Unlocking the massive potential of Iraq's economy: Obstacles and opportunities

At that time, people had just emerged from World War I, which had shaped the political geography of many countries, including Arab countries such as Iraq, Syria, and Jordan.

The resulting political divisions impacted the economic models that were adopted by these nations.

According to a British government census, Iraq's population in 1930 was approximately 2.9 million people. The purpose of the census was to understand the needs of the population and their geographic distribution, as well as determine the importance of cities and provinces such as Baghdad, Mosul, Basra, and Kirkuk.

The Indian rupee was used in Iraq until the end of the British mandate in 1932, and the Iraqi dinar was introduced under Law No. 44 of 1931.

When King Faisal I came to power, he adopted economic policies aimed at achieving development and improving living standards, as the country's population was suffering from poverty, illiteracy, poor healthcare, and lack of job opportunities.

Successive governments during the monarchical period focused on the implementation of infrastructure. They paid particular attention to the development of agriculture, the improvement of irrigation systems, and the streamlining of transportation.

In addition, they encouraged the private sector to become more active in manufacturing industries.

Oil economy

From the 1920s until today, the economy has remained primarily dependent on oil.

When the Ottoman Empire ruled Iraq in 1901, it granted the first oil exploration privilege to the British businessman William Knox D'Arcy. However, the first oil flow in Iraq occurred on 14 October 1927, in Kirkuk.

Read more: Kirkuk: Iraq's perpetual missed opportunity

After that, exploration agreements were signed with various foreign companies. The Iraq Petroleum Company (IPC) was also founded, in collaboration with several major companies – most notably the British Petroleum Company (BP).

The Reconstruction Counsel was established in 1950 due to increased oil revenue from 3mn Iraqi dinars in 1949 to 50mn dinars in 1953.

Governments during the monarchical period attempted to spend oil revenue shrewdly, allocating a significant portion to the Reconstruction Council, as it was responsible for vital projects, including infrastructure, education, healthcare, and housing; it cooperated with the International Bank for Reconstruction to identify these projects.

Oil revenue increased after profit-sharing agreements with foreign oil companies in 1951. Iraq had a population of no more than 5.7 million at that time. Even then, oil revenue remained limited relative to the population, but Iraq had substantial potential in vital sectors such as agriculture and manufacturing.

Despite economic policies encouraging private sector participation during the monarchist period until 1958, the state played a pivotal role in establishing specialised manufacturing companies, particularly cement industries, which became an export industry.

The agricultural sector also benefited greatly from state-led initiatives, such as irrigation projects, agricultural loans, and incentives to increase certain produce, such as dates and grains.

It can be concluded that the Iraqi economy during the monarchical period was diverse, thanks to partnerships between the public and private sectors across various realms.

However, unlike Syria, Egypt, Lebanon, and Palestine, the Iraqi private sector hasn't been prominent across different political eras since the beginning of the 20th century. This may be attributed to societal culture and political circumstances.

A shapeshifting economy

Since totalitarian parties took power, Iraq has been a rentier economy. The shift may have occurred gradually, starting with the administration of Abdul Karim Qasim and later the Ba'athist Party after the coup of 8 February 1963.

However, when Abdul Salam Arif and his Nasserist supporters seized power, he comprehensively attempted to copy Gamal Abdul Nasser's measures in Egypt.

Qasim issued Law No. 30 in 1958 regarding agricultural reform, which led to the fragmentation of sizeable agricultural landownership. He adopted similar laws to those issued in Egypt after July 1952 and other laws issued in India.

Poor enforcement of laws and failure to distinguish between feudal lords and civilian landowners led to a decline in agricultural production and the lack of appropriate production management.

It also resulted in the migration of large numbers of farmers to cities and the emergence of informal settlements around big cities, such as the city of Al-Thawra (The Revolution), now known as Sadr City, in Baghdad.

However, most farmers suffered from illiteracy, and their move to cities created a social layer of marginalised labour.

The state's dominance over the economy in Iraq became definitive, pushing the private sector's role to the fringes after the issuance of nationalisation decrees in 1964 under the late President Arif.

