Economy and Business in Iraq
Since the early 1980s, Iraq has been strongly influenced by years of war, as well as by international economic sanctions, which have had a profoundly negative effect on the country’s economic development. The first Gulf War, Iraq’s war with Iran in 1980–88, caused both large resources to be tied up in war efforts over a long period of time and a large part of the oil export infrastructure destroyed. The Second Gulf War, the Allied attack on Iraq in 1991, caused widespread destruction of the entire infrastructure, and was followed by an international sanctions regime that prevented reconstruction of the country. The UN sanctions lasted until the third Gulf War, the US-led invasion of Iraq in 2003, which inflicted further damage on the country, but which in several areas opened up a new social and economic development of Iraq, when the war removed President Saddam Hussein and the Baath regime, and with it the basis for the sanctions.
The starting point for Iraq’s economic and social development at the time of the regime change in 2003 was twofold: the country was strongly characterized by a negative development from 1980 – with three wars and a decade of sanctions; At the same time, Iraq is a resource-rich country with great income potential. With its significant population, Iraq also has a good foundation for industrial development, with its own professional expertise produced by a well-developed education system – in addition to the traditionally strong agricultural sector.
Already during the first Gulf War an increasing share of public resources was used for military purposes, while other key sectors – including electricity and water – were prioritized. Since the 1950s, the economy has been primarily characterized by the rise of a dominant oil sector, which has funded modernization. The outlook was good again after the first Gulf War ended in 1988, but partly because of the economic sanctions, Iraq entered a new economic downturn, and the country’s development plans failed to finance. Oil sector reconstruction was hampered by lower oil prices and government revenues, and Iraq blamed Kuwait, to help lower prices through overproduction. Iraq’s income needs are seen as a key motive for the occupation of Kuwait in 1990 – which, however, significantly deteriorated Iraq’s economy.
As a result of the invasion of Kuwait, the UN imposed financial sanctions on Iraq – and occupied Kuwait – in August 1990. At the same time, Iraqi and Kuwaiti accounts abroad were frozen, and Iraq was far from economically isolated, with the exception of a road link to Jordan. This boycott weakened Iraq’s opportunities for reconstruction, and public services also lapsed. The sanctions, especially from the mid-1990s, were gradually eased by allowing Iraq to increase its state revenues through the export of oil, the so-called “oil-for-food” program, which allowed access to export oil to import food. and medicines for an increasingly vulnerable civilian population. The sanctions were broken, among other things, by smuggling into Jordan and Syria, and the revenues from this helped to maintain Saddam Hussein’s power structure.
Especially from the 1970s, oil is the mainstay of the country’s economy, and despite investments in industry and agriculture and strong growth in the public sector, Iraq has gradually become more dependent on oil export revenues and to some extent gas. Prior to the sanctions, crude oil accounted for around 95 percent of the country’s export revenue, and funded the modernization of society. In the past, Iraq also exported food, but its focus on and agricultural production decreased as oil revenues allowed investment in industry and services. Agriculture is largely dependent on artificial irrigation, primarily from the two major rivers Euphrates and Tigris, both of which originate in Turkey, that is, outside Iraq’s borders. Iraq is therefore vulnerable to interference in the water flow, which has been done both by Turkey and Syria, which the Euphrates flows through. The two rivers gather and have a common outlet through Shatt al-Arab on the Gulf of Persia, where there were previously large, inhabited swamp areas. These embraced an area of about 20,000 km 2, and were home to a culture of their own. Between 1985 and 2000, the Iraqi regime carried out desiccation covering about 90 percent of the area, in what is known as an ecological disaster. Due to the high salt content of the dried up soil, it will be difficult to rejuvenate large parts of the area, although parts of it have been flooded again after 2003.
