Iraq's Economy: Past, Present, Future

Congressional research reportJun 3, 2003

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Iraq's Economy: Past, Present, Future

June 3, 2003

Jonathan E. Sanford

Coordinator

Foreign Affairs, Defense, and Trade Division

Congressional Research Service ˜ The Library of Congress

Iraq's Economy: Past, Present, Future

Summary

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.

Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Government and the Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

The Constitutional Monarchy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Economic Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

The Military Regimes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Governments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Economic Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

The Baathist Regime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Economic Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Demographic and Social Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Role of Women in the Government and Economy of Iraq . . . . . . . . . . . . . . 7

Iraq’s Economy in Recent Years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Macroeconomic Policy and Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Economic Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Gross Domestic Product (GDP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Currency and the Balance of Payments . . . . . . . . . . . . . . . . . . . . . . . . 12

Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Foreign Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Foreign Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Compensation Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Pending Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

The Oil for Food Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Petroleum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Oil Resources – Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Oil Production – History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Current Situation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Iraq’s Oil Industry – Current Status . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Iraq and OPEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Potential Iraqi Oil Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Agro-climatic setting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Pre-U.N. Sanctions (1980-89) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

U.N. Sanctions period (1990 to 2003) . . . . . . . . . . . . . . . . . . . . . . . . . 25

Prospects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Banking and Financial Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Transportation and Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Shipping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Railways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Air Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Roadways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Power Generation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Industrial Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

War and Sanctions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Prospects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

International Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Imports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Illicit Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

Prospects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Fiscal Levies on Foreign Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

The Post-War Situation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Assessing the Damage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Critical Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Transportation Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Humanitarian Assistance and Post-War Relief . . . . . . . . . . . . . . . . . . . . . . 39

Provision of Relief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Medical Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Food Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

U.S. Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

Major Issues Affecting Iraq’s Economic Future . . . . . . . . . . . . . . . . . . . . . . . . . 41

Preconditions for Economic Development . . . . . . . . . . . . . . . . . . . . . . . . . 41

Avoiding Rentier State Authoritarianism . . . . . . . . . . . . . . . . . . . . . . . . . . 48

Oil and Authoritarianism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

Possible Alternatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Reviving the Non-Oil Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Settling Debt and Overhanging Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Establishing a Currency and Monetary System . . . . . . . . . . . . . . . . . . . . . . 53

The Dinar Lacks Sufficient Credibility . . . . . . . . . . . . . . . . . . . . . . . . 54

Interim Dollarization by Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

A New Currency Requires Key Decisions . . . . . . . . . . . . . . . . . . . . . . 54

Importance of Monetary Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

Choosing an Exchange Rate Regime . . . . . . . . . . . . . . . . . . . . . . . . . . 55

Short-run Credibility vs. Long-run Flexibility . . . . . . . . . . . . . . . . . . . 56

Oil and Monetary Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

Rebuilding the Financial System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

Change to a Market-Based System . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

Administration Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Export and Border Control Capabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 60

Access to Foreign Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

Iraq and the International Financial Institutions . . . . . . . . . . . . . . . . . 60

The United Nations Development Programme . . . . . . . . . . . . . . . . . . 62

List of Figures

Figure 1. Iraq’s Gross Domestic Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Figure 2. Sectoral Composition of GDP, 1989 . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Figure 3. Iraq’s Oil Production and Consumption, 1980-2002 (Est.) . . . . . . . . . 19

List of Tables

Table 1. Iraqi Oil Production, Current and Potential . . . . . . . . . . . . . . . . . . . . . . 22

Table 2. Iraq’s Top Exports, 1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Table 3. Iraq’s Top 10 Imports, 1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Table 4. Iraq’s Imports under OFFP, 1997-2003 . . . . . . . . . . . . . . . . . . . . . . . . 35

This report was originally prepared at the request of the Senate Committee on

Foreign Relations. With the Committee's permission, it is being made generally

available for the use of Members.

Iraq's Economy: Past, Present, Future

Introduction1

This report provides information on the economy of Iraq in the recent past and

on current post-war conditions. It also discusses issues and factors which will likely

influence Iraq’s future economic prospects. In the 1980s, Iraq had one of the Arab

world’s most advanced economies. Though buffeted by the strains of the Iran-Iraq

war, it had – besides petroleum -- a considerable industrial sector, a relatively welldeveloped transport system, and comparatively good infrastructure. Iraq had a

relatively large middle class, per capita income levels comparable to Venezuela,

Trinidad or Korea, one of the best educational systems in the Arab world, a well

educated population and generally good standards of medical care. Nevertheless,

Iraq was a centrally directed command economy that was heavily dependant on oil

revenue to fund its key institutions and its development program. Iraq experimented

in the late 1980s with privatization, functional autonomy for some elements of the

economy, and limited use of market forces. This initiative ended, however, with the

advent of the first Gulf war.

In the dozen years since 1991, Iraq’s industrial and agricultural capacity has

decayed, its transportation and infrastructure systems have deteriorated, and the

education levels and standard of living for its population have declined. Oil exports

resumed under the U.N. Oil for Food Program (OFFP) after 1995, albeit at a lower

rate. However, its production capacity deteriorated from lack of inputs. Some

economic facilities were damaged in the recent war and its chaotic aftermath. In

effect, Iraq must start over as it rebuilds its economy. Its massive oil resources can

serve as an engine of future growth and development. It does not start, though, with

a blank slate. The experience, expectations, and aspirations of the past will have

important – if unknown – effects on Iraq’s future economy. What Iraq learns from

its past and how it adapts itself for the future will be important considerations.

An important feature of centrally planned economies, such as Iraq under

Saddam Hussein, is the absence of the legal, political, economic, and regulatory

institutions that are the necessary underpinning of successful market economies.

According to Dani Rodrik, a prominent development economist, "in the long run, the

main thing that ensures convergence with the living standards of advanced countries

is the acquisition of high-quality institutions."2 Institutions are the "rules of the

game," the sets of rules and norms that organize society and allow a market economy

Prepared by Jonathan E. Sanford, Specialist in International Political Economy, and Martin

A. Weiss, Analyst in International Trade and Finance, Foreign Affairs, Defense and Trade

Division.

Dani Rodr i k. “Gr owt h St r ategies.”

[http://www.ksg.harvard.edu/rodrick.]

April

2003.

Availabl e

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to function. Thus, the focus of the Iraqi reconstruction efforts must be the creation

of institutions that not only stabilize the economy, but can serve as an engine for

sustained long-term growth. Iraq will need to learn how to build and maintain good

institutions and how to use them effectively to rebuild its economy.

This report provides background on the different sectors and institutions of the

Iraqi economy. It also identifies some questions and issues which may have

significant bearing on Iraq’s future prospects and may need to be addressed as Iraq,

the United States, and the international community seek to put the economy of Iraq

on a sounder long-term foundation.

Government and the Economy 3

The history of Iraq during the 20th century falls into three fairly distinct periods:

1921-1958: A constitutional monarchy under direct British control

at first and later under significant British influence.

! 1958-1968: A series of nominally republican regimes headed by

military officers who assumed power in most cases through a

military coup d’etat.

! 1968-2003: A government controlled by the socialist, pan-Arab

Baath Party, which quickly developed into a vehicle for one-man

rule by leading party official Saddam Hussein.

The Constitutional Monarchy

Government. During the first period, Britain established a monarchy in Iraq

under King Faysal I, a leading member of the prestigious Hashemite family (of which

a collateral branch continues to govern Jordan). In 1932, Iraq became an independent

country, but the bilateral treaties replacing the British mandate provided for a

continued British role in Iraq, particularly in defense and foreign affairs. Rising

opposition to Iraq’s western ties and mounting nationalist sentiment among younger

Iraqis including the armed forces created growing disaffection from the regime. In

July 1958, a group of army officers led a coup in which the King and leading officials

were killed, many other officials imprisoned, and a republic was proclaimed.

Economic Policies. Economic institutions developed slowly during the early

years of the Iraqi monarchy as the nascent government sought to establish itself and

deal with internal tensions and ripple effects of World War II. With the advent of

mounting oil revenues in the 1950s, Iraqi were able to concentrate to a greater degree

on the nation’s economy. At this time, Iraq’s economy was largely market-oriented,

but based more on feudal and traditional rather than on modern principles. A

development board, established in 1950, promulgated multi-year plans that

emphasized three priorities: agriculture (including irrigation and flood control),

transportation and communications, and construction. Commentators have praised

the board for using most of the country’s oil income for capital investment and

Prepared by Alfred Prados, Specialist in Middle East Affairs, Foreign Affairs, Defense and

Trade Division.

CRS-3

infrastructure development. Some fault it, however, for over-emphasizing agriculture

and under-emphasizing industry and human resources, which would have appealed

to two increasingly important constituents: the educated elite and the workers.4 By

neglecting these groups, the government may have contributed toward the climate of

disaffection that helped bring on the revolution in 1958, although political opposition

appears to have been a more important factor in the demise of the old regime.

The Military Regimes

Governments. Three military leaders governed Iraq in succession during the

decade that followed the overthrow of the Iraqi monarchy by left-wing nationalist

army officers. The somewhat eccentric General Abd al-Karim Qasim, who led the

coup of 1958, terminated Iraq’s ties with the West, withdrew Iraq from the Baghdad

Pact, and aligned Iraqi policies to a considerable degree with those of the Soviet

Union. Steady erosion of his power base, sapped by growing domestic unrest

(including the beginning of a Kurdish insurgency) and regional quarrels, led to a

second coup in which Qasim was overthrown and killed in February 1963. Qasim’s

successors, Generals Abd al-Salam Arif and Abd al-Rahman Arif,5 took somewhat

more moderate positions on regional and international affairs, established better

relations with other Middle Eastern states (particularly Egypt under then President

Gamal Abd al-Nasser), and adopted a more friendly stance toward the West, while

retaining ties to the Soviet Union. However, the Arif regimes faced further domestic

instability, the Kurdish insurgency continued to simmer, and the government lost

much of its credibility–as did other Arab regimes–after Israel quickly defeated Arab

armed forces during the “six-day war” in June 1967. A year later, on July 17, 1968,

the Arif regime was overthrown by the Baath Party.

Economic Policies. The revolutionary regimes of 1958-1968 reversed many

of the economic policies of the old regime, although like the monarchy they

continued to devote major resources to transportation and communications, as well

as military modernization. General Qasim, the first of the military rulers, and his key

advisors were influenced by socialist models and emphasized several themes which

bore this stamp: a planned economy, elimination of foreign economic influences

(notably in the oil sector), and land reform. The Development Board, associated by

Iraq’s new leaders with the old regime, was abolished and replaced by a ministry of

planning, together with a planning board. In 1961, Qasim moved against one of the

principal vehicles for foreign involvement in Iraq’s oil sector, the partly Britishowned Iraq Petroleum Company (IPC). Law Number 80 expropriated 99.5% of

IPC’s concessionary area, leaving the company only those areas currently in

production. (Iraq subsequently nationalized the company itself, in June 1972.) Land

reform, perhaps the most significant of Qasim’s economic measures, was an

ambitious undertaking designed to break up the old feudal system of land ownership

See, for example, Phebe Marr, The Modern History of Iraq, Boulder, Colorado, Westview

Press, 1985, pp. 134-135.

General Abd al-Salam Arif came to power in conjunction with the Baath Party but ousted

his erstwhile Baathist collaborators in a third military coup nine months later. President Arif

was killed in a helicopter crash in April 1966 and succeeded by his brother, General Abd

al-Rahman Arif, who was serving as chief of staff of the armed forces.

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and redistribute land to peasants; however, implementation was slow as the

government sought to put in place the necessary machinery to administer the

program. One commentator has said the early reform measures “did more to destroy

the edifice of the old regime than to construct the foundations of the new.”6

Basic economic policies inaugurated by Qasim continued under his two

successors, although at a somewhat slower pace. The Arif governments adopted

additional measures to increase the role of the public sector in the economy; in July

1964 it nationalized all banks and insurance companies and in the same month it

nationalized the 27 largest privately owned industrial firms. The government also

reorganized other companies, required profit sharing with workers, and participation

by workers in management. These and similar measures contributed toward capital

flight and departure of trained management, with an accompanying decline in

industrial development during the 1960s.

The Baathist Regime

Government. Baathist leaders quickly established one party rule. By the early

1970s, Saddam Hussein, a dynamic but ruthless party official, had consolidated his

control over the party leadership and government apparatus. In 1979, Saddam

Hussein replaced the aging President Ahmad Hasan al-Bakr as president of the

republic and in several ancillary positions. Saddam’s position as president was

endorsed in 1995 and 2002 by ritual majorities of 99.6% and 100%, respectively.

Parliamentary life, suspended after the overthrow of the monarchy in 1958, was

nominally restored in 1980, when a new law established an elected 250-member

National Assembly; however, most observers have characterized Iraq’s post-1980

assemblies largely as rubber stamps.

After a period of international strain in the early 1970s, Saddam mended fences

with most Middle East countries in the later 1970s and 1980s and reestablished

relations with the United States in 1984. Trade relations flourished with the United

States, which–like the conservative Arabian Peninsula monarchies–regarded

Saddam’s secular regime as a bulwark against the militant clerical regime that came

to power in Iran in 1979. U.S. concerns over Iran in the 1980s tended to obscure

Saddam’s poor human rights record (illustrated by a brutal campaign of repression

and forced resettlement of his Kurdish population) and his efforts to develop

weapons of mass destruction. Meanwhile, the inconclusive Iraq-Iran war, which

lasted eight years and resulted in a total of perhaps a million casualties, left Iraq

significantly weakened and encumbered with an $80 million debt to oil-rich Gulf

states who had helped finance Iraq’s war. The occupation of Kuwait, which Saddam

may have thought would elicit no U.S. action beyond verbal condemnation, resulted

in a major military defeat by a U.S.-led coalition, widespread damage to Iraq, and

stringent economic sanctions, while relegating Iraq to the status of a pariah state.

Economic Policies. During the early years of his rule and in line with the

socialist principles of the Baath Party, Saddam followed economic policies similar

to those of the preceding military regimes. The government employed central

Phebe Marr, The Modern History of Iraq, p. 169.

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economic planning to manage its resources. Expenditures were divided into three

categories: a government operations budget, an investment budget, and an annual

import budget. Flush with mounting oil revenues, Iraq was able for some years to

pursue its socialist model without having to make hard choices between solvency and

other priorities such as welfare benefits, infrastructure development, and even armed

forces modernization. One commentator observes that in the early years of the

Baathist regime, “[t]he responsibility of the state was not so much to allocate scarce

resources as to distribute the wealth, and economic planning was concerned more

with social welfare and subsidization than with economic efficiency.”7

Growing economic burdens resulting from the protracted Iraq-Iran war led

Saddam to change course in the mid-to-latter 1980s. Abandoning to some degree the

socialist ideology that had dominated Baathist thinking in the past, he embarked on

a more pragmatic course of economic reform. In June 1987, a speech by Saddam

exhorted provincial governors that “[f]rom now on the state should not embark on

uneconomic activity.” That year, the government abolished a labor law that had

guaranteed full employment; laid off thousands of government workers (many of

whom were foreign nationals); transferred other civil service workers to factory jobs;

and took steps to privatize government-owned enterprises, including: bus companies,

gas stations, agricultural enterprises, department stores, and factories. In an even

more profound departure from the three previous decades, Iraqi officials announced

in late 1987 that the government would offer inducements for foreign companies to

operate in Iraq by easing former restrictions on foreign direct investment.

Iraq’s invasion of Kuwait and its aftermath dramatically altered the economic

scene in Iraq. Henceforth, Iraqi efforts were concentrated on circumventing the

international sanctions imposed as a consequent of the invasion, taking advantage of

the Oil for Food Program, and obtaining additional assistance through humanitarian

donations, illicit trade, and private barter arrangements. This “twilight” economy

might well have lasted for some time to come had not the Bush Administration

decided that the current situation was no longer tenable and required another

application of military force.

