new economic model for iraq future vision and market ... · that paves the way for the...

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2012-06-01

New Economic Model for Iraq Future

Vision and Market-Oriented State

Corporations Foster Liberalization of

Oil-Rentier Economies

Al-Saadi, Sabri Zire

Naval Postgraduate School (U.S.)

Culture and Conflict Review (Summer 2012), v.6 no.2

http://hdl.handle.net/10945/27393

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THE CULTURE AND CONFLICT REVIEW

A New Economic Model for Iraq: Future Vision and Market-Oriented StateCorporations Foster Liberalization of Oil-Rentier EconomiesSabri Zire Al-Saadi, 6/1/2012

Introduction

Iraq’s loaded experience is a thought-provoking case for better understanding of the potentialities of theoil-rentier developing countries. Over the last six decades, Iraq underwent radical economic and violentpolitical changes. Since 1952, oil revenues play an important role in the country's economic, social, andpolitical development. During the 1950's, 1960's & 1970's, the governments’ utilization of oil revenues,though not always efficient, was promising for building the country’s infrastructure, increasing economicgrowth, as well as improving the living standards. Significantly, the economic model of the 1970's wascharacterized by the dominance of the state where the share of public sector in GDP has substantiallyincreased, especially in crude oil and mining extraction industry, petrochemical industry, banking, trade,manufacturing industries, and agriculture. However, since 1980, Iraq has suffered from majordevastating three wars and economic decline and costly political events that resulted in the fall ofSaddam’s dictatorial regime which followed by more deterioration of the prevailing conditions. In additionto the political and security problems, Iraq at present is facing many difficult socio-economic challenges:the poverty; sluggish real growth; high unemployment; low productivity; low standards of living; andwidespread corruption.

In a wider geopolitical context and given the lessons learned from recent global financial crises andworld economic slowdown, Iraq’s awaited economic model that should benefit from the actualexperience of globalization positives and negatives, could also generate far-reaching political andeconomic impact on the security and prosperity of the unstable strategic Middle East region that is richin oil and gas.

Oil-rentier countries have many differences in their political, social, demographical characteristics, thelevel of industrial production capacities, the diversity of their natural resources, and their GDP per head.However, they have an important similarity in the dominant role of oil wealth on the political economyand social development' process. All these countries are dependant heavily on crude oil exports forfinancing the aggregate demand, and the economic dynamics is manipulated by public enterprises andthe macro fiscal and monetary policies.[1] Significantly, in addition to using the accumulated oilrevenues; i.e. "sovereign funds", the oil-rentier states owned and control the crude oil and gasindustries, as well as have the major shares of the basic industries; namely, the petrochemicals, steel,electricity, and banks. Evidently, oil revenues have been stimulus to economic growth, but not enoughfor the expansion of domestic capacities to produce goods and services and trading. Also, irrational useof oil-revenues restricts the drive for economic and political liberalization because of the negativedynamics of the "excessive" oil revenues that finance the "exorbitant" government expenditures. Anoutcome of this dynamics has been the increase of financial burden of the public enterprises thoughmost of them were based on technically and economically feasible studies. In addition, domestic energysubsidies and increasing energy consumption add more constraints to its economic reforms.

Also significant, oil exports have been subject to the risk of external unfavorable conditions; namely, theinterruption of unpredicted political and economic events in the short-run, and the upwards trend ofusing renewable and nuclear energy resources by the industrialized countries in the long-run. Therefore,

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emphasis on lessening the economy's dependence on oil should be considered by those countries as aprime objective of their economic strategy and reform.

This paper analyses Iraq’s experience and prospect as a case that highlights the most likely process ofeconomic growth in the oil-rentier countries under the conditions of economic diversification strategy.[2]The review of oil fortune’s influence on the political economy, especially during the painful and verycostly nine years experience of post-Saddam period, suggest that alternative of economic strategy andpolicies including public investment priorities should replace the current fragmented and irrelevantliberalization measures which have been imposed by the US occupation authority and applied in adisarray practices by the governments. Different from the widely practiced market reforms in developingeconomies, Iraq needs a profound change for restructuring the economy to be less dependent on oilsector and be more competitive and stable. In view of the causes and actual remedies of the recentglobal and Eurozone financial crises, the question is; what kind of new economic model Iraq mustadopt? Is State Corporations Model (SCM) or in aggregate–term, the State Capitalism Model, where theindependent management of big industrial public corporations that are powered with freedom ofinitiative, innovation capacity, and entrepreneurial skill which fit market competitiveness’ conditions, doesthe trick of accelerating economic growth and help the efforts for structural changes and liberalizingIraq's oil-hostage economy? If so, what are the necessary conditions of this new model?

It should be noted that for identifying the required policies, neither the basic assumptions of neo-classical economics where the macroeconomic policies justify the role of the state for increasing growth,nor the classic economics of capitalism where the “invisible hand” of the free market and profitmaximization of corporations that stimulate growth, are relevant to tackle the structural economicproblems and social development of Iraq as a developing oil-rentier economy.

The Complex Challenge

Although the basic remedies for dealing with the main problem of oil-rentier economies have beenwidely debated for a long time,[3] elaboration and modification to the earlier proposals are required tomatch the prevailing new conditions and avoid the crises’ consequences of the economic globalizationera including the increasing measures of protectionism. For Iraq’s prospect, new economic planningeffort, policies and measures are also essential; namely, formulation of the goals of the “ignored”“national future vision”, refining the priorities of the long-term economic strategy, programming thestructural economic reforms, identifying the relevant macroeconomic policies, and developing theincentives for Foreign Direct Investment (FDI) for indigenizing high-technology industries. Also essential,clarifying the conditions and pace for economic integration into the world economy in view of the policyimplications of recent global and Eurozone financial crises and the slowdown of the world's economicgrowth.[4] At the heart of Iraq’s required economic strategy lies a well-defined economic diversificationplan that has to be implemented by the government in the medium and long-term.

For the developing and emerging economies, expanding production capacities have been given prioritynot only for increasing the production of goods and services and trading, but also for improvingproductivity. In this process, both growth and competitiveness are enhanced by economic diversificationthat has several benefits for the developing as well as developed countries. Diversification ensuresstability against the risk of market uncertainty, promotes diffusion of technologies, and provides flexibilityto inter-industry linkages, trade, labor market, and other factors of production. However, unlike theexperience of most developing countries, efforts for economic diversification in the oil-rentier countriesmust not be directed mainly at increasing the role of the private sector that has small capacity and littleinnovative and entrepreneurial skill. Instead, the state should seize the opportunity of having substantialamount of "sovereign oil fund" for increasing investment in the leading industries. Indeed, oil revenuesprovide enough financial and foreign currency resources for investment in new industrial enterprises inaddition to building the physical, social, and environmental infrastructure projects. The state interventionand facilities coupled with the application of different approach to the management operation andobjectives of the public enterprises should be applied in order to lead the nation's effort for fosteringeconomic diversification, increasing production and productivity, and sustaining competitiveness. Suchnew approach implies that the benefit from globalization and the integration into the world economyshould be conditioned by the state long-term economic strategic objectives. Also, it implies that thepublic enterprises management should learn from the failure of past experience and instead apply theprivate corporations' management skill, creativity, business initiatives, and entrepreneurial of the marketeconomy. These steps that develop the objectives and operation criteria of the old fashion managementof public sector enterprises into big market-oriented state corporations that constitute the base of"SCM,"[5] which is, at this stage of development, essential for the success of economic diversification



that paves the way for the liberalization of the oil-hostage economies.

In a wider context, since it is necessary to ensuring the flow of crude oil, minimizing the cost of energyresources, and protecting global environment; liberalization of these economies also serves the interestof maintaining sustainable growth of the world economy. Even the application of partial measures ofeconomic reforms such as the reduction of energy subsidies and rationalizing the consumption ofenergy must be considered within the overall economic diversification strategy.

In reality, the application of the suggested remedy is not an easy task. It is difficult, but it is also apromising medication. Similar to the cautious use of pharmaceutical drugs in medical treatment thatavoids the risk of letting the patient fall in the self-destructive illegal drugs addiction, Iraq’s oil-rentshould be carefully utilized in dealing with the existing chronic structural economic problem, theamounting social problems, the political instability, and the stalled democracy. This is in contrast to theadventure of exercising loose liberalizing practices and falling deeper in the harmful spiral trap ofcontinuous increase of government spending that hangs on "excessive" increase of oil revenues andsuccessive finance, which resulting in the expansion of public and individuals consumption beyond thecountry's non-oil production capacities. At present, the misuse of “exorbitant” spending of the public oilrevenues through the inconsistent and inefficient macroeconomic fiscal, monetary, investment, and tradepolicies and measures have crippled more the Iraqi economy. The effects of misuse of oil power ondomestic politics have also been harmful. Equally serious, the continuous dependence on oil revenuesaffects negatively the good social values of work and nurtures the seeds for over-relaxation in a rentierculture.

While the world’s experience has ascertained the benefits of the globalization thrust; i.e. stimulate theimprovement of productivity, business entrepreneurial, and competitiveness, Iraq’s experience provideevidence that no concrete justification allows the dominance of the global financial and trade regulationsand priorities over the need for indigenous structural economic reforms and the required macroeconomicpolicies that fit the domestic market conditions.

Politically, freedom is the most precious right of the human beings that cannot be sustained withoutensuring the basic living needs for the people. Fortunately, the Iraqis have regained their basic libertiesafter painful suffering and huge sacrifices for a long time, with the historically significant help from theUS, Britain, and their Allies in toppling the former dictatorial regime on 9th April 2003. Thisaccomplishment has been a necessary condition for preserving the citizen's integrity and paves the roadto economic prosperity, social progress, flourish democracy, and culture welfare. Although theseobjectives have not yet realized, Iraq will ultimately rise again as an independent, stable, prosperous,and democratic country since it is endowed with rich resources, and most likely this free andmulticultural nation shall be inspired by the vision of "what Iraq's future ought to be," rather than "whatIraq's future could be."

However, at present, it is even more demanding for Iraq to consider that the growing worrying of certaindomestic negative factors: the continuous political instability; ineffective governments; and the paucity ofthe liberal and democratic parties. These factors that are enforced by the wide anticipation of holdingexcessive oil revenues in the near future, could quickly drive the ruling authority with the influence of USand IMF - consciously or unconsciously – to follow the prevailing political economy' model practiced bythe oil-rentier states in the Gulf region.[6] In fact, such trend has been partially experienced in Iraq byKurdistan Federal Government (KFG). Unfortunately, this model is neither suitable for Iraq’s economicdevelopment as envisaged by the citizens before and after the fall of the former regime, nor wouldcontribute to the political stability of the ME region. Alternatively, based on the predictive dynamics of theIraqi economy,[7] and reassured by certain successful foreign experiences of state capitalism model,[8]the priorities and criteria for utilizing oil fortune in tackling challenges facing the country should beradically changed.

