(March 11, 2001)

Abbas Alnasrawi is Professor of Economics at
the University of Vermont. This paper was first presented at a
conference organised by the Campaign Against Sanctions on Iraq.

Looking at the world map of oil we find certain facts to have shaped
the history of Iraq and its regional context and will continue to do so
for a long time to come. At the end of 1999 world oil reserves amounted
to 1033 billion barrels of oil with two thirds of these reserves to be
found in five countries (Saudi Arabia, Iraq, Iran, Kuwait and the
United Arab Emirates). Similarly in that year these countries were
responsible for nearly one third of the world oil production of 72
million barrels per day (MBD) and over 40 percent of the world’s oil
exports of 41 MBD. In relation to OPEC these countries command more
than four fifths of the organization’s reserves and two thirds of its
output and exports. Therefore, what happens to the oil industry in any
one of these countries will affect the fortunes of its neighboring
countries. Moreover, the high degree of concentration of oil reserves,
output and exports in these five countries made them a constant target
of outside power machination and interference. And it is a well known
fact that the oil sectors in these five countries have been until
recently under the direct control of a handful of multinational oil
corporations (BP, Exxon, Shell, Texaco, Gulf, etc … ).

The paper will attempt to deal with six topics: (1) historical
background; (2) oil and the Iraqi economy; (3) the Iraq-Iran war; (4)
the invasion of Kuwait; (5) the U.N. sanctions regime and; (6) Iraq’s
foreign debt. I will conclude with some speculative thoughts on the
future of the Iraqi economy.

1. Historical Background

It is a historical fact that the home governments (US, UK, France) of
multinational oil corporations have all played significant roles in
enabling their companies to acquire oil concessions, to penetrate
markets and to deal with the governments of oil producing countries.
Depending on the situation and the historical context, these
governments have at times cooperated with each other and at times
opposed one another.

In the case of the United States evidence of the close relationship
between the U.S. based oil MNCs and the U.S. government is abundant and
goes way back to the early part of the last century. Few examples will
illustrate the point. During World War II and because of the war
conditions oil companies could not produce enough oil to provide the
funds promised the Saudi government. Instead, these companies were able
to persuade the Roosevelt administration to provide such funds in order
not jeopardize the oil concession. The American president solved the
problem in 1943 by stating to the administrator of the Lend-Lease
program that: “in order to enable you to arrange Lend-Lease aid to the
government of Saudi Arabia, I hereby find that the defense of Saudi
Arabia is vital to the defense of the United States.” (Senate Committee
on Foreign Relations 1975: 37-39).

Following World War II Secretary of state Dean Acheson instructed the
Economic Cooperation Administration or the Marshal Plan that “in every
petroleum transaction an American company must be involved” and
“deliveries [of oil] from sources other than the United States and
possessions will be eligible only if made by American owned and
operated companies.” (Ibid: 83-4).

The policy of insisting that American companies be the ones to sell oil
to Europe was most conducive to MNCs plans to expand oil output in the
Middle East for their operations in Europe. Again following the
nationalization of BP operations in Iran the State Department in
cooperation with the British government (following the 1953 overthrow
of Dr. Mossadegh) was instrumental in finding the solution which
introduced American companies to Iran’s oil and reintroduced that oil
to the world market.

In 1958, when the monarchy in Iraq was overthrown, the U.S. governments
gave strong consideration to military intervention to undo the
revolution. The intervention could not be justified as long as the new
government respected Western oil interests which it did. This near
intervention led one observer to note that gunboat diplomacy was
clearly in line with the State Department commitment to pipelines and
profits.

In the early 1970s the U.S. government provided legal dispensation to
oil companies in order to enable them to enter into collective
negotiations with OPEC over prices.

One does not have to review the whole record to establish the interest
in and the commitment of the U.S. government to oil issues. This
relationship was assessed by the U.S. Senate Subcommittee on
Multinational Corporations of the Senate Committee on Foreign Relations
in a 1975 study in which it said that the system of allocating output
between oil producing countries was administered by the oil companies
with the assistance of the U.S. government. The system was premised on
two basic assumptions: (1) that the companies were instruments of U.S.
foreign policy; and (2) that the interests of the companies were
basically identical with the U.