A large-scale economic reconstruction started after the occupation in the spring of 2003, initially led by the US administration, then by the interim Iraqi Governing Council and then the elected government. This program requires greater investment than can be generated through Iraq’s oil exports, and a number of countries have joined forces to assist in the recovery, promising in 2003 to inject $ 32 billion. The World Bank had then estimated the need for a recovery of $ 36 billion; other estimates are significantly higher. An important contribution to regaining Iraq’s economy is also debt restructuring. A first major debt relief occurred in 2005, when the United States left $ 4.1 billion and a group of European countries decided to write off 80 percent of Iraq’s $ 38.9 billion debt. Iraq’s total foreign debt was estimated at USD 120 billion at the end of Saddam’s reign. Much of the debt is to arms suppliers, and to individuals, corporations, and states that were awarded war reparations as a result of Iraq’s invasion and occupation of Kuwait in 1991.
Petroleum production is very important to the country’s economy, and has long been the country’s most important export industry.
The living conditions of most people deteriorated throughout the 1990s; partly as a result of the devastation of the war, more as a result of the sanctions – which both reduced access to essential items and led to the decay of the public electricity, water and sewerage systems, resulting in increased spread of disease. The penalties, with a lack of food and medicines, also led to a sharp increase in malnutrition and malnutrition especially in young children and increased infant mortality. Partly as a result of the occupation power dissolved by the defense and the police in 2003, as well as the removal of members of the Baath party from public positions, the already high unemployment rate further increased. The greatly weakened security situation after 2003 made it difficult to normalize social life, which meant that reconstruction became more expensive.the coalition forces, and these were threatened by attacks by the Iraqi resistance, demanding special – and costly – security measures. The US administration also changed Iraqi law, allowing foreign interests to own businesses in Iraq. The Norwegian engineering company that participated in the coalition force outside Basra in southern Iraq in 2003–04 contributed primarily to the physical reconstruction of the country, both with the removal of explosives and the repair of infrastructure.
Iraq is traditionally an agricultural community, but with the rise of the oil industry, especially from the mid-1950s, the importance of agriculture has gradually diminished, and Iraq has gone from being a net exporter of agricultural products to dependent on imports. About 13 per cent of the land is cultivated, while another nine per cent is used for grazing. About half of the cultivated area is irrigated, and is adjacent to the large rivers Euphrates and Tigris, where several ponds are built for this purpose. Due to decay through the 1990s, large areas were left fallow. While around half of the workforce was employed in agriculture in 1965, the proportion fell to 9.2 percent in 2002. Despite government subsidies to the sector through the 1970s and 1980s, including self-sufficiency in food, the goal was not met. reached. Through the 1980s, new reforms were also introduced to encourage private initiatives in the sector. Iraq has considerable potential for increased food production, including for export to neighboring countries that do not have the prerequisite for being self-sufficient.
In central and southern Iraq, barley, rice, corn, millet, sesame, tobacco, sugar, vegetables, fruits, cotton and more are grown. The most important agricultural sales product is dates, and until 1990 Iraq provided 80 percent of the world’s dates. The most important area of cultivation lies along Shatt al-Arab. In the north wheat and barley are grown by so-called “dry farming”, in the mountains tobacco and fruit.
Forestry and commercial fishing have very little impact on the country’s economy, but the development of a fish farming industry has begun.
Mining and energy
Iraq has large mineral resources, primarily in the form of oil and gas, but there is also commercial extraction of phosphate and sulfur. Detection of rich oil deposits in the Middle East in the early 20th century contributed to the great powers of the region and to the United Kingdom in particular securing political control over much of the region. The strategic importance of energy resources has given the region more recently, has boosted interest, and one explanation for the US invasion of Iraq in 2003 is the need to secure the country’s oil supplies – and reduce dependence on other suppliers, especially Saudi Arabia.. Exploration for oil in later Iraq started in the Mosul area prior to World War I, affecting the British’s behavior in the area. The United Kingdom, and not least the chief of the British Navy, Winston Churchill, was keen to secure oil for its fleet. Ownership in the oil sector was the theme of the San Remo Conference in 1920, which led France and the United Kingdom to cooperate on oil recovery in Persia and Mesopotamia, which created concern in the United States that would secure access for the US oil company. Already after the First World War, there was a fear of energy shortages, and that the oil deposits were being used up. In 1925, the Turkish Petroleum Company (TPC) signed a licensing agreement with the new state of Iraq for 75 years. Ownership interests from several countries were included in the TPC, but British interests dominated the company, which was registered as UK. Prior to this, there was a diplomatic battle over the oil-rich Mosul province, which Turkey claimed, but which in 1925 ended in British-influenced Iraq. With this clarification, oil exploration and extraction started from the fields at Kirkuk, north of the country, where oil and gas were found in 1927.
