissent and adventure, the common man had no voice due to lack of democratic institutions and civil society (Alnasrawi, 2000). In addition, the thirty years of continued damage to the country also reflects in shortage of electric supply despite the electric generation being doubled in the past decade. Dependence on neighborhood generators, lack of potable drinking water, inadequate transport system reflect some of the weaknesses of the administrative and legal systems and political instability, all of which are obstacles to the economic development (Gal, 2013). Change is an essential part of growth but the changes in Iraq were unplanned, frequent and sudden, which eroded the intended benefits of change. This is particularly applicable to Iraq where civil institutions were neither mature nor insulated from political upheavals. After Saddam’s downfall, in the first year the economy stabilized even though political and security issues continued to prevail. In recent years Iraq has been enjoying an accelerated economic growth due to rise in oil production. Iraq has made rapid progress in rebuilding its oil production after the US troops have pulled out of Iraq. The oil output reached 3 million barrels per day (bpd), the highest output since the US-led invasion of 2003 that toppled Saddam Hussein (Grose, 2012). Its production has grown to the extent that it has surpassed Iran in oil production and is now the second largest producer of oil. Iraq is expected to double its oil production to 6 million bpd 2020 and reach 8 million bpd by 2035. Gal (2013) further states that Iraq is expected to grow at the rate of ten percent per year in real terms throughout the current decade. If this happens Iraq could be one of the largest economies in the Arab World although significantly smaller than Saudi Arabia and the UAE. State control over the economy resulted in meager salaries of government employees (almost 75 percent of the labor force) and inadequate diets. This led to the growth of the local tribal sheiks that were given control over the rural economy (Moore, 2003). However, the end of the war gave rise to black markets both for essential as well as luxury goods run mainly by the lower middle strata of the Iraqi society. These were the war survivors-turned smugglers handling goods from Syria, Turkey and Iran. The war economy of Iraq also has its roots in the ideological assumptions and economic quick fixes adopted by the US occupation officials who served to aggravate the dislocation and sanctions that were prevalent before 2003 (Moore, 2003). Immediately after the 2003 war the militia that supported or opposed the Iraqi government controlled import supply chains, thereby regulating all the sectors of the economy. Funds were diverted to support the militias and state-sanctioned violence as they controlled the external trade. However, these dynamics cannot be simply attributed to the chaos emerging because of the war but they were deeply rooted in international involvement and political economy. The effects of war and international economic sanctions lasted for decades in Iraq. At the time of the Iraq-Iran war in 1980, the Iraqi economy was on the verge of economic growth and development. However, war caused widespread destruction including destruction of oil facilities such as loading terminals, refineries, and pipeline, all of which adversely affected the output. The country so dependent on oil exports could not absorb these external shocks and the result was inflation, reduced development spending, increased number of foreign workers, erosion of per capita income and living standards, depleting foreign exchange reserves and mounting foreign debts (Alnasrawi, 2000). One of the major impacts of the war was the shift of labour from civilian economy to military and increased military spending and military imports, thereby leading to depletion of Iraq’s fiscal resources. However, nine months after the last US troops pulled out of Iraq, the scenario has changed and the world market is hopeful of Baghdad playing a major role in keeping the global oil flowing in the years ahead (Grose, 2012). Oil and gas fields and ports have deteriorated over the years due to the impact of the war. Currently the country is undergoing massive reforms. Under the Nouri Al-Maliki government, the country is poised for growth. The highest contribution to the country’s GDP comes through oil exports and this is also a higher percentage than any other oil-producing country (Grose, 2012). Oil revenues account for 55 percent of the GDP in Kuwait and 52 percent in Saudi Arabia. In Iraq, however, 95 percent of revenues from come from oil production. Oil revenues could form the basis of a solid foundation and transform the economy. The Iraqi government has announced a five-year plan to remove the dependence on oil through diversification of economy and development of the industrial sector. However, here too, sectarian violence and political infighting