S. national interests. The U. S. foreign policy objectives were
identified to be: (1) that the United States provide a steady supply of
oil to Europe and Japan at reasonable prices for economic recovery and
sustained economic growth; (2) that stable governments be maintained in
pro-Western oil producing countries; and (3) that American-based firms
be a dominant force in world oil trade (Senate Committee on Foreign
Relations 1975: 2).

Again in the 1970s, the 1980s and the 1990s, working through Saudi
Arabia, the U.S. government ensured that OPEC oil supplies were at such
levels as to keep prices from either skyrocketing or collapsing. Thus
in its study, The Changing Structure of the International Oil Market,
the General Accounting Office described the policy coordination between
the two governments in these terms: “To achieve the U.S. objective of
access to adequate supplies at “reasonable prices,” the United States
uses its bilateral relationships with friendly producers in attempt to
influence their pricing and production decision. This is especially
apparent with Saudi Arabia with which… the United States has a “very
active” bilateral policy. Frequent visits by cabinet-level officials
including the Secretaries of State, Treasury, Defense, and Energy
during the past several years illustrate this bilateralism.” (1982:
49-50).

And in the 1990s the U.S. government and its allies went to war in order to keep oil from falling in unfriendly hands.

2. The Role of Oil in the Iraqi Economy

Statistically, one way to measure the relative importance of oil in the
Iraqi economy is to trace the behavior of oil revenue. In 1960 Iraq’s
income from oil which amounted to $266 million rose to $521 million in
1970. But the extraordinary developments of the 1970s such as the
OPEC-led phenomenal rise oil prices, nationalization of the oil sector,
the Iranian revolution and the continued rise in exports pushed Iraq’s
oil income from $1 billion in 1971 to $26.1 billion in 1980. With such
rise in income there was an associated increase in the relative
importance of the oil sector from a mere 3 percent in 1950 to 56
percent in 1980. This meant that Iraq’s dependence on oil became
irreversible. But what does it mean to be an oil-based or an oil
dependent economy? It means among other things the following:

a) Economic activity, employment and income are determined by the
amount of oil revenue the economy receives from selling its oil abroad.
In other words people’s livelihood and economic security has become
highly dependent on what happened to the world oil market.

b) Oil revenue became the foundation of the state in that oil income,
which flows into state coffers, has become its primary source of
revenue instead of tax revenue. The state now can use its newly found
source of income and power as it pleased: to build its armed forces and
security organizations, to provide social services, to expand the civil
service, to distribute funds to its favorite groups and regions of the
country and to wage wars.

c) Oil also became the main source of funds for investment in industry,
agriculture, health and education and the infrastructure.

d) Oil revenue enabled the state to break its financial dependence on
the citizens. In other words the state no longer needed its citizens to
collect taxes to finance its activities.

It is worth pointing out that the 1970s was Iraq’s prosperous decade.
The spectacular rise in oil revenue made it possible for all economic
and social indicators to rise at very impressive rates. That
performance was never to be duplicated again.

The decade of the 1970s also witnessed the growth of Iraq’s oil
industry in all its components as funds were available for investment.
This investment was never to be duplicated in the next two decades
because of the Iraq-Iran war and the UN-imposed sanctions. But as we
know an oil dependent country has no control over its oil income since
such income is determined by how much you can sell and at what
price-factors that are determined by forces in the international
political economy which are beyond the control of any one oil exporting
country. This was very clearly the case when Iraq’s oil income
collapsed first in the context of the Iraq-Iran war and then in the
context of the U.N. sanctions. In the 1980s several market factors such
as the stagnant conditions of the world economy, the success of energy
conservation measures and the emergence of new oil exporting regions
had a depressing effect on OPEC’s and Iraq’s oil fortunes. The problem
for Iraq was compounded by the devastation of the Iraq-Iran war which
resulted in a sharp decline in the contribution of the oil sector from
56 percent in 1980 to 23 percent in

1989. And for the first years of the 1990s this contribution declined
to some 4-5 percent as Iraq ceased to be an oil exporting country.

3. Oil and the Iraq-Iran War

When the government of Iraq decided to launch the war against Iran in
September 1980 the Iraqi economy was on the threshold of another decade
of economic growth. The immense increase in oil revenue mentioned
earlier had made it possible for the government to increase
simultaneously spending on the infrastructure, the bureaucracy, goods
producing sectors, social services, foreign assistance, imports, and
the military. In addition it was in a position to have balance of
payments surplus and thus accumulate unprecedented levels of foreign
reserves. But the war-caused destruction and closure of oil facilities
led oil output, export and revenue to decline very sharply-by 60
percent between 1980 and 1981.