Oil Governs the Future

The strategic importance of crude oil as a main source of global energy, as well as a major source ofincome and foreign currency for the developing oil-rentier countries are indisputable facts that need notto be emphasized. For other concerned parties: the oil consumer countries are trying to maintain thesupply flow of oil at lowest prices; the major international oil companies are interested in maximizing theprofit for their shareholders; and the oil traders and financial speculators are cleverly exploiting thefinancial benefits of the oil price fluctuations in the world market. However, unlike the interests of theconsumer countries, the oil companies, the oil traders, and the speculative investors in oil prices, Iraq



has different priorities. It is not only increasing the value added of oil, but it is also essential for Iraq,expanding the non-oil industrial production capacity, improving the living standards, promoting socialprogress, maintaining "just" distribution of public wealth, sustaining political stability, and encouragingdemocracy practices. In addition, by appreciating the need for environmental and natural resourcesdevelopment and considering the interests of next generations, especially in regard to the depletion ofcrude oil and natural gas resources, the call for "sustainable development" is therefore more appropriatethan to focus the efforts on only economic growth and stability similar to the practices of the developedcountries. A significant difference is that, unlike the guidance of economic efficiency criteria for theallocation of the tax payers' money through the government fiscal policy, oil revenues that finance thegovernment expenditures which dominate the aggregate demand are owned by all "Iraqis" regardless oftheir individual income and wealth. The implication is that the priorities for the allocation of oil revenuesare bound to be different from the macroeconomic policies that are generally suggested for thedeveloping countries.

In a modern state, respect of basic human rights: the liberties; security; rule of law and public order; andthe provision of basic education and health services, clean water, housing, and electricity, are allfundamental conditions for economic progress and social welfare. Application of these norms requiresgood government’s management for the utilization of oil wealth.

The country’s experience showed that neither the mummified policies of the highly centralized andcomprehensive socio-economic development planning and the dominance of role of the rigid publicsector enterprises of the totalitarian former regime, nor the current loose application of the panaceaeconomic reforms and policies of the IMF and the World Bank that are strongly backed by the USpolitical influence, are relevant to deal with the existing acute economic and social problems.Specifically, the post-war inhomogeneous governments that are flying blind with the application of non-conditional liberalization policies have miserably failed to ensure the minimum conditions for economicand social development despite of the availability of financial and foreign currency resources.

Since the fall of the former regime, Iraq’s problems have not eased and the country is still facing notonly the political instability and insecurity miseries, but also the challenges of the faulty structuraleconomy, high unemployment, widespread poverty, lack of basic needs and public services, low privatesavings, insufficient physical infrastructure, and increasing corruption that put the authority of thegovernment and public institutions at high risk of losing the control completely. Nevertheless, if oil wealthused efficiently, not only the economic objectives could be achieved, but it would also release the socialtension arising from the sectarian conflict, combating the religious extremism, and depriving theadvantages of the terrorist and the anti-liberal groups from the existing social discontent environment.Under the present circumstances, the government holds the oil power that could positively influence thecountry’s future development. Hence, a democratically elected and politically committed government canuse rationally this massive power of oil-rent for the benefit of Iraq.

Iraq’s Political Economy

With the great power of oil wealth,[9] the Iraqi central government makes the choice between the crucialeconomic alternatives,[10] rather than the citizens or the labor unions or the public enterprises or theprivate companies or the business entrepreneurs or the local authorities. Hence, for assessing Iraq’seconomic prospect, what matters is the awareness of the behavior and dynamics of the governmentconduct the allocation of oil revenues.[11] The government’s policies have been influencing themacroeconomic events; i.e. they are making the choice between main alternatives in production,distribution, consumption, and investment, especially for the reconstruction of public infrastructure, butthey were deplorably inefficient and insufficient.

Unfortunately, for a long time, the nation could not establish a democratic regime capable of ensuringefficient utilization of the country’s natural and human resources. In post-Saddam period, it was not goodenough to change the policy-making players and personalities. What is more important is the rightchange of the country’s objectives and policies as part of overhaul change in the political culture andeconomic thinking. The governments have missed the relevant macroeconomic and social priorities andintended to play populist politics that in turn caused more waste of public resources and loss ofdevelopment opportunities. Indeed, the task of designing and implementing the required economicstrategy and policies, as well as identifying the investment priorities cannot be performed by the weak orideologically rigid government who relied heavily on oil revenues.[12] Instead, Iraq needs a forceful andinspiring political leadership that has a clear progressive future vision and is capable to lead the people,the entrepreneurs, the business community, and the private companies to establish a rigorous economic



system with the help of oil wealth. Regrettably, the existing political structure and process is unqualifiedto allow the emergence of such leadership that could make the right political and major economicchoices. So far, the political arrangements – developed under the circumstances of fear and mistrustamong social and political groups and lack of confidence in politicians – have produced ineffectivedominance of religious; Shiite and Sunni, and the Kurdish nationalist parties, both have strong butvague ideological commitments, though in different degrees, as well as produced very weak andfragmented liberal and democratic parties who should play at least a positive role in opposition.[13]Also, the experience have missed the importance of effective non-governmental organizations and theparticipation of the civil society groups in monitoring the government’s decisions and enhancing thedemocratic practices although many of them have been officially licensed.[14]

The weary and farcical experience of the government-forming process and the current inhomogeneouscoalition government that followed the successful general election of 7th March 2010 and ended innominating the Prime Minister on 11th Nov. 2010 and the government finally formed in 21st Dec. 2010,revealed how unstable the political power-struggle and indecisive compromise among the dominantparties is.[15] It perpetuates the ineffectiveness of the political leadership and adds to evidence that thedemand for political reform is urgent. The constitutional law, the election rules, the legal and executiverights of the state and the government hierarchy, and the political institutions and facilities for smoothtransfer of the authority’s power, must be all reformed. In addition, the stagnation of the non-oileconomic activities, especially the public sector enterprises, needs policy and institutional reforms. Alsoessential, by gradual increase of the contribution of taxes on income and profit,[16] and other sources ofpublic finance, it would generate an impetus that improving economic efficiency and enhancing thedemocratic practices, as well as restoring the government integrity.

In politics, pragmatism is normally practiced for regulating and manipulating the political processes,whereas in development economics it is essential to strictly observe policy objectives based on pre-determined priority criteria. Also, it is a common knowledge that freedom and political stability constitutenecessary, but not sufficient, conditions for economic and social development. In democratic practices,when the country is facing unexpected problematic events, the government usually invites the opinionsand remedy proposals from different concerned parties: the political opposition; the independent andnon-partisan groups; and the professional experts. Ironically, in Iraq, where there are amounting socio-economic and political problems, the government and the dominant political parties were not open toindigenous opinion and had no appetite to consult independent and qualified native advisors thoughthey had no clear and consistent economic strategy and policies.[17] Indeed, the ruling authorityincompetence is beyond imagination as can be shown by the following striking example. The membersof the "working group responsible for identifying the economic policy for Iraq": the Vice PM and Head ofEconomic Committee of the Parliament; Minister of Finance; Minister of Oil; and the Head of PublicFinance Editing Diwan (office), have had their first meeting on early February 2012; that is to say nineyears after the fall of the former regime, in order to identify the main economic challenges facing thecountry. The meeting's outcome is astonishingly brilliant! The members of the committee have justdiscovered that there are seven economic challenges facing Iraq. These are: transformation to marketeconomy; unemployment; chronic inflation; structural imbalances of the economy; foreign debt;rebuilding the infrastructure; and the legacy of the laws and regulations of the former regime.[18] Whatan outstanding visionary performance!

It is unfortunate that the authorities who are “isolated in their offices”, not only ignore non-governmentalviews and proposals, but also they shrink from engaging themselves in public debate or giving formaleconomic policy explanation. Such negative attitude was not only a result of poor economic knowledgeand audacity, but most important, it was the temptation of using the abundant oil revenues easily indefusing temporarily the daily demands of the people.[19] The renewable proposal for distributing someof oil revenues among the citizens is an example.[20] Significantly, by relying on foreign consultanciesand experts especially of the IMF, WB, USAID, and other institutions for economic advice, thegovernments surpass the role of indigenous expertise and advisers who are, the least to say, morefamiliar with the country’s reality.[21] Actually, the non-restricted and non-productive spending of theexcessive oil revenues by the government and, indirectly, by the political parties has saved theirexistence by releasing the pressure of public discontent and demand though temporarily. In general, it isvery hard to imagine how these incapable governments and parties could have survived without the useof the public oil revenues. They were very lucky indeed. Oil revenues have been extensively used tocarry on the state's functions and activities, especially in maintaining security and rebuilding the army, aswell as in influencing the domestic politics in pragmatic ways. In 2010, the total salaries and wages ofthe civil servants constituted 47% of the annual budget's operational expenditures, in addition to the



expenditures of the parliament activities and the presidency office that totaled 8% of the budget. Inreality, oil revenues have been used as an extinguisher instrument for fighting brushfires, but not asstrategic development factor which needs strict application of efficient allocation criteria under publicapproval and observation.

In Iraq's extraordinary difficult circumstances, pragmatic measures are not entirely unacceptable. In fact,even in a normal and politically stable situation, pragmatism is followed for dealing with the suddenmajor political, social, and economic change of events.[22] But the problem with the Iraqi ad-hocmeasures and inconsistent policies lies in the fact that both the government and the political partiesneither have viable national future's vision and clear economic and social strategic goals, nor committed,individually or collectively, to a specific number of objective' priorities. Such a vague situation confirmsthat there is no factor more important than the use of oil wealth in influencing Iraq’s reality and shapingits future beyond the interest in increasing non-oil financial contribution to the annual budget.

In addition to the extremely difficult security circumstances, the governments’ incompetence thatsustained by the application of the flaw economic policies and self-interest measures, have led not onlyto the apparent economic failure, but also encouraged the corruption that reached extremely seriousedge threatening the effectiveness of the government and public institutions, as well as affected thesocial morality values. Corruption, as it is known, means the use of public resources and the state powerfor serving self-interest. This is exactly what is happening in misusing oil power on a large scale.

The citizens’ high expectations vis-à-vis the government’s fading promises have resulted in credibilityloss of the government and the dominant political parties as reflected by the widespread skepticism andpassive attitude among the citizens. In turn, the credibility wane adds more pressure on the rulingauthority to increase public spending and finally increase the economy reliance on oil revenues.

Due to its strategic geopolitical position in the unstable ME region,[23] it is most likely that the followingexternal factors could also affect Iraq’s political economy:

1. The US has strategic interests in the ME region and its military presence and politicalinfluence will most likely remain in Iraq for a long- time. However, the fast failure of theUS economic strategy has either confirmed the complete inexperience of the country’seconomic problems and remedies by the occupation authority, or indirectly supported theimplicit suggestion that Iraq's economic policies should remain the same as thosepracticed by other oil-rentier countries in the region. Or a defect of both suggestions. Thisis in contrast to the promising future of a stable, democratic, and prosperous for Iraq thathas potentialities in terms of human and natural resources, social components andvalues, and historical roots of mixed and creative culture. Thus, it is neither in theinterests of Iraq nor to the US to keep the economy dependant on oil exports since theoutcome of this dependence could perpetuate the disappointing conditions and policies.