within the coalition government are likely to hamper growth. Under Al-Khash (2013-17) the government expects to invest about $357 in development projects such as construction, services, agriculture, education, transportation and energy (Salman, 2013). The contribution of the government is expected to be approximately 79 percent of the total expenses, the rest being the contribution of the private sector. Focus is also on agricultural production to reduce dependence on oil. The International Energy Agency (IEA) believes that Iraq could add more than any other nation to global oil supply in the coming years but its uncertainty in governance, deteriorated infrastructure and insufficient water supply could pose to be severe blocks in the path to progress (Grose, 2012). Iraq’s dependency on petro dollars limits its growth potential since its revenues have not been used for diversification. The country is also not immune to incidents such as attacks by Israel on Iran’s nuclear facilities of the Syrian civil war. All of these impact the oil and gas sector. Moreover, dominance of the oil sector poses a challenge for diversification. The revenues from oil exports is sufficient to fund huge investments for the development of the oil and gas sector as well as infrastructure development and diversification plans but several non-financial obstacles prevent the realization of these objectives. Because of governance issues and its lack of ability to enact laws and develop institutions, Iraq is unable to attract Foreign Direct Investment (FDI) (Index Mundi, 2012). The uncertain business climate is keeping the investors at bay and unless political reforms take place, foreign investors would continue to be skeptical about investing in Iraq. Lack of suitable laws and institutions is one of the reasons that corruption has become endemic thereby undermining reform and reconstruction efforts. In other words, structural deficiencies led to political corruption and abuse of power. Because of internal deficiencies, the US mediators could encourage Iraqis to commit two blunders. The Iraqis even abandoned the constitution in favor of forming a ‘national unity government’ aimed at appeasing the Sunni Arabs who were against the political process (Kadham, 2010). Apart from unplanned changes to the constitution, the ministries were given veto over negotiations which made it difficult to prosecute Iraqi officials for corruption. The amount of bribes and kickbacks depended upon the degree and level of the government employees which could go up to millions of US dollars when ministers and deputy ministers were involved. All these amounted to abuse of public trust and waste of resources but Iraqi officials did not find it wrong to intercede on behalf of jailed terrorists for personal benefits. The corruption of political elites is responsible for the manner in which the people are exposed to harm such as contaminated wheat imports (Sawaan, 2012). The government has proved to be inefficient to combat corruption; it has not been able to impose laws to curb corruption. Sectarian violence, gun attacks and bombings are rampant throughout the state (Grose, 2012). In addition, the Iraqi elites are known to connive with external agencies thereby laying open the nation to external interests and foreign initiatives. Monies that come in as international donation only make the corrupt wealthier thereby depriving the Iraqi population for whom the donation was meant; graft and kickback schemes are rife throughout the country (Sawaan, 2012). To add to the woes is the corrupt judiciary that is against any sort of meaningful transparency. Such corruption has not simply affected the growth of the country but the issues of oil revenues and food security are also in danger. The failure of the elites to bring about reforms in the country has contributed to structural and fundamental distortions that become an obstacle to sustained growth of any country. Perpetual conflict between Iraq’s federal and regional governments over governance and the corrupted legal framework dictate the operations of the foreign agencies focusing on rebuilding Iraq (Grose, 2012). In addition, neglect, internal conflict and internal sanctions have also impeded progress. Iraq has enormous natural gas reserves but they have not been utilized effectively for economic development. Since its natural electric generation is unable to meet the demand, the gas reserves could be utilized in different ways. For instance, it has not considered exports of gas although the potential of supplying gas to Europe through pipelines is immense (Grose, 2012). It can also ship liquefied gas to Asia, in addition to replacing oil-fired power plants with gas-fired ones. Basically, the country has no guidance to use its natural resources and derive economic benefit through them. Iraq plans to raise oil production but logistics issues, sectarian problems and corruption appear to be the biggest bock to economic growth