In a country that has grown dependent on a single export these external
shocks forced the economy to have to cope with a number of serious
problems some of which had become structural. Among such problems are
the following: 1) Iraq’s major oil exporting capacity was either
destroyed, blocked or closed, 2) Iraq’s heavy industries were destroyed
or in need of major repair, 3) the infrastructure was extensively
damaged, 4) a major segment of the labor force (one fifth) was in the
armed forces, 5) agricultural and industrial growth was either stagnant
or negative, 6) rural workers had either been drafted into the army or
drifted to the city, 7) the large number of foreign workers imported
during the war had become a burden on the economy, 8) dependence on
food imports increased, 9) inflation had become a structural problem,
10) privatization was not succeeding according to expectation, 11) Iraq
had become a major debtor country, 12) levels of imports declined, 13)
development spending virtually ceased, and 14) the higher living
standards which were promised during the war could not be delivered in
the postwar period.

In short, the government’s big gamble of winning a quick victory over
Iran led the economy to a dead end with no prospect for recovery. What
staved off total economic collapse was the pumping of funds and credit
by the Gulf states, OECD and the former Soviet Union (Alnasrawi
1994:83-100).

Militarization of the Economy One of the most significant changes to
take place in the Iraqi economy in the decades of the 1970s and the
1980s was the massive shift of labor from the civilian economy to the
military and the sharp increase in military spending and military
imports. In 1975 Iraq had 3 per cent of its labor force in the armed
forces. By the time the war with Iran ended in 1988 the government was
employing more than 21 per cent of the labor force or 1 million persons
in the armed forces.

The other side of this expansion in the armed forces was the sharp rise
of the military’s claims on Iraq’s fiscal resources. Thus in 1970 the
government spent less than $1 billion on the military, or 19 percent of
the GDP-A high ratio by world standards. By 1980, the government raised
military spending to $12.1 billion, or nearly 23 percent of GDP. The
share of military spending, which amounted to $111 billion during the
period 1981-88 was 40 percent of that period’s GDP.

Another way of looking at the burden of military spending is to relate
it to Iraq’s oil revenue. During the eight-year period 1981 -88,
military spending which amounted to $111 billion was 154 percent of the
same period’s oil revenue of $72 billion. According to the Iraqi
president the country imported and used $102 billion of foreign
military equipment during the Iraq-Iran war.

This bankrupting effect of the war explains why Iraq had to exhaust its
international reserves, increase its foreign debt and suppliers’
credit, resort to internal borrowing, accept grants from Gulf states,
abandon its development plans, and reduce imports and social services.

4. Oil and the Invasion of Kuwait

Iraq entered the post war period with a smaller and disorganized
economy that was overburdened with unemployment, inflation and foreign
debt. To cope with the economic crisis, and to also fund an ambitious
program of military industrialization the government had to rely on a
shrinking source of oil revenue which in 1988 generated only $11
billion compared to $26 billion in 1980.

The exhausted state of the economy was made worse by the 9 percent
decline in GDP in 1989 over 1988 – a decline that constituted a severe
blow to the government and forced it to adopt an austerity program of
spending. But to reduce government spending in a period of severe
economic crisis had the effect of worsening the crisis. What the
economy needed at that particular juncture was an increase in the
supply of goods to dampen inflation and restore some of the living
standards that were severely eroded during the war. In order to achieve
these objectives the government had only one option- to raise oil
revenue. And it was in this particular arena that the stage was set for
Iraq’s conflict with Kuwait.

The collapse of the price of crude oil in the mid 1980s persuaded OPEC
member countries to agree in October 1986 to return to their system of
quotas and to set the price at $18 per barrel, a price which they
deemed to be necessary for their economic and social development. Yet
several countries especially Kuwait and the United Arab Emirates chose
not to comply with their quotas thus forcing the price to decline to
$12 per barrel by October 1988. Although market conditions improved
causing the price to reach $20 per barrel in January 1990 Kuwait and
other non-complying OPEC countries, however, decided to raise their
output to such level that the price declined by one third by June
1990-a decline that wiped out a major portion of the oil income of Iraq
and other OPEC countries. In the case of Iraq a decline in the price of
$6 per barrel meant a loss of $6 billion in oil revenue per year, a
loss that Iraq could not afford. The Iraqi president characterized oil
actions leading to above quota production and lower prices as causing
damage to the Iraqi economy that was similar to the economic damage
inflicted by conventional wars (Alnasrawi 1994: 105-118).