2. The efficient use of the oil fortune will help the economy grow at higher rates and copewith the globalization competitiveness conditions. Parallel to this target, the likely growingeconomic and oil power of Iraq could also change the aggressive and/or the passivepolitical attitude of the neighboring states towards its internal affairs.[24] The experienceof pre- and post-election of 2010 showed how serious is to minimize foreign interventionand influence in domestic politics. Iraq needs to regain its economic strength that will betransferred to a strong political protective presence in the ME region.

Given the political and security requirements, the institutional fundamentals of the targeted reforms thatwould ensure the rational choice of macroeconomic policy alternatives should maintain the centralgovernment control of the following:

1. The oil revenues purse and allocations.

2. The macroeconomic fiscal and monetary policies.

3. Financing the public infrastructure and utilities projects.

4. Investment in high-technology industrial corporations to be owned fully or partially bythe state.

5. The design and implementation of the privatization program.



6. The regulations and provision of incentives for promoting investment by the indigenousprivate sector and the FDI.

At the same time, it is important to develop the institutional mechanism and financial capacity of thelocal authorities of the governorates to be able of designing, partially financing, and managing theimplementation of the public utilities and small works projects. In addition, the establishment of localcouncils within the big cities; i.e. Baghdad, Basra, Mosul, and Erbil are also required to expand andimprove the public services and utilities, as well as the follow-up the implementation of public worksprograms.

Crucial Economic and Social Issues

It was optimistically presumed that the post-Saddam government and the emerging opposition partieswould be able to lead the country towards achieving its social, economic, and political objectives.Unfortunately, many causes have jeopardized the people's optimism. In particular, the poor economicperformance form a strong ring in the problematic chain of vicious circles; namely, the security problem,social discontent and hardship living, the political instability, the corruption, the crime, and the sectarianconflict. The social problems, especially the religious and ethnic sectarian conflicts, have a strongregressive dynamics.

However, Iraq is endowed with abundant natural and human resources as well financial and foreigncurrency resources that are necessary for investment for rebuilding the infrastructure and improving theliving standards.[25] The huge amount of increasing government expenditures and its non-productiveallocation is a clear evidence for potential increase in economic growth.[26] The evidence also showthat the misuse of these resources created fiscal problems.[27]

Specifically, Iraq at present is facing many crucial economic and social problems[28] which can beranked in accordance with their priorities that are relevant to the suggested economic strategy asfollows:

1. Sluggish Real Economic Growth and Structural Imbalance: the use of GDP and GDPper capita statistics in assessing the economic performance and the living standards inIraq, as usually practiced world wide, needs analytical qualifications and explanation dueto the high fluctuated contribution of oil value added to GDP. Available GDP officialestimates (at current prices) show that it increased from about ID107,828.5m ($84,531m)in 2007, ID155982.3m ($132,770m) in 2008, ID139330.2m ($120,869m) in 2009 andID171957.0m ($147,826) in 2010.[29] Accordingly, GDP per head increased from about$2,848 in 2007, $4163 in 2008, $3765 in 2009, and $4,466 in 2010;[30] i.e., GDP(current prices) grew at annual average of 44.7%, -10.7%, and 13.3% in 2008, 2009,and 2010, while GDP per capita grew at annual average of 46.2% in 2008, -9.6% in2009 and 18.6% in 2010. Such astonishing uneven trend is obviously a result of oil pricefluctuations during the four years period. Even if we consider the GDP indicators atconstant prices, they do not adequately reflect the real macroeconomic performance andthe progress made in the living standards in Iraq as usually used for country’scomparison purposes.[31] The reason is not only related to the distortion caused by thechange of prices of the consumer and capital goods and raw materials, during the year,but most importantly it is related to the fact that the value added of oil sector contributesabout 53.7%, 56.0%, 40.1% and 43.0% of total GDP in the years 2007-2010. Moreover,the contribution of the non-oil sector to GDP shows either deterioration or stagnation ofthe commodity sectors compared to the services sector. E.g. the value added ofagriculture sector contributed 5.0%, 3.5%, 4.4%, and 5.0% to GDP of 2007-2010, whilethe services sectors, mainly of government services, increased from 12.2%, 12.4%,17.9%, and 15.9% in 2007-2010, and manufacturing industries contributed 1.7%, 1.5%,2.4%, and 2.3% in the same years. Demand composition of GDP shows that in 2008, forexample, the government consumption shared 46% of the national consumption and theactual public investment (fixed capital formation) contributed 94.1% to total nationalinvestment and imports, which were mainly financed by oil exports earnings of foreigncurrency. It is the oil revenues, not the non-oil economic activities that are behind theGDP growth. In this respect, it is interesting that the IMF estimates of Iraq's GDP for theyears 2007-2014 neither adequately reflects reality nor they help in describing theeconomy dynamics.[32] Therefore, at this stage, the use of GDP estimates has littleanalytical value for assessing the real performance of the economy. It is a tricky indicator



that does not reflect the real factor behind the expansion of the non-oil productioncapacities and the improvement of the living standards.[33]

2. High Unemployment and Underemployment: published official statistics onemployment have estimated the unemployment average rate at about 8% in 2010.[34]The ratio of unemployed male was 7% and 13% for women. However, theunderemployed; i.e. those who have temporary and limited work' hours, estimated at15%. As generally observed in reality, most of the active labor force is either idle or semi-idle except the people working in the government. Therefore, one might assume that theunemployment rate is much higher than 8% and nearly 20%. Significantly, thegovernment institutions employed 40% of the total number of working people, while theprivate sector employed the rest 59%. Also, unemployment and underemployment wasuneven among the Governorates; the highest rate was (16%, 19%) in ThiQar, the lowest(2%, 4%) in Kirkuk, (7%, 12%) in Baghdad, and (4%, 12%) in Erbil. Significantly, the civilservants and the police and the army employees are estimated at about 2,468,422employees in 2010[35] and most of them are idle.[36] Also important, only less than 1%of the working manpower was employed by the oil sector.[37]

3. Widespread Poverty: poverty in Iraq has been spreading fast since the UN economicand trade sanctions imposed on the country in August 1990, but it increased after 2003to reach the ratio of 22.9% in 2008; i.e. the number of poor people was 8 millions.[38]Luckily, the “poverty gap” estimated at 4.5% which means that the roots of poverty arenot very deep and can be dealt with by investing extra resources. Poverty distributionpattern showed that there exist wide disparities among the Governorates; e.g. the povertyration in Muthana estimated at 49%, 41% in Babel, 40% in Selah el-din, whereasestimated at only 3% in Erbil & Suleymanya, 9% in Dahouk, and 13% in Baghdad.[39]However, the governments have failed to deal with this serious socio-economic problem,and surprisingly the program of the present government even avoids recognizing theexistence of severe poverty in the country[40] since the current staple food ration systemshow that the problem is much more acute than the official estimates suggest.Regardless of their claims and ideals, the governments have had enough money tomake the fight against poverty its central mission by implementing public work programsand promoting small businesses that provide job opportunities and generate income forthe poor people. The allocation of oil revenues must address the roots of povertyproblem. Private or public charities are not the solution, but creating productive jobs andgenerating income from economic activities is the remedy. It is the sluggish economicgrowth, high unemployment, poor public education and health services and utilities, lackof basic needs for infrastructure; e.g. electricity and clean water that have been thepathway to the existing poverty and social breakdown. While it is necessary that thegovernment should put emphasis on improving the primary and secondary education ofthe poor people; the root of the poverty problem, it should not ignores the economicfactors behind the existing poverty. More disappointing, with the availability of abundantoil revenues, the government suggest to rely on the donors and regional and internationalorganization to finance poverty alleviation projects.[41]

4. Wide Disparity in Income and Wealth: low pay to the workers against the runawaysalaries at the top of government officials kept poverty and inequality stubbornly high andpolitically dangerous. Available rough estimates indicate the gravity of the situation wherethe annual salary and allowances of the parliament member amounted to about$300,000 whereas the senior civil servants and the university academic staff receivemore than $12,000 on the average, and the majority of government employee receivesabout $4,000. However, the average wages in the private sector was about $10 daily.[42]The disparity may also be assessed by referring to the fact that while 21% of the laborforce work in the agriculture sector, the value added generated by the sector wasestimated at only 3.45% of GDP in 2008.[43] As referred earlier, unemployment andpoverty distribution among Governorates have wide disparity patterns.

5. Corruption: the exorbitant government spending, the collapses of the publicinstitutions, the security problems, and the economic failure have all led to the collapse oflaw and order. While the international comparisons of corruption; i.e. the corruption index



2011, placed Iraq at the bottom rank of 175 among the 182 countries,[44] recent surveyshowed that most Iraqis agreed that there is widespread corruption practices in the civilservant institutions, the government, the political parties, the parliament, the judiciaryinstitutions, the private sector, as well as in international organization, and in internationalnon-governmental organization.[45] It is essential to emphasize that spread pace ofcorruption is strongly related to the degree of failure in maintain economic growth andstability, increasing employment and alleviating poverty, controlling inflation, andimproving the living standards.[46]

6. The Food Ration System: although the subsidy cost of the food ration system financedby the annual budget estimated at about $2,998m in 2010,[47] the perpetuation of thesystem and the indirect income support given to the less productive civil servants boostthe “little wealth of the poor”. However, the poor are still have no economic means andactivities for generating enough income. Thus, instead of the food ration system, aradical comprehensive and well integrated program to eliminate poverty should beinitiated by a government entity alongside with other economic growth policies. This isessential especially when the government intend to conclude the food ration system asquickly as possible.[48]

7. Low Non-Oil Exports: at present, non-oil exports contribute very little to the tradebalance which has always been a surplus. Crude oil exports contributed 99% and 97% tothe value of total exports in 2009 and 2010. It is self-evident that these facts implies veryrisky structural gap that urgently necessitates the increase of non-oil export- orientedactivities.[49]

Future Vision, Economic Priorities, and State Capitalism

"In 2030, an independent, prosperous, and democratic Iraq will hold a prestigious place in the world. In2030, all three dimensions of "sustainable development"; i.e. economic growth, social progress, andenvironmental protection and natural resources development, will be maintained. Iraq's competitive anddiversified economy that has industrial knowledge-base corporations, innovative technology,entrepreneurial, and science capacities, will occupies an important position in the world economy as amajor energy source of crude oil, industrial hub, and a center of financial services in the ME region. Itstrade and investment in the region and the world will be significant. The conditions for free market; i.e.freedom of work, property ownership, investment, and trade, will be prevailed, and the state's economicand financial regulations will be minimized. The economy will no longer depend mainly on oil exports. Inaddition to the leading vigorous public-private sharing of industrial corporations, the private sector; thebig companies, medium and small industries, and business firms, will play an important role inproduction, investment, and exports activities.