Demographic and Social Conditions

Overview 8

Before 1990, Iraq was one of the more prosperous and advanced countries of the

Arab world. It was an upper middle income country with a substantial middle class,

considerable technical capacity, high (by regional standards) female participation in

education and the economy, and relatively high standards overall of education and

health care. Since 1990, economic conditions in Iraq have deteriorated and

Helen Chapin Metz (ed.), Iraq: A Country Study, 4th ed. Washington, Federal Research

Division, Library of Congress, 1990, p. 127.

Prepared by Martin Weiss, Analyst in International Trade and Finance, Amy Thayer,

Research Associate, and Jonathan Sanford, Specialist in International Political Economy,

Foreign Affairs, Defense and Trade Division.

CRS-6

education, health and living standards have declined. A new generation has grown

up having had little participation in or memory of the earlier years. Social, religious,

and ethnic differences have become more pronounced and perhaps more significant.

Iraq’s population has grown steadily in recent decades, from 9.4 million in 1970

and 13 million in 1980 to 22.3 million in 2000, a rate of increase comparable to most

other countries in the region.9 This is despite population losses due to war, civil

conflict, and emigration. In 1965, 51% of the population lived in urban centers. The

urban share rate reached 73% in 1988 and 77% in 2000. Baghdad held 35% of the

population in 1960 and 55% in 1980. Its share has since declined to 27% as the other

major population centers grew in size. This broadened pattern of urbanization is

typical for most advanced developing countries. In 1989, Iraq had life expectancy

and mortality rates comparable to those for Saudi Arabia, Libya, and other high

income Arab countries.10 By 2000, life expectancy in Iraq had fallen to 61 years

while it had grown in the Middle East as a whole to over 67 years. Likewise, the

Iraqi mortality rate for children under 5 rose from 95 per thousand in 1980 to 121 in

2000. Primary school enrollment rates fell from 100% of the relevant age group in

1980 to 88% in 1998, while secondary enrollment rates declined from 57% to 20%.

In the late 1980s, Iraq’s middle class was a highly urbanized, secular, welleducated group, consisting mainly of state employees and civil servants. According

to one estimate, the middle class rose from 28% of Iraq’s urban population in 1958,

to 54% in 1988.11 The middle class benefitted greatly from the expansion of

educational and government employment opportunities and from increased levels of

government revenue. Since 1991, however, the lower ranks of state employees

suffered greatly from years of war, economic sanctions, and the general decline of

government revenues. Salaries did not keep up with hyperinflation. Many families

were obliged to sell household items and other assets. The flow of population to

cities also swelled the ranks of the urban poor. Unemployment or underemployment

among former rural residents was a problem and has become more so in the past

dozen years. In recent years, Iraqis have come to rely increasingly on kinship

networks and religious charities for support the government no longer provides.

Iraq’s population comprises a wide diversity of religious and ethnic groups.

Some 95% of the people are Muslim, Islam being the officially recognized religion.

Most of the Arabs in Northern Iraq, the Bedouins, the Kurds, the Turkomans and

some inhabitants of Baghdad and Basra are Sunni, while most Arabs in the South are

Shiite. There are also small Christian communities, particularly near Mosul, as well

as other small groups such as the Sabian and Yazidis.12 While the majority of Iraqi

Muslims are Shiite, Sunnis are disproportionately represented among Iraq’s wealthy

Unless otherwise stated, data in this section were taken from the World Bank’s World

Development Indicators, 2002, and its World Development Reports for 1990 and 1992.

Life expectancy (years) in 1989: Iraq 63; Libya 62; Saudia Arabia 64/ Crude death rate

(per 1,000): Iraq 8; Libya 9; Saudi Arabia 8.

War in Iraq: Political Challenges After the Conflict, International Crisis Group Middle

East Report No. 11, March 25, 2003.

The Middle East and North Africa, 2003, Europa Publications, 2002, pp.477-78.

CRS-7

Muslims. The predominance of Sunnis in Iraqi political, economic, and defense

institutions goes back to the Ottoman period and continues to be a major grievance

of the Shiite community. The government of Saddam Hussein sought to mold from

these disparate groups a common sense of Iraq nationality. It was successful in part

during the Iran-Iraq war, as few Shiites went over to support the Iranian side despite

commonalities in religion. Whether that identity is strong enough to weather the

current difficulties remains to be seen. The answer to that question will have

considerable bearing on Iraq’s future economic and political prospects.

Role of Women in the Government and Economy of Iraq13

Iraq has a mixed record in its treatment of women. Under the relatively secular

Baathist regime, women enjoyed significantly more privileges and opportunities (at

least in theory) than they did under some traditional regimes that enforce Islamic

tenets more strictly. Article 19(a) of the Provisional Constitution of 1970 specifies

that “Citizens are equal before the law, without discrimination because of sex, blood,

language, social origin or religion.” Under the Baathist regime, women could vote,

serve in the Peoples’ Assembly (Iraq’s rubber stamp legislature), and serve in the

police. Though not subject to conscription, women holding university degrees in

health care could serve in the armed forces, mainly in health care fields, and

manpower shortages during the Iraq-Iran war of 1980-1988 led the government to

allow women in other branches of the military service as well. According to the most

recent U.S. State Department report on human rights practices, the government

enacted laws to equalize women’s rights in divorce, landownership, taxation, and

suffrage. Women made strides in education; for example, female attendance in

primary schools rose from 34% to 95% between 1970 and 1980. Government

programs to improve the status of women helped increased job opportunities for

women; in 2002, women comprised 20% of the labor force, and some were

represented in medicine, engineering, academia, and the civil service.

In practice, women faced various forms of discrimination and mistreatment

under Saddam Hussein’s regime, despite legal protections. For example, Iraqi police

and security officers frequently raped female detainees despite laws to the contrary.

Furthermore, as the Iraqi regime sought to polish its Islamic credentials and appeal

to tribal groups in the aftermath of the 1990-1991 Gulf war, the government became

more lax in implementing official guarantees of equality. “Honor killings” of women

by male relatives increasingly went unpunished. Despite greater access to the labor

force, most female employees tended to work in fields where they had little contact

with men and no authority over male employees. Even legal guarantees of women’s

rights had loopholes; women under age 45 are not allowed to travel outside of Iraq

unless accompanied by a male relative. Finally, many women from more traditional

segments of Iraqi society did not benefit to a significant degree by the progress

achieved in women’s status over the past 30 years.

The status of women in a post-Saddam era is open to conjecture. Some groups,

particularly more fundamentalist elements within the Shi’ite Muslim community,

Prepared by Alfred Prados, Specialist in Middle East Affairs, with the assistance of Amy

Thayer, Research Associate, Foreign Affairs, Defense and Trade Division.

CRS-8

probably look askance at an expanding role for women. Should such groups find

themselves in a position to influence or dominate a post-Saddam government, they

might seek to dismantle the legal protections women have gradually gained in recent

years. Already, press reports indicate that many Iraqi women are feeling “sidelined”

and have become fearful of moving about freely as they did before.14 Should Iraq

move toward a less centralized system of government or even toward fragmentation,

some of the resulting mini-states or entities might pursue widely differing gender

policies. The issue of women’s roles in the months ahead will be an important one

for those who seek to shape the future of Iraq.

Iraq’s Economy in Recent Years

Macroeconomic Policy and Conditions15

The structure of the Iraqi economy has been characterized by heavy state control

and involvement since the time of the Ottoman empire. According to one source,

different governments from the British mandate and the monarchy, to Baathist rule

and Saddam Hussein have all had the common goal: to fix prices and to stabilize

consumption.16 Government control of the economy tightened from one regime to

the next. Nevertheless, an underlying goal was to satisfy the large sector of the

population that was employed by, and dependent on, the state. During the 1970s, hard

choices were avoided as oil revenues financed development projects and obscured

economic mismanagement resulting from state control of the economy. The eight

year war with Iran drained the economy of its surplus oil revenue and forced the

regime into debt. The first Gulf war and economic sanctions imposed new constraints

on an already crippled economy. Economic statistics were considered state secrets

during the Baathist regime and were suppressed or not kept at all. Such fragmentary

data that do exist indicate that the Iraqi economy since 1980 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.

Economic Policy. As noted above, the predominance of the state in the

economic affairs of the nation was confirmed by a series of expropriations and

nationalizations in the 1950s and 1960s. In agriculture, expropriation of land

occurred faster than redistribution to the detriment of that sector. The petroleum

industry was nationalized in stages from 1961 to 1973. Large-scale industry,

banking, insurance and services were nationalized in 1964. These nationalizations

also enabled the government to weaken rival power centers, whether landlords, the

Shia business community or foreign oil companies.

“Iraqi Women Out of the Picture,” Washington Post, May 17, 2003.

Prepared by Ian Fergusson, Analyst in International Trade and Finance, Foreign Affairs,

Defense and Trade Division.

Kirin Aziz Chaudhry, “Consuming Interests: Market Failure and Social Foundations of

Iraqi Etatisme,”in Iraq’s Economic Predicament, ed. Kamil Mahdi, (Reading UK: Ithaca

Press, 2002), p.234.

CRS-9

From 1968, the Baathist regime placed greater emphasis on the industrialization

of the economy. The government embarked on two five-year development plans

between 1970-1980. The first plan was primarily concerned with “economic

independence”– the final nationalizations in the oil sector and investment in that

sector. The modesty of the goals reflected a consolidation period for the regime, and

in part, the lack of money to achieve more far reaching development goals.17 This

changed with the oil boom following the first Arab oil embargo. The second five-year

plan (1976-80) reflected an Iraq that was flush with cash and ready to spend money,

nearly $14.2 billion on economic development, often indiscriminately. Heavy

industrial complexes such as the petrochemical complex at Basra, the iron and steel

mill at Khor al-Zubair, the development of sulphur and phosphate extraction and

processing, and the fertilizer industries were developed during this period.

Much of this industrial structure was not effectively utilized after the outbreak

of the war with Iran in 1980, due largely to the shortcoming of Iraq’s administrative

apparatus. Direct attacks on Iraqi industry around Basra were less significant than

the Iraqis’ inability to obtain inputs, spare parts or to export oil or other products due

to damaged ports. Iraqi economic management during the war was predicated on a

belief that Iraq could fight a quick and limited border war without disrupting the

home front or its economic development plans.18 To pull this off, the regime

borrowed to finance its continued spending.

As the war drained away funds that could have been utilized for economic

development, weak points in the economic development strategy became apparent.

Despite the pervasiveness of the state sector in the management and planning of the

economy, there seemed to be very little actual planning. An industrial infrastructure

was developed seemingly without regard for transportation or supply bottlenecks.

There were no clear priorities for development. Workers often did not possess the

technical capabilities that were required to operate the plants and there existed a

shortage of managerial and administrative skills to run the public and private sector.

Many of these shortcomings reflected problems in the state sector itself. Officials

were often unwilling to assume authority or accountability, and rigid (and

ideologically driven) economic policies were common.19

As noted, the government embarked on a series of economic reforms designed

to make the economy more flexible and more market-driven in 1987. It removed

price controls on commodities. It privatized several sectors of the economy either

by selling assets directly to domestic investors, through public offerings on the newly

constituted Baghdad stock exchange, or through long-term leases of state assets. The

most prominent of these divestments was Iraqi Airways, in which a majority of the

enterprise was sold off to the public. It also lowered or removed state subsidies to

enterprises remaining in government hands and for agriculture. The country’s labor

Anthony A. Cordesman and Ahmed S. Hashim, Iraq: Sanctions and Beyond, (Boulder

CO: Westview Press, 1997), p. 128.

ibid 133.

Mahdi, “Rehabilitation Prospects...”, p. 42; Cordesman and Hashim, Iraq: Sanctions and

Beyond, p.129

CRS-10

law, which largely guaranteed lifetime employment, was abolished and thousands of

white collar officials of state enterprises were laid off. The government also eased

direct investment restrictions, allowing limited foreign ownership of investment

projects. This last reform reflected the increasing unwillingness of western creditors

to loan money directly to the Iraqi government for development projects.20

These economic reforms did not long survive the end of the Iran-Iraq war. By

1989, the economic crisis deepened and exacerbated the decline in living standards

for most Iraqis, creating a threat to the viability of the regime.21 In addition, the

success of the privatization program was disappointing with many enterprises sold

for under either book or replacement value. With the economy facing dire straits, the

government reimposed price controls, re-nationalized some state enterprises, and

raised industrial and agricultural subsidies.

The first Gulf war and the subsequent sanctions wreaked havoc on an already

distressed economy. The bombing campaign of 1990-1991 severely damaged or

destroyed much of the petroleum, transportation, power and industrial infrastructure.

The government initially channeled its efforts to repairing the oil infrastructure,

communications, and the state security apparatus. It instituted a rationing program

to spread available food and consumption items. However, government policy

essentially has been reactive, because the sanctions regime (and the regime’s

priorities) left little for reconstruction and development of the economy. Because Iraq

relied on international trade in oil for the functioning of its economy, the sanctions

regime had an immediate deleterious effect. The Oil for Food Program ameliorated

this situation somewhat, but shortages, rationing, hyperinflation, and the absence of

international trade characterized the Iraqi economy in the 1990s.

Gross Domestic Product (GDP). Economic data were considered state

secrets during the Hussein era, thus no reliable data are available for much of the

period. The figures available for the sanctions era are based on extrapolations from

oil production and anecdotal evidence. According to one source who estimated GDP

for the period 1950-2000 on constant 1980 dollar prices22, the gross domestic product

peaked at $53.9 billion in 1980 because of the oil boom, and fell by about one-half

to $26.9 billion in 1989. GDP reached its low point in 1994 falling to $6.5 billion

under the weight of economic sanctions. Since the resumption of oil shipments under

the Oil for Food Program, this source estimates GDP has recovered to $46 billion.

However, these figures may be suspect. It seems optimistic to report that the Iraqi

economy in the late 1990s could nearly recover to its 1980 level in constant dollars

in the presence of sanctions, a heavily depreciated currency, and chronic inflation.

However, the figures may reflect the use of the fixed exchange rate of 1ID=$3.11,

although the usefulness of such figures is limited.

Metz. Iraq: A Country Study, p. 128-9.

Chaudhry, p. 233.

See Abbas Al-Nasrawi , Iraq’s Burdens: Oil, Sanctions, and Underdevelopment,

(Westport CT: Greenwood Press, 2002), p. 103.

CRS-11

According to the Economist

Intelligence Unit (EIU),23 Iraq’s GDP

stood at $66.2 billion 1989, measured in

nominal dollars. In the 1996-2002

period (see figure 1), the EIU data also

showed a gradual recovery as GDP (in

nominal dollars) increased from $10.8

billion in 1996 to $31.8 billion in 2000,

before falling back to $26.1 billion in

2002.24 These figures are subject to a

wide margin of error, given the limited

data on which they are based. Another

source, quoted by GAO,25 estimates

nominal GDP, in purchasing power

parity terms, to have risen from $9.2

billion to $14.8 billion from 1996-2002.

Figure 1. Iraq’s Gross Domestic

Product

Per capita GDP figures have also experienced wide swings. According to AlNasrawi, GDP per capita reached $4,083 (in 1980 constant dollars) at the height of

the oil boom in 1980. By the end of the Iran war, he says, it had plummeted to

$1,537 and reached a nadir of $343 in 1996. Again, the Oil for Food Program

boosted per capita GDP in the late 1990s to reach $1,941 in 2000. In nominal

dollars, EIU figures indicate per capita GDP was $3,675 in 1987. From 1997-2000,

EIU reported per capita GDP increased from $503 to $1,385, before falling to $1,184

in 2001. Per capita GDP, in nominal terms was estimated to have risen from $448

to $644 from 1996-2002.26 Such per capita figures, as they are derived from the GDP

data above, are also highly speculative. Income inequality probably grew during this

period. With wealth being concentrated increasingly in the hands of regime

adherents, most Iraqis probably subsisted on a much smaller figure than the average

would suggest.27

Economist Intelligence Unit, Country Profile Iraq, 2002/2003, July 24, 2002. Obtained

from [http://www.fggm.osis.gov/EIU/CP/CPCIQD00.htm].

