The economic revival of Iraq

by Sabri Zire al-Saadi

The following article was written by economic adviser Sabri Zire al-Saadi, an ex-UN employee who worked in a number of Arab countries as Chief Technical Advisor, Macroeconomist and Investment Programmer, and held senior economic planning and policies posts in Iraq.

Background and priorities
A distinctive feature of the Iraqi experience over the last five decades was the absence of well-defined institutional economic policies. There were at least two interrelated reasons for this: the dominant role of the oil sector (revenues) and the lack of economic and social development strategies. Such phenomena, coupled with the destructive and backward political agenda of Saddam's regime, were behind the hidden economic crisis of the 1970s, the apparent crisis of the 1980s, and the acute chronic crisis of the 1990s and afterwards (1). Since then, Iraq has experienced rapid economic and social deterioration and wasted a lot of its abundant human and natural resources.
Since 1980, Iraqis have suffered severe economic hardships, high unemployment, and shortage of public services and essential utilities -- reflected in their very low living standards. Between 1980 and 2001, total value of Iraqi oil exports amounted to $ 192.2 bn. However, in terms of GDP per capita, Iraq may be classified as one of the few Least Developed Countries (2). In 1980, GDP per capita was estimated at $ 2,143 and dropped sharply to only $ 239 in 2001 (3). It is below the poverty line of $ 360 annual income. At present, the situation continues to deteriorate and the value of this important indicator is even lower.

Since 1990, the Iraqi economy has been characterized by low levels of production and productivity, low levels of investment and consumption, high unemployment, high inflation, big annual budget and the balance of payment deficits, and unprecedented deterioration and fluctuations of foreign exchange rates (4).
After the fall of Saddam's regime, the Iraqi political parties, unfortunately, still have no clear vision and policies, individually or in common, for the reconstruction and economic revival of the country. Surprisingly, the Coalition Provisional Authority (CPA) has been hesitant to provide a definitive strategy and clear economic liberalization policies for Iraq.

A recent US report reviewed the current situation in Iraq and implicitly supported such a claim (5). However, while this report rightly identifies the problem areas, it does not identify the main causes and remedies. It only acknowledges that more money is needed for the reconstruction of public utilities and to stimulate economic recovery. Most importantly, the suggested general remedies to meet the identified challenges are lacking the sense of priorities.
With a certain degree of detail, identification of the priorities is the most crucial element of the targeting policies for dealing with the prevailing problems. In practice, it is the assessment of the magnitude of problems that matters in dealing with the present situation, not a mere generalization of well-known public complaints. Indeed, all Iraqi people, as well as the CPA, have rightly identified the problems of internal security and lack of law and order, political stability, poverty, unemployment, and the shortage of public services and utilities as top priorities of concern.

However, for policy formulation, arranging these priorities within a consistent framework of economic strategy and policies is far more important than repeating the general symptoms. This is the art of realistic planning that is based on thorough analysis and solid professional involvement in the past experience of Iraq. It is, therefore, unacceptable that neither the Iraqi political parties nor the CPA has succeeded in identifying priorities, along with the measures required within a clear economic strategy and policy framework.
The USAID doctrine on economic governance for the reconstruction of Iraq needs to do more than improve the government's capacity to deal with fiscal and monetary policies and the swift implementation of privatisation (6). Even those who believe in neo-liberalism for Iraq have demonstrated little knowledge of Iraq's realities (7).

In the extraordinarily difficult circumstances of Iraq, a meaningful conclusion related to the future economic policies can not be drawn from the partial and pragmatic economic and financial measures taken by the CPA. There are many practical requirements that have to be considered by the decision-makers, i.e., the CPA and/or the Governing Council and/or the ministers. However, in order to avoid the negative consequences of measures such as the delay in issuing a new currency (8), economic policy guidelines for the TGC and the ministries are still needed urgently (9).
It is no secret that oil revenues, the major variable of economic revival, are still below their normal level and, therefore, no real economic progress and improvement of the living standards of the Iraqi majority can be achieved with the actual government expenditures.
At present, however, there are alarming signs of high inflation and increasing disparities in income and wealth distribution: sky-rocketing houses prices, relative stability of demand on consumer goods and stable foodstuffs, and high unemployment. It would be a serious setback if the present economic situation were to prevail, even in the short term.

