Rentier State: The Fundamental Obstacle To Iraq’s Sustainable Development *

From the 1920s to the 1960s, agriculture provided the backbone of the Iraqi economy, with around 75% of the population living in rural areas and agricultural and livestock production accounting for the largest share of GDP.

During this period a system of private individual ownership prevailed, a system expanded by the British, who gave individual owners control of tribal land through a series of laws, the most important being the Land Settlement Act of 1933. This made tribal shaikhs the owners of land that had previously been considered the collective property of the tribe and transformed the role of individuals from co-workers to peasants working on land belonging to shaikhs or major landlords.

Economically, agriculture, fishing and forestry accounted for 32.3% of Iraq’s GDP in 1953, a figure that dropped to 20.6% in 1961. The area of land under wheat and barley cultivation in 1948-52 was 7.48mn dunams (around 2mn hectares), rising to 10.452mn dunams in 1955-56 before falling to 8.272mn dunams in 1974-76.

In the second phase of the modern Iraqi economy, from the mid-1950s to the 1980s, oil began to come into its own. Iraqi oil production started in the late 1920s, but despite the huge profits made by the companies that discovered the oil, the terms of the prevailing concessions gave the exporting countries only a few cents per barrel of production.

Oil revenues did not improve until the mid-1950s, when they began to provide the main source for state budgets. Oil’s share of Iraq’s GDP rose rapidly from 3% at the beginning of the 1950s to around 15% in the 1970s and to 50% by the middle of that decade. More important still was the fact that oil accounted for more than 90% of total exports and was almost the sole source for the state budget. It also provided more than 95% of foreign exchange resources, and was to become the main driver for all other sectors of the economy.

1970S: OIL TAKEOVER

The bottom line is that the Iraqi economy’s dependence on oil began during this period, turning the state into the main, and almost sole, employer, meaning that if the oil were to stop flowing, economic activity as a whole would cease. There were attempts early on to use oil wealth to encourage development and stimulate other sectors, but one by one they evaporated. In 1950, all oil revenues were placed at the disposal of the Iraq Development Board, but the allocation then dropped to 70%. In 1961 only 50% of oil revenues were allocated to development plans.

What is significant is that the decline in allocations from 100% to 50% was required to fund military expenditure and other non-productive state interests at the expense of a rational investment of oil proceeds, to support economic sectors with solid and stable bases in order to develop the country.

Perhaps the most important development in this period was the enactment of Law 80 of 1961, which empowered the state to expropriate around 95% of foreign companies’ concession areas. Developments in the global oil industry were also boosting royalties, with the result that revenues rose from $6bn in 1974 to $26.5bn in 1980.

1980S-90S: WAR ECONOMY

Iraq then entered the third stage – the war economy of the 1980s and 1990s. The roots of this period, which ultimately escalated into the Iraq-Iran war, lay in internal conflicts, especially in Iraqi Kurdistan. Other domestic and external factors – such as the conflict in Palestine – helped to give the army a key role in political, economic and social life as a whole.

It is true that the army was kept out of political life during the era of the monarchy. But this did not reflect the true balance of power, especially after the weakening of the commercial, agricultural and professional sectors as a result of the role played by rising oil revenues in the development of the state. The seizure of the reins of power by the military after July 1958 was a logical consequence, as was the militarization of society. Moreover, the military character of the state forced opposition parties to follow suit. All these factors contributed to the expansion of the role of the military in the economy, and the army became the leader in industry, commerce, property, land ownership and investment. It also became the foremost employer of the country’s workforce.

The number of civil servants in all ministries, including the Ministry of Education, rose gradually to 400,000 in 1972. Just six years later this figure had reached 600,000. But employees in the public industrial sector represented only 16% of the total, while the Ministry of Interior, that is to say the security apparatus and the police, represented 23%. Employees of the Ministry of Defense totaled 200,000, constituting more than 33% of employees in the public sector. The proportion of the armed forces in the workforce at the end of the first Gulf War was 21.3%, up from 2.9% in 1970.