Using purchasing power parity, the CIA estimates 2001 GDP to be $59 billion.

GAO-03-792R (GAO), Rebuilding Iraq, May 15, 2003, Enclosure 1, p.6. Source, Global

Insight.

Ibid.

The figures from EIU and Global Insight do not appear to be directly comparable. The

EIU data seem to use the exchange rate conversion method for calculating GDP. In other

words, it takes the local currency value of the economy and converts it to dollars using the

prevailing exchange rate. By contrast, the PPP method looks at what local people can buy

from a common international marketbasket of goods using their local income and then states

the U.S. dollar value of those goods as though they were purchased in the United States. In

effect, it shows what standard of living those people would have if they lived in the United

States on their dollar-equivalent local income. The two methodologies often produce widely

different results, both of which are accurate in their own way but are not interchangeable.

CRS-12

Attempts to disaggregate Iraq’s GDP into its sectoral components are also

hampered by the lack of hard economic data. Figure 2 shows one source’s effort in

1989.28 According to this source, oil comprised about 60% of the economy during the

1980s. Its share declined as the economy shrank with the imposition of sanctions, but

later recovered as oil became the sole source of export earnings during the 1996-2003

U.N. Oil for Food Program. Agriculture’s share of GDP had been declining since

the 1960s. However, since the 1991 war, its

share of GDP reportedly expanded as the

economic pie shrank and food imports were Figure 2. Sectoral Composition of

GDP, 1989

cut off.29 The resumption of agricultural

imports (under the OFFP) has caused a

decline of domestic production and probably

shrank the sector’s share of GDP once again.

Although the industrial sector accounted for

an increased share of GDP in the 1970s and

1980s due to extensive economic

development programs, later war damage and

diminished operability probably lowered its

contribution to GDP. Both industry and

agriculture’s true share of GDP, after

accounting for subsidized raw materials and

inputs, may have been overstated during the

1970s and 1980s.

Currency and the Balance of Payments. The Iraqi dinar was long

considered a strong currency aided by oil revenues and rising foreign exchange

reserves. Some of this reputation may be attributable to the decision, by the National

Bank of Iraq in the 1950s, to maintain 100% reserves behind outstanding domestic

currency.30 The official rate was variously set between $3 per dinar to $3.38 per

dinar in the 1970s, the last official rate of $3.11 per dinar was set in 1982. During

the 1970s, the official and markets rates generally corresponded and by 1980 the

country had $35 billion in foreign exchange reserves. By 1987, that figure had fallen

to $2 billion.31 The currency depreciated steadily during the Iran-Iraq war, and the

pace of descent quickened after the first Gulf war. One estimate had the currency

depreciate from 4 to 8 dinars per dollar in 1990-91.32 The advent of sanctions

paradoxically stabilized the currency for a brief time as foreign exchange transactions

virtually ceased. However, the onset of limited food and medicine trade under

sanctions renewed the downward slide. The dinar reached an all-time low of 2,660

per dollar in December 1995. It has slowly appreciated from that low, yet has

fluctuated widely from 1,000 to 2,300 dinars per dollar in the period 1997-2001 on

Economist Intelligence Unit, Country Profile: Iraq, 1995-1996, p. 13.

One source, Ahmad, p. 179 reports agriculture share of GDP expanding during the 1980s.

However, these figures are hard to interpret as they are based on current dinars during a

period when GDP in dollar terms was declining.

Metz. Iraq, a Country Study, p. 131.

Middle East and North Africa Yearbook, 2003 p. 599.

Mahdi, “Rehabilitation Prospects...”, p. 48.

CRS-13

the black market. Although the regime did not alter the official exchange rate, it

acknowledged the rate differential in 1999 by allowing state banks to exchange hard

currency at the rate of 2000 per dollar. The depreciation of the exchange rate in the

1990s was enhanced by capital flight and emigration, the restrictions of the sanctions

regime on exchange transactions, and the progressive dollarization of the economy.

Up to the 1980s, the country ran consistent balance of payments surpluses with

oil sales producing increasing foreign exchange reserves. While the earnings of the

oil fields allowed the government to implement development plans without becoming

indebted, the dependence on oil revenue also had less salutary effects on other sectors

of the economy. With increased income from oil exports, the value of the dinar

appreciated. This made the country’s non-oil tradable goods less competitive with

imports and depressed those sectors of the economy. (See the discussion of “Dutch

Disease” in the concluding discussion of factors affecting the non-oil.) Falling oil

prices in the 1980s put heavy pressure on Iraq’s balance of payments. Iraq responded

by increasing its oil production and by borrowing heavily from abroad. The problem

was acute by the end of the Iran war. Relatively low oil prices, the exhaustion of its

foreign exchange, growing import bills, and debt service payments all strained Iraq’s

balance of payments.

Ironically, in the 1990s, Iraq regained a trade surplus position with sanctions and

the Oil for Food Program in place. Imports were tightly controlled and income from

oil exports exceeded outlays for imports – even after 25% to 30% of OFFP revenue

was diverted for war compensation. As of May 2003, the OFFP reported it had an

unencumbered balance from oil sales of $3.2 billion maintained in escrow accounts.33

It should be noted, however, that Iraq made no payments on its foreign debt after

1990.

Inflation. As with other indicators, data on inflation are spotty and, during the

1990s, price data have a highly anecdotal quality. Before the oil boom, the Iraqi

economy was characterized by price stability with an inflation rate at 5-6% during

the period 1960-73.34 This source calculates inflation increasing from 18% to 68%

between 1975-79 as a consequence of substantial currency inflows related to the oil

boom.35 Prices continued to rise during the Iran-Iraq war as resources were diverted

toward the military and government borrowing from the central bank expanded the

monetary base. Inflation was recorded at 95% in 1980 and had increased to 400%

by 1989. During the 1990s, a period of hyperinflation occurred. The government

continued to print money to meet expenditures while economic sanctions shut off the

supply of imported goods leading to a classical monetary overhang. A yearly inflation

rate of upwards of 2,000% per cent was reported in open market food prices between

1990-1991.36 Another source estimated that inflation increased 5,000% between 1990

United Nations, Office of the Iraq Program, Oil for Food Program site,

[http://www.un.org/Depts/oip/]

Abbas Al-Nasrawi, The Economy of Iraq, (Westport CT: Greenwood Press, 1994), p. 164

ibid.

Mahdi “Rehabilitation Prospects...”, p. 48.

CRS-14

and 1995.37 In the period 1996-2001, however, another source estimated that

consumer price inflation gradually declined from about 200% to about 60% due to

the reappearance of goods as a result of the Oil for Food Program.38

The deepening inflationary spiral had many consequences. Most importantly,

it led to a decline in living standards and the impoverishment of the great majority

of the population, especially of state sector employees whose salaries did not keep

up with inflation. Two decades of high inflation – at times, hyper inflation – also led

to the loss of confidence in the dinar as a store of value. This led to the widespread

dollarization of the economy. Many Iraqis also sought to convert their liquid assets

into other assets, real estate and gold. Goods were purchased and hoarded when

available and then bartered for other goods.39 Another consequence of inflation was

capital flight, as money left the country to avoid further erosion in its value.

Declining confidence in the currency and capital flight further weakened the

economy and led to new rounds of inflation, deteriorating confidence and capital

flight. These patterns of behavior will need to be changed if the economy is to

recover. (See the concluding discussion of monetary policy below.)

Foreign Investment. Foreign direct investment (FDI) was discouraged in the

Baathist era for reasons of economic nationalism. During the 1970s oil boom, Iraq

paid directly for economic development projects (plants, industry, and infrastructure)

without resorting to credit or foreign ownership. During the Iran-Iraq war, Iraq

continued to contract for economic development projects, but it borrowed from

overseas creditors to pay for them. The regime attempts at economic reform in the

late 1980s provided for some limited venues for foreign investment. However, such

reforms provided little incentive for foreign investors, and the UN sanctions regime

specifically prohibited foreign investment. Thus, Iraq has little experience with

foreign direct investment and will require extensive capacity and institution building

in order to attract and facilitate such investment.

Foreign Debt. Iraq’s indebtedness primarily has been the result of the war

with Iran. Iraq traditionally had been free of foreign debt and had accumulated

foreign reserves that reached $35 billion by 1980. These reserves were exhausted in

the early stages of the war. One source cites estimates of Iraqi arms purchases alone

during the 1980s as between $52 - $102 billion.40 Borrowing was heightened by the

government borrowed increasingly to pursue its economic development strategy.

Foreign creditors initially were willing to provide loans to Iraq in order to preserve

access to the Iraqi economy, but as oil prices slumped in the mid-1980s investor

enthusiasm waned.41 After the war with Iran ended, Iraq faced a particular concern

with its short-term debts, estimated at $35 to $45 billion, from western creditors.

However, the regime was resistant to western attempts to reschedule the debt on

Cordesman and Hashim, Iraq: Sanctions and Beyond, p. 141.

Economist Intelligence Unit, Country Profile: Iraq, 2002-3

Al-Nasrawi , The Economy of Iraq, p. 165.

Mahdi,“Rehabilitation Prospects...”, p. 60

Iraq Country Study, p. 129.

CRS-15

terms more favorable to Iraq. This stance was, in part, due to its reluctance to

engage in greater transparency with regard to its economy.42 Based on the

calculations of one source, Iraq has the highest debt burden in the world in terms of

debt to GDP or debt to exports.43

Figures vary widely as to the extent and composition of the debt. In 1991, at the

end of the first Gulf war, Iraq told the United Nations that its debt totaled $42.1

billion. This submission stated that this debt had a maturity of five years at 8%

interest.44 This figure excluded interest and funds from the Gulf Cooperation Council

(see below). OECD figures indicate that Iraq’s outstanding total debt was $18.4

billion at the end of 2001. However, these figures only include OECD country

bilateral loans and export credits.

The joint Bank of International

Settlements/International Monetary Fund/ World Bank debt tables list the debt as

$26.6 billion at the end of 2001. This likely does not include accrued interest. The

Economist Intelligence Unit estimated total debt in 2002 to be $64.3 billion. Of this,

EIU estimates $35 billion is long-term principal, $8.5 is short-term principal and

$21.7 billion is interest arrears.45 Another estimate placed accrued interest at

between $23.6 billion to $30.1 billion depending on the whether the interest is

capitalized.46 A survey of the debt conducted by the Center for Strategic and

International Studies breaks down public and private debt at more than $108.1

billion, $47 billion of which is calculated as interest. The CSIS figures include an

estimate of $30 billion payable to the Gulf states.47

Iraq’s foreign debt originated from several sources. Western credit provided

military assistance, development finance and export guarantees. This assistance has

been estimated at $35 billion in principal. In the 1980s, the Soviet Union and other

eastern European states provided loans for military assistance and development

projects estimated at $7-8 billion. The Gulf states of Saudi Arabia, Kuwait, and the

United Arab Emirates provided between $30-40 billion to fight Iran. One source

suggests much of this latter figure represents oil sold on behalf of Iraq from the two

shared neutral zones between Iraq and Kuwait and Saudi Arabia, respectively.48 The

Gulf states consider these funds to be loans, but Iraq considered these to be grants in

a common endeavor to curb the spread of Iranian fundamentalism.

Compensation Claims. Claims have been made on Iraq based on damage

inflicted on Kuwait as a consequence of the war with Kuwait. The United Nations

Cordesman and Hashim, Iraq: Sanctions and Beyond, p. 134.

Al-Nasrawi, Iraq’s Burdens: Oil, Sanctions, and Underdevelopment, p. 145.

Mahdi, “Rehabilitation Prospects...”, p. 60.

Economist Intelligence Unit, Country Profile: Iraq, 2002-3, Table 16.

Ahmed M. Jiyad, “The Development of Iraq’s Foreign Debt,” in Iraq’s Economic

Predicament, p, 115.

Center for Strategic and International Studies, A Wiser Peace: An Action Strategy for

Post-Conflict Iraq, Supplement One, “Background Information on Iraq’s Financial

Obligations”, January 23, 2003.

Mahdi, “Rehabilitation Prospects...”, p. 61.

CRS-16

Compensation Commission (UNCC) has received and processed such claims since

its establishment in 1991, pursuant to U.N. Security Council Resolution 692. The Oil

for Food Program provided that 30% of oil sales would be used to settle

compensation claims authorized by UNCC. During the operation of this process,

individual and family claims of $148 billion were received, and from that $43 billion

has been awarded. Oil sales had netted $16 billion for this fund by the end of 2002.

Additional claims of $172 billion from companies, governments, and international

organizations have been received, though not resolved, by the UNCC.49 This figure

does not include potential reparations claims by Iran, estimated by one source at $97

billion, for damaged inflicted during the Iran-Iraq war. 50

Pending Contracts. This category of claims represents contracts signed with

public and private foreign companies. According to CSIS, the overwhelming

majority of these contracts have been with Russia, although companies from the

Netherlands, Egypt, the United Arab Emirates, China, and France have also been

identified. These contracts have been estimated at $57.2 billion primarily in the

energy and telecommunications sectors. Many of these contracts have not been

executed due to the sanctions regime, and it is unclear whether they will be honored.

The Oil for Food Program51

In August 1990, the United Nations Security Council imposed on Iraq

(Resolution 661) a comprehensive international trade embargo as a consequence of

its invasion of Kuwait. Following the first Gulf war, the Security Council resolved

in April 1991 (Resolution 687) that the embargo on oil exports established in 1990

would remain in effect until Iraq fully complied with U.N. efforts to end its weapons

of mass destruction (WMD) programs.

The first version of the OFFP was approved by the Security Council on August

15, 1991 (Resolution 706). It allowed Iraq to export $1.6 billion in oil every six

months. Iraq rejected it as too limited in scope and an infringement on Iraq’s

sovereignty. Without oil revenues, Iraq was not in a position to import sufficient

quantities of food and medical supplies, and living conditions in the country

deteriorated sharply.

In April 1995, the Security Council adopted a new plan (Resolution 986) which

allowed Iraq to export $2 billion in oil every six months. A memorandum of

agreement between Iraq and the United Nations went into effect in May 1996 and the

first oil exports occurred in December 1996. When the Secretary General determined

that the program was not meeting the food and medical needs of the Iraqi people, the

Security Council raised the oil export ceiling in February 1998 (Resolution 1153) to

$5.256 billion every six months. The Council abolished the export limit in December

Ibid.

Al-Nasrawi, Iraq’s Burdens: Oil, Sanctions, and Underdevelopment, p. 158.

Prepared by Kenneth Katzman, Specialist in Middle East and African Affairs, Foreign

Affairs, Defense and Trade Division. For more on the Oil for Food Program, see CRS

Report RL30472, Iraq: Oil-For-Food Program, International Sanctions, and Illicit Trade.

CRS-17

1999 (Resolution 1284) to encourage Iraqi cooperation with the effort to eliminate

its weapons of mass destruction.

Under the OFFP, Iraq’s State Owned Marketing Organization (SOMO) sold oil

(under the supervision of the U.N. Sanctions Committee) to international oil

companies. The oil was exported through an Iraq-Turkey pipeline and from Iraq’s

terminals in the Persian Gulf. The purchasers deposited their payments directly into

a U.N.-monitored escrow account held at the New York branch of France’s Banque

Nationale de Paris (BNP). Recently, U.S. firms purchased a third to half (often the

latter) of the 2.1 million barrels Iraq exported daily under the OFFP program.

The revenues from OFFP exports were allocated by the Sanctions Committee.

Most recently, 25% of the total was transferred to the U.N. Compensation

Commission to pay reparations to the victims of Iraq’s invasion of Kuwait. Another

59% was allocated for purchases of humanitarian items for Baghdad-controlled Iraq

and 13% was used for purchases by the Kurdish-controlled areas in northern Iraq.

The U.N. took the remaining 3% to fund the costs of administering OFFP and the

UNMOVIC weapons inspection program.

