Tuesday, May 21, 2013

Iraq’s economic instability: The past, the present and the future

Iraq’s economic instability: The past, the present and the future

During the period 1970 to 2010, Iraq experienced three types of conflicts. First: internal conflicts mostly between the central government and the Kurdish community in the North and between the government and the oppositions. Second: external conflicts such as the war with Iran (1980-1989), Saddam’s invasion of Kuwait and the ensuing Gulf War that led to a worldwide military coalition to evict him by force. This was followed by total UN sanctions, which lasted until the toppling of the regime in 2001 by the Americans. The 1980s also witnessed serious internal conflicts; largely a rising religious opposition met by government crackdowns. Third: political conflicts related to the occupation that began in 2001 following the US military. The 2000s has been very violent. Violence included a near civil war, ethnic killing, civil unrest, score-settling, and military confrontation between the central government and the Kurd.

Instability adversely affects economic development and progress. I would like to compare the economic instability of Iraq with that of Iran. The two countries share the decade of war from 1980 to 1989 and so should have a similar magnitude of instability. Iraq, however, continued its waring activities throughout the 1990s and until recently, whereas Iran avoided wars. Given these facts, one would expect Iraq to be the more volatile economic environment of the two.

The Penn Table 7.1 is the most recent world data.[1] Figure 1 plots the purchasing power parity (PPP) – converted real GDP per capita in levels for Iraq and Iran from 1970 to 2010. First, clearly Iran is much richer than Iraq. Its income per person averages approximately 9000 international dollars per head, whereas the Iraqi average income per head is 3500 international dollars. Second, both Iraq and Iran benefited from the oil shocks in 1973 and 1979. Income per head peaked at 17000 dollars in Iran and 6000 dollars in Iraq. Third, both countries suffered during the war period from 1980 to 1989. Average income per head plummeted to 8000 dollars in Iran and to 4000 dollars in Iraq. During the 1990s, Saddam invaded Kuwait in 1990. In 1991, he was evicted by force and the UN subsequently imposed devastating economic sanctions, which lasted until 2001. During that decade Iraq’s average income per head was approximately 2500 dollars, which is less than half its average income per head in the previous decade. Iran’s average income per head only slightly increased because Iran managed to avoid major conflicts.

I compute the average income per head growth rate and its standard deviation for the decades 1970s, 80s, 90s, and 2000s for both countries. The standard deviation measures the distance from the mean, which is a common measure of uncertainty, instability and variability. I found some interesting facts. First, Iraq’s growth rate during the 1970s was 7.74 percent, while Iran’s was 0.09 percent. This is a significant difference. It might be because Iraq grew from a very low base during the 1960s. There are no data for this period for Iraq, but Iran’s average GDP per person growth rate for the period 1960 to 1969 was 6.54 percent, which is relatively high. Those who lived in Iraq during the 1970s, like me, felt the development and progress achieved in 10 years. Although both are relatively large in magnitudes, the standard deviation is much higher in Iran, 12.75 compared to 8.43 in Iraq. These countries were experiencing high uncertainty and variability.  High uncertainty notwithstanding, one must conclude that Iraq was doing rather well and much better than Iran in the 1970s. Second, during the war (1980-1989), both countries grew at negative rates of -4.1 and -4.9 percent, respectively. The standard deviations were identical and very large (10.12 and 10.11 for Iran and Iran, respectively), which suggests that both economies were equally unstable. The war reduced economic growth and increased instability and uncertainty. Third, Iraq continued its war adventures in the 1990s, while Iran did not. Iraq’s average income per person growth rate over the decade 1990-1999 was 1.3 percent, while Iran grew at a healthy rate of 2.65 percent a year. The standard deviation of Iraq’s income per person rose to a whopping 41.75 and that of Iran was cut by half to 5.29. The combination of wars and sanctions completely broke Iraq’s economy and the problems continued to the next decade and persist now. This period was the worst in Iraq’s modern history. Fourth, for the period from 2000, during the US invasion and occupation of Iraq and until 2010, Iraq’s growth of income per person remained 1.3 percent a year whereas Iran managed to grow at a very healthy and fast rate of nearly 5 percent annually. Economic uncertainty continued in Iraq, with a standard deviation of approximately 20, while Iran’s was halved again to 2.6 percent. Although Iran keeps growing and improving its economy by staying out of conflict, Iraq’s has not found its way to resume development and growth even under different political and economic circumstances.

In conclusion, Iraq’s economy is severely broken. That it survives at all is attributable to increasing oil prices. Its productivity and labour utilization rates must be just as low as its income per person growth rate. Uncertainty has been clouding everything. It is hard to expect any improvement especially when the whole Middle East is in turmoil. Even if the political situation in the region improves, wars cease, and normality returns, Iraq will need a miracle to get to where it was in the 1970s.   

Figure 1

[1] Alan Heston, Robert Summers and Bettina Aten, Penn World Table Version 7.1, Centre for International Comparisons of Production, Income and Prices at the University of Pennsylvania, July 2012.