Global Policy Forum

Rebuilding Iraq?


By Paul Sullivan

Middle East Economic Survey
October 7, 2002

There are 4.5mn infants and toddlers in Iraq. 30-40% of all children are not in school, but are on the streets working to help their families make ends meet. Literacy rates have been dropping. Enrollment rates have been dropping in all but, oddly, university education. Pre-primary education, crucial for a head start, has only 7% of the toddlers enrolled. That is about the same percentage as that found in Laos or the Kyrgyz Republic. Books in schools and universities have not been updated, in most cases, since 1989. Medical education is backward. It is constrained by a lack of materials, as well as a severe lack of qualified teachers. Often instructors, at all levels of education, need to take on 2, 3, or 4 jobs to help pay the family bills. The students, education, and Iraq suffer. The country continues to fall behind in many fields.

Where will the new, and greatly needed, skilled professionals come from to rebuild Iraq? Most will need to come from those who have fled. About 2mn, mostly middle class, and some of the highest skilled and best educated have left the country. Who of these would be willing to come back to such a difficult environment?

Let us look at what the returnees would face:

Iraq is a country that started to de-develop in 1980, with the Iran-Iraq war, and headed into a death spiral of de-development after 1991. Real income per capita is now about 15-20% of what it was in 1979. The average Iraqi used to make about $4,000-5,000 per year just previous to the Iran-Iraq war. Now they would be lucky to make $800 in the south and center, and $1000-1,500 in the north. That is after the elite takes its cut of the all important oil revenues and other sources of income.

This is a country that could have been a model for development for the Arab World. It turned out to be a devastated case of de-development. This is a shattered country run by men who oppress and brutalize a shattered people. The sanctions have allowed these men to stay in power. Almost all of the development successes of the 1970s, and there were many, are gone.

The Iran-Iraq war, the Gulf War, the sanctions, and the multiple failures in economic and strategic leadership have led this country into a de-development hell.

The number of physicians per person has dropped rapidly since 1991. The average calories consumed per capita are only now reaching 70% of the 1979 levels. Malnutrition was unknown in Iraq in 1979. Now it is common. 30-40% of the children admitted to hospitals are suffering from malnutrition. The oil-for-food program has helped, but not enough – especially in the south. The oil-for-food program has spurred some small-scale industrialization in the north. In the south and center it has helped people live at a bare minimum level, rather than what would otherwise have happened.

The north seems better fed and better off, in many ways. They get a larger cut of the oil-for-food program funds per capita, and have more NGOs working than in the south or center. Also, the UN administers the program in the north. The Iraqi Government and the UN co-administer the program in the south and center.

The Kurds were never a favorite of Saddam Husain. Witness the gassings, the relocations, and the mass murders. The Kurdish leadership has much to be desired. But at least one could say that the Kurds are being somewhat abused by their own leadership, rather than what would have occurred if Saddam Husain has his way. They may never have it so good without the sanctions and the no-fly zones.

The Shi'a, as usual, are the hardest hit. Yet they are 60% of the population. They have the lowest GDP per capita, the lowest levels of government aid, the lowest levels of education, and the worst health system in the country. Saddam Hussein's building of his namesake canals and other irrigation projects to "drain the swamps" ostensibly were to help desalinate and drain farmlands – and to expand farmlands. He had strategic goals. The Shi'a know that all too well. What he also intended to drain from the swamps and the marshes, and the south, were many of the Shi'a.

So what is the point?

Those who might return may be walking into a post-Saddam bloodbath of score settling and vendettas at many levels. Iraq's ability to handle its multiethnic nature may also have de-developed over the last few years. This will clearly slow down any efforts to rebuild Iraq.

What else might the returnees face? Iraq is a country with a foreign debt of between $65bn and $83bn. Forecasted debt service might be in the range of $5-12bn per year depending on the repayment schedules. This is not good for a country that recently posted a GDP of only $25-30bn.

Iraq was an aid donor during the 1970s and until 1982. Since then it has been an aid recipient – while sitting on possibly 200bn barrels of oil.

Since 1997, 25-30% of the oil revenues of Iraq have gone to war reparations. Unless something changes, these war reparations bills will continue to be sent to Iraq. This will indeed slow down the redevelopment of the country.

Iraq is an administered economy, albeit by the UN and the Iraqi Government. For many years, percentages of oil revenues have been taken out to pay for weapons inspections, the administration of UN programs, and oil transport fees. Fiscal and monetary policies, some of them rather bizarre, are usually directed at strengthening the military and the security services, rather than aiding the people of Iraq.

The UN still has some control over the export amounts of oil, even though officially the cap has been taken off. The control is by trying to keep the export of oil going through only three different places: two terminals in the south, and a pipeline in the north. The Iraqis have gotten around this in some ways. Iraq "legally" exports about 100,000 b/d to Jordan. It also illegally exports about 150,000 to 200,000 b/d of oil to Syria. It possibly is exporting as much as 100,000 to 200,000 b/d through the Gulf, overland to Turkey, and elsewhere. The smuggling has given extra funds to Saddam Husain's regime, but not much to the Iraqi people. Such smuggling also feeds fuel to the suspicions of the West about Iraqi weapons programs.

The smuggling of oil, and other goods, also shows another side of Iraq that those who intend to rebuild the country will need to face: massive corruption and criminality. The place is saturated with it. When a country collapses, the wolves come out to prey. They also become role models in the country, and get an important place in the definition of the society. That does not bode well for the future of Iraq.

