Iraqis in freefall

Zaid Al-Ali
21 March 2007

There was something distinctly tragic about the way Iraq's economy was ravaged during the 1980s and the 1990s. Because of a rare combination of vast natural resources and an industrious and educated people, Iraq was supposed to become the region's economic powerhouse. Instead, after war, dictatorship and international sanctions, Iraqis were reduced to poverty and helplessness.

Then, after the United States-led invasion in 2003, began the farce. Iraq was suddenly host to a group of superbly unqualified, undermanned, inadequately funded American officials who were at best moderately committed to rebuilding the country. Their projects went nowhere, and the reconstruction money disappeared into thin air. But as the war intensified, and as Iraqis began fleeing their country in the hundreds of thousands, the tragedy re-emerged. It recently even started manifesting itself in cities such as Beirut, where, to the disbelief of many, Iraqi street-children have started surfacing.

Zaid Al-Ali is an attorney at the New York Bar and specialises in international commercial arbitration. He has graduated from King's College London, the Sorbonne University in Paris and Harvard Law School. He is also the editor of www.iraqieconomy.org.

Zaid Al-Ali is currently writing a book on the Iraqi constitution with Jőrg Fedtke; it will be published in 2009.

This article is adapted from one that was originally published in French in Alternatives Internationales (March 2007).

Among Zaid Al-Ali’s articles on openDemocracy:

"Iraq: the lost generation"
(7 November 2004)

"Iraq’s dangerous elections"
(23 December 2004)

"The end of secularism in Iraq"
(18 May 2005)

"Iraq: a constitution or an epitaph?"
(16 August 2005)

"Iraq: a constitution to nowhere"
(14 October 2005)

"Iraq’s war of elimination"
(21 August 2006)

" Saving Iraq: a critique of Peter W Galbraith"
(26 October 2006)

" The United States in Iraq: the case for withdrawal"
(19 January 2007)

The decline of public services

Four years after the invasion of March 2003, the situation for the vast majority of Iraqi families is grim. Electricity production, the availability of drinkable water, the price of petrol (when it is available), and other vital services have all taken a decisive turn for the worse since the arrival of the occupation forces. At the same time, the situation in Iraq is so desperate that it is practically impossible to obtain reliable information on the status of the economy.

In 2004, the United Nations, in collaboration with the Iraqi ministry of planning, published a report on living conditions in Iraq, which set out detailed information relating to the country's economy. A few weeks ago, a second UN report was published - titled the "Unsatisfied Basic Needs Mapping and Living Standards in Iraq". The latter's economic analysis, however, is entirely based on the data collected in the context of the 2004 survey, and the more recent report therefore sheds no light on how economic conditions have evolved in the past three years. It must be suspected that insecurity has grown to such an extent that data collection has become impossible.

The result is that no one can say for sure how far Iraq's economy has deteriorated since the war in 2003. Some claim that unemployment stands at 30% whereas others maintain that it is closer to 70%. Government figures suggest that the agriculture sector is growing, but the province of Diyala, long referred to as Iraq's breadbasket, has been turned into an enormous battlefield involving rival Iraqi militias and American forces. The effect is that the area's magnificent fruit groves have been neglected for years.

It is beyond doubt that basic salaries have increased exponentially since 2003 (state employees earned $2 per month prior to the war, in addition to a food ration; today they can earn hundreds of dollars a month); but then again, so has inflation. An average Iraqi family will now pay $200 a month for around five hours of electricity a day - before 2003, it would have paid pennies for much better service.

Moreover, as distribution lines continually break down, and as goods are increasingly scarce, the cost of living is beyond the capacity of most Iraqi families to bear. Many are forced to sell whatever goods or property they have left. Only 16% of Baghdad's residents - supposedly one of the country's most prosperous cities - say that their income is sufficient to meet their basic needs. Many rely on remittances from abroad, and many others have decided to leave altogether, vowing never to return. Recent figures indicate that 3,000 Iraqis were fleeing their country every day.

Electricity production is another source of agony for many Iraqis. In the period immediately preceding the 2003 war, Iraq's electricity network produced on average 95,000 megawatt hours (MWh), a reasonably high and stable supply even if insufficient to service the entire country. Between November 2004 and the end of January 2005, the network could muster only an average of 80,000 MWh, and sometimes dropped to less than 50,000 MWh. In comparison to 2003, everyone in Iraq is worse off: the entire country now suffers from severe blackouts, leaving many families with access to electricity for less than five hours a day.

An oil sector in tatters

Oil production has not fared any better. Iraq's oil production peaked in the late 1970s (immediately before Saddam Hussein's coup d'état in 1979) when it managed to produce 3.5 million of barrels of oil per day (bpd). After a turbulent two decades, oil production managed to rise once again to 2.5 million bpd in the immediate pre-war period. Since then, this figure has slipped once again and has failed even to reach the disappointing standards established by Saddam Hussein's regime. Iraq now exports 1.45 million bpd (in 2003, Iraqi and American officials were predicting that by 2007 the country would be exporting closer to 4 million bpd). Some have wondered why the US has not made a more concerted effort to bring about an increase in the export of oil. The explanation is the same as for everything else: the US military, its civilian staff, and its contractors are undermanned, incompetent, corrupt and not truly committed to developing Iraq.

To make matters worse, oil smuggling is now totally out of control. An audit carried out by KPMG for the International Advisory and Monitoring Board in July 2004 reported that oil revenues were being mismanaged. The audit cited "(weaknesses) in controls over oil extraction". Three years later, the Iraqi government is yet to set in place a metering system to measure how much oil is being extracted from the wells. The result of this desperate situation is untold misery for Iraq's poor - they now have to stand in line for days to buy petrol for their cars, and often have to resort to paying extortionate prices on the black market.