Iraq’s first oil export occurred from Kirkuk in 1934, and the Kurdish city has become one of the country’s oil centers. It was not until the 1950s that Iraq gained significant revenue from oil extraction, and a substantial increase in exports occurred in the 1970s, after the rich Rumailah field at Basra came into production. In 1961, the state’s takeover of the oil sector began, and in 1972 the nationalization of the oil industry was completed, including by the Iraq Petroleum Company (IPC; formerly the TPC), and the state secured full control of the oil revenues. In 1964, the state established Iraq National Oil Company (INOC), to develop the licenses taken over from IPC. Later, several state-owned companies were established to handle the extraction of oil deposits in various parts of the country.
Iraq’s output peaked at 3.7 million barrels per day in December 1979. In 1980, before the outbreak of the war with Iran, exports stood at 3.3 million barrels per day, with oil revenues accounting for about 60 percent of GNI. The country was then the world’s second largest exporter of crude oil, after neighboring Saudi Arabia. Then production and exports fell as a result of the war. In 1990, before the invasion of Kuwait, production was again up to 3.5 million barrels per day, of which 3.1 million barrels went to export – before the Second Gulf War broke out, and again hit exports. In 1996, production was down to 600,000 barrels per day, but as a result of the “oil for food” program, oil exports could rise again, and production reached about 2.6 million barrels per day in early 2003, just before the outbreak of the war. During the US-led invasion in March, production stopped for a shorter period, but the oil industry was sought to be protected by the US forces, and only seven of a total of 1500 oil wells were ignited. Prior to the war, there were fears that Iraqis would ignite many of the wells, as they did in Kuwait, before retiring in 1991. Already in April 2003, production resumed in the Rumailah field, but the recovery has since been hit by sabotage operations of Iraqi resistance groups.
In 2003, Iraq’s oil reserves were estimated at 115 billion barrels; the third largest in the world, after Saudi Arabia and Canada. About 80 percent of known deposits are found in the southern part of the country, but only about 10 percent of Iraq’s land area has been surveyed, and there may be significant deposits not yet found. In 2004, Iraq’s oil ministry stated that the country had “unconfirmed or potential reserves” of 214 billion barrels, and it is believed to have the potential to become the world’s largest oil producer, with reserves that could last nearly 130 years before being depleted.
Production costs in Iraq are low; about one USD per barrel, which is also less than half the cost in Saudi Arabia, and only one-tenth of that in the United States. Alongside the large fields in the south, there are several smaller ones in the north, and a larger east of Baghdad, which was opened for production in 1989. There is a great need for capital for the rehabilitation of the oil industry, for production, processing and transport. It is estimated that Iraq’s oil export infrastructure can handle about six million barrels per day; 2.8 million via shipping ports on the Gulf, 1.65 million through Saudi Arabia, 1.6 million through Turkey, and perhaps 300,000 through Jordan and Syria. Iraq has only very little access to the sea, at the heart of the Persian Gulf, and the country’s oil industry relies on other export channels, primarily oil pipelines to shipping ports. Such are built from Kirkuk to Ceyhan in Turkey, as well as from the Kirkuk fields to Banias in Syria and Tripoli in Lebanon, and from the southern oil fields to Muajjiz on the Saudi Red Sea coast. Several of these have at times been closed as a result of war actions or political disagreements. One more cord Haifa in what was then Palestine was built in the 1930s, and after the imposition of the Saddam regime in 2003, it was speculated whether it should be restored and re-used. However, it is in very poor condition and in practice dismantled through Jordan. Plans have been made to build a new pipeline to Jordan, and discussed with Iran the construction of a pipeline to the Abadan refinery there.
