Dismantling pre-war legacy: Iraq's prosperity was short-lived

Going back in time we find out that Iraq's economic prosperity was extremely short-lived. External and internal factors constrained the expansion of an economy that had significant growth potentials driven by its massive oil reserves and a large market by regional standards.

The country's political history can be summarized in a series of military coups and counter coups, violent seizures of power, wars, and sanctions. These elements prevented Iraq from embarking on a sustainable development path.

Instead, even before the UN imposed its paralyzing sanctions on Iraq following its invasion of Kuwait, the country's Gross Domestic Product reached merely US$ 16.4 billion in 1990 (in 1980 prices), almost half its level in 1985 of US$ 31.7 billion and down by 70% from its level in 1980 (US$ 54 billion).

The drastic drop in output can be attributed to the extensive militarization of the economy which started in the 1970s but became quite pronounced in the late 1980s during the Iran-Iraq war. As a percentage of GDP, military spending captured some 14% in 1975. In 1988, military expenditures rose to 57% of GDP.

On the eve of Iraq's invasion of Kuwait, military spending climbed once again to absorb a high of 61% of GDP in 1990. This pattern clearly shows how military expenditures consistently crowded out the potential expansion of other sectors of the economy.

Additional evidence can be found in the increase of military personnel during the same years. For instance, military personnel accounted for about 23% of the total Iraqi labor force in 1998, the equivalent of one million persons. This figure rose further to 1,390,000 military personnel in 1990, to represent around 30% of the total labor force against less than 3% in 1975.

So when did Iraq enjoy an economic boom or is it all an illusion?

In its long history of political insecurity, Iraq witnessed a short period of relative stability stretching from the late 1960s till 1979. The Baath party which seized power in 1968 thrived to tighten its grip by fiercely suppressing opposition groups and all political parties (other than the Baath) while rewarding potential followers and friendly minorities. The success of the Baath party in consolidating its power was mainly due to the unprecedented use of internal security force and the nationalization of oil companies.

In the 1970s, higher oil prices and larger oil production contributed to the phenomenal increase in Iraqi oil revenues which amounted to US$ 26.3 billion in 1980, accounting for 56% of GDP, up from 3.6% in 1970, and just 3.4% in 1960. As such, GDP per capita in 1980 prices rose from US$ 1,260 in 1960, to US$ 1,745 in 1970 and further to US$ 4,083 in 1980.

Prior to the Iraq-Iran war that erupted in September 1980, foreign observers and Iraqi residents would describe living standards and the level of social wellbeing as being similar to those of the neighboring oil-exporting monarchies.

However, the events that followed proved that the Iraqi economy was totally dependent on its oil revenues. Any incident that would hinder its ability to export its oil output would directly curb growth and cripple its economy.

The Iran-Iraq war that extended from 1980 till 1988 dramatically reduced oil output due to the destruction of major oil facilities. Oil revenues slipped by almost 60% in the first year alone since production fell to 0.9 million barrels per day (MBD) in 1981 against an average of more than 2.5 MBD in 1980. Oil production then slowly picked up as of 1983 and rose to 3.0 MBD in 1988 as the war finally ended. However, oil revenues did not grow at the same pace as receipts were channeled mostly towards military reinforcement while spending on development was subdued.

In 1988, the country had to cope with new problems. These included inflation, the deterioration of living standards, the contraction of income, high unemployment and a large exposure to foreign debt as the government borrowed heavily to import arms.

It was difficult for Iraq then to raise oil revenues due to the destruction of a large part of its oil infrastructure and the country was in desperate need to increase the supply of goods in order to curb inflation and restore the economy. Faced with such a worn out state of the economy yet still possessing enough powerful arms, Iraq decided to invade Kuwait in August 1990.

This drove the United Nations Security Council (under the influence of the United States) to impose one of the strictest forms of economic sanctions just four days after the Kuwait invasion. All international transactions with Iraq were accordingly banned except for medical supplies and in some cases foodstuffs.

Iraq became almost completely cut off from the world economy and a humanitarian crisis broke out as the embargo caused intense food shortages and denied people of their basic subsistence needs.

The US bombing of Iraq in January of 1991 made things worse as it did not spare civilian targets and smashed a large section of the infrastructure including power and communications. What once was a highly urbanized society was brought back to a pre-industrial age.

It was only in December 1996, when the UN adopted the oil-for-food program that a part of the population was slightly relieved. However the overall state of the economy remained largely in collapse.

Regardless of the stance towards the US-led war on Iraq, the fact that it would lift the 11-year-long sanctions brings some hope that the wellbeing of resident Iraqis might improve. On the other hand, as Iraq sits on the world's second largest oil reserves after Saudi Arabia, massive growth potentials become viable if the country gets its share of political stability.

Iraq has 112 billion barrels of proven oil reserves while its resource potential could be even greater as around 90% remains unexplored. Besides, Iraq's oil production costs are among the lowest in the world. Once the country gains access to new technologies of production, oil output would more than double.