Under the OFFP, Iraq purchased goods and services directly from supplier firms.

The OFFP program specified what share of the oil revenues could be spent for

various categories of goods. The Sanctions Committee reviewed all contracts for

such purchases. Any member of the Committee could place a “hold” on a contract

for goods to be imported by Iraq. The United States often placed holds on exports

of dual use items (civilian items that could have military applications).

Petroleum52

Oil Resources – Overview. Iraq has 112 billion barrels of proven oil

reserves, the world’s second largest endowment. The U.S. Department of Energy

(DOE) also notes that “probable” and “possible” reserves may be as high as 220

billion barrels.53 Saudi Arabia, with 260 billion barrels, holds the largest proven

reserves. While Iraq’s reserves are smaller than those of Saudi Arabia, they rank well

ahead of other important oil producers, including the United States.

The United States – which by contrast has high output from relatively small

reserves – produces 5.6 million barrels per day (mbd) from 24 billion barrels of

proven reserves. Iraq was able recently to produce 2.8 mbd of output from an

estimated 1,500 to 1,700 operational wells. Compared with U.S. production, which

comes from over 150,000 wells in Texas alone, Iraqi oil can be produced easily and

at low cost. The ease of production in these fields has permitted Iraq to remain in

production since 1980, when its war with Iran began, without a steady supply of

spare parts, state-of-the-art technology, or the ability to drill many new wells.

Prepared by Larry Kumins, Specialist in Energy Policy, Resources, Science and Industry

Division.

Energy Information Administration (EIA). Iraq Country Analysis Brief, February 2003.

p. 10.

CRS-18

Adding to the appeal of Iraq’s resources are possibilities of much greater output

from the country’s 73 known fields – of which only a fraction are in production.

Greater reserves could result from re-evaluation of known fields using the advances

in geophysical science made during the past 25 years. And there is a likelihood of

even further new field discoveries – especially in the unexplored Western Desert

region54 – which could boost reserves and possibly raise production even further.

Iraq certainly holds the potential to become the world’s largest oil producer. For

this to become a reality, however, the Iraqi oil industry would require large financial

investments for all manner of technical services, capital equipment, and

infrastructure. As a recent Council on Foreign Relations report notes, Iraq’s oil

sector is being held together by “Band-aids.” “War, sanctions and political

manipulation have all seriously challenged Iraq’s highly skilled oil industrialists.”55

The fact that Iraq’s oil output has been so resilient speaks to the quality and size

of the underlying resource as well as the abilities of those keeping the oil fields

operating. With sufficient technology, spare parts, and infrastructure reconstruction,

Iraq’s oil fields should be able to return to output levels of the recent past and reach

higher levels in a few years.

Oil Production – History. Iraq’s all-time peak oil production was 3.5 mbd56

in 1979, just prior to the war with Iran. Output dropped sharply as the war began and

gradually recovered to 2.9 million barrels per day by 1989. The Gulf Crisis sharply

cut production again in 1990. U.N. sanctions imposed after the war prohibited oil

exports, so post-war production was limited to the amount needed to meet internal

demand plus small amounts that may have been illegally exported. Domestic

demand was estimated at 450,000 barrels per day before the recent war began.

Figure 3 shows Iraq’s annual oil output and domestic consumption since 1980.

Iraqi oil exports resumed under the Oil for Food Program in May 1995.

Production rose accordingly, peaking at 2.6 mbd in 2000. During 2001 and 2002,

frequent disputes with the United Nations over pricing and other aspects of program

administration led Iraq to halt exports sporadically. Despite approaching 3.0 mbd on

a monthly basis several times, annual output trended down, with a brief spurt above

2.5 mbd during January and February 2003. This spurt suggests that, despite a

shortage of parts, production techniques that allowed water intrusion into oil-bearing

geologic zones, isolation from increasingly powerful geophysical technology,

inability to work-over production wells, and generally deteriorating infrastructure,

Iraq’s oilfield workers were able to sustain relatively high production capability.

Current Situation. Iraq’s oil deposits lie in two general regions: the north,

in and around Kirkuk, and in the south, in and around Basra and Umm Qasr, near the

EIA, Iraq Country Analysis Brief, February 2003. p. 2.

Guiding Principles for U.S. Post-Conflict Policy in Iraq, Report of an independent

Working Group Cosponsored by the Council on Foreign Relation and the James A. Baker

III Institute for Public Policy of Rice University. January 2003. See Addendum, page 17.

Energy Information Administration, Monthly Energy Review, Table 11.1.

CRS-19

Persian Gulf port of Mina al-Bakr. Production is centered on the Rumaila field – the

largest producing field in the south, with 663 producing wells. Together with

adjacent fields, it has produced more than half of Iraq’s output. In the north,

production from Kirkuk (the largest northern deposit) and satellite fields has

accounted for about 40% of Iraq’s production since it restarted under the OFFP.

Port facilities for southern oil were severely damaged during the first Gulf war

but were sufficiently repaired to handle the amounts of oil – exceeding 1 mbd –

exported under the Oil for Food Program. Oil from Kirkuk and nearby fields was

exported via the 600-mile pipeline to Ceyhan, Turkey, a port on the Mediterranean.

This 40-inch pipeline – which appears operable – has a capacity of 1.1 mbd, although

it is not clear that it can be run at that throughput level in its current condition. A

second, parallel pipeline with 500,000 barrels per day of nominal capacity exists, but

it is reportedly inoperable.57 Potentially, the two pipelines could have a combined

capacity of 1.6 mbd, although extensive rehabilitation of the unused pipeline and

some repair to the operable pipeline would likely be needed.

Figure 3. Iraq’s Oil Production

and Consumption, 1980-2002 (Est.)

In February 2003, DOE characterized Iraq’s near-term production capacity “at

no higher than about 2.8-3.0 million barrels per day, with net export potential of

around 2.3 to 2.5 million barrels per day....”58 It appears possible that this level of

production could be reached in less than a year were oil production facilities,

pipelines, ports, and other infrastructure in operation before the current conflict to be

restored and deferred maintenance performed.

Iraq’s Oil Industry – Current Status. While oil field security is in the

process of being established, oil to meet domestic needs is beginning to flow. Platts

EIA. Iraq , Country Analysis Brief. p. 6.

Iraq, More Details, A supplement to EIA, Iraq, Country Analysis Brief. p. 2.

CRS-20

Oilgram News reports that production has reached 700,000 barrels per day,59

500,000 from northern fields and 200,000 from the south. This is more than current

daily needs, although refineries are unable to turn this oil barrel-for-barrel into the

products desired, chiefly gasoline and propane. These fuels remain in short supply.

An interim oil minister, Thamer Abbas Ghadhban, has been appointed, and is

soliciting new bids for contracts of Iraqi crude. Brig. Gen. Robert Crear heads the

U.S. Army Corps of Engineers team that is helping rebuild the oil industry and

infrastructure. He is aided by Phillip Carroll, a former head of Royal Dutch/Shell’s

U.S. operations. The Halliburton subsidiary KBR is performing the work using local

oilfield workers. The Washington Post reported the Minister’s goal is to increase

production to 1.5 mbd “within weeks.” More recently, Platts reports a June 1 goal

of 1.13 mbd, although this goal may be difficult to achieve.

Several barriers must be overcome for Iraqi oil to be successfully marketed in

international commerce. First, needed production increases must be achieved. It is

unclear that Halliburton and the U.S. Corps of Engineers are successfully engaging

the Iraqi oil workers. Exportable output seems much further off than expected.

Next, clear title to the crude must be established, so that a would-be purchaser

can be assured that he is buying oil from its rightful owners. Until very recently, this

was a problem. Under the old regime – exporting oil under U.N. auspices – title was

granted by the Iraqi Ministry of Oil. In April 2003, it was unclear who had the

authority to certify that oil had been properly sold. The U.N. Security Council

resolved this issue May 22, 2003, in lifting the U.N. sanctions on Iraq. The U.N.

resolution allows essentially free trade in non-military goods, authorizes procedures

whereby Iraq can legally export oil, and specified that the proceeds from oil sales

must be put into the Development Fund for Iraq (DFI). (See the discussion of this

below.) The resolution also shields Iraq’s oil revenues(until December 31, 2007)

from seizure, attachment, or garnishment by creditors and claimants. Platts quotes

Ghadhban: “We are now free.... The sanctions are out. We are free to go back to the

market and also an open market so we can maximize the return....We want to get the

maximum price for the Iraqi barrel...No more discounts, etc, etc.”

Iraq and OPEC. Iraq was a founding member of the Organization of

Petroleum Exporting Countries (OPEC). It has always participated in its

deliberations, even after 1991. There are too many unresolved issues to attempt a

reliable analysis of a future Iraq-OPEC relationship, although many factors point

toward Iraq’s continuing OPEC participation. In addition to OPEC membership being

an accustomed situation, there is the fact that Iraq’s geographic neighbors are all

participants, and its stake in the world oil market will grow as exports expand, and

that OPEC offers an oil price security blanket as well as a voice – most recently

effectual – in price determination. Looking further forward in time, OPEC could be

useful to any efforts by Iraq to reach the pre-Iran war’s production levels of 3.5 mbd,

an amount that OPEC would most likely act to accommodate. However, the length

Iraq to begin exports in two weeks: oil minister: US, Platts Oilgram Price Report, May

28, 2003. P. 1.

CRS-21

of time it might take to get production up to that level is a matter of speculation,

given current difficulties in Iraq’s oilfields.

From a U.S. perspective, Iraq’s return to OPEC as a full-fledged cartel member

would not dovetail with stated policy of encouraging non-OPEC supply sources. If

the United States establishes broad control over Iraq’s oil industry during its

rebuilding phase, it seems unlikely that Iraq will be able to participate in OPEC

strategy and decision making during that period. But if Iraq’s Ministry of Oil is

reconstituted, it is more likely that OPEC will be seen as a help in getting exports

flowing, since it may take some time for Iraqi production to ramp to 3.5 mbd.

In the first months of 2003, most OPEC members increased production to offset

lost Iraqi supplies as well as coincident (but unrelated) losses from other members.

In June 2003, new OPEC quota figures rolled back most of the 2003 Saudi Arabian

increase (up nearly 1.5 mbd60) as well as significant increases by Algeria and Kuwait.

Presumably, this would make room in world markets for Iraqi exports (initially about

1.0 mbd, according to Oil Minister Ghadban’s recovery plan discussed above)

without adverse impact on OPEC pricing goals. OPEC has set a target price band for

the weighted average price of members’ crudes (the so-called OPEC basket) of $22

to $28 per barrel, FOB at export facilities.

The target price band was likely chosen to fall within OPEC’s market power to

influence prices. In order to exert market power, an entity must have control over

supply or demand, or some combination of the two. OPEC has scant influence on

demand, and limited influence over supply. But that limited influence over

incremental amounts of supply appears to give the cartel some price leverage, given

current demand and supply from non-OPEC producers. To the extent that OPEC can

control supply from its own members, it can influence prices given current market

conditions, as evidenced by its ability during the past two years to keep prices mostly

within its target range.

Compared to prices during the post-war crisis period –1992 to 2001 – prices

have been quite stable since OPEC started implementing the price band in December

2000. Prices have remained in the band except for a brief spike early in 2003 – which

has now corrected – and a brief drop below the band in late 2001/early 2002. In

contrast, prices previously fluctuated more significantly, touching a low of $10 per

barrel in February 1999 and reaching a top of $35 in September 2000.

Potential Iraqi Oil Revenues. Were production, development and export

issues to be fully resolved, Iraq could generate great wealth from oil exports. Much

depends on world oil prices, which have fluctuated between $10 and $35 during the

past decade. Given its pre-2003 production capacity of 2.8 mbd, Iraq could export

2.3 mbd (after subtracting 500,000 barrels per day for domestic consumption.)

Annual gross revenues would be $18.5 billion at an assumed $22 price, and $23.5

billion at an assumed $28 per barrel price. Each million barrels per day amounts to

$8.0 billion per year at the lower end and $10.2 billion at the upper end of that range.

CRS Report RL31676, Middle East Oil Disruption: Potential Severity and Policy Options.

Updated April 29, 2003. See Table 1.

CRS-22

Table 2. Iraqi Oil Production, Current and Potential

Time Period

May

2003

Near Term

(12 to 24 months)

Within a Decade

Production

Capacity

700,000

barrels per day

2.3 to 2.8 million

barrels per day

up to 6 million barrels

per day or more

Annual

Revenue

Domestic Use

$19 to $25 billion

$50 to $60 billion

Prepared by Jonathan E. Sanford, CRS, based on discussion in text.

Sources: DOE, Iraq, More Details, A supplement to EIA, Iraq, Country Analysis

Brief. Platts Oilgram Price Report, May 28, 2003. Energy Intelligence Group, in

Petroleum Intelligence Weekly, March 12, 2003.

How much revenue could Iraqi oil exports generate? That depends on such

variables as how much total production can be achieved, domestic consumption,

world market prices, and to what extent Iraq can participate in international oil

markets without driving down market prices. The last variable depends at least in part

on how and if OPEC makes room for Iraqi exports.

The volatile history of oil prices is an important part of Iraq’s revenue equation.

This parameter has fluctuated almost as much as the volume of Iraqi exports since

the Iran-Iraq war. For Iraq’s economy, the combination of price and quantity – and

its unpredictability – provide some real uncertainty about monies that might be

available for reconstruction and development. These imponderables weigh on the

monetary contribution of oil to Iraq’s economy. Oil can be a potent revenue

generator, and Iraq has the potential to produce and export more oil than it ever has

in the recent past.

What might the future hold for Iraqi crude production? While there are many

imponderables, were these unknowns to be resolved over time in a manner favorable

to developments supporting greater exploitation of already known proven reserves,

future crude output could be far greater than the highest levels of production realized

at any time in the past.61

Some analysts estimate that Iraqi oil exports could reach 6 mbd within a decade. See

Energy Intelligence Group, Inc. “Iraq is well primed for big oil opening.” Petroleum

Intelligence Weekly, March 12, 2003. Estimates differ from the various sources, but all

agree that future output could be very much greater than that likely in the near future.

CRS-23

Agriculture62

Overview. Before the first Gulf war, Iraq imported a large share of its

agricultural needs and was a major agricultural export market for the United States.

During the prior regime, due to drought, lack of inputs, poor methods and weak

administration, Iraq had been unable to achieve agricultural production levels near

its potential. After 1991, the irrigation system fell into disrepair and much of the

irrigated cropland in central and southern Iraq was severely damaged by salinization.

Several years will be needed to remedy the situation. In the meantime, Iraq will rely

on imports once again for most of its agricultural needs. Absent a strong agricultural

sector, population movements from rural to urban areas will continue, adding to the

country’s social problems and further worsening unemployment. Absent positive

incentives (see the section on the non-oil economy and “Dutch Disease” below), Iraq

may have problems restoring productivity in the agricultural sector.

Agriculture comprises a relatively small share of the Iraqi economy. In the past

two decades, the sector has been injured by the pressures of military conflict

(particularly the 1980-88 Iran-Iraq War and the 1991 Gulf war) and by varying

degrees of government efforts to promote and/or control agricultural production. In

the mid-1980s, agriculture accounted for only about 14% of the national GDP. After

the imposition of U.N. sanctions and the Iraqi government’s initial refusal in 1991

to participate in the proposed U.N. Oil-for-Food Program, oil production fell and

agriculture’s share of GDP rose to an estimated 35% by 1992 63.

Rapid population growth during the past three decades, coupled with limited

arable land and a general stagnation in agricultural productivity, has steadily

increased dependence on imports to meet domestic food needs since the mid-1960s.

In 1980, Iraq imported about half of its food supply. By 2002, under the OFFP,

between 80% and 100% of many basic food staples were imported.