Why economic policy guidelines
For an elected government of a democratic Iraq, there is no justification for imposing external economic policies. If government policies need to be changed, the political opposition parties and civil rights movement should play a constructive role by democratic means.
However, in the current circumstances, Iraq needs the Governing Council, as a transitional non-elected government, in order to bridge the gap and pursue the implementation of Security Council resolution 1483. Hence, the necessity exists for policy guidelines that reflect adequately the common economic views and interests of the Iraqis and their political parties (10).
Such guidelines would also help to modify or change the implementation of the intended partial remedies and piecemeal solutions identified by some Iraqi professionals, as well as by the CPA, for dealing with the outstanding problems. It is true that political stability and economic stimulus require ad hoc measures, but they should not overlap with the priorities that have been identified from past experience or/and envisaged within a consistent framework of economic strategy and policy.

The Iraqi six-month budget is a case in point (11). Total government revenue was estimated at $ 3,887.7 mm, whereas total expenditures were estimated at $ 6,099.6 mm; i.e., the budget has a deficit of $ 2,211.9 mm. Significantly, oil revenues constituted 88.9 % of total revenues, and public sector revenues were estimated at about 10 % of the total. Taxes on private activities were estimated at about 2 % only. Also, significantly, expenditures on the Social Safety Net (SSN -- presumably the cost of UN food ration system) were estimated at about $ 1,350.0 mm, 22 % of total expenditures. The total allocation of salaries, wages, and pensions of government employees were estimated at $ 1,140 mm, 18.7 % of total expenditures.
Obviously, it would be much more appropriate to increase the government wage bill against the cost of the SSN, which should be replaced by a permanent Social Security and Welfare System (12). At this stage, it is not correct to judge the future fiscal policy on the basis of this exceptional half-year budget. But the low level of planned expenditures is alarming.

If the revenues had to cover the cost of USAID assistance, the situation would be even worse. Moreover, the ambiguity of the real intention for determining low expenditures raises a serious concern. If a policy of low planned expenditures is meant as a radical solution to deal with the budget deficit, it is like amputating an injured arm that could be treated by medication. Iraq at this stage needs high level of government consumption and investment.
Also, the criterion for the allocation of budget items raises another concern. In the explanatory note, the planner highlighted the need to assure donors countries and the investment community. If economic stability was the objective, then the claim is not true because monetary policy is absent.

The stability objective of fiscal policy, however, is closely related to monetary policy where its foundation is absent. In addition, the claim that the budget assures fiscal discipline in the use of budgetary resources in order to rebuild the confidence necessary for the international donor and investment community to support the country's effort (13) is misleading.
Without the implementation of drastic structural economic reforms as well as undertaking a huge public investment program in the infrastructure, the investment environment will not be improved. In order to stimulate the private sector and encourage entrepreneurs, the rehabilitation and development of physical, social and environmental infrastructure projects are necessary requirements. That is to say, it would need more than the allocated amount of expenditures for the reconstruction item to realize tangible economic growth and create new work opportunities.
Except from the foreign debt problem that has to be settled politically, it would not be wise, if not misleading, to put more emphasis on the role of donor countries in Iraq. There are three important facts backing this point of view. First, Iraq is endowed with huge human, natural, and financial resources. Secondly, it is not in the interests of Iraqi people to link the current financial problems with the exceptional economic and political difficulties. Thirdly, in many cases the amounts pledged by donor countries for financial and economic assistance was much less than anticipated.

The initiative: A coherent economic program
A modern, democratic Iraq needs political parties and civil organizations to play an active role. However, no party, whether Islamic, nationalist, liberal or socialist, has a political program that includes an economic and social development strategy and defined detailed objectives and policies that reflect contemporary economic, political, and technological developments around the world. In particular, no coherent economic liberalization policies have been initiated by any of the domestic political parties or their associates (14).
However, the (suggested) economic policy represents a compromise between different public objectives and interests, dealing with the prevailing economic and financial crises within a framework of balanced short-term and medium-term needs.

At the same time, the policy prepares for the implementation of the targeted development strategy which is based on maximum utilization of oil revenues for lessening the state's dependence on crude oil exports by undertaking economic structural changes in the long run (15). Also, the policy considers the burden of foreign trade debts, the need to increase public finance revenues and crude oil exports, increasing employment, and the reduction of the existing grave disparities in income distribution and wealth accumulation.
The proposed policy presents the effective and balanced application of an integrated package of macroeconomic, fiscal, and monetary policies in order to ensure economic stability and control inflation arising from the existing economic and financial imbalances, as well as to undertake structural economic reforms. These policies should be accompanied with the implementation of a huge government investment program for the completion and upgrading of public infrastructure.