Socially; all citizens are equal and will enjoy full range of political and social liberties in an openmulticultural and tolerant society guided by ethical and human values. The society will benefit from anintegrated social securities and welfare system that ensure basic education and health services, as wellas helping the unemployed, retired, elderly, and needy people. The middle class will play a pioneer anddominant role in the economic, social, technological, and culture development. Iraqi labor force will becharacterized by high productivity and skill and the ability for initiative and innovation. All citizens willparticipate actively in the management of the state activities.”[50]

Prior to identifying the economic strategy objectives and policy priorities, it is essential to outline in awide futuristic framework that is based on past experience the notion that the nation must be incited by"what Iraq's future ought to be”, but not, "what Iraq's future would be". This is neither a perfectimaginative political proposition, nor a definite description or prediction of the country's future reality thatis compatible with the possible advance of technology; nevertheless, it is definitely an inspiringvision:[51]

Iraq, at present, is a developing country which has a small economy in terms of GDP, low GDP perhead, and very low value added of non-oil sectors, shortage of skilled labor, lack of infrastructure,decline in entrepreneurship, weak private sector, and widespread informal sector activities. However,Iraq, as it is well-known, is endowed with human and abundant natural resources; crude oil and naturalgas, water for irrigation, cultivatable land, and promising productive manpower. Also, the nation has richand creative culture heritage deep in history.[52] Iraq, therefore, is qualified and deserve better than themodest future vision recently suggested by the "national development plan 2010-2015" adopted by the



government to lead the country for achieving sustainable economic growth and strategic developmentobjectives.[53] An attempt to assess the government's proposed economic strategy and policies duringthe period (2003-date) in retrospective with the past experiences of using oil revenues by thegovernments during an "assumed" five periods (1921-1951, 1952-1958, 1959-1968, 1969-2003, and2003-date), is neither logical nor realistic or even fair to historical judgment. However, it is very importantto highlight the ways the decision-makers use oil revenues in order to reveal the extent of the presentstate of inefficient utilization of public resources. In contrast, even when oil revenues were insignificantin the period (1921-1951), the then governments tried to allocate them to finance some of the mostneeded public infrastructure projects though they failed to keep their promises under the pressure ofimproving the public services especially during the difficult period of Second World War. At that time,they used oil revenues for financing the current expenditures of the annual budgets because they wereobliged to scrap the implementation of most planned projects of the “development programs.”[54] In thesecond period, the governments were more cautious in utilizing the oil revenues for financing a numberof required physical and social infrastructure projects, as well as for improving public basic services. In(1959-1968) period, although the governments recognized the need for reducing the economy’sdependence on oil sector and put more emphasis on industrial development, they actually reallocatedmore oil revenues to finance the government current expenditures; i.e. public consumption. During theperiod (1968-2003), oil revenues were utilized mainly to serve the vague “Arab Socialism” ideology andimposing the political objectives of the former regime disregarding the individual liberties and democracyand the required promotion of the private sector. Though the former regime was well aware, especiallyprior to the full nationalization of oil foreign companies in 1974, of the risk of dependent heavily on oilrevenues for financing the government expenditures, its policies and allocation priorities failed todevelop enough non-oil industrial capacities and non-oil exports, as well as failed in generating non-oilfinancial sources for the state’s annual budget.

As the Iraqis regained their basic liberties, they were inspired by the cause of building a liberal,democratic, and economically prosperous regime. However, the post- 2003 economic reforms were illadvised by implementing the hasty and non-conditional liberalization policy and advocating the pre-mature privatization of the oil industry and the public enterprises prior to their rehabilitationrequirements.[55] Also, the recently proposed easy move, though not yet legalized, to considerunconditional accession to the WTO, would be more harmful to the infant industries and agricultureproduction than would enhance the intended economic reforms.[56] And the promises of improving theinvestment environment by the introduction of “investment law of 2007” that suppose to promoteinvestment, especially FDI, have quickly evaporated.[57] The unsuccessful IMF, WB, and US policyreforms was a result of misidentifying the economic priorities and the absence of oil utilization criteriathat match with the dynamics of the real driving economic, social, and political forces.

On the other side, the lack of the political system in providing wide choices adds to the economic failure,it is extremely difficult to assume that the dominant religious political parties are capable of undertakingthe required radical economic reforms and cope with the existing problems, as well as facing theunexpected global economic, technological, and political fast moving events.

Good macroeconomic management needs careful assessment of the public finance, the availability offinancial resources for investment, the public debt, and the country’s reserve of foreign currency.[58]Therefore, the following policy areas should have priority importance:

1. Increasing public investment for the erection of the economic infrastructure projects;i.e. dams for water resources, salty land reclamation, roads, railways, ports, moderntelecommunications network etc. In addition to developing the existing basic industries;the petrochemicals, oil refining, electricity, sulfur and phosphate mining, aluminum,fertilizer, and finance new high-technology industries; e.g. steel and car industries, in theform of vigorous public and public- private owned corporations that can fit the currentconditions of free market; namely, applying independent managerial operations that allowinitiatives, innovation, entrepreneurial, and marketing skills. The proposed investmentprogramme in non-oil industries constitutes the base of the envisaged State CorporationsModel that is fundamentally different from the past experience of inefficient and politicallycontrolled public enterprises. In pursuing the establishment of the SCM, we need a well-defined program that identifies the required industries and sets of functionally and timelyintegrated projects. The task could be performed by an independent public entity; i.e. the“Iraqi Reconstruction and Development Council (IRDC). At this stage of globalization, theSCM is extremely important for implementing effective economic diversification strategy.



In addition to the public investment in non-oil industries, the IRDC should also prepare aprogram consist of synchronized physical, social, and environmental infrastructureprojects to be allocated for all Governorates that have to be selected on the basis ofoverall economic and social criteria; e.g. roads, electricity, water dams, irrigationschemes, clean water, sewage systems, town planning, economic free zones, industrialparks, schools, hospitals, and public utilities.[59] The two programs should be financedby at least 60% of oil revenues during the years 2013-2015 and 80% in 2016 andonwards.[60]

2. Modernizing the financial services sector; especially banks, the stock market, andinsurance companies. This sector is the vehicle of investment operations and should beregulated in accordance with the main objectives of the country's economic strategy. TheCBI should, therefore, take the necessary measures and provide incentives to developthe banking system and associates institutions and increase the credit facilities, as wellas activate the influence of the interest rates by increasing public awareness of savingand investment necessities and benefits.

3. A flexible foreign exchange regime must be established by taking gradual liberalizationsteps and share part of the responsibility for improving productivity and sustainingeconomic growth and stability as part of the economic diversification strategy but not onlyfor controlling inflation. Even the CBI practice where the foreign exchange regime usedmainly as an instrument for controlling inflation, it is not quite effective because of thefiscal policy dominance.[61] Practically, at present, the current foreign exchange regimeis US$ peg regime. The exchange rates of ID must reflect Iraq’s economic reality andserve the main objectives of the economic diversification strategy. However, the currentpractice that reduce imports cost through overvalue of the ID vis-à-vis $US, led toincrease in private consumption only. The latter can not be productive and sustaineconomic growth unless it is generated from non-oil industrial and economicactivities.[62] And since there are no idle production capacities, such a situation wouldresult in increasing the pressure on government spending.

4. Alleviating poverty by generating income sources for the poor people in addition to theprovision of public services and basic needs. Poverty alleviation can be achieved byimproving labor skill through rehabilitation and vocational training, reforming primaryeducation, and the promotion of income generated from small projects, as well as by theimplementation of a thoughtful regulated social security benefits system.

5. Redistribution of income and wealth: In Iraq, a "just" distribution of income is not onlyan ethical or social issue, or an issue related to the lack of market mechanism in dealingwith the unfair pattern of income distribution, or it is an issue stemming from theinefficiency of government fiscal policies in tackling the unsuitable wealth distribution. Inaddition and most importantly, it is the public ownership of oil wealth that justifies theState intervention in putting the income distribution process into a more socially andeconomically appropriate priority and path. Oil wealth is the major source of governmentexpenditures; for investment and consumption, as well as for financing the requiredincreasing imports which constitute directly and indirectly the major share of the effectiveaggregate demand that generate economic growth: i.e. oil revenues are the engine thatlead to increase profits for the entrepreneurs, rent for the use of the land and assets,interest rates for utilizing the capital, and wages for hiring labor force. But oil wealth isowned by all Iraqis and thus it should not be used in activities that increase thedisparities in individual income and wealth. Therefore, the government is obliged toundertake effective policies and measures to reduce the existing wide gaps in incomeand wealth among the citizens.

In practice, the success macroeconomic criteria of the diversification strategy can be summarized by thefollowing: the contribution of the value added of non-oil activities to GDP should be increased to at least80%, non-oil revenues should contribute at least 50% to the State’s annual budget,[63] non- oil exportsshould increase to at least 70% to total exports, the value added generated by the private sector to GDPshould increase to 70%.[64] In this respect, though the required macroeconomic policies have to beimplemented in view of the suggested economic strategy objectives, they should be flexible for changeto cope with any unexpected macroeconomic events.[65]



Privatization, FDI, and State Corporations

The recent global financial and Euro zone crises and the resulting slow growth of the world economy(2008-2009, 2011- to date) has revealed the catastrophic impact of widening gap between the rapidincrease of money and credits on one side and the relative slow pace of increasing production on theother in the major industrial economies. The divergence between the fast expansion of financial flowsand the limited economic growth is similar to the case of the oil-rentier economies where thegovernment exorbitant expenditures financed by excessive oil revenues through its macroeconomicfiscal policy while the expansion of the real economy is limited and fails to match with the successivefinancial flows. Hence careful attention should be given to balance the allocation of oil revenuesbetween government current expenditures and public investment on one side, and manipulate themacroeconomic policies so as to mobilize the nation's resources for increasing economic growth on theother. But economic growth should be sustained and, therefore, must be put on the path of thediversification strategy in which the private sector should play an important role in terms of its valueadded ratio to GDP, exports, and public finance. This also necessitates the need for FDI. The promotionof indigenous and FDI is an essential part of the liberalization reform that would constitute an importantelement in increasing the economy competitiveness.

The crucial factor in implementing the economic diversification strategy that is guided by the State’sfuture vision is to increase investment in expanding the industrial capacities, especial of high-technology, as well as in building the physical infrastructure, science and technology promotion projects.At this stage, the State can provide the financial requirements for building those projects. However, theoperational management of the assumed new industries should be independent and designed asbusiness-oriented corporations that fit the market competitiveness’ conditions; i.e. corporations have tobe characterized by initiatives, innovations, creativity, and entrepreneurship. Such State CorporationsModel should not be considered as similar to the public sector enterprises model of the period (1964 – todate). Although the two models are similar as both owned by the State, they have two main significantdifferences;

1. The socio-economic objectives of the old public sector enterprises are different fromthe objectives of the new State corporations that have to be operated similar to theprivate corporation in the free market.