In the early stages of the post-2003 Iraq War period, the country’s agricultural

sector remains beset by the legacy of past mismanagement and the lingering effects

of a severe drought during 1999-2001. Iraq’s irrigation infrastructure is only partially

functional; salinization of prime cropland is widespread throughout the irrigation

system; and the fertility of cropland and rangeland has been badly depleted from over

exploitation due to poor soil management practices. The poultry and livestock

sectors have been devastated by a general lack of feedstuffs and pasture, as well as

from a lack of veterinary medicines used to control common parasites and diseases.

Agro-climatic setting. Iraq has a total surface area of 43.7 million hectares

(about the size of Wyoming and South Dakota combined) of which 34.0 million

(78%) is not viable for agricultural use. Less than 0.4% is in forest and woodlands

Prepared by Randy Schnepf, Analyst in Agricultural Policy, Resources, Science and

Industry Division.

Mahmood Ahmad. “Agricultural Policy Issues and Challenges in Iraq” Short- and

Medium-term Options,” in Mahdi, Iraq’s Economic Predicament, pp. 179-180.

CRS-24

situated along the extreme northern border with Turkey and Iran.64 The remaining

22% (about 9.5 million hectares) are involved in agricultural activities, although

almost half of this is very marginal and used only for seasonal grazing (mainly goats

and sheep).65 An estimated 340,000 hectares are in tree crops (mostly dates, but also

some figs, grapes, and olives).66

Area cultivated annually to field crops such as cereals, pulses, fruit, and

vegetables varies with weather and market conditions, but generally averages

between 3.5 to 4 million hectares.67 Between 75% and 85% of crop area is generally

planted to grains (mostly wheat and barley). Iraq is divided into a rain-fed northern

winter-grain producing zone and a center-south irrigated zone that produces

vegetables and fruit, as well as cereal crops. According to the U.N. Food and

Agriculture Organization (FAO), 2.55 million hectares were irrigated in 1989.

Pre-U.N. Sanctions (1980-89). During Saddam Hussein’s early years in

power (1979-1990) the state attempted to foster private sector control and investment

in Iraq’s agriculture. Surging oil revenues were used to acquire Western technology

and to lavish extensive government subsidies on the sector. Area and production

expanded through the 1980s for cereals, vegetables, and fruit.

However, cereal yields stagnated due to poor production practices and limited

varietal development. The Iran-Iraq War also diverted labor and other resources

away from agriculture. Population growth continued to outpace agricultural

production, increasing the importance of trade. Despite government efforts at

stimulating agricultural output, cereal and poultry imports nearly doubled as a share

of domestic consumption, 69% and 48 %, respectively, during the 1980s. By 1989

Iraq was importing over $2.5 billion in agricultural commodities annually including

78% of its cereals and nearly 100% of its vegetable oils and sugar.

Cereals, mostly wheat and rice, comprised 60% of calories consumed by the

average Iraqi in the 1980s. Meat – the principal source of dietary protein – provided

an estimated average132 calories per day per capita between 1985 and 1989. Poultry

production made strong gains during the 1970s and 1980s. By 1989 poultry had

surpassed beef as the main source of calories from meat in the Iraqi diet.68

In the 1980's, U.S.-Iraqi agricultural trade expanded rapidly on the strength of

large USDA export credits to Iraq to buy U.S. agricultural products. From 1983

through mid-1990, Iraq received nearly $5 billion in U.S. export credit guarantees to

FAOSTAT, FAO, United Nations. (A hectare equals about 2.47 acres.)

PECAD, FAS, USDA. “Iraq Crop Production.” January 16, 2003.

http://www.fas.usda.gov/pecad/highlights/2003/01/iraq_update/index.htm

FAOSTAT, FAO, United Nations.

In the early 1990s, cultivated area temporarily expanded to nearly 5.5 million hectares

before returning to under 4 million.

FAOSTAT, FAO, United Nations.

CRS-25

purchase significant quantities of U.S. agricultural commodities.69 By the mid1980s Iraq was the major destination for U.S. rice exports and also an important

purchaser of U.S. wheat, feed grains, oilseed products, cotton, sugar, dairy products,

poultry, and tobacco. In addition, Iraq also participated in other U.S. agricultural

export programs including the Export Enhancement Program, the Targeted Export

Assistance Program, and the Cooperator Foreign Market Development Program.

U.N. Sanctions period (1990 to 2003). Under the U.N. sanctions regime

adopted in 1990, the importation of agricultural products was not banned; however,

foreign companies were prohibited from investing directly in Iraq.70 In addition,

because the Iraqi government was unwilling in 1991 to participate in the Oil for Food

Program, the country could not legally export oil and so had no revenues it could use

to buy food and agricultural inputs on the international market. From 1990 to 1994,

Iraq’s agricultural imports averaged slightly above $1 billion or less than half of the

pre-war level. USDA’s export credit offers to Iraq were stopped, and USDA’s

Commodity Credit Corporation had to pay over $2 billion in unpaid Iraqi export

credit guarantees. U.S. agricultural trade with Iraq fell to nearly zero.

After 1991, the northern portion of Iraq fell under de facto local Kurdish control

while the fifteen governorates in central and southern Iraq remained under central

government control. This corresponds roughly to the rain-fed northern agricultural

zone and the irrigated center-south zone. The central government took steps to

increase both production and control of domestic food within its zone of control.

These changes included Government monopoly control over most grain production

and the introduction of a state-managed system of rationing of basic foodstuffs.

Government incentives coupled with rising internal food prices encouraged Iraqi

farmers to expand crop area by planting on marginal pastureland and fragile hillsides.

Record cropped area was attained in 1992 and again in 1993. However, agricultural

productivity suffered for lack of fertilizers, agricultural machinery and the means of

spraying planted areas with pesticides.

Anecdotal evidence suggests that the 1991 Gulf war resulted in significant

damage to the irrigation and transportation infrastructure vital to Iraq’s agricultural

sector, but it is difficult to evaluate the extent or severity of the damage. Iraq’s

irrigation infrastructure fell into disrepair and salinity has spread across much of the

irrigated fields of central and southern Iraq. Once severe salinization has occurred

in soil, the rehabilitation process may take several years according to FAO officials.71

In addition, rural areas were left with a severe labor shortage further hurting

agricultural productivity. According to the U.S. Census Bureau, in 1991 Iraq

experienced a 3.7% decline in population as an estimated 663,000 persons died or

U.S. General Accounting Office. Iraq’s Participation in U.S. Agricultural Export

Programs, NSIAD-91-76, Nov. 1990, p. 2. [http://161.203.16.4/d22t8/142766.pdf]

Country Factsheet, The Economist

[http://www.economist.com/countries/Iraq].

Intelligence

Unit,

The

Economist.

The Economist, “Digging for defeat: Iraq,” May 2, 1998, Vol. 348, No. 8066, p.44.

CRS-26

left the country following the first Gulf war.72 Much of this exodus included foreign

guest workers from the agricultural sector.

Iraq’s poultry and livestock populations were devastated by the loss of rangeland

to grain crops and the drop off of feed grain imports and veterinary medicines needed

for routine control of parasites and diseases. A 1997 screw worm epidemic and a

1998 outbreak of foot-and-mouth disease resulted in further losses of animals.

By the mid-1990s severe macroeconomic problems related to the international

sanctions led the government to end most support to the sector and instead to

implement austerity measures that further curtailed agricultural investment.

Declining food availability resulted in a significant rise in malnutrition in Iraq,

particularly in the center and south of the country.73

By 1996, Iraq agreed to U.N. terms for establishing the OFFP. Once started,

however, OFFP food imports made Iraq’s trade dependence nearly complete for

many basic foodstuffs. According to the World Food Program, by early 2003 nearly

60% of Iraq’s population was totally dependent on imports via the OFFP. The Iraqi

population’s failing nutritional status and growing trade dependence was further

aggravated by a severe drought that persisted throughout much of the Middle East

from 1999 through 2001 and devastated crop output in Iraq.

Prospects. Some progress has been made at restoring lost agricultural

productivity; however, a return to normal weather patterns is critical for domestic

cereal production in Iraq. With the action of the U.N. Security Council on May 22,

2003, lifting trade and financial sanctions on all non-military goods, Iraq will be able

to import food and needed agricultural inputs. However, political stability and

increased internal security will also be necessary before Iraq’s agricultural sector

witnesses significant investment and growth. Restoration of the irrigation

infrastructure (including a long-term de-salinization program), as well as the grain

marketing infrastructure for handling, storing, and distributing agricultural inputs and

outputs will be vital. In addition, the development of a viable agricultural research

and extension service to develop and disseminate improved varieties and successful

production practices are needed to restore agricultural productivity.

Clearly, Iraq will be dependent on imports for meeting domestic food demand

for several years to come. In the long term, after the economy has regained its

viability and vibrancy, market forces and international competition will likely be the

driving forces behind Iraq’s agricultural trade patterns. Historical trade and food

consumption patterns suggest that food grains such as wheat and rice, feedstuffs

including corn, barley, and protein meals, vegetable oil, sugar, meat, and dairy

products are all likely to be important imports into Iraq.

U.S. Bureau of the Census, International Data Base (IDB), Iraq, Oct. 10, 2002;

[http://www.census.gov/ipc/www/idbacc.html]

UNDP, Iraq Country Office, 1999-2000 Report, June 2000.

CRS-27

Banking and Financial Institutions74

Iraq has never had what most Western analysts would call a market-oriented

banking system. Nevertheless, before 1991, it had one of the most modern financial

systems in the Arab world. The government created most of the country’s financial

institutions, with the exception of some private banks established after 1988. Iraqi

banks seem to have gotten most of their funds, not through borrowing in the market

or from deposits, but from allocations from the national treasury. Access to capital

and financial services seems to have been determined more by political factors than

by independent considerations of creditworthiness, profit and risk. Between 1991

and 2003, government control over the Iraqi financial system tightened further.75

Iraq’s banking system was limited, until the 1930s, by the size of its economy

and the small level of savings. In 1936, the government created an agricultural and

industrial bank which split in 1940 into two separate institutions. Other specialized

banks, for real estate, mortgages, and cooperatives, were created in the 1940s and

early 1950s. A commercial bank, the Rafidain Bank, was created in 1941. It also

served for a few years as the central bank. A state-owned institution, the National

Bank of Iraq, was founded in 1947. It became the Central Bank of Iraq in 1956, one

of the earliest Arab monetary authorities. The Rafidain Bank was, for many years,

the only commercial bank in the country.76 Its original ownership is unclear. In

1964, all Iraqi banks and insurance firms were nationalized. The government’s

specialized banks were consolidated at that time into separate institutions for

agriculture, industry, and real estate. The industrial bank made loans to both public

and private sector firms and held equity positions in several public/private joint-stock

companies. Government policy evidently played a major role in its decisions and

those of the other specialty banks. In the early 1980s, for example, the industrial

bank was instructed to expand its lending to private and state-owned firms in order

to promote development. The real estate bank meanwhile was instructed to increase

its lending in order to promote the construction of housing and to encourage more

people to build their own houses.

Prepared by Jonathan E. Sanford, Specialist in International Political Economy, Foreign

Affairs, Defense and Trade Division.

Much of the factual and descriptive information presented here on Iraq’s financial system

is drawn from the Europa Middle East and North Africa yearbook for 2003 and from Metz.

Iraq, a Country Study.

The Rafidain Bank was the only commercial bank in the country until 1988 and it

remained the predominant institution thereafter. Some analysts have questioned whether

it was truly independent of the central bank. For most of their history, both were owned and

controlled by the government. With assets of more that US$17 billion in 1983, the Rafidain

Bank was reportedly the largest Arab commercial bank. In 1982, according to one report,

the American Banker newspaper named Rafidain the world’s fastest growing bank. In early

1989, Rafidain ranked number 83 in the world, with $54.5 billion in assets. In 1996, it had

152 local branches and nine branches abroad. Given the strength of the Iraqi economy

during this period, it seems likely that much of the capital to fund the bank’s operations

came from government or from regime sources.

CRS-28

Until the late 1980s, Iraq had one of the most modern financial systems in the

Arab world. It reportedly helped Jordan (and perhaps others) establish their own

central banks. The Rafidain Bank was a shareholder in several European-Arab

consortia banks and one of the seven founding shareholders of the Gulf International

Bank, a regional commercial bank founded in 1977. In 1981, Rafidain created a joint

venture bank with Banco do Brasil, with a capitalization of US$17.5 million. In

1987, its own capital base was doubled (to ID 100 million) as the first stage in a plan

to expand the national banking system. In 1988, the Iraqi government announced

that another commercial institution, the Rashid Bank, would be created (also at a

capitalization of ID 100 million) to compete with the Rafidain Bank. Some sources

report that Rafidain emphasized foreign connections while Rashid focused more on

the domestic economy. The government seems to have been the source of the new

capitalization for both banks. The government also encouraged more competition

among the three state-owned insurance firms. The banks and insurance firms were

encouraged to expand and given administrative and financial autonomy, bound

officially only by the Government’s fiscal policy.

In May 1991, the government rescinded the 1964 decree nationalizing all

financial institutions. According to recent reports, there were 17 privately owned

banks in Iraq in 2002. The role of the private banks is unclear. Given the legal

restrictions on access to foreign capital and the weakness of the Iraqi economy, most

of their resources likely came from official or regime sources. No information is

available as to where or for what purpose they invested their funds. In June 1991, the

government created a state-owned Socialist Bank, with a capitalization of ID 500

million, to make interest-free loans to civil servants and decorated war veterans.

Events since 1991 have substantially limited the capacity of Iraq’s financial

institutions. Much of the flexibility and autonomy implicit in the legalization of

private banking, in 1988 seems to have been overtaken by events. Most of the

country’s overseas assets were impounded (“frozen”) in October 1992 or shifted to

escrow accounts. This made it very difficult for Iraqi financial institutions to operate

internationally. The post-1991 sanctions regime and the Oil for Food program also

centralized financial control within Iraq in the hands of the government and the

international bodies administering the system. Iraqi banks had little access to capital

other than through official channels. Much of the lending by these institutions in the

past decade seems to have been based more on personal or political connections than

on normal banking principles. In many cases, it is not clear that these were in fact

loans which the borrowers were expected to repay.

Since the end of the recent war, most of Iraq’s banks have been severely battered

by looting. The Central Bank and other banks have been thoroughly looted, by

officials of the former regime as well as by post-war thieves.77 The financial capacity

of Iraq’s banks and their ability to continue operations may be in serious doubt. For

its part, the Rafidain Bank served during the 1970s and 1980s as the government’s

principal agent for borrowing funds abroad. After 1990 it became the principal venue

through which Saddam’s government defaulted on its foreign debts. The bank was

Some money has been recovered, however, and turned over to occupation authorities but

its source and ownership are unknown.

CRS-29

sued by most of the country’s creditors for collection of those debts. It is, in effect,

bankrupt. In April 1993, British liquidation experts informed creditors meeting in

London that the liquidation of the Rafidain Bank’s international operations would

yield only a minimal recovery.

Transportation and Infrastructure78

Iraq’s transportation and infrastructure systems have deteriorated substantially

in the past dozen years. The government invested heavily in them, during the1970s,

thanks to the inflow of oil revenues and, in the 1980s, as a matter of strategic

necessity due to the Iran-Iraq war. Much of this infrastructure was destroyed during

the first Gulf war, and rebuilding efforts were hobbled by the sanctions regime. The

telecommunications network was subsequently targeted in the 2003 hostilities.

Shipping. Iraq’s main port is at Basra, about 50 miles inland from the Persian

Gulf along the Shatt-al-Arab waterway. Before the oil boom of the 1970s, it was a

relatively small port, most trade being oriented overland through Syria and Jordan.

The port was damaged by Iranian shelling during the Iran-Iraq war and by coalition

bombing during the first Gulf war. The Shatt-al-Arab also was blocked by sunken

ships until cleared and dredged in 1993. Ports were built at Umm Qasr and Khor alZubair in the 1980s, connected to the Gulf by the Khor Abd-Allah waterway. Limited

shipping was resumed at Umm Qasr in November 1993, although the condition of

the port prevented intensive use. The port at Khor al-Zubair was designed to handle

cargo destined to and from the large industrial and petrochemicals industries there,

most of which remain idle. Certain contracts for forklifts and dredging equipment

were allowed by the UN sanctions commission in order to improve the ports for food

and medical shipments. The regime dredged stretches of the Tigris between Baghad

and Basra to facilitate barge traffic, and it commissioned navigation studies for other

areas along Tigris and Euphrates. A barge canal between Al-Nasiriyah on the

Euphrates and Baghdad was completed in December 1992.