The implementation of the macroeconomic policies will pave the way for the execution of a number of economic reforms, i.e., reform of public finance, especially tax system, the banking system, the financial market, public health services, social security, government administrative, law, privatisation, foreign trade, etc (16). The suggested policy responds adequately to the political reality by dealing quickly and directly with the urgent problems such as the high prices of stable foodstuffs, poverty, and the high cost of living. Also, it identifies the sector-wise strategies, objectives, development policies, and investment opportunities.
Due to its expected effects, the application of the proposed policy would help to sustain the interrelationships between the economic interests of all regions as well as accelerating the development of Kurdistan and the southern governorates through the use of oil revenues in financing the infrastructure projects. To deal with the prevailing difficulties, effective application of the macroeconomic policies must be undertaken alongside a development plan and program of action.

The latter has two stages. Each may last two years. In the first, a public investment program for erecting and improving the required infrastructure should be implemented. At the same time, for maintaining overall economic equilibrium, the government should undertake active policies to regulate aggregate demand, especially government expenditures, to reduce public finance deficit and the deficit of foreign trade balance and the balance of payments.
In the second stage, public investment expenditures should continue, as should price liberalization policies. In this regard, taxes and improving the efficiency of public enterprises such as oil products industries and public services have to be emphasized. By the end of this stage, the privatisation program should be completed. The government should give special consideration to link wages and salaries of the civil servants to the productivity and inflation criteria.
It is expected that at the end of this program that a favourable economic environment would be established. Such an environment would greatly help to increase investment and production activities of the Iraqi private sector and encourage foreign investment in Iraq. Big manufacturing industries, tourism, banking and financial services may attract foreign investment. The opportunities in the construction sector, housing in particular, agriculture, banking and insurance, trade and services may be the focus of domestic private sector.

The political economy and decentralization
The successful implementation of the (suggested) policies is subject to a conducive security and political environment. Politically, the new Iraqi regime should be constitutional and democratic, protecting individual liberties and basic civil rights for all citizens. The political system should reflect the economic interests, social values, and culture of all social groups regardless of their religious, sectarian, tribal, ethnic and racial origins. The regime should be institutional in a way that allows regular general elections to choose the people's representatives (parliament) who would take care of the legislation process and monitor the government performance according to the constitution, law, and pre-determined procedures.
The government, led by one majority party or a coalition, and all other active political parties should present their political, economic, and social programs for democratic public debate before assuming public responsibilities. All political participants and governments should accept the public's right to have full access to the information, data, and indicators relating to their programs and economic policies.

Also, the civil servants should perform their duties without being influenced by political parties, even if their views differ from government policies. It should also be emphasized that the political representation in the parliament is not enough to reflect the interests of various groups of the society. Such representation must be extended to the public institutions, military and civil, as well as the economic, culture, social, religious private institutions and organizations.
In line with the need for more decentralization in the management of the governorates and local communities, the proposed policy assumes that the local governing bodies should be responsible for the identification and finance of local small-scale projects. These bodies are also responsible for dealing with the local economic and financial affairs of the governorates through their budgets.

The governorate budgets should not, however, overlap with the government regional planning prepared as part of the national development plans and the annual investment programs. The latter would consider the reconstruction of Kurdistan in the north and the marshes area and other governorates in the south.
The political issue of the federal system proposed for Kurdistan has two main economic implications. The first is related to the state's sovereignty as concerns the ownership and utilization of the country's natural economic resources. These public resources such as crude oil and gas and minerals, water, land and the rent from the use of Iraqi space and related public utilities shall be public and all its returns belong to the state. The exploitation of these resources by other parties should be arranged on the basis of unified state laws and regulations to be applied in all parts of the country without prejudice based on geography, ethnic, sectarian or religious criteria.
The second economic implication of the suggested federal political system is related to the conditions for effective macroeconomic regulatory policies. These should be undertaken and implemented by the central government without geographic and economic bias except for reducing the disparity in public wealth's distribution and development indicators when necessary.