and development. While Iraq has planned massive oil production, the country lacks storage and transportation to handle this growth (Grose, 2012). It also needs a larger, trained workforce that is capable of operating the drilling rigs. However, the youth seeks government employment due to reasons of job security and benefits even as they lack the physical mobility and education to procure government jobs. Unemployment is as high as 38 percent according to a study conducted by USAID in 2011 (GPO, 2012). Doing business in Iraq continues to be challenge due to lack of capital and the government’s inability to pay bills on time. The employees of state-owned enterprises are paid meager salaries and subsidies, which too, are expected to be withdrawn in a year’s time. The law is complex, investors scarce and the Iraqi government does not have a business-friendly approach. These multitude of hurdles push the youth to look for secure government jobs. Water is needed to pump the oil from the ground but inadequate water supply is another logistic issue that hampers production and thereby economic development. To overcome the logistics problems, Iraq would have to invest more than $530 billion in infrastructure to achieve the envisaged production. Unless the state prepares itself to meet the infrastructure requirements, it may not be able to meet the world demand for oil, which could impact the world economy as a whole (Grose, 2012). What needs to be noted is that most of the oil production comes from the southern fields while the development in the northern fields remains stagnant due to political disputes or internal governance issues. Therefore, internal and regional conflicts, such as political disputes between the Kurdish regional Government and the central Iraqi government in Baghdad, hamper growth (Gal, 2013). If these disputes could be amicably resolved, Iraq could be one the biggest producer and exporter of oil. In conclusion, while the current situation is attributed to US covert actions which adversely impacted Saddam’s political actions, gaps persist in Iraq today in administration, in effective utilization of funds and in overall management. Public trust is totally lost which is essential during the change from dictatorship to democracy. Political fragmentation and corruption block economic development and political progress. Even the new government has a laid back attitude which does not support progress. Corruption continues even years after the Saddam regime, which can only be expected to mount further given the current economic situation. Lack of infrastructure does not encourage foreign direct investments. The switch from dictatorship to democracy is generally turbulent and impedes progress. Oil production, natural oil and gas reserves are in abundance but due to corruption and lack of laws and institutions, benefits cannot be achieved. Lack of essential services such as electricity, security of its population and shortage of skilled labor, add to the grim situation. Threat of external pressure persists from neighboring countries which indirectly causes sectarian violence within Iraq. All these together have stifled growth and economic development. The potential in oil production and exports is immense but if the government is unable to reduce corruption, unite its people through provision of basic amenities and gain public trust, the situation could affect not just the region but the entire world economy. References Alnasrawi, A. (2000). ""Iraq: economic embargo and predatory rule", Available from http://www.casi.org.uk/info/alnasrawi9905.html [Accessed November 17, 2013] Brands, H. (2011). "Making the Conspiracy Theorist a Prophet: Covert Action and the Contours of United States–Iraq Relations", The International History Review, 33 (3), 381-408 Gal, Y. (2013). "Iraq: A Leap in Oil Exports, Accelerated Economic Growth and Implications", Middle east Economu, 3 (3), Available from http://dayan.org/sites/default/files/Iqtisadi_March2013_YitzhakGalEnglish.pdf [Accessed November 17, 2013] GPO. (2012). "IRAQ REPORT: POLITICAL FRAGMENTATION AND CORRUPTION STYMIE ECONOMIC GROWTH AND POLITICAL PROGRESS", From the US Government Printing Office, 112th Congress Session, Available from http://www.gpo.gov/fdsys/pkg/CPRT-112SPRT74162/html/CPRT-112SPRT74162.htm [Accessed November 17, 2013] Grose, T.K. (October 9, 2012). "Iraq Poised to Lead World Oil Supply Growth, but Obstacles Loom", National Geographic Daily News, Available from http://news.nationalgeographic.co.in/news/energy/2012/10/121009-iraq-oil-production/ [Accessed November 11, 2013] Gunter, F.R. (2012). "Political Economy of Iraq", Available from http://www.lehigh.edu/~incbeug/Attachments/Eco345Spring2012.pdf [Accessed November 17, 2013] Index Mundi. (2013). "Iraq Economy Profile 2013", Available from http://www.indexmundi.com/iraq/economy_profile.html [Accessed November 17, 2013] Infoplease. (2013). 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