Railways. The Iraqi railway system has five major routes. A northwest route

links Baghdad with Mosul and the Turkish border. A second runs north from

Baghdad to Kirkuk and Arbil. The third runs south from Baghdad to Basra and Umm

Qasr. A fourth line stretches from Baghdad west to Qusaybah at the Syrian border

and continues west to link the industrial complex at al-Qaim with the phosphates

mines at Akashat. A fifth line connects this route at al-Hadithat with Kirkuk, thus

linking the minerals processing complex at al-Qaim with sulphur mines in the

country’s northern region. Due to the dilapidated condition of the rails and

equipment, service is reportedly infrequent and unreliable. The U.N. sanctions

committee allowed the importation of 30 new mainline locomotives in 2000. The

Hussein regime commissioned studies to improve and expand the railways, but lack

of funds prevented the execution of these projects. In 1994, Iraq possessed 1,259

miles of operating track. No new construction has occurred since.

Prepared by Ian Fergusson, Analyst in International Trade and Finance, Foreign Affairs,

Defense and Trade Division.

CRS-30

Air Transportation. Iraq has international airports at Baghdad and Basra.

Civil international air traffic was prohibited under UN sanctions, but several Middle

Eastern states and France and Russia operated flights sporadically into Baghdad.

Iraqi airways was effectively grounded by sanction, not only due to the prohibition

on flights, but also due to the lack of access to spare parts. In 1989, the last full year

of ‘normal’ operations, the airline carried approximately 1.2 million passengers to 42

destinations within Iraq and abroad. In 1987, the fleet contained 14 Boeing passenger

aircraft and 35 Russian-built Antonov and Ilyushin cargo planes. Iraqi airways was

divided into its aviation and ground services components in 1987 and the two entities

were partially privatized a year later. However, its virtual disappearance from the air

after the imposition of sanctions did not bode well for investors.

Roadways. In 1994, Iraq had an estimated 27,410 miles of paved roads and

highways. The road network received priority during the 1980s due to its strategic

value in the war against Iran. Consequently, the roads connecting the central

population centers with the Iranian frontier received the most attention. The

International Expressway #1, a six-lane highway linking Safwan on the Kuwaiti

border north to Baghdad and west to the Jordan border, was completed in 1989. It

was designed to link the Gulf states with the Mediterranean. Iraq’s roads and bridges

were heavily damaged during the first Gulf war, but they reportedly received priority

in the regime’s later reconstruction efforts. In 1994, approximately 765,000

passenger vehicles and 265,000 trucks were registered in Iraq.

Communications. Iraq’s telecommunications infrastructure was severely

damaged by the first Gulf war, the 1998 allied airstrikes, and the 2003 hostilities.

Before 1991, there were approximately 37 land-lines per thousand residents,

declining to 30 lines per thousand in 2001. The earlier figure indicates that the system

was not particularly widespread before the destruction of the central switching

facilities and trunk lines. The U.N. Sanctions Committee (UNSC) blocked most

contracts to replace damaged infrastructure on grounds that such equipment could be

utilized for military purposes. In 2001-2002, the UNSC approved several upgrades

to improve international connectivity and the domestic trunk networks. A wireless

phone network in the northern Kurdish-controlled operates with the Europeanoriginated GSM standards.

Power Generation.79 Iraq’s government invested heavily in electric power

generation in the 1980s, contracting with Britain, West Germany, France, Italy, South

Korea, the Soviet Union, and Yugoslavia to build or expand thermal and gas

generating plants, hydroelectric facilities, and transmission wires. A great majority

of these installations are oil or gas fired, although hydro power accounts for about 2%

of capacity. A nuclear reactor at Osirik was destroyed in an Israeli attack in 1981.

Iraq’s transmission grid was linked with that of Turkey in 1987, and Iraq became the

first Middle Eastern state to export power. In 1990, capacity was reported to be 9,000

MW. Bombing during the first Gulf war reportedly destroyed about 90% of its

electronic generation and transmission facilities and electricity generation capacity

In addition to other sources cited in this section, information on Iraqi power generation

was also obtained here from the Energy Information Administration, Country Analysis

Brief: Iraq, February 2003 (http://www.eia.doe.gov/emeu/cabs/iraq.html#elec).

CRS-31

fell precipitously to 340 MW by March 1991. Although the regime declared that 75%

of generating capacity had been restored by early 1992, subsequently in 1998 an Iraqi

energy official claimed that the system was operating at 50% of capacity due to lack

of spare parts. Recently in 2002, the U.N. Iraq Program declared that operating

capacity to be 4,300-4,400 MW. Contracts for spare and maintenance equipment

were approved in 2001-2 to aid in boosting production, but chronic shortages of

power remained. Power was available only 12 hours per day in many areas. The

power supply deficit was estimated at 1,100 MW overall, with a peak load deficit of

2,500 MW estimated in 2001.

Industry80

For the most part, the industrial sector of Iraq was created during the 1970s and

1980s as a result of government attempts to diversify the economy through economic

development projects using proceeds from Iraq’s oil wealth. While some projects

were undertaken to exploit available economic resources, others were developed to

foster national identity or to enhance the prestige of the regime. Industrial enterprises

sustained heavy damage in the 1991 Gulf war. Such facilities that were not destroyed

were degraded or rendered inoperable during the remaining years of the Baathist

regime due to the shortage of spare parts and technical know-how. The age and

debilitation of the infrastructure, and the presence of a technically competent

workforce, may determine the economic viability of the industrial sector.

Industrial Development. Since the days of the monarchy, Iraq’s economic

development programs have emphasized the development of industry as a means to

modernize the nation. In the 1950s, the monarchy used oil revenues to undertake

large infrastructure projects, but most manufacturing industry remained in private

hands. After the overthrow of the monarchy and extensive nationalizations of

industry in 1964, industrial development was characterized by extensive state

planning and public sector control of industry. Generally, however industrial

development programs sought to advance common goals, namely, (1) to diversify the

economy and to lessen reliance on oil revenue, (2) to provide employment

opportunities for the labor force, (3) to develop and exploit local resources, and (4)

to encourage import substitution industries.81

Large scale industrialization expanded during the oil boom in the late 1970s.

With more money in hand, the government was able to purchase heavy industrial

plants from foreign contractors on a turn-key, ready-to-operate, basis. Several

industrial zones sprang up in this fashion, notably at al-Qaim (minerals processing),

Khor al-Zubair (including a large French-contracted iron and steel plant) and a

petrochemical complex near Basra. Light manufacturing, including textiles, food

processing, and household goods, was centered around Baghdad.

Prepared by Ian Fergusson, Analyst in International Trade and Finance, Foreign Affairs,

Defense and Trade Division.

Tariq al-Khudayri, “Iraq’s Manufacturing Industry: Status and Prospects for

Rehabilitation and Reform,”in Mahdi, Iraq’s Economic Predicament, p. 202;

CRS-32

The Soviet Union and other eastern bloc countries also contracted for the

construction of several projects in the 1980s. Among these were steel works and an

electrical equipment manufacturing plant in Baghdad, a tractor works in Musayib,

and a pharmaceutical plant in Samara. Romania provided two cement plants, in alQaim and Sinjar. They reportedly produced 7.5 million tons of cement in 1987, of

which 4.5 million tons were exported. Iraq purchased these facilities through

Economic Cooperation Agreements signed with various eastern-bloc countries

beginning in 1985, which provided credits arrangements considered to be more

favorable to Iraq than those offered by western creditors at that time.82

To diversify away from petroleum dependency, Iraq sought to develop its

mineral resource industry. Sulphur mining and processing has been conducted in

northern Iraq near Mosul since 1972. Proven sulphur reserves in 1988 were

reportedly 515 million tons. At its peak in 1989, production was estimated at 1.4

million tons, of which 1.2 million tons were exported. Sulphur production was

enhanced by the opening of a sulphur recovery and sulphuric acid plant built by

Japanese firms in 1988. Phosphate extraction and processing is located in the

northwest region of the country in mines around Akashat. The reserves of the

Akashat mine, opened in 1981, have been estimated at 3.5 billion tons. Phosphate

is processed in al-Qaim, in a plant built by a Belgian firm in 1984. Production was

estimated at 1.2 million tons in 1989, of which 766 thousand tons were exported.

Before the first Gulf war, Iraq was self-sufficient in fertilizers.

Several problems have been identified in the manner of industrialization

undertaken in the 1970s and 1980s. Due to the large influx of petrodollars, these

projects were often ill-conceived and unproductive. They were often undertaken for

symbolic reasons, were grandiose in scale and did not reflect the absorptive capacity

of the economy. Plans for needed technical expertise, sources of supply input, and

transportation needs were often inadequate.83 One source estimated that at the peak

of its operations, the manufacturing sector imported 80% of its inputs. Hence it was

highly vulnerable to supply disruptions and currency volatility.

War and Sanctions. Aside from the internal weaknesses in the sector, war

and sanctions also crippled Iraqi manufacturing. During the Iran-Iraq war, most

industry escaped direct damage from Iranian attacks. However, much of the industrial

infrastructure was sidelined by the inability to obtain intermediate inputs and spare

parts due to interference with shipping and damage to ports. As the conflict dragged,

the government concentrated its resources on military industrialization projects and

this emphasis contributed to the decision to privatize some state industries in 1988.

In the manufacturing sector, approximately 50 state operations were sold to the

private sector or listed on the Baghdad stock exchange. Many of these entities were

sold at well below what was considered market cost.84

Ahmed M. Jiyad, “The Development of Iraq’s Foreign Debt,” in Mahdi, Iraq’s Economic

Predicament, p. 98

Cordesman and Hashim, Iraq: Sanctions and Beyond, p.129.

al-Nasrawi, Iraq’s Burdens: Oil, Sanctions, and Underdevelopment, p.99.

CRS-33

Much of the industrial infrastructure that survived the Iran-Iraq war was

destroyed or severely damaged by bombing during the first Gulf war. The Khor alZubair heavy industry complex was heavily hit, and although some reconstruction

work has occurred, it has not operated since. For industries not destroyed, the

sanctions regime in effect between 1990 and 2003 closed off the possibilities of

obtaining inputs or spare parts or exporting manufactured products legitimately.

Reconstruction efforts did not concentrate on the revitalization of the manufacturing

sector, but rather focused on the more lucrative oil industry and on instruments of the

regime’s power.85

Prospects. The future outlook for the manufacturing sector is clouded. Most

facilities have been destroyed by war or degraded by sanctions. Few new inputs have

been put into the sector sine 1990. Iraqi manufacturing is saddled with aging, if not

damaged, equipment and infrastructure. The capacity and skills of the labor force

have deteriorated over time. In addition, much of the economic rationale for Iraqi

industry has evaporated, since much of the capacity built in the 1970s and 1980s was

based on national prestige, import substitution, or other non-market considerations.

New policies to facilitate and encourage the growth of industry on better and more

sound foundations will be needed. Given the large size of the urban population and

the limited growth prospects for agriculture, new employment opportunities in

industry likely will be needed. Iraq will need to take care (see the section on the nonoil economy and “Dutch Disease” below) not to allow its currency to appreciate so

much in value (due to large oil exports) that the incentives and prospects for industry

and other sectors are unnecessarily diminished.

International Trade86

Exports. Oil has been Iraq’s main export since the 1930s. By 1953, oil

exports accounted for 49.3% of national income.87 In the 1980s, crude oil made up

83% of all Iraqi exports.88 The figure in 2001, under the Oil for Food Program, was

over 95%. Non-petroleum export products included portland cement, fruit (mainly

dates), fertilizers, and reaction engines. Table 2 illustrates Iraq’s top exports in 1989.

In 2001, Iraq’s exports totaled $12.6 billion. Its largest export markets were the

United States ($6.3 billion), Canada ($1.1 billion), France ($887 million), the

Netherlands ($791 million), and Jordan ($736 billion).

International sanctions were imposed by the United Nations in August 199089

following Iraq’s invasion of Kuwait. (See the section on the Oil for Food Program

above.) The U.N. Security Council created the OFFP in 1995, allowing Iraq to

Cordesman and Hashim, Iraq: Sanctions and Beyond, p.149.

Except for the portion on customs duties, this section was prepared by Cathi Jones,

Analyst in International Trade and Finance, Foreign Affairs, Defense and Trade Division.

Slugett, M. & Slugett, P. Iraq since 1958: from revolution to dictatorship. New York:

KPI Limited, 1987, p. 35.

Economist Intelligence Unit (EIU) calculations.

United Nations Security Council Resolution 661, August 9, 1990.

CRS-34

export $2 billion worth of oil every six

months. The first Iraqi oil exports began

on December 10, 1996, after it agreed in

May to implement the program.90 The first

shipments of food under the OFFP arrived

in March 1997, followed by imports of

medicines in May 1997.

From the

implementation date to March 2003,

approximately $26.8 billion worth of food,

humanitarian supplies, and equipment was

delivered to Iraq under the program.91

Table 2. Iraq’s Top Exports,

1989

SITC Rev3 Commodity

Millions

of U.S.$

3330-Crude oil from

bituminous minerals

$11,545.4

3344-Fuel oils, not

elsewhere specified

$211.3

3343-Gas oils

$119.8

The six-month ceilings on oil sales

3341–Gasoline (motor

$78.8

were raised from $2 billion to $5.3 billion

spirit) and other light

oils

in 1998 and abolished altogether in 1999.

This allowed Iraq to export and import

2741- Sulfur of all kinds

$39.2

without limit so long as it complied with

(except sblmd, prcpt, or

coll)

the U.N. screening process. Despite this,

Iraq’s oil exports ran significantly below

6612-Portland cement

$35.7

aluminous, slag,

capacity in 2001 and much of 2002, due, in

supersulfate, etc.

part, to disputes between Iraq and the U.N.

over the formula for pricing Iraq’s oil. Iraq

0579-Fruit, fresh or

$30.8

dried, not elsewhere

imposed surcharges of about 30-50 cents

specified

per barrel on its oil buyers, resulting in

illicit kickbacks that the government

5629-Fertilizers, not

$29.6

elsewhere specified

allegedly used to buy unapproved goods. In

September 2001 the UN Sanctions

7144-Reaction engines

$29.2

Committee changed the pricing formula to

5222-Chemical

$27.7

“retroactive pricing” in an attempt to block

elements, not elsewhere

the surcharges. This policy reduced Iraq’s

specified

oil sales by about 25%, although the UN

Source: United Nations international trade

noted a rebound to previous sales levels by

data

September 2002. In addition, Iraq has

sometimes unilaterally interrupted the sale

of oil to protest Security Council policy or to challenge the United States and its

allies. For example, Iraq suspended its oil sales for the month of April 2002 in

protest of Israel’s military incursion in the West Bank.

Imports. Prior to the implementation of the Oil-for-Food Program, Iraq was

essentially a command economy with virtually all transactions conducted through

government contracts. Little or no private sector trade flowed across borders. Major

imports included food, motor vehicles, spare parts, iron and steel, and medicines.

Table 3 shows Iraq’s top ten imports in 1989. In 2001, Iraq’s imports totaled $4.2

United Nations Document number S/1996/356.

United Nations. Office of the

[http://www.un.org/Depts/oip/factsheet.html].

Iraq

Programme.

Oil-For-Food.

CRS-35

billion. Its top suppliers were France

($592 million), Australia ($439 million),

China ($397 million), Italy ($327

million), and Vietnam ($320 million).92

Importing via the public sector

continued during the operation of the

OFFP, however, all government

purchases were monitored by UN staff,

who reviewed all contracts and ensured

that imported goods were on a list of

commodities approved by the UN

Security Council. Besides food and

humanitarian supplies, Iraq was

permitted to import spare parts for repair

of its oil infrastructure, limited quantities

of transportation and communications

equipment, and some consumer goods.

