Iraq's Economy: Past, Present, Future

Publication Date: June 2003

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Economics

Type:

Coverage: Iraq

Abstract:

For most of its history, the government of Iraq has played an active role stimulating and directing the Iraqi economy. This pattern was most pronounced during the recent regime of Saddam Hussein, which was at root a centrally-directed command economy with some trappings of market economics and crony capitalism. Iraq's industrial sector was created, in large part, as a result of government efforts to diversify the economy through economic development projects using the proceeds from Iraq's oil wealth and borrowed funds. Many of these initiatives were not viable without government subsidies. Much of the industrial base has now been destroyed, either by direct attack in the Iran-Iraq or the two Gulf wars or through atrophy caused by neglect. Iraq has suffered absolute declines in gross domestic product (GDP), chronic inflation, wholesale depreciation of its currency, virtually non-existent foreign investment and the accumulation of a crushing debt burden.

This report, which will be updated periodically, identifies issues to be addressed before Iraq can participate normally in the world economy. It will need civil peace and a new legitimate government Hague and Geneva conventions place limits on the capacity of an occupying power to restructure or develop the economy of an occupied state by its own decisions alone. It will need a sound monetary system and a market-oriented banking and finance system. It will need to recast its industrial sector on sounder principles with attention to productivity and relative prices. It will also need to ensure that the government cannot use the massive oil revenues passing through its hands to establish once again a new authoritarian regime.

Should Iraq's oil fields be restored to their pre-war conditions, Iraq could reenter the world oil market as one of the largest suppliers, generating up to $24 billion in annual revenues. It has large undeveloped potential. Long term, it may be the world's largest oil producer, generating even larger export revenues perhaps doubling or more its income within a decade. How Iraq uses this prospective oil wealth and its effect on the rest of the economy will be a concern. At present, its oil revenue will go into the internationally-audited Development Fund for Iraq. Iraq's agricultural sector is small. Output during the 1980s was stimulated by incentives and subsidies, but production lagged and imports supplied most of the country's agricultural needs. During the 1990s, through poor practices, Iraq's farmland was heavily damaged by salinization. Years will be required to rebuild Iraq's agricultural productivity. In the meantime, Iraq will rely on imports to meet its agricultural needs. As a result, among other things, urbanization will increase.

Iraq has large foreign debts, with estimates ranging from $42 billion (plus unpaid interest since 1991) to $64 billion and $78 billion. This does not include 1980s war-loans from Gulf or other Arab states or war damage claims. Most of the debt stems from the Iran-Iraq war or from loans incurred before 1990 to fund consumer needs and industrial or infrastructure projects. The earlier U.N. sanctions regime and the Security Council resolution of May 22, 2003 shield Iraq against action by its creditors and claimants to settle claims. The issue will need to be resolved before normalization of Iraq's international trade and financial relations can occur.