Iraq Still Struggling 10 Years After Change

Nearly 10 years after the overthrow of former Iraqi President Saddam Hussein, Iraq is still suffering from myriad economic problems and is in need of serious reform, writes Amer Diab Tamimi.

al-monitor Men stand outside the Iraq Stock Exchange (ISX) building in Baghdad, Feb. 3, 2013.  Photo by REUTERS/Thaier Al-Sudani.

Topics covered

reforms, iraqi politics, iraqi economy, iraq

Feb 25, 2013

The Arab countries that underwent fundamental political changes have suffered from objective problems that have led to a halt in development. Following regime changes, development was not focused on economic reform and development needs. It goes without saying that these countries inherited heavy social and economic problems that make the economic recovery process both complicated and thorny.

Iraq is one of the countries that experienced change, after an international intervention led to the overthrow of former President Saddam Hussein and transformed the political system into a parliamentary system based on political pluralism, and resulted in a decentralization of power. The Kurdish region in the north gained important autonomy, and the other regions now enjoy new authorities provided by local governance. It is well known that Iraq, since the July 14, 1958, coup, was governed by an influential central authority that reinforced a totalitarian economy, after oil became the main source of sovereign revenue. Moreover, after nationalization efforts began in 1964 under President Abdul Salam Arif, the private sector was marginalized in a systematic manner. Therefore Iraqis began to rely on public spending mechanisms, and basic facilities in the manufacturing, banking and services sectors became state-owned.

After the overthrow of Saddam Hussein by the United States and its allies in 2003, it was hoped that the Iraqi economy would transform into a magnet for investment and would support free-market mechanisms. These trends were, and probably still are, evident. They were adopted in the new constitution, the orientations of the ruling authorities and the Investment Promotion Law. However, the political and security situation that prevailed in the country following the fall of the former regime did not lead to a consolidation of political structures appropriate for the flow of funds or to encourage investors — whether foreign or local — to invest in vital sectors. Despite the improved security situation over the past five years and limited investments in the telecommunications and banking sectors, the desired goal was not achieved.

Although the north — where Kurdish parties took control and established quasi-independent autonomy from the central authorities — was able to attract investors and establish many projects, this did not happen in the rest of the country's provinces. Iraq was able to increase its oil production, including a fair amount of exported oil, to reach an average of 2.6 million barrels per day in 2012. This increase in oil exports resulted in a significant increase in sovereign revenues. In 2012, these revenues amounted to $95 billion. Contracts signed with international companies indicate that Iraq has real potential to increase oil production, to enhance state revenues and improve the country's capacity for current expenditure and investment.

Yet Iraq, where gross domestic product (GDP) in 2011 was about $127 billion, is still far from achieving economic development capable of promoting real economic advancement. The non-oil economic sectors are still unable to attract investment, and the state is unable to convert its many industrial holdings to the private sector though a clearly defined allocation program. There are many laws and regulations that must be reviewed, amended or even replaced, if Iraq wants to improve the business environment in the country.

Although the Iraqi government has signed contracts and agreements with the World Bank and the International Monetary Fund to develop institutional and legal infrastructure, importance should be given to the development of the judicial system, in order to gain the confidence of businesses and enhance the country's ability to protect investment rights. The state’s efforts to acquire assets in various non-oil sectors and the application of the agrarian reform law for more than 50 years has led to a terrible and corrupt government bureaucracy. This bureaucracy cannot be overcome without the adoption of clear liberalization policies that enjoy political support based on the will and courage to achieve suitable economic transformation.

The goals of economic reform in Iraq should be aligned with human development goals and address social problems. Iraq is facing a growing unemployment crisis, with unemployment rates estimated at 15%. The country's workforce comprises of 8.9 million citizens, with 60% working in the service sector, 19% in industry and 32% in agriculture. Statistics indicate that 25% of Iraqis suffer from extreme poverty — according to criteria developed by the United Nations — a figure that is very high for a country that enjoys significant sovereign revenues from the oil sector.

This data confirms that Iraq is still far from recovery or improving living standards. Iraqis still suffer from a significant deterioration in services, as well as constant interruptions in the power supply and a decline in the supply of clean water. This is not to mention a deterioration in roads, sewage and transportation services. Recent heavy rainfall has revealed this decline in the level of infrastructure, and emphasized the importance of allocating more money to upgrading infrastructure. There are also problems in the education sector at various levels, as the country lacks modern school facilities and students are crammed into small classrooms. Furthermore, there has been a recent decline in academic standards of universities and high education institutes.

Health services also require attention, which would improve the quality of life for Iraqi citizens. According to reports issued by the International Bank for Reconstruction and Development, in 2011 the population of Iraq reached 33 million. Moreover, the average age was 21 years, which means that over half the population has increasing needs and requirements and will soon flood the labor market. Thus, the government must adopt effective policies that lead to overcoming existing structural problems and enhancing the potential for reform, and hence leading to economic recovery and a higher quality of life.

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