2. The management of the State corporations are free from government politicalintervention and support but only guided by the market conditions.

In 1953, the public sector contributed only 11.8% to GDP, but by 1979, its contribution increased to80.9%. In 1979, the public sector owned 100% of the oil, electricity, and clean water industries. Also, itcontributed 53% to the total value added of the manufacturing industries, 34.4% of the agriculture, and23.9% of the construction sector.[66] However, since the nationalization of the major industries andbanks of the private sector in 1964, it was realized that the “socialist and comprehensive planning”policies have restricted the activities of private sector and fostered the inefficiency of the publicenterprises, especially in the manufacturing industries, banking, and trade, and thus contributed to thethen economic problems. The expansion of public sector which was promoted by the availability of oilrevenues has arrested the development of efficient private sector. Under the pressure of the fall of oilrevenues and the costly war with Iran, the former regime has undertaken a partial, tailor-made, and self-interest program for the privatization of certain public enterprises during the 1980s. But those measureshave also failed not only to establish the conditions for free market, but also they were unsuccessful tolimit the increasing financial burden of the public enterprises. During the period (1990- 2003), Iraq hasexperienced extraordinary difficult circumstances in which the then policies cannot be considered for fairassessment of the role of the indigenous private sector vis-à-vis the public enterprises.[67]

After April 2003, it was assumed that the ultimate aim of the new economic strategy and policies or as itwas called the “economic shock thereby” is to liberalize the economy from government intervention andto establish the conditions for free market and private sector activities that would increase investmentand growth, as well as promote competition and in turn improve the economy efficiency. The policies,including the intended privatization program, have quickly failed.[68] However, the failure cannot changethe fact that the economy is still in dire need for radical structural and intuitional reforms that promotethe role of the indigenous private sector as well as FDI. Therefore, the targeted market reform endeavorshould be carefully designed and implemented by a strong government to fit the allocation of oilrevenues for achieving the goals of diversification strategy.[69] Part of this strategy is to urgently



privatize the public sector enterprises that cannot be developed into market-oriented large industrialcorporations.

In addition to the targeted improvement of the investment climate by erecting the physical andinstitutional infrastructure, privatization of certain public enterprises is also an essential measure. Theprogram should aim not only to ease the financial burden of the inefficient public enterprises, but morecrucial is to increase the economic competitiveness by liberalizing the economy from governmentmonopolies and reduce the taxes on income and business profit. However, in Iraq, public ownership ofcertain strategic enterprises are still essential for maintaining the State’s security and public interests aswell as for major industrial projects that have comparative advantages by utilizing the public naturalresources; i.e. water, oil, land, and space, such as the petrochemicals and oil refining industries,communication and IT infrastructure, roads, and water dams. Also, when the private sector is not readyto invest in the very costly projects that are essential for the economy and the society, such asproduction of electricity, the public ownership of those projects is a must. However, Iraq needs toprivatize public enterprises that can be owned by the private sector. If successfully prepared andimplemented, the privatization program would help to increase investment and improve economicefficiency, as well as mobilize resources for public finance.[70]

To avoid the corruption disease likely associated with the implementation of the program, carefulpreparation for identifying candidate enterprises for sale to the private sector, its re-evaluation andrehabilitation, and setting the rules and the implementation process must be made under the supervisionof the highest executive official authorities.

While incentives should be given to the indigenous private sector to promote investment in all activities,especially in medium and small industries and export-oriented enterprises, particular incentives shouldbe given to FDI for indigenizing high-technology industries. Also, regulations for conditional andtemporary protection measures to the infant industries and certain agriculture products must also beapplied in a balanced way. In this regard, it is essential that economic policy should reconcile, in apractical manner, the need for high-technology industries and the provision of employment opportunitiesby expanding production capacities using labor-intensive technology.

For the FDI, the following policy’s guidance and incentives must be observed:

1. For the high-technology industries, corporate tax exemption should be guaranteed andmight extend to more than 10 years, as well as full and partial custom duties allowanceson imported machines and equipments and raw material, except for similar locallyproduced. Also, free transfer of profit, wages, and equity returns must be guaranteed.The required physical infrastructure and basic needs of electricity and water, as well ascredit facilities must be also provided.

2. Export-oriented industries must also have similar incentives as those for high-technology projects.

3. Establishing free economic and industrial zones and innovation parks.

4. Encouraging R&D projects by providing grants to qualified private enterprises.

5. Set-up preferable incentives for encouraging FDI in the less developed regions.

6. Excluding the FDI from investment in the nation's strategic infrastructure andenterprises; in land, sea, and space.

7. Ensuring equal treatment with the Iraqi private sector.

These suggestions, with the earlier proposed economic priorities, constitute the basic elements that areimperative for increasing the competitiveness of the economy.

In practice, the exact identification of the required measures and incentives could be prepared on thebasis of detailed field study that aim to assess the economic environment components; the law andlegal regulations, the conditions of the existing infrastructure, education and training facilities, the extentand attitude to transparency and corruption, the state of technology, and R&D facilities.



Conclusions

Iraq, like many oil-rentier countries, is facing serious challenges emanated from the economy’s highdependence on oil exports for a long-time. By broaden its economic base into diverse range ofcompetitive production activities, Iraq would be in a better position not only for achieving sustainableeconomic growth, accelerating social development, and improving the living standards, but also fordeveloping a dynamic political system with wide democratic practices.

The assessment of past experience and based on our understanding of why and how themacroeconomic variables, including oil exports, and the political actors behave under the current andenvisaged circumstances, would lead to the suggestion that until the economy escapes the "oil-hostagetrap" and the government respects the tax-payer voters: then the public ownership of oil wealth; theneed for democracy; the required competitive economy that is able to integrate into the world economy;the improvement of the living standards; and the demand for social equality; are all necessitate forradical change of the current economic and political conditions. The proposed policies are in line withthe lessons derived from the global financial crises and the world economic slowdown (2007-2009 &2011- to date) which clearly revealed the huge damage caused by the implemented unlimitedinternational and national financial deregulation policies that have resulted in the adaptation of morecautious attitude to the role of national and international macroeconomic policies.

Over the last nine years, nothing radical has changed in Iraq; neither the inefficient macroeconomicpolicies, nor the political passiveness to economic reforms, or the misuse of money and time consumingefforts in the rebuilding of the country's infrastructure. Since the prevailing political parties lack thevision, the will, and the interest in pursuing the required fundamental change, the governments haverelied heavily on spending public oil revenues for performing the state’s normal functions, satisfying thedaily financial and socio-political demand of citizens and social groups, as well as for serving theirpolitical interests. The government's expenditures, which constitute the major share of the aggregatedemand, have not only drained the precious non-renewable energy resource and finally failed to createwealth and restrain the deterioration of the living standards, but also it deepened the chronic structuraleconomic problem and substantially increased corruption. Nevertheless, Iraq has ample opportunity indealing effectively with the prevailing serious problems, i.e. sluggish production of non-oil sectors, lowproductivity, high unemployment, widespread poverty, poor public education and health services, lack ofpublic utilities and basic needs and the insufficient physical and institutional infrastructure. Guided byinspiring future national vision and applying effective economic diversification strategy with cleareconomic policy priorities, but certainly without the reliance only on “illusion magic” of non-regulatedmarket mechanism and the independent monetary policy, Iraq must embark on a radical tailor-madeeconomic and institutional reforms program for increasing indigenous private investment and FDI, aswell as public investment by allocating most of the oil revenues to finance the physical, social; especiallyeducation, and environmental infrastructure projects that have to be managed by an independent publicentity.

At this stage, vigorous state’s owned corporations of high-technology industries must be built andmanaged, as private corporations, by independent qualified directors that have the required initiatives,innovative technology, entrepreneurial, and marketing capacities which qualify them to be competitive inthe markets. The market-oriented SCM would contribute, together with the promotion of medium andsmall private enterprises, to the economic growth and diversification. Also necessary, public investmentfor improving primary education and extensive training programs for manpower, promoting R&D andinnovation, and supporting creative entrepreneurial initiatives management skill in all sectors.

However, the application of the model should not undermine the urgent implementation of the targetedprivatization programme of the public sector enterprises that cannot be developed into the form of statecorporations.

Socially, the government policies must reduce the existing wide disparity gaps in income and wealthamong individuals and regions by careful allocations of oil revenues for public projects, as well asthrough the fiscal policy.

The application of the suggested new economic model needs democratic environment, strong politicalwill, and liberal forward-thinking by the policy- makers, as well as competent public institutions andeffective non-government organizations and civil societies that are able to invoke the nation’s spirit forbuilding a strong and stable economy, maintaining political stability, and social progress.



Annex: The Dynamics of Iraq’s Macroeconomic Analytical Model

Triggered by the recent financial global and Eurozone crises and the resulted slowdown of the worldeconomy associated with increasing de-globalization measures, the policy-makers and academic debateon the effectiveness of the national and international macroeconomic policies as originally based on theneo-classical Keynesian economics; the macroeconomic policy that justify a role of the state forincreasing demand for promoting growth, vis-à-vis the viability of classic economics of capitalism; AdamSmith’s free market and profit maximization of corporations that stimulate growth without intervention ofthe macro fiscal policy and putting more emphasis on the role of independent monetary policy, haverelevance to the problems facing the developed capitalist economies. However, such debate has nopractical value in dealing with the structural problems of the oil-rentier economies like the case of Iraq.Although there are significant similarities between the causes and symptoms of the global financialchallenges that are facing the developed countries and the problems of the oil-rentier economies: theexorbitant of credits in the global financial markets and disproportionate spending of the excessive oilrevenues; investment in opaque financial products in the global markets and investment in non-productive white-elephant projects in the oil -rentier economies; and the widening disparity in wealth andincome at the national levels;[71] these challenges and problems need different remedies. Thus, thegiven policy propositions and analysis for Iraq that are based primarily on its experience cannot beconsidered in line with the discussion on the effectiveness of classic vis-à-vis neoclassicmacroeconomic policies.

As stated in the “Special Theory of Economic-Rent and Free Market Efficiency (STER),”[72] Iraq’sactual economic experience, especially during 1970s,[73] provided enough quantitative and qualitativeevidence that allows to put it in a formal dynamic economic model for predicting the behavior of themacroeconomic variables under different assumptions that are adequately define the initial conditionsand illustrate how the whole economic system evolve over time; i.e. describes the connections ofcauses and effects as a result of increasing the government spending that is financed by oil-rentgenerated beyond the economic surplus generated from normal production activities. In other words, thefinance for investment is exogenously available. STER is a predictable economic analytical model whichis useful to illustrate the most likely economic development path as assumed in this paper.