By contrast, military expenditure accounted on average for close to two-fifths of GDP in the 1970s and 1980s. The total in 1981 (ie at the height of the Iraq-Iran war) was 66% of GDP, which at that time was $37.3bn. Conversely, military expenditures throughout the 1980s consumed all oil revenues, and even exceeded them by a factor of two in 1981 and 1982 and a factor of four in 1985 and 1986. The fact is that military expenditure relied mainly on debt and inflation, with the result that before the invasion of Kuwait in 1990 Iraq had run up debts of approximately $120bn.

The country thus embarked on the fourth stage of the rentier state economy, which took two forms. The first, before the US invasion in 2003, was a centralized rentier economy under one-party rule. The second was more diverse in terms of groups and regions and has resulted in substantial differences in the performance of the rentier state as a whole.

1. THE UNILATERAL RENTIER STATE UNDER POLITICAL ISOLATION AND ABSOLUTE RULE

The first and second Gulf Wars left Iraq facing a number of challenges both before and after 2003. Debts with interest reached around $120bn in 2004. Statistics indicate that Iraqi losses from the invasion of Kuwait totaled an estimated $100bn as a result of the oil blockade and ban on exports, while material loss and destruction of infrastructure cost a further $684bn.

Around 1.25mn Iraqis – or a third of the Iraqi workforce – were killed, wounded or taken prisoner during the two wars. If developments in Iraqi Kurdistan, which has removed 3mn citizens from central government administration since 1991, are also taken into account, the extent of the deterioration of the Iraqi economy is clear. The power shortfall after 2003 is an example of this deterioration and of the state’s inability to solve problems. Official figures in 2012 showed power generation running at 7,000mw, of which 1,000mw was imported from Turkey and Iran, with demand not less than 15,000mw, despite the fact that the Ministry of Electricity was allocated nearly $30bn in the budgets for the period 2003-11.

THE COLLAPSE OF THE MIDDLE CLASS

The living conditions of the population have undergone an unprecedented deterioration. Conditions for the poor have worsened, and this category has expanded to include the middle classes and most low-income employees and military personnel, whether employed by the state or in the private sector. Theft, fraud and deceit have become the norm. People sell body parts or their bodies, or rely on charity and their relatives. This is how the majority of the population sustain themselves. Iraq is no longer facing just a poor economy, but rather one that is sick, decaying and controlled by official or semi-official mafias. In contrast to the way ordinary people have to live, the ruling class and the sycophants surrounding them have continued to accumulate money, property and assets.

FUELING INFLATION

Perhaps the most dangerous action taken by the rentier state before 2003 was the fueling of inflation by pumping money into the economy, leading to the collapse of markets and of people’s incomes. The dinar, which two decades ago traded in the market at more than ID1= $3 before dropping to $1, fell to somewhere between ID1,500 and 2,000 to the dollar and has on occasions in recent times reached ID3,000.

Following the American invasion the new dinar was introduced in 2004, and an exchange rate mechanism was set up under which the Central Bank of Iraq (CBI) sets the rate daily according to supply and demand in the currency market. CBI reserves rose from zero in 2003 to $70bn by the end of 2012 and the exchange rate settled at below ID1,200 to the dollar. But the rentier state was suspicious of the successful policies of the CBI, which it sought to bring totally under its control by sacking the CBI Governor, Sinan al-Shabibi, and his deputy, Mudhar Muhammad Salih.

SOCIAL WELFARE, RATION CARDS

Ration cards saved the country from famine during the era of blockades and sanctions, but the continuation of this system for such a long period has had dangerous political and social consequences. Ration cards have turned contracts signed by the Ministry of Commerce into opportunities for bribery and corruption. Moreover, ration cards, the social welfare system and various other forms of support constitute approximately 13% of the 2013 budget.