In addition to the issue of oil production and prices Iraq accused
Kuwait of using diagonal drilling to pump oil from that part of the
Rumaila oil field that was located inside Iraqi territory.

On July 17, 1990 the Iraqi president accused rulers of the Gulf states
of being tools in an international campaign to halt Iraq’s scientific
and technological progress and to impoverish its people. On July 27 and
in the shadow of Iraqi troops movement along the Iraqi-Kuwait border,
OPEC decided to raise the reference price of oil from $18 to $21 per
barrel and adopt new quotas. But on August 2 the government of Iraq
decided to invade and occupy Kuwait.

The invasion of Kuwait was looked at as a short cut solution to Iraq’s
economic crisis and to the regime’s failure to improve living
standards. This policy decision was articulated by the deputy prime
minister for the economy who stated that Iraq will be able to pay its
debt in less than five years; that the G 4 new Iraq” would have a much
higher oil production quota; that its income from oil would rise to $38
billion; and that it would be able to vastly increase spending on
development projects and imports (ibid).

The invasion of Kuwait prompted the UN Security Council under the
leadership of the United States to vote on 6 August, to adopt Res. 661
which imposed a sweeping and comprehensive system of sanctions which is
still in effect.

5. Oil and the UN Sanctions Regime

The centerpiece of the 1990 sanctions system was UNSC Res.661 . This
resolution and subsequent sanctions resolutions created a set of
conditions which virtually cut off Iraq from the world economy. The
sanctions included a ban on all imports and was enforced by a naval and
air blockade, an oil embargo, a freezing of Iraqi government financial
assets abroad, an arms embargo, suspension of international flights,
and prohibition on financial transactions with Iraq. The UNSC also
called upon member states to enforce naval and air blockades against
Iraq. All shipping on the Shatt-al-Arab waterway in the South of Iraq
was intercepted and all vessels approaching the Jordanian port of Aqaba
were boarded and inspected (Cortright and Lopez 2000: 39-41). In short,
the embargo was intended to prevent anything from getting through into
Iraq. The embargo appeared to support the contention that the UNSC was
using famine and starvation as potential weapons to force Iraq into
submission. (Freedman and Karsh 1993: 191-93).

Given Iraq’s utter dependence on oil exports and commodity imports it
was not surprising that the embargo succeeded in shutting off 90
percent of Iraq’s imports and 97 percent of its exports and produced
serious disruptions to the economy and hardships to the people.
Needless to say that these disruptions were aggravated and magnified in
the aftermath of the bombing of Iraq’s infrastructure. The vast scale
of destruction, which must have set the economy back to nineteenth
century status, should not be surprising in light of the fact that the
initial plan of bombing which had focused on 84 targets was expanded in
the course of the war to include 723 targets (House Armed Services
Comm. 1992: 86).

Between the time sanctions were imposed in August 1990 and the time
when Iraq resumed oil exports in December 1996 the people, as we all
know, had to endure conditions of death, poverty, diseases, economic
underdevelopment, emigration, unemployment, social disintegration, and
school drop out among other catastrophes.

What about oil under conditions of sanctions? Oil became the focus of
attention of both the government of Iraq and the United Nations for
different considerations. For Iraq, oil is the foundation of the
country’s economy and livelihood as well as the state’s plans for
survival, power and rule. For the United Nations Iraq’s oil was an
instrument to be used to enforce its decisions and implement its
resolutions from border demarcation to making payments to war victims
to disarming Iraq and to monitoring future developments in Iraq. In
other words by regulating Iraq’s oil sales and Iraq’s commodity imports
the United Nations sought to control the government’s room for
maneuverability. This was the posture which the U.N. took from the time
resolution 687, the cease-fire resolution, was passed in April 1991.