It was also stated that the main conditions for increasing economic growth and employment in Iraq canbe summarized as follows: raising domestic private saving for increasing investment, in addition toincreasing public investment, especially in non-oil industries, and increasing non-oil exports.[74] Also,success criteria have been suggested to assess quantitatively the advance in satisfying thesesnecessary conditions.[75] At present, and like the situation during (1974-1980), there are no financialand foreign currency constraints that constitute binding restrictions on economic growth and theinvestment for the reconstruction of the public economic (physical) infrastructure.

Given these growth and development conditions, there are at least three main practical reasons thatnecessitate the application of a simple formal macroeconomic model for Iraq:

1. To identify and trace the behavior of the main economic variables through time.

2. To highlight the first causes of the economic dynamics under current circumstancesand in perspective conditions.

3. To identify the role of the economic agents; i.e. the state, the private sector, and theconsumers in the economic growth process.

Also, as stated earlier, the proposed macroeconomic model consists of the following maincomponents:[76]

• The endogenous variables; i.e. GDP, wages, profit, consumption, and imports. • The exogenous variables; i.e. oil exports, non-oil exports, and investment.[77] • The parameters; income distribution pattern, the propensity to save in public and in private sector, oilrevenues ratios for government current expenditures and for public investment, the technologycoefficient as reflected by the capital-output ratio, the ratios of investment, intermediate, and consumergoods and commodities to GDP.[78]

In testing the model’s behavior, the values of the exogenous variables and the parameters are to bedetermined by the actual macroeconomic policies of the government (as reflected in the annual budget’s



revenues and expenditures, total investment, and exports) which are described qualitatively in thispaper.

Since the government control most of the macroeconomic variables, it provides the external costs andbenefits to all economic activities that are not reflected in prices and ignored by the market economy;i.e. the externalities, as well as maintains the instrument to determine the criterion for influencing thedistribution pattern of income and wealth. Hence, given the described prevailing economic and politicalconditions, the first cause that initiates the dynamics of growth and distribution process, is the exorbitantgovernment spending of the available excessive oil revenues, not the tax payers contribution or theprivate savings. Once the effects of government spending starts, the resulting “snow ball” ofexpenditures keep rolling and grows due to the increasing demand of the people for better publicservices and maintaining low prices of their basic needs and essential imported products. As the rulingauthority struggle to maintain its political power, the size of the rolling “snow ball” continues to be biggerand bigger with the successive increase of oil revenues which lead to: the improvement of the livingstandard in terms of cheap public services; increasing income and consumption but without matching therequired increase in domestic production; increasing productivity; and increasing investment in non-oilindustries. Therefore, unless the government controls the expected change of the macroeconomicvariables behavior in a systematic way, this situation pushes the government further to allocate moreinvestment for increasing oil exports (revenues) in disregard to the depletion of this valuable publicnatural resource and consequently increase the economy’s dependence on it. It is the successiveincrease of oil revenues that lead to the increase of non-productive expenditures which comes first inthe dynamics process of the macroeconomic activities which eventually deepening the economicstructural problems.

Since the government ability to manipulate the macroeconomics events over the functioning of theindividual economic activities will be increased by the growing power of oil revenues, then the role ofproducers (investors), the consumers, and the workers, who make their decisions on the basis of pricesand wages, cost, and profit, become less effective.

Excessive spending of oil revenues in less productive economic activities acts against the targets ofachieving sustainable economic growth and efficient use of the oil wealth. It is interesting to comparethis actual negative dynamics process of the relationship between oil revenues and economicdevelopment with the dynamics role of the new technology in advancing science that is in turn improvingthe technology which opens more doors to scientific achievement.[79] Nevertheless, if oil revenuesutilized efficiently under the described reforms, it would increase economic growth and maximizeemployment of resources which create the wealth for the nation.

References

1. In general, there are three main criteria set for defining the oil-rentier economies: first, thecontribution of oil sector to GDP is more than the total contribution of industry and agriculture sectors.Secondly, oil revenues finance more than 50% of the state annual budget, and public investmentcontributes more than 50% of total national investment. Thirdly, the value of crude oil exportscontributes more than 50% of total national exports. These criteria were proposed by the author in astudy entitled “al-qeema al-iqtisadia lil mawarid al-naftia al-arabia baina al-daawa lil takamul al-iqtisadial-arabi wa baina shoroot al-nimow wa al-tanmia al-qutryia” (Arabic) “the economic value of arab oilresources and the call for arab economic integration vis-à-vis country’s growth and developmentconditions”, paper presented to the 11th scientific conference of the Arab Economists Union held inCasa Blanca in Morocco (2-5th October 1989) and published in the monthly journal “Dirasa’at Arabia”,issued by “Dar Al-Talia” publishers, Beirut, Lebanon,26th year no.4, Feb. 1990.

2. The case of Arab authoritarian-autocratic oil-rentier countries is more complex, and the given analysisand suggested remedies in this paper do not completely fit their required changes. Some of thesecountries need comprehensive radical socio-political overhaul: freedom of religion; combat religiousextremism; clear discrimination based on ethnic, sectarian, and gender; lifting the restrictions oneducation; allowing free thinking and criticism; and ensuring equality of opportunities.

3. On the early writings about these economies, see; Mahadvy, H. "The Pattern and Problems ofEconomic Development in Rentier States: The Case of Iran", in Cook, M. A. (ed.) "Studies in EconomicHistory of the Middle East", Oxford University Press, London, 1970.

4. Most obvious, the wide practices of governments’ fiscal stimulus and monetary policy intervention



that have bailed- out and eased the toxic debts of the big banks and investment institutions and crippledindustries which have resulted in severe cut in governments’ spending, as well as raise the temptationfor trade protectionism and manipulation of the foreign exchange regime to maintain external balance.See; Sabri Zire Al-Saadi, “The Global Financial and Economic Crises and the Hidden Crisis of Oil-Rentier Economies: Back to Basics”, published in “Strategic Insights” issued by “Center forContemporary Conflict”, vol.8 no.1 (January 2009). (http://www.ccc.nps.navy.mil/si)”, and “CrucialChallenges to Global and Oil-Rentier Economies", published in "Contemporary Arab Affairs", volume 2,no. 2, April 2009, issued by the "Centre of Arab Unity Studies", and published by Routledge: Taylor &Francis Group Ltd., London.

5. In this paper, the use of the term “State Capitalism”, which was widely referred to in the socialistthinking of different views in contrast to Marxism ideology, was motivated by recent initiative of "TheEconomist" of London, which debate the efficiency and sustainability of the model as cited in theemerging economies, especially of China. See; The Economist, "emerging-market multinationals: Therise of state capitalism" & "and the winner is …: For all its successes, state capitalism has fatal flaws"21st Jan. 2012 (www.economist.com)

6. An interesting recent study on the problems that caused the failure of the Gulf oil states (Kuwait,United Arab Emirates, Qatar, Saudi Arabia, Bahrain, and Oman) in achieving development and security,highlighted the following: the oppressive and monopolistic family inheritance' ruling regimes which havethe oil wealth but without community control, participation, and accountability; and the dependence onforeign power. See; Yusuf Khalifa Al-Yusuf, " dowaal majlis al-taawin al-khaligee wa muthalath al-wiratha wa alnaft wa alqiwa al- ajnabiya" (Arabic), "The GCC States and the Triangular of Inheritance,Oil, and Foreign Power", published in "al-mustaqbal al-arabi", a monthly journal issued by the Centre ofArab Unity Studies, Beirut, Lebanon, no. 383, January 2011.

7. See; Sabri Zire Al-Saadi, “Success Conditions for Iraq’s Oil- Rentier Economy: Special Theory ofEconomic- Rent and Free Market Efficiency”, Strategic Insights, Center for Contemporary Conflict, Vol.6, Issue 6, (December 2007). (http://www.ccc.nps.navy.mil/si/). Also see; Sabri Zire Al-Saadi, “A FormalGrowth and Distribution Model: The Case of a Developing Crude Oil Exporting Economy", OPECReview, vol.13, issue 3, pages 227-242, September 1989.

8. E.g. the remarkable well-known economic success of South Korea’s state-led economic and socialdevelopment planning prior to the 1990’s especially in building the industrial and institutionalinfrastructure and the improvement of education. Most recent successful experience is China impressiveeconomic advancement during the last two decades which has been characterized as State CapitalismModel.

9. It was recently confirmed by the Iraqi minister of oil that the country's oil proven reserves haveincreased to (143.1) billion barrel from (105.0) bb; i.e. Iraq becomes the world's second largest holder ofcrude oil resources after Saudi Arabia (264.59) bb. Also, the unproven reserves increased to (505.408)bb. See; "Al-Sabah", the Iraqi semi official daily newspaper dated 5th Oct. 2010. (www.alsabaah.com).Also, oil production in 2012 will be increased to 3 m b/d compared to 2.6 m b/d in 2011according theDeputy PM for energy; (reported in MEES 6th March 2012). The information add more credibility to thegovernment targeted increase of average annual oil production to about (12.0) million b/d in 2016/2017in accordance with the investment agreements made with the foreign companies. On the implication ofthe likely growing Iraq's oil power, see; Sabri Zire Al-Saadi, "The Political Economy of Iraq's Growing OilPower: A Crucial Phase", published in "The Culture and Conflict Review", vol. 4, no. 1, Spring 2010, aweb-journal issued by the "Program for Culture & Conflict Studies at the US "Centre for ContemporaryConflict". Republished in Arabic under the title "al-iqtisad al-siyasi li-tanami qowat al-naft in iraq:marhala hassima", "al-mustaqbal al-arabi", a monthly journal issued by the Centre of Arab UnityStudies, Beirut, Lebanon, no. 378, August 2010.

10. At present, the KFG plays similar role though less important than the central government in terms ofthe amount of oil revenues as 17% of total oil revenues have been annually allocated to the region.

11. See; "The Political Economy of Iraq's Growing Oil Power: A Crucial Phase", ibid.

12. This issue was raised earlier, see; e.g. Sabri Zire Al-Saadi, “Iraq’s Vicious Circles of EconomicPriorities, Misuse of Oil Wealth, and Political Weakness”, MEES, vol.50 no.16, 16th April 2007.

13. The general election of March 2010 has resulted in the following parliamentary power: the Al-Iraqiyacoalition, mainly Sunni held 91 seats, the Law State, mainly Shiite held 89 seats, the National Coalition,



mainly Shiite held 70 seats, and the Kurdish Coalition, mainly Kurdish nationalists held 43 seats. Exceptfrom insignificant number of liberal personalities, the liberal and democratic parties have failed to secureseats in the parliament.