The state maintained ownership of banks, insurance companies, and major factories during the subsequent periods. However, there were attempts made during the Iran-Iraq war, specifically in 1987, to accomplish privatisation and economic liberalisation.

These attempts involved selling government farms and manufacturing facilities, creating competition in the banking sector, launching a stock market, and encouraging foreign investment.

However, these attempts were not met with enthusiasm by the local private sector, foreign investors, or Arab investors. As is well known, the entire oil sector was nationalised in 1972 during the second Ba'athist regime, following Law No. 80 in 1961 by Qasim, which had revoked privileges granted to oil companies and reclaimed 99.5% of their allocated lands.

The early 1970s marked the transition of oil company ownership from private to state in oil-producing and exporting countries.

Devastation reigns

Iraq has endured challenging, if not devastating, conditions in the past 65 years, ever since the coup of 14 July 1958 resulting from internal policies, relations with neighbouring countries, and the resulting long wars.

These included the conflict with the Kurds, the Iraq-Iran War, the invasion of Kuwait, the subsequent Gulf War to liberate Kuwait, and the invasion of Iraq by the international coalition led by America in 2003. Then there was the war against the Islamic State (IS) that began in 2014.

Even after the fall of the late President Saddam Hussein, the new regime announced development plans and investment laws were enacted, but nearly nothing has been actually implemented.

Wealth and reserves

Iraq possesses significant oil wealth, with reserves estimated at 145 billion barrels, which could increase with new explorations. Its gas reserves amount to 132 trillion cubic feet (according to data from the Iraqi Ministry of Oil, announced in May 2023).

The budget law indicates that the Iraqi government aims to export 3.5 million barrels of oil daily.

Iraq's public treasury is largely dependent on oil revenues. Parliament recently passed the general budget — the largest in the country's history. Spending was set at $153bn, and oil revenues were based on exporting 3.5 million barrels per day at an average price of $70 per barrel.

Oil revenue is estimated at $89.4bn, while non-oil revenues do not exceed $13.2bn, bringing the total to $102.6bn.

This implies a projected deficit of around $50bn in the current fiscal year. Current spending constitutes 78% of the total expenditure, while the remaining 22% is allocated to investment spending, which does not exceed $35bn.

Even though 20 years have passed since the fall of the previous regime, the Iraqi economy is still in an abysmal state. Subsequent governments have failed to deliver on their promise to capitalise on the country's massive potential

While reform plans have been announced to improve public services, water supplies, agriculture, the education system, healthcare and housing, nothing substantial has happened.

Meanwhile, unemployment and poverty rates continue to rise.

A report by the United Nations Development Programme (UNDP) estimated the poverty rate in Iraq to be around 40% of the total population in 2018. This percentage is high for a country with significant oil wealth, not to mention other economic potential.

Employment and a diversified economy

Another report released by the Iraqi Ministry of Planning on World Population Day (11 July 2023) stated that the population of Iraq had reached 43.3 million. The percentage of the working-age population (15-65 years) is 57%.

The high population growth rate of around 3% annually, gives an added urgency for job creation.  

This would require the implementation of a comprehensive investment and development programme that addresses population growth challenges, rising population needs, and their livelihood and consumption aspirations.

Building a solid foundation

To move forward, a solid foundation must first be built.

This means reforming the education (and vocational education) system, which will, in turn, improve academic output and professional qualifications. In this regard, Iraq could benefit from the past experiences of countries such as India and the Philippines.

Improving higher education will also help in transitioning to a knowledge-based economy.

This increases the possibility of establishing modern manufacturing industries that keep pace with technological advancements, elevating the country's status in the region and enabling Iraq to move towards the ranks of countries like South Korea or Malaysia.

However, these aspirations for the Iraqi economy require cooperation with – and an attempt to benefit from – the private sector in the Gulf countries, not to mention working with development funds to enhance infrastructure and housing.

These plans are also contingent on the stability of the political system, a willingness to embrace democratic values, the consolidation of the foundations of the civil state, and a move away from sectarian and ethnic divisions to promote social harmony and economic development.