Also, as the economy shattered time and time again, unemployment became normal at the 50% range. Skills and work ethics have been worn away for many. Dissaving become an everyday thing. Families have sold off many of their possessions: heirlooms, parts of their houses, and even necessities, in order to pay for food and medicines. Who buys from them? The criminal wolves do, of course. Who else would have the money? Parents also seem to be "forced" to buy some of the household and other items that the teachers sell off. They fear for the grades, and even the graduation, of their children.

How does one make a rule of law work in such a shattered country, with a legal system so ignored, and in a society so spun out of control?

What about the youth? About 50% of the population is under 20. They have known nothing but war, sanctions, oppression, corruption and criminality. How do you turn these 12 million young people into productive citizens of a newly developing country?

What are other aspects of Iraq to consider in the rebuilding?

Agriculture has been neglected since the 1970s, but even more so since 1991. The Iraqi Government has spent little in the last decade on agricultural development. Yields and output in food crops have mostly been in decline since 1989. This is as the population has grown in the 2-2.5% range per year.

Things have gotten worse off for the farmers under the oil-for-food program. The Iraqi Government and the UN have been dumping cheap grains on the market. The Iraqi farmers cannot compete with these prices. Salinization and poor maintenance of land, machines and more have added to the problems. It has also been difficult to import fertilizers or fertilizer plant and plant parts – into a country with a potential of annual feedstock for fertilizer plants of 3 trillion cu ft of natural gas. Sanctions have also stopped the import of certain agricultural machines and equipment, because they may have a "dual use". Diseases have ravaged Iraqi livestock.

There have been sanctions on nylon sutures, some medical supplies, and water treatment chemicals. The health system in Iraq has collapsed for all but the elite. It was once one of the best in the region. However, most of the best doctors have left. Sanctions have hamstrung the doctors that have remained. The oil-for-food program has helped, but not enough. There are still shortages of many medicines and equipment – and even oxygen and anesthetics. Water is often short. Electricity is often short. There are long blackouts in most areas of Iraq each day. Sanitation and hygiene have suffered. Life expectancy has dropped by 2-3 years in the country.

Medicines are sometimes not available even for everyday prescriptions – except for the elite who can pay the hefty prices required on the black market (which they run). There is a large market for pharmaceuticals that have already expired. The bribes of choice are often pharmaceuticals like antibiotics. Deaths of under-5s increased dramatically after 1991. They remain at historically high levels – even after the oil-for-food program went into effect. Polio, malaria, ocular problems, kwashiorkor, heart disease and other health problems increased dramatically after 1991, and remain at historically high levels. Two years ago there was a serious polio scare. Iraq has one of the highest per capita cigarette consumption rates in the world.

The oil industry is in disrepair. Some poor "water injection" and other techniques have damaged important fields. The import of parts and supplies under the oil-for-food program has helped, but not enough. Maintenance of some fields and equipment has been poor. 95% of export revenues comes from oil. 50-60% of the GDP comes from oil. (It was 30% of GDP before 1989. Part of the de-development of Iraq has been its de-diversification.) Most of the Iraqi oil fields are not developed.

Most of the historically dwindling oil revenues have gone to military adventures. Military expenditures were in the range of 250% of oil revenues in the mid-1980, and have averaged very high levels, most likely, ever since. Military expenditures as a percentage of GDP were in the 50-60% range in the mid-1980s, and may have been averaging about 20-30% since then. But that is very hard to prove. Much of the natural wealth that could have been invested in Iraqi development went to decades of war.

Inflation was about 200% in 1996. It has been brought back down to about 50% recently. However, the dinar is still reeling at every rumor of war or attack. The Iraqi Government in its typically absurd denial and defiance still keeps the dinar at a level of ID1 = $3. The actual rate may be around 1,900-2,300 dinar to the dollar. Recently, the government started allowing foreign currency exchanging. However, on the books such activities are still illegal.

Iraq is blessed with much good land, water, oil and other minerals, and a great people. It has been cursed by its leaders.

It is also important to understand that in this world of "free markets" and globalization, Iraq is one of the most centrally planned, and externally administered economies. Free enterprise, an American ideal, is seen only in the black markets, gray markets, and smuggling. The economists got it right after all. Give people certain incentives and watch where those incentives lead them. In this case the incentives have led to the development of parallel markets so the elite can live La Dolce Vita, while the people starve and die on filthy operating tables.

For Iraq to develop it needs to invest in education, health, infrastructure, training, administration, innovation and change, a new legal system, a rule of law, and more. It needs to transform from a military dictatorship and a mukhbarat (secret police) state into a free, open and creative society. It needs new ways of leadership. It needs new ways of thinking. It needs new ways of treating its people. It needs new ways of dealing with the rest of the world.

This will take decades. It will also take more than just aid money and decades of foreign troops keeping the peace. It will cost over $100bn at the least.

The old ways cost Iraq well over $1 trillion (rough estimate based on some rough assumptions about a rough country) in destroyed assets, lost GDP, lost potential GDP, lost lives, damaged lives, lost education, crushed creativity, and psychological scars. Iraq may have been a newly industrialized country with a GDP per capita of $15,000 by now if the conditions were just right over the last 21 years. It may also have turned out to be a country with a GDP of $200-400bn. It is now a country with a GDP of about $25-30bn and, after the elite gets it cut, a per capita income of about $800-1,500 – depending on where you are. It is a country of mostly poor miserable people sitting on possibly as much as 200bn barrels of oil. That potential 200bn barrels will help in the redevelopment of the country. But there are lots of caveats and "free variables" that could get in the way.

More Information on Sanctions in Iraq
More Information on the Historical Background of Iraq

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FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Policy Forum distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.