As if that was not enough, the International Monetary Fund imposed as a condition for writing off a part of Iraq's debt that the government stop subsidising the price of oil. The government announcement that Iraqis would have to pay over ten times more than in the pre-2003 period was made the day after the parliamentary elections in December 2005. More than twelve people died in the ensuing riots, mostly in the poor Shi'a south; this event was almost completely ignored by an international media more concerned to trumpet the emergence of a new democracy in the middle east.

A new oil law to solve Iraq's ills

The Iraqi government's response to this disarray has been to draft a new oil law, which is supposedly designed to solve all of Iraq's ills. The draft oil law was prepared in complete secrecy by a small group of individuals, some Iraqi and some not. It was finally published on 9 March 2007 by the Kurdish Regional Government on its website - but only after Raed Jarrar, Iraq director for Global Exchange, published a leaked version of the draft on his blog. Although secret discussions and negotiations have been ongoing about the draft for months, it has yet to be discussed by the Iraqi national assembly, most likely, a vote will be forced in the next few weeks.

The draft contains two main features. The first provides for a revenue-sharing mechanism that will in theory allow all of Iraq's provinces and regional governments to benefit in what should be an equitable fashion from the country's vast oil wealth. The second feature is more controversial - it allows foreign oil companies to bid for the exclusive right to exploit oilfields, for the first time in Iraq since the oil industry was nationalised in 1972. The oil companies will presumably negotiate royalty rights that will have to be paid to the Iraqi government within the context of the oil law. Most of the remaining revenues will inevitably be repatriated, in contrast to the situation in most other Gulf countries, where no revenues whatsoever are taken out of the country.

Iraqis have always been proud of their achievements, of the expertise of their oil engineers, and of the efficiency of their national oil company. The selling off of their most precious possession in this way will not go down well amongst the general population, which might explain all the secrecy surrounding the draft (for more information on the draft oil law, see the Hands Off Iraqi Coalition).

The International Compact for Iraq

Another "solution" that has been proposed in the past few months is the International Compact with Iraq. This initiative was launched by the Bush administration during summer 2006 as a way to force more international donors to prop up the Iraqi economy. There are three significant differences between it and earlier international donor conferences.

The first is that the idea behind the international compact is to establish an ongoing relationship between donors and Iraq in a way that encourages transparency and accountability on the part of the Iraqi government. Indeed, the principle is that donors will only make contributions if certain socio-economic benchmarks are met, which encourages the Iraqis to move ahead and implement the fundamental reforms that they ought to have carried out long ago. A draft document prepared by the Iraqi government and international experts seeks to illustrate to the donor community what these benchmarks are, and sets out the reforms that the Iraqi government is committing itself to.

The second difference is less appealing. One of the compact's main rationales was to create a mechanism for new international donors to become involved in Iraq's reconstruction. The main target in that regard was the Gulf countries, which have been accumulating vast amounts of wealth in recent years due to high oil prices. But the view that these countries would be happy to invest in Iraq has proved to be even more naïve than many initially assumed.

From the start, observers were rather amused by the spectacle of American officials encouraging Gulf countries to fund Iraq's reconstruction, despite the fact that these same countries have thus far refused to write off the debt that is supposedly owed to them by Iraq (Gulf countries are claiming more than $50 billion in debt from Iraq, almost all of which dates back to the 1980s - many Iraqis dispute that such a debt is owed). To make matters worse, the US government seemingly fails to appreciate that Gulf leaders, who are notoriously averse to Shi'a political power, would sooner die than finance what they consider to be Baghdad's new Iranian administration. That point was made more than obvious when Kuwait, Saudi Arabia, Qatar, the United Arab Emirates and others all fell over each to donate funds to Lebanon after its 2006 war with Israel. Those same countries then turned to the Bush administration and lamented that their foreign-aid budgets were exhausted.

The third and most telling difference between the international compact and previous donor conferences for Iraq is that this initiative comes at a time when the Iraqi central bank has up to $25 billion of unspent funds in its coffers, which it has no plans to spend. This will probably come as a surprise to most readers. If most of the country is experiencing such high levels of economic depravation, why isn't the Iraqi government spending these funds in order to improve the lives of its most vulnerable citizens? Part of the answer is that the government does not have the capacity to implement the type of large-scale projects that the country needs.

It is well known by now that more than 2 million Iraqis have fled their country since 2003, but what is often not considered is how this depopulation has affected the efficiency and delivery of services and of government. Almost all government ministries have lost a large proportion of their vital staff, the most important reason being the desperate security situation in post-2003 Iraq. The ministry of planning is a case in point. It is supposed to be responsible for establishing the country's economic roadmap and to contribute to its implementation. But since the sitting minister was appointed after the parliamentary elections of December 2005, both his deputies as well as the ministry's director-general have left their posts. A number of senior economists have either left the country or been killed. The ministry has therefore been reduced to a useless shell where almost nothing happens - which explains why the deputy prime minister has taken over just about all its responsibilities.

The message is clear - as a result of war, occupation and deprivation, Iraq has lost the capacity to invest its own monies, let alone the monies of the international community. Yet senior governmental officials have persisted in telling the media that they expect the international community to donate $100 billion to reconstruct the country. The comments were apparently designed to refocus some attention on Iraq's economic needs; they were instead met with horror and astonishment by just about every foreign official who heard them.

This is the true story of Iraq's economy. It was obvious from the start that the war and occupation were going to have a devastating effect on the country. But the state's infrastructure and the services that it used to provide have, in the past year, crumbled away faster than most thought possible. The question that most Iraqis are now asking themselves is precisely the one that is not being asked in government circles in Washington, London and Baghdad: will the occupying countries now reconsider the value of their presence in Iraq and withdraw once and for all?

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