Table 4 represents Iraq’s imports under

the OFFP. From 1997 to 2003, almost

60% of Iraq’s people were, to some

extent, dependent on food and other

humanitarian supplies provided by the

program.

Illicit Trade. As noted earlier, the

regime of Saddam Hussein imposed

surcharges on oil buyers, solicited

kickbacks from suppliers of humanitarian

and other civilian goods, and conducted

illicit oil dealings with its neighbors.93

This helped generate funds it could use

without restrictions. Although there are

no authoritative figures for the value of

Iraq’s illicit trade, the most widely cited

estimates come from a General

Accounting Office (GAO) study released

in May 2002 that estimated Iraq’s illegal

earnings at $6.6 billion from 1997-2001.

Countries receiving illicit exports

allegedly included Syria, Turkey, and

Jordan.94

Table 3. Iraq’s Top 10 Imports,

1989

SITC Rev3 Commodity

Millions of

U.S.$

0412-Wheat (including

spelt) and meslin, unmilled,

617.3

7843-Tractor, motor vehicle

170.4

6793-Iron and steel seamed

160.9

0112–Meat of bovine

144.6

7812–passenger motor

139.6

6791–Iron and steel

137.8

0423–Rice, milled

132.2

6762–Alloy steel bars, rods

130.7

5429–Mendicaments

124.5

6911–Metal structures and

parts

Source: United Nations

Trade Data.

105.4

Table 4. Iraq’s Imports under

OFFP, 1997-2003

Sector

Food

Food Handling

Health

Oil Spares

Electricity

Water and Sanitation

Agriculture

Education

Communication and

Transportation

Housing

Special Allocation

Millions

of U.S. $

13.5

3.3

3.0

3.6

3.5

2.0

3.7

1.1

2.0

2.7

293.6

Source: United Nations. Office of the Iraq

Program

International Monetary Fund trade data.

CRS Report RL30472, p. 12.

General Accounting Office, Weapons of Mass Destruction: U.N. Confronts Significant

(continued...)

CRS-36

Prospects. Since so much of its GDP depends on oil exports, Iraq’s economic

prospects are linked to its ability to pump oil. Given the deterioration and current

disarray in the manufacturing and agriculture sectors, it does not appear that Iraq will

be able to produce sizable quantities in either sector for export any time soon.

Indeed, it appears that imports in the near term will need supply much of the

country’s demand for food, other agricultural products, and many manufactured

goods. Reconstruction and improvements in Iraqi competitiveness may diminish this

situation in the next few years, if the country pursues appropriate policies and

establishes adequate incentives for non-oil economic activity. In the meantime, as

discussed in the section on petroleum above, Iraq seems poised to became a major

exporter of oil to the world market. Some experts believe that it can double its

capacity to 6 million barrels per day within a decade.95

Fiscal Levies on Foreign Trade.96 No quantitative data are available on

Iraq’s past revenues from duties, taxes or fees on imports or exports. Likewise there

is little information available on government revenues in general. The future Iraqi

government’s fiscal system will have to be built from the ground up. The size of the

government’s fiscal needs and their financing will depend on the prospective

activities of the government as reflected in the budget. The extent to which Iraq will

rely on duties or taxes on foreign trade – as opposed to other domestic and foreign

sources of revenue such as income and business taxes (e.g. on petroleum and/or its

products, various fees, foreign assistance) – to finance such activities (as well as their

scope) is a matter yet to be decided by Iraqi’s future governing authorities.

Speculatively, the obvious source of a foreign-trade related fiscal levy would be

an export tax or duty on crude petroleum and/or its products, traditionally the most

important component of Iraq’s foreign trade. Similar levies on other exports would

not be a likely source of significant revenue because of the small share they hold in

Iraq’s exports. Moreover, at least in the short to medium run, in certain areas the

availability of output for export will be modest because of past deterioration of

production facilities and the damage caused by recent wars.

A likewise less likely source of significant (if any) trade-related fiscal levies

would be Iraq’s imports, which consist mainly of articles for basic personal

consumption (food, medicine) and inputs for agriculture and industry, and for the

rehabilitation of Iraq’s economy. The obvious broad need for imports of this type and

the ultimate locus of the burden of such taxation (the general public) would make

this approach somewhat counterproductive. It would also lead to increases in the

prices of such commodities with their concomitant inflationary effect. This may have

a negative impact on the country’s non-oil economy. (See discussion below.)

(...continued)

Challenges in Implementing Sanctions against Iraq, GAO-02-625, May 2002.

Energy Intelligence Group, Inc. “Iraq is well primed for big oil opening.” Petroleum

Intelligence Weekly, March 12, 2003.

Prepared by Vladimir N. Pregelj, Specialist in International Trade and Finance, Foreign

Affairs, Defense and Trade Division.

CRS-37

In the matter of any levies on domestic and/or foreign transactions in petroleum

and its products, some consideration would have to be given to certain aspects of

world petroleum trade. In view of the overall uniformity of the world prices of such

products, for instance, an export levy could not be passed to the importer, but would

have to be absorbed by the exporter if Iraqi petroleum is to remain competitive on the

world market. Another aspect to be considered in this context is Iraq’s membership

both of the Organization of the Petroleum Exporting Countries and of the

Organization of Arab Petroleum Exporting Countries (OAPEC) and their role in

Iraq’s petroleum exporting policy and activities.

The Post-War Situation97

Assessing the Damage

Rebuilding the physical and social infrastructure of Iraq is a necessary

prerequisite to the functioning of the Iraqi economy. In addition to fixing utilities

and transportation, the government must be able to assure the basic welfare of its

citizenry through adequate food supplies, medical care, and security arrangements.

This cost of the reconstruction will likely be borne by the newly constituted

government of Iraq through oil revenues, by national and multilateral aid

organizations, and by the Iraqi people themselves.

Critical Infrastructure. Although the United States did not target much of

Iraq’s electrical, water, and telecommunications infrastructure during the war,

collateral bombing damage and the chaos which ensued following the downfall of the

Saddam Hussein regime has prevented coalition forces and local Iraqis from rapidly

repairing and restoring vital services such as electricity, water, sanitation, and

telecommunications. Some of Iraq’s power plants were looted after U.S. forces

entered Baghdad. Power lines also have been damaged, and in some instances, were

deliberately cut down by looters. In Baghdad, several towers, which hold up high

voltage power lines were wrecked by bombing and a central dispatch center that

coordinates the allocation of electricity was ravaged by looters. Most of all, many

employees of Iraq’s electricity system have been to afraid to go back to work, forcing

coalition forces to have to find vital electric engineers and other employees of Iraq’s

electricity system in order to restart service.

The water supply in Iraq’s main cities also was damaged both during and after

the war. Even before the war, Iraq’s water system was old and decrepit as nearly 40%

of all water is lost due to leaky pipelines. The war exacerbated this situation. In

Baghdad, there were breaks in the main water line that required repairs before

residents could receive water service. Some of Iraq’s water and sanitation

infrastructure was damaged by looters in the days and weeks following the cessation

of heavy fighting. The lack of electricity has had an impact on water service, as

engineers have had to rely on generators to power water stations. Many sewer

treatment plants are not functioning, allowing sewage to drain into water systems.

Prepared by Jeremy M. Sharp, Analyst in Foreign Affairs; Rhoda Margesson, Analyst

in Foreign Affairs; and Curt Tarnoff, Specialist in Foreign Affairs, Foreign Affairs, Defense

and Trade Division.

CRS-38

There also has been no garbage collection service, other than local efforts in

neighborhoods to collect and dispose of trash.

In an effort to disrupt Iraqi communications during the war, coalition forces

bombed Iraq’s telephone exchanges, cutting off telephone service for many Iraqis.

Some telephone lines also are down due to a combination of war damage and postwar looting. Iraqis with satellite phones, which were banned under Saddam Hussein’s

regime, can make long distance calls and have begun charging other Iraqis for calls

abroad. Outside the Kurdish area, Iraq has no mobile phone network.

Transportation Infrastructure. Iraq’s roads, bridges, and highways were

not seriously damaged during the recent war. However, the war and the ensuing civil

unrest have disrupted the distribution of fuel throughout the country. Many drivers

of gasoline tankers have stopped making shipments, due to the insecurity on the

roads. This has caused shortages and long lines of cars waiting for gas at fuel

stations. The port of Umm Qasr, Iraq’s main outlet to the Persian Gulf and only deepwater port, was only partially damaged during the war. British and Australian forces

continue to sweep it for mines, but massive dredging and rebuilding are required to

prepare the port for large cargo ships. A team of port management specialists and

engineers are reported assessing the damage and determining what needs to be done

to make it operational for the distribution of humanitarian aid.

Damage to Iraq’s airports varied during the war. During the first Gulf war,

Iraq’s national airline, Iraqi Airways, had lost many of its planes, some of which it

had flown to safety in neighboring states. Furthermore, international sanctions

preclude incoming commercial flights from flying into Iraq. Some legal experts

believe that these sanctions must be lifted before Iraq’s airports can be reopened to

commercial traffic.98 Business analysts believe that it will take 2-3 years before Iraqi

Airways will be up and running, as the airline requires an entirely new fleet of planes.

Security. Police services have also been seriously diminished. Many observers

believe that one of the greatest challenges to Iraq’s recovery from war and future

economic growth is the security situation in Iraq’s population centers and rural

countryside. In the aftermath of the war, there has been a complete breakdown in law

and order with the dissolution of the Baath Party and Saddam Hussein’s repressive

security apparatus. With no cohesive local police forces, judicial system, or national

army, Iraq is entirely dependent on coalition forces to provide security. In Baghdad,

several hundred Iraqi police officers have returned to work. However; many officers

have remained at home. Police officers who are back on duty face shortages in

equipment and have complained of being outgunned by armed bandits. There are

widespread shortages of reliable manpower to provide stability in many areas in Iraq.

In areas where U.S. forces do not have a large presence, local neighborhood

associations have started to organize security patrols. In more dangerous areas, armed

militias, some of which are associated with clerics and tribal sheikhs, have sprung up

to become the de-facto police, enforcing the rule of a local leader.

Over the last several years, some international carriers, in violation of sanctions, had

started offering flights to Baghdad.

CRS-39

Humanitarian Assistance and Post-War Relief99

The war, which was followed by massive looting, destroyed critical

infrastructure, disrupted the delivery of basic services and food supplies, and

impacted the humanitarian situation inside Iraq. So far, the overall disruption has not

reached the crisis levels some predicted before the start of hostilities: Widespread

hunger, massive population movements, and severe health epidemics have not

occurred. However, basic services have essentially collapsed and the conditions are

serious and deteriorating. Lack of water, fuel, and electricity and inadeqate shelter,

sanitation, and medical care are creating hardship for many. While the humanitarian

situation continues to change with developments on the ground, the amount of

assistance that is ultimately needed will depend on the nature and duration of the

post-hostility phase.

Provision of Relief. In the short term, security of humanitarian aid delivery

and distribution is a major concern. Looting and lawlessness have been extensive; the

situation remains volatile. Recurrent insecurity problems have made it impossible to

launch a full-scale humanitarian effort. Many aid agencies remain on Iraq’s borders

unwilling to enter for security reasons. There are more than 150 U.N. staff and

approximately 50 non-governmental organizations (NGOs) in Iraq. Local Iraqis are

also involved in the aid effort. Deliveries of priority items – water, food, and medical

supplies – are getting through slowly, although at times the chaos and violence

hamper the efforts of those trying to provide the most minimal vital assistance.

While they need protection, aid agencies fear that receiving it from coalition-led

forces could mean an increase in security risks for their staff. Coalition troops are

now patrolling cities and have been successful in controlling the looting in some

areas. Troops are also helping with the emergency restoration of critical services,

such as water and power. But it is slow going. Many Iraqis are growing impatient

with the lack of order and public service.

Medical Services. Many Iraqi hospitals were looted after the dissolution of

the Iraqi government, causing widespread shortages in medical equipment and

medicine. In some cases, hospitals have been stripped of furniture and plumbing.

Some looters stole ambulances, or stripped them of their tires and other parts. Despite

these challenges, many Iraqi doctors and medical staff have persisted and have

managed to provide treatment in emergency situations. At some hospitals, staff took

up arms to protect their facilities from looting during the immediate post-war chaos.

The International Committee of the Red Cross has reported that hospitals have

varying levels of capacity and security. There are reports of dramatic increases in

diarrheal cases, especially among children, as well as confirmed cases of cholera in

southern Iraq. The situation at the hospitals has been complicated by an insufficient

clean water supply along with a lack of electricity.

Food Supplies. At present, food supplies seem adequate, in part because extra

rations were distributed prior to the war and because the World Food Program (WFP)

has increased its food deliveries through humanitarian corridors. There is a high

For more on humanitarian and reconstruction efforts, see: CRS Report RS31833 Iraq:

Recent Development in Humanitarian and Reconstruction Assistance.

CRS-40

dependence on WFP rations. Until their activities were suspended on the eve of war,

U.N. and other humanitarian agencies were providing aid to Iraq through the Oil for

Food Program, under which 60% of Iraq’s estimated population of 24 to 27 million

were receiving monthly food distributions. The WFP, Ministry of Trade (MOT) and

ORHA have launched a $2 billion post-conflict Public Distribution System (PDS),

which took effect on June 1.

U.S. Activity. Among the key policy goals the Bush Administration specified

when launching a war in Iraq was the economic and political reconstruction of the

country. An Office for Reconstruction and Humanitarian Assistance (ORHA),

staffed by personnel from State, USAID, Defense, and other agencies, was created

within the Pentagon for the purpose of implementing such a program, and it is now

deployed in Iraq. Until recently, retired Lt. Gen. Jay Garner headed the Office.

Recently appointed Presidential envoy to Iraq, Paul Bremer, is the senior official

responsible for the reconstruction program and the establishment of an Iraqi civilian

government.

The FY2003 emergency supplemental appropriations bill (P.L. 108-11) provides

$2.48 billion for an Iraq Relief and Reconstruction Fund, roughly $1.7 billion of

which is expected to be used for reconstruction activities. Most analysts expect Iraq

reconstruction needs to greatly exceed this amount , likely needing supplements from

other sources, such as additional U.S. appropriations, contributions from other

donors, debt reduction or rescheduling, and profits from oil resources.

According to the statements of U.S. officials and budget justification

documents, U.S. reconstruction objectives in Iraq include the formation of an Iraqi

Interim Authority (IIA), leading to a constitutional commission and establishment

of a new Iraqi government. U.S. assistance is envisioned for repair of economic and

social infrastructure – including roads, schools, hospitals, and markets. U.S. and

Iraqi exile experts are to advise each of the 23 Iraqi ministries. U.S. funds are

intended to support efforts to encourage adoption of reformed judicial, legal, and

electoral systems; to provide education to all children, and basic health care for all

Iraqis. U.S. advisers are expected to help promote appropriate macroeconomic

policies and open the Iraqi economy to free-market private enterprise.

Most reconstruction efforts are in their early stages. General Garner announced

earlier that he expected the nucleus of an interim government to emerge by mid-May

and be fully established by early June. On May 21, U.S. civil administrator Bremer

postponed the formation of an interim government until at least mid-July due in part

to security concerns. Some suggest that a longer time period is needed to insure that

the interim government is sufficiently inclusive of all political groups Contractors

and grantees have been selected to implement programs in seaport and airport

administration, capital construction, theater logistical support, public health, primary

and secondary education, personnel support, and local governance. However, there

are few reports of actual work on the ground. Bechtel is reportedly actively

undertaking a dredging operation at the port of Umm Qasr. Iraqi exiles and U.S.appointed advisers are taking up positions in Iraqi ministries. USAID grants are

being provided to meet identified community needs, such as a sports facility and

communications center in Umm Qasr. Civil servants, including teachers, are

reporting to work. However, as the time since the end of hostilities lengthens, there

CRS-41

is increasing criticism of the lack of observable progress in the reconstruction effort,

including slow restoration of domestic fuel and gasoline production, shortage of

supplies at hospitals, and lack of public order and essential services.