Oil played a central role in all that has taken place between the
United Nations and the government of Iraq. To begin with, resolution
687 empowered the Sanctions Committee to approve financial transaction
to provide adequate funding for the import of humanitarian supplies
into Iraq. The government’s several requests to the Committee that it
be allowed to sell oil to import such supplies were denied. It is
important to note that prior to its adoption of resolution 687, the
UNSC had before it two documents regarding conditions in Iraq at its
disposal. The first was the March 20, 1991 report of the Ahtissari
mission which had this to say:

I, together with all my colleagues, am convinced that there needs to be
a major mobilization and movement of resources to deal with aspects of
this deep crisis in the field of agriculture and food, water,
sanitation and health … It is unmistakable that the Iraqi people may
soon face a further imminent catastrophe, which could include epidemic
and famine, if massive life-supporting needs are not rapidly met …
Time is short (UN 1996: 186-8).

The other document was the March 22 Sanction Committee determination which stated:

In the light of the new information available to it, the Committee has
decided to make, with immediate effect, a general determination that
humanitarian circumstances apply with respect to the entire civilian
population of Iraq in all parts of Iraq’s national territory (ibid:
189).

But since Iraq’s foreign held assets were frozen and its oil exports
were embargoed the Sanctions Committee’s determination proved to be of
no benefit to the population.

Then there was the mission led by the Executive Delegate of the UN
Secretary-General which submitted its 15 July 1991 report on
humanitarian needs in Iraq. The new mission concentrated its work on
four sectors: food supply, water and sanitation systems, the oil
sector, and power generation. This mission estimated that the cost of
rehabilitating these four sectors would be $22.1 billion (ibid: 273-9).

The mission also offered a one year estimate of the costs based on
scaled down goals rather than pre-war standards and came up with the
figure of $6.8 billion for food imports; power generation; the oil
sector; health services; water and sanitation; and essential
agricultural inputs.

Aside from the humanitarian merits of the case the mission advanced two
other arguments. First, the amount of funds that Iraq required to meet
its humanitarian needs were simply beyond what the international
community is willing to provide. Only Iraq has the resources to fund
its needs provided, of course, it is allowed to export its oil. Second,
Iraq should not have to compete for scarce aid funds with a
famine-ravaged Horn of Africa and a cyclone-hit Bangladesh.

In August /September 1991 the UNSC finally relented and passed
resolutions 706 and 712 which authorized the sale of oil in the amount
of $1.6 billion over six months to finance U.N. operations in Iraq,
provide financial resources to the Compensation Fund and pay oil
transit fees to Turkey thus leaving $669 million for Iraq’s imports, a
level of funding which had been described by the U.N. Secretary-General
as being $800 million short of the minimum necessary to meet Iraq’s
humanitarian and essential civilian requirements.

The government of Iraq rejected the 706/712 oil sales scheme because of
its restrictive terms which the government considered to be a major
infringement upon its sovereignty. It is worth noting that the Iraqi
technocrats who were in favor of oil export resumption argued that the
restrictive conditions are bound to be relaxed and that it would be in
Iraq’s long term interest to reestablish its position in the world oil
market and that the initial oil sales will give a much needed boost to
the faltering economy and the collapsing Iraqi currency.

Policy makers in Iraq, however, did not share these views since the
thrust of their policy was to strive for the total lifting of the
sanctions rather than their partial relaxation. This can be seen in the
position which the Iraqi president stated in October 1991 when he
announced that “it should be clear that Iraq could live under sanctions
for 10 to 20 years without asking anything from anyone.” (MEES 1991:
A3). Again in 1992 Iraq’s deputy prime minister told the UNSC that Iraq
was ready to hold talks with the U.N. for the purpose of resuming oil
exports provided such sales are not governed by any UN resolutions.
(MEES 1992: A4).

Although several rounds of negotiations were held between the
government and the U.N. such negotiations failed to bridge the gap
between the two sides and were suspended in 1993.The failure to
implement resolutions 706 and 712 meant the continued deterioration of
the Iraqi economy and further decline in the living conditions of the
people.

Oil-for-Food Under Resolutions 986/1153/1284/1330 It was not until
April 1995 when the UNSC decided to revisit the issue of sanctions when
it adopted Res 986 allowing Iraq to sell $2 billion worth of oil every
six month period to provide more resources to the Compensation Fund and
fund various UNSC mandated operations in Iraq and to help Iraq purchase
civilian supplies. Except for the increase in oil income to $2 billion
under this resolution, the core of the scheme remains the same. The
UNSC retained to itself the necessary mechanisms to monitor all sales,
all purchases, with all funds moving in and out of a UN-administered
escrow account.