14. By the end of November 2010, there were 628 non-government organizations registered at the"Iraqi Ministers Council, NGOs Directorate"; among them there are more than 20 organizations whereeconomic development and interests were expressed in their official names. See; the Iraqi cabinet website, (www.cabinet.iq).

15. The published ministerial program of the new government clearly reflects the same old governments’practices of unqualified big promises, absence of priorities, especially in economic sphere, artificial wayof political compromise among the political parties. The program promises include rosy targets fordealing with the political, social, economic, and oil issues, maintain law and judiciary, ensuring security,building military capacity, increasing employment and housing units, accelerating rural development,empowering women, flourishing culture, improving foreign relations, heritage protection, supporting themedia, protecting liberties and democracy…etc. Noticeably, the program failed to highlight the severityof poverty and unemployment and the lack of public services. The text of the program was published in“Al-Sabaah” the semi official Iraqi newspaper, Wednesday, December 22, 2010. (www.alsabaah.com). Itis a program that cannot stand the practical reality and thus would add more to the peopledisappointment.

16. In this respect, the application of a flat low tax-rate in some foreign experiences proved to beeffective in increasing economic growth that resulted in an increase of the absolute value of taxes.

17. There are media reports that the Prime Minster has more than 60 advisers in his office, most ofthem are from his supporters and recruited from the universities. However, few of them have richeconomic experience and very few addressed the crucial economic issues to the public.

18. The meeting's outcome was reported on 9th February 2012 by the ministry of Finance see;(www.mof.gov.iq) the said group was established by the PM office, decree no.64 of 2011.

19. Total cash value of oil exports received by the government during the last nine years is estimated toexceed $300 billion. See footnote 25.

20. Sabri Zire Al-Saadi, Iraq: Does Distribution of Some Oil Revenues among Citizens Help? MEESvol.55 no.10 5th March, 2012.

21. The following two examples clarify this view: the first shows how the government institutions conductdiscussions on serious economic policy reforms with foreign advisers. Regardless the lack of official andpublic consensus of the IMF “two-year stand-by arrangement" in the amount of $3.6billion approved bythe government, a recent IMF report revealed that IMF-Iraq meetings held to assess the progress madein implementing the program which assumed to provide temporary budget support, ensuremacroeconomic stability, and provide a framework for advancing structural reforms. The resulted reportwas “based on discussions held during May 12-13, 2010 in Istanbul (Turkey), and July 13-17, 2010 inAmman (Jordan) where IMF staff met the Governor of Central Bank of Iraq (CBI), Adviser to Deputy ofPM, Senior Advisor to Minister of Finance Azez, and other senior officials and management from twolargest state-banks”. The report concluded that the Iraqi authorities have “met all the performancecriteria for end-March 2010, with the exception of the floor for the CBI’s net international reserves” See;IMF, "IMF Country Report No. 10/316, October 2010", available on CBI web-site, (http://www.cbi.iq/). Incontrast, a clear, thoughtful, and rare statement made by an Iraqi senior official on the state of theeconomy, a professional economist Dr. Ahmed Ibrihi Al-Ali, the Vice Deputy of CBI's Governor admittedthe bad state of the economy and the failure of the governments' reconstruction and revival efforts. Heconfirms that the Iraqi economy has no sign of revival and no preparatory arrangements were made forthe provision of its requirements, in addition to the failure in solving the electricity problem. The Statehave done nothing, he said, to improve the capacity of the government institutions responsible for thereconstruction as the management of public enterprises is still following the same old procedures andrunning by the same old departments and employee. He admitted that there have been no efficientindigenous private or foreign companies capable of implementing the Sate big projects or even buildingschools, swage networks, and hospitals. He also said that the annual budget of 2011 is almost the sameas the budget of 2010. Even in the oil sector, there have been little positive signs that foreign companieshave starting the implementation of the recent "oil service contracts" for increasing oil production. See,"Experts: the economic scene of 2010 shows the economy is still have structural imbalances", Almada



newspaper no. 2001 dated 30/ 12/ 2010. (www.almadapaper.net).

22. The most recent example was the governments’ bail- out given to the failure banks and majorindustries in the US and European countries during the global financial crisis (2008-2009 & 2011- todate) in order to prevent the collapse of their financial and economic systems.

23. A thorough analysis of the driving forces of Iraq and the region political complexity was given by thewell-known veteran politician ?Mr. Fakhri Karim, the editor-in-chief of Almada newspaper, in his editorialcolumn entitled, “the Arab and Regional Sectarian Intent and Iraq-Iraq Conflict”, (Arabic), Almada paper,no. 2378, Monday 30th January 2012. ( www.almadapaper.net )

24. On the influence of oil power in the Middle East region, see; “Oil Power and Adversity in Iraq’sExperience: Case History of the Middle East”, ibid.

25. Total net cash from oil exports sales during the period (22nd May 2003-31st December 2010) Iraqreceived through the "Development Fund for Iraq" amounted to $ 250.956 billion, while the grand totalcash Iraq received during the same period was $270.721 billion. Total disbursements; i.e. governmentexpenditures was amounted to $ 263.169 billion. See; International Advisory and Monitoring Board forIraq (IMBI), Final Report-revised version 2011.(http://www.iamb.info/) The country’s foreign currencyreserve was amounted to $60.0 billion by the end of 2011, see; Central Bank of Iraq, (http://www.cbi.iq/)

26. It was estimated that in 2008, the total planned government expenditures of the annual budget was$72.236 billion; i.e. current expenditures were $51.124 billion (71% of the total), and the governmentinvestment was $ 21.112 billion (29% of the total). However, actual expenditures were as follows;current expenditures were $40.857 billion; i.e. the execution ratio was 80%, total government investmentwas $8.646 billion; i.e. the execution ratio was 41%. This also reflects the fact that actual investmentconstitutes 17% of total actual government expenditures. It was also estimated that in 2009, the totalplanned government expenditures was $58.615; current expenditures were $45.888 billion (78% of thetotal), and government investment was $12.727 billion (22% of the total). In 2010, total revenues of theannual budget were estimated at about $ 52.764 billion; oil revenues were estimated at about $47.906billion (90.8%). Total expenditures were estimated at $72.356 billion; i.e. the budget has planned deficitof 27.1%. 72% of the total expenditures were allocated to current expenditures and 28% for financinginvestment projects. In 2011, total revenues of the budget were $69.1 billion and total expenditures were$82.6; i.e. the planned deficit was $13.5 billion. In 2012, total revenues of the budget were $100.5 billionand total expenditures were $105.0; i.e. the planned deficit was $12.8 billion. The current expenditureswere 68.4% of the total budget expenditures out of which 34.2% were salaries and wages, and about10% were subsidies and grants and social benefits. Investment expenditures were 31.6% of the total outof which 28.7% allocated to the oil sector and 12.9% to the electricity. Oil revenues were estimated tocontribute about 94% of total revenues.

27. As a result of the government “exorbitant”, but not productive spending, the deficit of the annualbudget was 21.9% in 2009 ,14.2% in 2010, 16.2% in 2011, and 12.8% in 2012, and the deficit of thebalance of payment to GDP was 14.4% in 2010.

28. There are no enough reliable updated statistical data and indicators to quantify in more accurateway the economic and social problems. However, the given statistical data supports the generalconclusions given in the section, and they are published in the "Annual Abstract of Statistics 2008-2009", issued by the Central Organization for Statistics and Information Technology (COSIT) of theMinistry of Planning and development Cooperation. See; (http://www.cosit.gov.iq/english/index.php), andthe "Annual Economic Report 2009" issued by the Central Bank of Iraq. See;(http://www.cbi.iq/documents/Annual_economic_report2009_f.pdfc

29. Central Bank of Iraq, “the annual economic reports for the years 2007-2010”.

30. Ibid.

31. It has no practical or analytical value at all to use the available GDP estimates at 1988 prices inorder to neutralize the price fluctuation of GDP current values. See; the "Annual Abstract of Statistics2008-2009", ibid.

32. The lack of updated and detailed official estimates of GDP and other macroeconomic indicators mayinvite the interested parties to use the IMF GDP estimates for the years 2007-2009 and projected for2010-2012; i.e. $57,0m, $86,526m, 65,8m, 84,1m, 92,9m, 109,2m. See; IMF, "IMF Country Report No.



10/316: First Review Under the Stand-By Arrangement ", March 2011& "IMF Country Report No. 11/75:Second Review Under the Stand-By Arrangement ", March 2011. (www.imf.org). Accordingly, GDP percapita estimated at $1926, $2845, $2087, $2626, $2827 & $3400 in the same years. Obviously, IMFestimates are always presented in a consistent, and elegant, macroeconomic framework, but they arenot necessarily reflect the reality, especially those predicted for the years 2010-2012, or the assess theeconomic efficiency performance as widely indicated by the GDP growth rates for other countries, aswell as give correct assessment to the contribution of sectors to GDP. The IMF projected GDP growthrates, in particular, that are office- made exercise derived by applying a certain macroeconomic modelthat is based on certain assumptions relevant to pre-perception on economic reforms in the developingcountries which are different from Iraq's economic reform requirements.

33. E.g. In 2008, only 65% of families got their water from the public water network, and only 30% haveproper sewage system, 32% of families have public collection rubbish service, and 70% of families havethe problem of more than 12 hours cut of electricity. See; Central Statistical Organization andInformation Technology, "Iraq Knowledge Network Survey", Ministry of Planning and DevelopmentCooperation of Iraq, January 2011.

34. See; Central Statistical Organization and Information Technology, ibid.

35. See; MOF, “the annual budget 2010”, available at (www.mof.gov.iq).

36. The minister of planning admitted that 70% of the State's employees are without real work andwithout real product. See; "al-awqa'at al-iraqia", (Arabic), (the Iraqi times), a weekly economic journal,10/10/2010. (www.iraqitimesmg.com).

37. See; Arab Monetary Fund (editor), “the unified Arab economic report 2009”, available at(www.amf.org.ae).

38. On the data and the national strategy for poverty reduction in Iraq; See, Central StatisticalOrganization and Information Technology, “taqreer khatt alfaqr wa malamih alfaqr fi aliraq”,(Arabic) “ areport on poverty line and poverty aspects in Iraq”, Ministry of Planning and Development Cooperation,March 2009. Also see; Ministry of Planning and Development Cooperation, press release on 25/11/2010issued by the High Committee for Poverty Reduction Policies in Iraq. (www.mopdc-iraq.org).

39. Ibid.

40. Ibid.

41. Ibid.

42. An interesting recent assessment of the deterioration of the socio-economic indicators was made byDr. Ahmed Ibrihi Al-Ali, in which the following indicators were mentioned: in 2007, 23 percent of totalpopulation estimated at about 30 million - and about 30,8 million in 2009 - are below poverty line, only26 percent of total population are economically effective, 32 percent of the population spend less thanID 100,000m ($83) a month per person, 38.2 percent spend more than 100,000 and less thanID180,000 ($83-150), while 29.2 percent spend more than ID180,000.0 ($150.0) per person per month.The overall average was estimated at ID145, 800 ($121.5). The average individual spending inKurdistan Federal Region is almost twice the average in the rest of the country. See, Ahmed Ibrihi Al-Ali,"maeishat al-usra wa rafah al-am fi thaoue al-masih al-iqtisadi wa al-ijtimaie lil-iraq" (Arabic), "the familyliving and general welfare in view of the economic and social survey of Iraq", paper in private circulation,Baghdad, 2009.