WIDESPREAD CORRUPTION

The greatest corruption is not theft in the usual sense of the word or the question of salaries, even though these are important. Rather, it is the way the system is geared towards consumption rather than production, and the harm that this does. The phenomenon of corruption is an extension of the state’s monopoly and centrality, giving it the power to interfere in matters small and large. The number of state employees has risen over the past eight years from less than 1mn to 2.5-3mn. But state productivity and effectiveness have declined rather than advanced over this period. China has 20 ministries. We have more than 27 after the recent restructuring, when a maximum of 15 would suffice.

Similarly, we should also opt for ‘social conscription’, a ‘parallel economy’ and ‘market economies’, with the latter being a measure of the efficiency of the public and private sectors, and a way of sharing in the provision of labor and services – rather than there being a total reliance on the state.

Overstaffing and mismanagement in departments can be dealt with by rooting out corruption and impediments to efficiency and adopting modern management and organizational methods, including e-government.

Finally, the state today is not one that offers public service but rather a poor form of social care. It would be better for the budget, the economy, citizens and businessmen if the government allowed the majority of civil servants to remain at home and receive their pay.

THE CORRUPT STATE AND SOCIETY

Our relationship with the state has become one of compulsion, based on force, threats and lies on one side and non-productivity, distrust, cynicism and servility on the other. We rely on the state owning everything and having a complete grip on society.

UNEMPLOYMENT: THE BIGGEST CHALLENGE

Unemployment is the greatest concern of the Iraqi people. But the concept of unemployment is weak, especially in the public sector, since unemployment is linked to work, which means productivity. Studies indicate that the average work rate of employees is as little as 20 minutes a day, meaning that 130,000 employees could do the work of 3mn. As for the remaining 2.870mn employees, they come under the category of ‘social welfare.’ This does not mean that the welfare of millions of employees is being neglected, but it does mean that the system is failing.

2. THE SECOND PHASE: THE RENTIER STATE UNDER ADMINISTRATIVE TENURE AND POLITICAL OPENNESS

In comparing the rentier state system before and after 2003, it should be noted that the first and second phases are different in many ways. The first is based on a political system and a social and political philosophy that differs radically from the second, since the latter is based on a constitution that has a different political, economic and social policy from the 1970 Interim Constitution. But in practical ways we still find ourselves living in a rentier state system that has not fundamentally changed. It is true that the constitution favors a market economy and states that oil wealth is the property of the Iraq people and not the state. The banking system has also been brought by law under the central bank, which has greatly facilitated the process of transferring capital to and from the country. The CBI determines the value of the currency based on supply and demand, oversees the establishment of companies and banks, organizes a currency bourse and seeks to bring Iraqi and foreign capital under the framework of new Investment Law 13 of 2006. But despite all these theoretically positive developments, in practical terms nothing has happened to allow us to change the description of the system – at least at the centralized state level. For the rentier economy remains strong, and is even becoming stronger in many aspects, since the emerging system has not eliminated aspects of the old rentier system such as corruption, militarization, destruction of infrastructure and lack of services and investment. Meanwhile new problems such as terrorism have appeared, while the rentier economy plays an ever greater role in the creation of new values governing spending, incentives and rights. According to the report of the ‘Advisory Board’ monitoring the accounts of the Development Fund (2010-13), income in round numbers was $270bn and expenditure $263bn, and there was a surplus of $7.5bn at the end of January 2010. With the $270bn that Iraq earned over the seven-year period many problems could have been dealt with if the money had been spent in the proper way. There is no way of explaining this waste of money, except to say that the rentier state, by nature, is wasteful and unproductive, and has proved a complete failure in all its incarnations, past and present.

*Summary of a paper delivered at the First Iraqi Economic Network, held in Beirut on 31 March 2013. MEES translation from the Arabic.

** Al-Sayyid ‘Adil ‘Abd al-Mahdi is Iraq’s former Vice President and Minister of Finance.