With 30 percent of the proceeds to be diverted to the Compensation Fund
and other deductions to pay for UN operations, Iraq was slated to get
$1.3 billion every six months to finance its imports.

Again, the Iraqi government decided to reject Res. 986 thus plunging
the economy in a deeper crisis. The collapse in the value of the Iraqi
dinar and the resulting hyperinflation and the further collapse in what
remained of personal income purchasing power not to mention the
internal political crisis associated with the defection of the
president’s relatives to Jordan forced the government in January 1996
to reverse its position and agree to enter into negotiations with the
UNSC over the implementation of Res 986. It took Iraq’s oil almost
another year before it was finally exported in December 1996.

In February 1998 the UNSC decided to raise the ceiling from $2 billion
to $5.2 billion per six month phase under resolution 1153 and in
December 1999 resolution 1284 removed the ceiling on oil exports but
kept all other restrictions in place. In December 2000 under resolution
1330 the share of the Compensation Fund in oil revenue was lowered from
30 percent to 25 percent.

Before leaving the topic of oil and sanctions a few observations
regarding investment in the oil industry are in order. Investment in
the oil industry, like investment in other sectors of the economy, was
disrupted during the Iraq-Iran war then came to a halt in 1990. The
embargo which has been placed on the import of necessary equipment and
spare parts and which threatened the long term prospects of the
industry was finally acknowledged in 1998 when a group of oil experts
was sent by the U.N. Secretary-General to study the conditions of the
oil industry in Iraq. The March 1998 report of the mission concluded
that the industry was in a “lamentable state.” Following this group of
experts’ report the UNSC adopted Res. 1175 in June 1998 authorizing for
the first time, the import of up to $300 million of equipment and spare
parts per phase for the oil sector. In January 2000 another group of
experts in yet another report concluded that the lamentable state of
the Iraqi oil industry has not improved and that insufficient spare
parts and equipment have arrived in time to sustain production. In
short:

“… decline of conditions of all sectors of the oil industry
continues, and is accelerating in some cases. This trend will continue,
and the ability of the Iraqi oil industry to sustain the current
reduced production levels will be seriously compromised, until
effective action is taken to reverse the situation.” (Group of Experts
2000: 4)

In response to this new report the UNSC adopted in March 2000 Res. 1293
raising the cap on imports for the oil sector to $600 million per
phase. The problem, however, is not with the level of oil sector
imports, although that is important; it is with the UNSC Sanctions
Committee’s refusal to approve all the contracts which the U.N.
Secretary-General had already approved for Iraq’s oil sector imports.
The disruptive impact of withholding approval of such contracts was
expressed by the Executive Director of the U.N. Iraq Program when he
told the Security Council: The Council last year doubled the allocation
for oil spare parts and equipment. This was most welcome for the sector
that is the lifeline of the humanitarian programme. However, that was
the end of the good news – we continue to experience serious delays and
the number of holds placed on applications has become unacceptably
high. On the one hand, everyone is calling on OPEC to increase the
export of oil. On the other hand, the spare parts and equipment that
are the minimum requirements of Iraq’s oil industry, have been facing
serious obstacles in the Security Council Committee (Sevan 2000: 3).

6. Iraq’s Debt Problem

Iraq, sometime in the 1980s, changed status from a creditor to a debtor
country. As was noted earlier the decline in the oil sector and the
massive financial requirements of the Iraq-Iran war forced the change
in status. And the sanctions denied Iraq, of course, the opportunity to
pay any part of the debt.

In a memorandum to the U.N. Secretary-General dated April 29, 1991 the
government of Iraq acknowledged that its external debt obligations
(instalments and interest) were projected to be $75.1 billion at the
end of 1995 (MEES: 1991: D6-9). This figure should be $120 billion by
now assuming an annual interest rate of 8 percent. No other debtor
country in the world has Iraq’s debt burden in terms of the
relationship of the debt to GDP or to exports. It was calculated that
with exports of $5.6 billion and GDP of $22.3 billion in 1997, Iraq’s
debt indicators show that its external debt was more than 5 times its
GDP and 21 times its exports (Elali 2000: 68). No other indebted
country comes close to Iraq’s debt burden.