43. See; "Annual Economic Report 2009”, ibid.

44. See; Transparency International, (www.transprency.org) .

45. The survey results show that 74% agree that the political parties influenced by corruption, only 9%disagree, 69% agree that the parliament infected by corruption, only 11% disagree, 63% agree that thegovernment infected by corruption, only 17% disagree, 74% agree that corruption widespread amongthe civil servants, only 7% disagree. Even in the private sector, corruption spread as 62% of peoplenoticed, 11% disagree. The survey also shows that 54% of the people agree that corruption increasedduring the last two years has increased. See; Central Statistical Organization and InformationTechnology, “Iraq knowledge network survey”. (www.csoit.gov.iq).



46. Quantitative and qualitative analysis of country experiences show strong relationship between theeconomic factors and corruption. See; Paolo Mauro, “The Effects of Corruption on Growth, Investment,and Government Expenditures: a cross-country analysis” in “Corruption and the Global Economy”,Institute of International Economics. (www.iie.com). Shang-Jin Wei, “Corruption in EconomicDevelopment: Beneficial Grease, Minor Annoyance, or Major Obstacle?” Harvard University andNational Bureau of Economic Research. (www.nber.org). IMF, “The Economics of Corruption: AnOverview”, George T. Abed and Sanjeev Gupta, September 2002. Institute of International Economics,“Corruption and Global Economy”, Kimberly Ann Elliot (editor), 1997. (www.iie.com).

47. See; “the annual budget 2010”, ibid.

48. The government intention is revealed in its proposal for the annual budget of 2011.

49. See; “the annual abstract of statistics 2008-2009", ibid.

50. Iraq has had a short- lived “technical” experience of long-term economic planning in the 1970’s. Thethen concept of long-term planning widely used in the development planning was limited to theeconomic perception of the country but not its socio-political dimensions as pioneered by thegovernment of Malaysia. See; Ahmad Sarji Abdul Hamid, Chief Secretary of the Government ofMalaysia (editor), “Malaysia’s Vision 2020”, Pelanduk Publications, 1993. About Iraq’s past experience,see; "the economic experience of modern Iraq: oil, democracy, the market, and the national economicproject (1951-2006)" (Arabic), ibid.

51. The concept of future vision for Iraq was initiated earlier, see; Sabri Zire Al-Saadi, " Iraq's NationalVision, Economic Strategy, and Policies", published in Strategic Insights, Center for ContemporaryConflict, Vol. 5, Issue 3 (March 2006). (http://www.ccc.nps.navy.mil/si/).

52. In Mesopotamia, Iraq’s ancient name, the first civilization appeared on earth around (3500-1000) BC.See; e.g. Roberts, J. M. “The Penguin History of the World”, penguin books, third edition, London,England, pp48-63.

53. Against the advocates for free-market policies given to the governments, especially by the USadvisors, the new "National Development Plan 2010-2015" – regardless its little practical value - followsthe same old approach in dealing with the prevailing economic and social problems. Indeed, except fromthe different wordings and the use of the popular concepts such as sustainable development,participation of private and public sector in development efforts, and the integration into the worldeconomy. The document which was prepared with the assistant of IMF and WB experts put all policiesand priorities in one basket of a "collection of bright promises". A glance at its main objectives and theexplicit and implicit policies confirms the failure of the applied economic strategies and policies since2003. It clearly states that "the plan was prepared in response to the failure of the annual investmentprograms, lack of projects priorities and projects integration, and the difficulties of formulating mediumand long-term comprehensive development vision". See: Ministry of Planning and DevelopmentCooperation, “Summary of the National Development Plan 2010-2015", www.mopdc-iraq.org .

54. See; Sabri Zire Al-Saadi, “al-Tajribah al-iqtis?a¯di¯yah fi¯ al-Ira¯q: al-naft? wa-al-di¯muqra¯t?i¯yahwa-al-su¯q fi¯ al-mashru¯e al-iqtis?a¯di¯ al-wat?ani¯, 1951-2006”, (Arabic), "the economic experienceof modern Iraq: oil, democracy, the market, and the national economic project (1951-2006)" dar al-meda, Baghdad, Damascus, and Beirut 2009 “the economic experience of modern Iraq: oil, democracy,the market, and the national economic project (1951-2006)" (Arabic), ibid

55. Early assessment was given in "Iraq's Post - War Economy: A Critical Review", ibid.

56. It is astonishing behavior on the side of authorities that such move ignored the big lesson of recentglobal financial crisis that even the States of the highly developed market economies intervened heavilyin the course of economic process to protect their failed major industries, banks, investment institutions,and insurance companies by bailing out huge amounts to them.

57. Aspects of the given views and policy proposals have been presented by the author earlier; e.g.“Iraq's National Vision, Economic Strategy, and Policies, published in Strategic Insights, Center forContemporary Conflict, Vol. 5, Issue 3 (March 2006). (http://www.ccc.nps.navy.mil/si/). And ”Liberalization Strategy for Iraq’s Oil-Hostage Economy: Alternative to Oil Power Dominance and Neo-Liberal Subordinate Economic Policy, Part 1&2, MEES, Vol.49 Nos. 42& 43 16th& 23rd October 2006.”And “Success Conditions for Iraq’s Oil- Rentier Economy: Special Theory of Economic- Rent and Free



Market Efficiency”, ibid.

58. It is noticeable that the government annual budget of 2010 has ignored completely the economicstrategy and policies in regard to the future reliance on oil revenues. Instead, it identified a number ofeconomic challenges that Iraq is facing as follows; the commitment to IMF and the UN Assistant Missionfor Iraq (UNAMI), the new economic policy that aim for decentralization, gradual government withdrawalfrom direct management of public enterprises, provision of the infrastructure, proved favorableenvironment for the private sector, rationalizing the government subsidies policy, and building theimplementation capacity of the ministries and public departments. Five objectives were highlighted;ensuring security and law and order, satisfying the basic needs of the citizens, increasing investment inhuman development, reconstruction of the infrastructure, and contribute to reduce unemploymentthrough investment in public projects. On its economic reforms, the budget document includedinhomogeneous mixed eleven sets of policies ended with "increase of GDP". The annual budget is atypical mixed and inhomogeneous political and economic high promises and an artificial attempt toshow professionalism in dealing with the existing economic problems. See; (http://www.mof.gov.iq/).

59. The establishment of the IRDC would help to better integration of the public infrastructure projects,evaluation of cost-benefits of projects, effective follow-up of implementation, and ensuring accountabilityagainst corruption. The IRDC proposal was first initiated and presented to a meeting held in Washingtonon 24-26 October 2002 as part of the "Future of Iraq Project" sponsored by the US Department of theState. On the functions and structure of the IRDC, see; Sabri Zire Al-Saadi, “The Iraqi Development andReconstruction Council “, unpublished paper, Future of Iraq Project, US Department of the State, Oct.2002. It should be mentioned that the US occupation authority in Iraq implemented after 9th April 2003under the same name IRDC different concept in terms of objectives, functions, and institutional structureand employed experts of different disciplines and qualifications as originally suggested by the author.

60. About this proposal also see, "The Political Economy of Iraq's Growing Oil Power: A Crucial Phase",ibid.

61. It was clearly stated by the IMF that “the exchange rate remain the CBI's main policy instrument tokeep inflation low, given the very level of financial intermediation”. See; IMF, "IMF Country Report No.10/316, October 2010", page 8, available on CBI web-site, (http://www.cbi.iq/).

62. Theoretical analysis of the issue was given in: Sabri Zire Al-Saadi, "foreign Exchange rates andOptimal Crude Oil Production in Oil Exporting Developing Countries", OPEC review, vol. 12, no.2, June1988.

63. It should be ascertained that increasing tax contribution to public finance does not mean, at thisstage, an increase of tax rates or adding new taxes on economic activities.

64. See; Sabri Zire Al-Saadi, Liberalization Strategy for Iraq’s Oil-Hostage Economy: Alternative to OilPower Dominance and Neo-Liberal Subordinate Economic Policy, Part 1&2, MEES, Vol.49 Nos. 42& 4316th& 23rd October 2006.

65. If the present government policies and the economy’s dependence on "excessive" oil-rent continuein the future, the Iraqis may enjoy the looking at the high and beauty architect of mushroomedskyscrapers in Major cities such as Baghdad, Basra, Mosul, and Erbil. They may also experience highlevel of consumption and receive better public services. Success stories of certain Iraqi businessentrepreneurs and contractors companies will also dominate the media daily. However, in 2030, thenation would then realize the gravity of misusing the country’s non-renewable oil fortune.

66. See; Statistical details on role of public sector in Iraq are given in: "the economic experience ofmodern Iraq: oil, democracy, the market, and the national economic project (1951-2006)" (Arabic), ibid.

67. See; “oil wealth and poverty in Iraq”, Ibid.

68. See; “Iraq post-war economy: critical review”, ibid.

69. Earlier assessment was given in, “Economic Liberalization and Oil Policy in Iraq: Vision andPriorities", ibid.

70. See; “The Global Financial and Economic Crises and the Hidden Crisis of Oil-Rentier Economies:Back to Basics”, ibid. & "Crucial Challenges to Global and Oil-Rentier Economies", ibid.



71. See; Sabri Zire Al-Saadi, "The Global Financial and Economic Crises and the Hidden Crisis of Oil-Rentier Economies: Back to Basics”, published in “Strategic Insights” issued by “Center forContemporary Conflict”, vol.8 no.1 (January 2009). (http://www.ccc.nps.navy.mil/si). & "CrucialChallenges to Global and Oil-Rentier Economies", published in "Contemporary Arab Affairs", volume 2,no. 2, April 2009, issued by the "Centre of Arab Unity Studies", and published by Routledge: Taylor &Francis Group Ltd., London.

72. See; “Success Conditions for Iraq’s Oil- Rentier Economy: Special Theory of Economic- Rent andFree Market Efficiency”, ibid.

73. See; "the economic experience of modern Iraq: oil, democracy, the market, and the nationaleconomic project (1951-2006)" (Arabic), ibid.

74. See; “Success Conditions for Iraq’s Oil- Rentier Economy: Special Theory of Economic- Rent andFree Market Efficiency”, ibid.

75. Ibid.

76. Ibid.

77. There are also the endogenous variables of the lagged time- span, e.g. GDP at previous year.

78. Ibid.

79. See: John Gribbin, “Science A History”, Penguin books, 2003.

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