Major Issues Affecting Iraq’s Economic Future

Preconditions for Economic Development100

A number of key issues will need to be addressed in order to normalize Iraq’s

economic situation and to open the door to its normal future participation in world

commerce. These are conditions which must exist before any substantial economic

development can occur.

A first requirement is the re-establishment of civil peace. Some economic

activity can proceed behind walls or surrounded by armed guards. Generally, though,

little progress can be made in Iraq so long as looting and civil conflict continue.

International law requires that the occupying powers in Iraq “take all measures in

[their] power to restore, and to ensure, as far as possible, public order and safety.”101

The United States and its coalition partners have a few thousand soldiers

patrolling and performing police functions.102 Some commentators (military and

civilian) say that several multiples of the current total are needed. Some Iraqi police

from the former regime are also on duty. Additionally, several foreign governments

have indicated that they would be willing to assign police to Iraq to help restore

order. No final steps have yet been taken for internationalizing the police function

or restoring control to Iraqi police officials who are not tainted by their prior

connections to the old regime. In the meantime, U.S. troops are in the uncomfortable

position of serving both as the military instrument of the occupying power and as the

force providing civil police functions. The Iraqi public will likely have mixed

feelings about this situation. The situation is rendered more complex if, as has been

reported, some of the civil unrest and looting seen in recent weeks has been

perpetrated by supporters of the Hussein regime (or perhaps others) in hopes of

destabilizing the current scene.

A second requirement is the establishment of a legitimate government.

International law sets limits on the actions an occupying power may take and the

100

Prepared by Jonathan E. Sanford, Specialist in International Political Economy, Foreign

Affairs, Defense and Trade Division, with the assistance of Jennifer K. Elsea, Legislative

Attorney, American Law Division.

101

See: Hague Convention No. IV Respecting the Laws and Customs of War on Land, Oct.

18, 1907, 36 Stat. 2277, Annex art. 43 [hereinafter “Hague Regulations”]. See also:

Department of the Army. The Law of Land Warfare [hereafter “LLW”], section 363. This

is a compilation of the laws, prepared by the Department of the Defense and issued to U.S.

troops. See Department of the Army, Field Manual 27-10, July 18, 1956, updated July 15,

1976, at [http://www.adtdl.army.mil/cgi-bin/atdl.dll/fm/27-10/toc.htm].

102

Newsweek reported in late May that 2,200 additional military police would arrive soon

in Baghdad, bringing the total to 4,000. Joshua Hammer and Colin Soloway. “Who’s in

Charge Here.” Newsweek , May 26, 2003, p. 29.

CRS-42

initiatives it may pursue.103 Legally, under the Hague Regulations, an occupying

power may use movable assets such as money, equipment, and oil from existing

wells to pay current obligations, such as health care, schools, transportation

infrastructure and the administrative costs of the occupation regime, until a viable

Iraqi government is established.104 However, the occupying power must serve as a

trustee of the assets.105 Title for property does not pass to the occupation authorities

and property must be restored to its original owner at the end of the occupation.

Compensation to the owner may be required. The civil and penal laws of the prior

regime continue in effect and the occupying powers must enforce them (though they

can be altered, repealed or suspended if they constitute a threat to the security of the

occupying forces, restrict the political liberties of the subject population, or are

inconsistent with the duties of the occupant, for example, contravening international

law.)106 The occupation authorities may “regulate commercial intercourse in the

occupied territory [and] may subject such intercourse to such prohibitions and

restrictions as are essential to the purposes of the occupation.”107

Under the Hague Convention, the occupying power may not reorganize, sell,

allocate, restructure or otherwise alienate immobile property (such as oil wells,

forests, mines, or farms). It can control property to prevent its military use against

the occupant and to meet the humanitarian needs of the population, but that “measure

of control must not extend to confiscation.” The occupying power does not have the

right of sale or unqualified use of such property.108

In 1967, the United States insisted to Israel when it held Egyptian oil fields that

it could not drill new wells or otherwise develop those facilities.109 The 1967 case

103

For a discussion of this, see the CRS General Memorandum “The Law of Belligerent

Occupation: Rights and Responsibilities of an Occupying Power Regarding the Use of Oil

Resources,” by Jennifer K. Elsea, CRS American Law Division, April 8, 2003. See also

testimony by Robert Ebel, Director of the Energy and National Security Center at the Center

for Strategic and International Studies (CSIS) before the House Energy and Commerce

Committee Subcommittee on Energy and Air Quality, May 14, 2003. Several authorities

are cited on current issues and the rights and responsibilities of an occupying power.

104

See generally ERNST FEILCHENFELD, THE INTERNATIONAL ECONOMIC LAW OF

BELLIGERENT OCCUPATION (1942). Hague Regulations art. 53, 55; LLW, sections 399, 400,

402-404.

105

Hague Regulations art. 55; 2 OPPENHEIM’S INTERNATIONAL LAW § 166 (7th ed. 1952)

[hereinafter “OPPENHEIM”].

106

Hague Regulations art. 43 (requiring the occupant to “respect[], unless absolutely

prevented, the laws in force in the country”); LLW sections 369-72.

107

LLW section 376.

108

LLW, sections 399, 402. Hague Regulations art. 53.

109

See United States Department of State, Memorandum of Law (Oct. 1, 1976), reprinted

in 16 I.L.M. 733 (1977). But see Evan J. Wallach, The Use of Crude Oil by an Occupying

Belligerent State as a Munition de Guerre, 41 INT’L COMP. L. Q 287, 296-300 (1992)

(documenting that U.S. and Allied practice during post-WWII occupation of Europe was to

treat oil as war material). Jordan J. Paust asserts that “an occupying power cannot engage

(continued...)

CRS-43

is complex, as it involves privately owned assets and plans for using the oil for the

benefit of Israel itself. Some authorities believe the occupying powers in Iraq can

drill new wells if the proceeds are used to benefit of the Iraqis.110 Others disagree.111

In any case, the principles of trusteeship would apply. Any contracts, regardless of

the nationality of the companies, could last no longer than the occupation, and would

be subject to Iraqi contract law. Some assert that actions favoring U.S. firms, over

and against those of other countries such as Russia or France, would likely be

contrary to the requirements of the Geneva and Hague conventions.112

Iraq has strict laws (put into place during the prior regime) limiting foreign

investment in the country. Under the provisions of the Hague and Geneva treaties,

they cannot be altered by the occupation authorities – except perhaps to facilitate the

needs of the occupation regime – until a new independent government decides

whether they should be changed. The occupation authorities can establish courts,

with binding permanent authority to adjudicate among conflicting property claims.113

In Iraq, such courts could sort out the conflicting claims of foreign firms that signed

contracts with the former regime (for the development of oil fields, for example.)

However, it could not substitute parties having no such claims for the exiting

claimants. The occupation authorities could also defer action on these claims until

a new Iraqi government in place to evaluate and decide them.114

On May 22, 2003, the Security Council directed, in Resolution 1483, that

countries should transfer to the Development Fund for Iraq (see below) any financial

109

(...continued)

or participate in ‘privatization’ of Iraqi oil or the state-owned oil production and distribution

industry and must not tolerate rates of extraction beyond prior ‘normal’ rates of extraction

or excessive fees or profits by others administering such properties.” He notes that

violations of these provisions of the Hague convention would be a war crime. See: “The

U.S. as Occupying Power over Portions of Iraq and Relevant Responsibilities Under the

Laws of War.” Available from the National Institute for Military Justice web site,

[http://www.nimj.com].

110

Gerson argues that the development of such assets will make them more valuable when

they are returned to local control, so long as they are not spoilt or exhausted. Allan Gerson,

Notes and Comments, American Journal of International Law 71:725 et seq. (1977).

111

Langenkamp says that the consensus of legal opinion is against such expanded use. R.

Dobie Langenkamp. What Happens to the Oil: International Law and the Occupation of

Iraq. Unpublished paper, National Energy-Environment Law and Policy Institute, University

of Tulsa College of Law, January 17, 2003. . 18. Available from [http://energy.uh.edu].

112

See: Suzanne Nussell, in Legal Affairs, May-June 2003, cited by Ebel in his May 14,

2003 testimony. She says that new production could be developed so long as preference is

not given to U.S. firms. Earlier Jessup said the occupant’s use of property has “a solid basis

in law” if, among other things. the use is “not for his own enrichment.” Philip Jessup. “A

Belligerent Occupant’s Power over Property.” American Journal of International Law

38:461 (1944). Langenkamp says, op. cit, pp. 39-40, that efforts by the occupation

authorities in Iraq to use Iraqi oil output to push down the world price of oil, to the benefit

of their home economies would violate the Hague rules.

113

Hague Regulations, art. 43.

114

See Langenkamp, op cit, p. 25.

CRS-44

assets or economic resources in their territory belonging to the Iraqi government or

to officials of the former regime.115 Claims by private individuals on those funds or

assets will be held in abeyance until decided by an internationally recognized,

representative government of Iraq. Earlier, the Administration had asked other

countries to transfer Iraqi assets, frozen in 1990 and 1991, to the occupation authority

for use in Iraq. It also asked countries to turn over illicit Iraqi funds. The U.S.

Treasury Department announced serious penalties for foreign governments and

financial institutions that fail to turn over such funds.116

Unilateral action by occupying powers without confirmation by recognized local

authorities may be questionable. In an extreme case, the Japanese and Germans were

found to have committed war crimes during the second world war, when local

officials in puppet regimes allowed them to make permanent social and economic

changes and to remove assets and develop resources for the benefit of the occupying

power. By contrast, in Japan after 1945, U.S. occupation authorities worked through

the existing Japanese government to effect major changes. In Germany after 1945,

the quadripartite agreement for the post-war administration had broad international

support, including support by the wartime United Nations.

Most authorities believe that Iraq will need a legitimate government before

permanent changes can be made in its laws, economy and institutions. Moreover, it

would likely need a government which is broadly recognized by other countries.117

Some believe the occupying powers have the authority to create mechanisms for the

establishment of a new Iraqi regime. Others believe that an international body, be it

the United Nations or another body, must be involved in the process.118 In

Resolution 1483, the U.N. Security Council created a process, involving a Special

115

United Nations Security Council Resolution 1483, document S/2003/556.

116

Treasury General Counsel David Aufhauser observed, in testimony before the House

Financial Services Committee on May 14, 2003, that the USA PATRIOT Act gives the

Secretary of the Treasury authority to require U.S. financial institutions to take appropriate

countermeasures against foreign jurisdictions or foreign financial institutions that the

Secretary finds to be of primary money laundering concern. He noted that the

Administration was asking foreign governments and institutions to turn over all Iraqi assets

that might belong to Saddam Hussein or his associates. He stated that “Should it be

necessary, a jurisdiction’s or a foreign financial institution’s refusal to search for and

eliminate accounts holding illicit proceeds may fall within the purview of this [legislation].”

In other words, the Administration might cut off their access to the U.S. financial system if

countries or institutions failed to comply with the U.S. request. Aufhauser did not say how

illicit assets owned by members of the prior regime could be distinguished from assets held

abroad legally by other persons or by agencies or instrumentalities of the Iraqi government.

117

Countries may not recognize regimes installed by a foreign power. See Restatement of

the Foreign Relations Law of the United States, 3d ed., 1987, § 203 (2) “A state has an

obligation not to recognize or treat a regime as the government of another state if its control

has been effected by the threat or use of armed force in violation of the United Nations

Charter.” Also “In principle, an unlawful successor should not succeed to rights in property

or to rights under a contract, but the illegality of the succession should not be a defense to

the responsibility of the successor state for the debts of the predecessor.” Id. comment h.

118

For a discussion of this issue, see CRS Report RL31871, Post-War Iraq: Potential Issues

Raised by Previous Occupation and Peacekeeping Experiences, April 24, 2003.

CRS-45

Representative appointed by the Secretary General, whereby an interim and a new

sovereign government could be created for Iraq. It is unclear whether the occupying

powers must use this procedure and whether they will avail themselves of it.

The next concern for Iraq would be lifting of sanctions and other restrictions

on its freedom to transfer assets, receive or make foreign investment, and buy and sell

in world markets. The U.N. Security Council moved far in this direction on May 22,

in Resolution 1483, when it rescinded almost all the trade and financial restrictions

embodied in the earlier sanctions regime. (Restrictions on military supplies not

needed for police functions were retained.) Foreign investors and lenders are

unlikely to transfer assets to Iraq so long as the status of its existing debt is not

clarified and its immunity status (see below) remains in effect.

The resolution also approved a mechanism (replacing the OFFP) whereby Iraq

can export oil without legal doubt as to the authenticity of the sale. Under the plan,

SOMO can sell Iraqi petroleum through normal commercial channels. Of the

proceeds of those sales, the Security Council directed, 5% shall be transferred to the

U.N. Compensation Fund, which addresses claims by individuals, firms,

governments and other for direct losses or damage caused by Iraq’s invasion and

occupation of Kuwait. The remaining proceeds of those sales are to be placed –

“until such time as an internationally recognized, representative government of Iraq

is properly constituted” – in a Development Fund for Iraq, an account held by the

Central Bank. The DFI will be audited by independent public accountants reporting

to a special international advisory board.

The Security Council said that the occupation authorities (the “Authority”) can

use the resources in the DFI – in consultation with the Iraqi interim administration

– for specified purposes. These are (1) to meet the humanitarian needs of the Iraqi

people, (2) for economic reconstruction and repair of Iraq’s infrastructure, (3) for the

continued disarmament of Iraq, (4) for the costs of the Iraqi civilian administration,

and (5) for other purposes benefitting the people of Iraq. The leeway the occupation

authorities may have in their interpretation of this last purpose will depend

considerably on the overall scope of their authority in Iraq.

Resolution 1483 seems a careful weaving together of the authorities held

respectively by the Security Council and by the occupying powers. A certain degree

of ambiguity may have been left for resolution in the future. The Council notes (but

did not itself create) the DFI, which was established by the occupying powers. It

underlines (but did not direct) that Iraqi oil revenues shall be used for purposes that

were previously announced by the occupying powers. However, it directs that a

portion of those revenues shall be transferred to the Compensation Fund. It transfers

$1 billion from the OFFP to the DFI and it directs that member states shall transfer

frozen Iraqi assets to the DFI. In that case, its underlining of the purposes of the DFI

seem to be conditions under which that $1 billion and the frozen assets may be used.

The Security Council calls on the occupying powers, consistent with the U.N.

Charter and other relevant international law, “to promote the welfare of the Iraqi

people through the effective administration of the territory.” It may be, but it is not

evident, that the Council conferred new powers on the occupation authorities. It

recognizes the “specific authorities, responsibilities and obligations under

CRS-46

international law which they have as occupying powers.” It calls on them to act in

a manner consistent with the U.N. Charter and international law. It also calls upon

“all concerned” to comply fully with their obligations under international law,

“including in particular the Geneva Convention of 1949 and the Hague Regulations

of 1907.”

The Security Council included in Resolution 1483 provisions whereby longterm changes could be made in Iraq. It said that the Special Representative appointed

by the Secretary General shall promote, in coordination with the occupation

authorities, “economic reconstruction and the conditions for sustainable

development, including through coordination with national and regional

organizations, as appropriate, civil society, donors, and the international financial

institutions.” The syntax of this phrase makes interpretation difficult. However, it

would appear that the Special Representative may promote the implementation of

conditions which are conducive to long-term development in Iraq. The word

“sustainable” would suggest that changes in current procedures and institutions

would be possible, so long as broad consultation occurs. Presumably, those changes

will have validity after the occupation period is concluded.

It is less certain that unilateral actions by the occupation authorities which

exceed their legal mandate under the Hague and

This text is long and has been trimmed here. Open the source document for the complete record.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.