Given the many claims on Iraq’s financial resources in the post
sanctions era it is difficult to see how Iraq will be in a position to
pay the debt. Indeed without the cancellation of all or most of the
debt its payment will mean that Iraq’s economic crisis will be
perpetuated.

Needless to say that the burden of compensation if allowed to continue
into the future will greatly complicate the tasks of recovery and
growth.

Concluding Remarks

At the turn of this century Iraq’s per capita GDP was a small fraction
of its level of twenty years earlier. The combined impact of the
Iraq-Iran war, the Gulf war, the sanctions, the utter dependence on the
oil sector and the mismanagement of the economy transformed a once
prosperous economy and a vibrant society into a poor economy and a
society laboring under poverty and despair. The country has lost
decades of growth and social and economic development. In the decade of
the 1990s alone Iraq lost some $140 billion in oil revenue due to the
sanctions. No one can tell, of course, when the sanctions will be
lifted. But when they are lifted Iraq will face a horrendous task.

Iraq will enter the post sanctions era with these external claims on
its financial resources: over $100 billion of foreign debt; over $200
billion of Gulf war compensation claims; and $100 billion of claims by
Iran for its war losses. If to this bill of $400 billion we were to add
the replacement cost of infrastructure and other assets destroyed in
the course of the Gulf war we would arrive at an astronomical figure of
financial requirements which is simply beyond the capacity of the Iraqi
oil sector to generate. The government of Iraq will not be able to do
much if foreign creditors and war reparations claimants do not forgive
or adjust downward their claims. Oil, while essential, will be of
limited assistance because of the magnitude of the financial claims on
the oil sector. It has been estimated by the Iraqi government’s own
studies that in order to double production capacity to 6 MBD you need
ten years and $30 billion. It is very difficult to say that sufficient
foreign investment will be available and if so at what terms.

But given Iraq’s low cost vast oil reserves and the world oil market’s
need for more oil supplies one should not rule out that the necessary
capital inflow into Iraq’s oil industry will be forthcoming. According
to recent forecasts world oil demand will be such that Iraq’s oil will
have to be developed. Thus according to International Energy Agency
projections world oil demand will rise from 76 MBD in 1999 to 117 MBD
in 2020. To meet such increase in demand OPEC oil is projected to
increase from 30 MBD to 58 MBD while Iraq’s output is projected to rise
from 3 MBD to 6 MBD during the same period (al-Chalabi 2001: D6).
Indeed, it was postulated that a totally rehabilitated and
sanctions-free Iraq could expand its production capacity way beyond 8
MBD, easily reaching 10 MBD, and theoretically even 12 MBD under
certain conditions (Chalabi 2000: 163).

There is also the important fact that between 1980 and the year 2000
Iraq’s population has increased from 13 million to 23 million and will
be 34 million in the year

2115. In other words you have an additional ten million people who need
to be housed, fed, educated, employed and otherwise cared for at a time
of diminishing resources and a smaller economic base. This fact gives
rise to the question of how oil income will be spent in the post
sanctions era. On the face of it the answer should be clear since all
sub-soil minerals in Iraq belong to the people. This means that
economic and social policies should reflect the preferences of the
majority. This will require democratic institutions, transparency and
accountability. This obviously has not been the case during the last
three decades. The system is one where public and private resources are
melded and public office serves as a means for the creation of private
wealth.

Given what had taken place in Iraq over the last three decades a
complete economic and political overhaul is in order. This overhaul is
essential for reasons of social and economic justice. There is another
reason for the change which transcends the question of equity. If
current institutional mechanisms for the allocation of oil income will
continue to function in the future then what guarantees are there that
the destructive adventures of the past will not be repeated in the
future?

References

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Chalabi, F.J. 2000. “Iraq and the Future of World Oil,” Middle East Policy 7 (4) 163-173.

al-Chalabi, I. 2001. “Future Prospects of Iraq’s Oil Industry,” Middle East Economic Survey. February 19, DI-D7.

Cortright, D and Lopez, G A. 2000. The Sanctions Decade: Assessing UN
Strategies in the 1990s (Boulder, CO: Lynne Rienner Publishers).

Elali, W. 2000. “Dealing with Iraq’ Foreign Indebtedness,” Thunderbird International Business Review 42 (1) 65-83.

Middle East Economic Survey (MEES). May 3, 1991; October 21, 1991; March 16, 1992.

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