Government capacity building
It is important to emphasize the need for improving the decision-making process by using advanced information technology and data processing. Such improvements constitute a driving element in modern economies. However, government capacity building is not limited to IT application. Most essential is the need for operational procedures that reflect the government decision-making process as well as the way to implement government policies. For the implementation of the proposed economic policies, many institutional changes will have to be undertaken at the ministerial level and in government economic and financial departments.
Also, it is necessary to lay down detailed administrative and legal measures for defining the new functions of all concerned institutions. The anticipated changes should be part of the overall execution, judiciary, and legal system of the new state. Obviously, the quick pace of implementation will depend on the available information at the time. However, it is essential to initiate the required changes as the government's guidelines for the new administration, and economic, financial, and development planning departments (17).

In this process, the application of advanced IT would be necessary and useful to improve the decision-making process as well as saving time. The use of data base, data collection, and data processing procedures by computer network software in tax reform is an example in this regard.
Also, it is essential to use advanced computer hardware and software in the preparation of the annual budget and public investment program by the central government and governorates.

Conclusion
In a country where domestic politics and foreign interests have long been governed by oil, free Iraqis will not give legitimacy to the Authority or any government without persuasive economic liberalization and oil policies that serve their interests.
Indeed, the roots of Iraqi problems lie in the non-productive way of utilizing oil revenues, the lack of sharing of political power, and the failure of economic development. Iraq needs a quick solution to these problems on the basis of individual economic, social, and political liberties.

Notes
1. Aspects of the economic crises were given in; Sabri Zire Al-Saadi, "The Economic Project For Change In Iraq -- Economic Policies And A Program Of Action For The New Democratic Regime", paper presented to the Economy and Infrastructure Group, Future of Iraq Project, US Department of State, 23 October 2002.
2. Sabri Zire al-Saadi "Oil Wealth And Poverty In Iraq: Statistical Adjustment of Government GDP Estimates (1980-2001), MEES 46: 19 12 May 2003. See also, "Oil-Rich Iraq Now One of the World's Least Developed Countries", MEES 45:40 7 October 2002. Also, " Economic Deterioration, Waste of Oil Wealth and Widespread Poverty in Iraq' The Iraqi File, an Arabic monthly political documentary published by Iraqi Studies Centre in London, No 130, October 2002, London.
3. Ibid.
4. On these issues, see "The Economic Project for Change in Iraq", ibid.
5. "Iraq's Post-Saddam Reconstruction: A Field Review And Recommendations", 17 July 2003. Issued by "Iraq Reconstruction Assessment Mission 27 June-7 July 2003" at the request of US Secretary of Defence and Ambassador L Paul Bremer. The mission members were Dr John Hamre, Frederick Barton, Bathsheba Crocker, Dr JohannnaMendelson-Forman, and Dr Robert Orr.
6. Neil King Jr "Bush Officials Devise a Board Plan For Free-Market Economy in Iraq", The Wall Street Journal, 2 May 2003.
7. Robert Looney, "Neo-Liberalism and Iraqi Economic Reconstruction", Strategic Insight, CCC, National Security Affairs Department at Naval Postgraduate School, Montery, California. 1 August 2003.
8. Sabri Zire al-Saadi, "Crippled Start For New Currency In Iraq", MEES 46:21 26 May 2003.
9. For more details, see "The Economic Project For Change In Iraq", ibid.
10. Details of these guidelines were given in "The Economic Project For Change In Iraq", ibid.
11. Republic of Iraq, "Budget Revenues and Expenses 2003 July-December", Budget Summary, Ministry of Finance, Ministry of Planning, Coalition Provisional Authority. Undated document.
12. See "The Economic Project for Change in Iraq", ibid.
13. Republic of Iraq. "Budget Revenues and Expenses 2003 July-December", p3 ibid.
14. The author initiated a series of studies and articles on this problem published in the "Iraqi File" a monthly political documentary issued by Iraqi Studies Centre in London, UK Issues Nos (107 dated November 2000, 116 dated August 2001, 119 dated November 2001, 123 dated March 2002, 127 dated July 2002, 130 dated October 2002). Some also published in Althakafa Aljaddida, the periodical of the Iraqi Communist Party, Nos (297 dated November-December 2000, 300&301 dated May-August 2001, 305 dated March-April 2002).
15. See: Sabri Zire Al-Saadi, "Economic Liberalization and Oil policy in Iraq: Vision and Priorities", MEES 46:29 21 July 2003.
16. See "The Economic Project for Change in Iraq", and "Economic Liberalization and Oil Policy in Iraq: Vision and Priorities", ibid.
17. For more details and concrete proposals, See "The Economic Project for Change In Iraq", ibid.