Iran destroyed Iraq’s offshore oil terminals during the first Gulf War, and partly during the second. Iraq has three tank terminals in the Persian Gulf: Basra, Khor al-amaya and Khor az-Zubair, with the former being the largest.
Iraq’s crude oil refining capacity was estimated at about 590,000 barrels per day in 2004. The country has eight refineries, with Baiji, Basra and Daura as the largest. In 2003, it was estimated that investments to generate 3.5 million barrels per day would amount to approximately $ 9 billion, and an additional $ 20 billion to repair the necessary electricity supply. Following the US occupation in 2003, there has been a political battle over the future of Iraq’s oil reserves, not least about who is going to make investments. Prior to the invasion, Russian interests had entered into agreements for the development of new oil fields in Iraq. Russia opposed US intervention; So did France – which also has economic and strategic interests in Iraqi oil. The US government rejected oil as a reason for entering Iraq.
Iraq also has large gas deposits, in 2003 estimated at approximately 3100 billion m 3. In 1979, production reached 20.2 billion m 3, but fell as a result of the war with Iran before returning to 10.7 billion m 3 in 1989. By far the largest deposits are related to oil, and the largest gas areas are found at the oil fields – both in the north and south. In 2002, it was estimated that Iraq produced about 300 million m 3 a month, solely for its own use. There are plans to increase gas production, mostly for domestic consumption, to reduce oil dependency, but also with a view to petrochemicals and increased exports – including to Europe, via Turkey.
Iraq also has some other mineral deposits, notably iron ore, chromium, copper, lead, zinc, sulfur and phosphate. Prior to 1990, there was strong growth in the export of sulfur from deposits at Mosul, with a record production of 1.4 million tonnes in 1989, the majority for exports. The phosphate deposits have formed the basis for the production of artificial fertilizers. Particularly as a result of the Second Gulf War, much of Iraq’s electricity supply was destroyed, and lack of production and stable supply was a major problem associated with post-war reconstruction in 2003. A production capacity of approximately 9300 MW in 1990 was reduced to just 340 MW in March 1991 – following the Allied attacks. Nearly 90 percent of the supply network was also destroyed. In 2004, Iraq had a production capacity of approximately 5000 MW, which in 2016 has increased to 13000 MW. In 1981, Iraq’s nuclear test reactor Osirak was destroyed in an Israeli bomb attack.
Iraq developed a significant industrial base as part of the modernization of the country, especially from the 1970s, when, in addition to an extensive small industry, it was invested in heavy industry, essentially at the hands of the state. Among other things, in addition to the oil and mining industry, two cement factories and a steel mill were built, a larger textile factory; several sugar refineries and flour mills, as well as plants for the production of a number of goods to replace the need for imports. Iraq also built up a significant military industry, as part of its armament. After 1990 there was a sharp decline in industrial production. Many industrial plants have been closed down as a result of the trade boycott, which made it difficult to obtain both spare parts and imported raw materials.
Iraq’s foreign trade has from the 1970s been dominated by oil exports, which gave Iraq large revenues, which were used, among other things, to import various goods for the modernization of the country, as well as for military production. As a result of Iraq’s occupation of Kuwait in 1990, the pattern of trade was completely changed, with the UN Security Council imposing sanctions on Iraq, which persisted until the US invasion in 2003. The boycott brought about an almost complete halt in Iraq’s foreign trade in the first half of the 1990s, but from In 1996, the United Nations authorized a limited oil export, on condition that 70 per cent of the proceeds from the sale were earmarked for food and medicine, and 30 per cent for the compensation of victims after the Kuwait war. In addition to this official and supervised trade, there was extensive smuggling of oil out of Iraq – and of goods into the country.
Before the Second Gulf War, crude oil sales accounted for about 95 percent of Iraq’s export revenue. Apart from oil, Iraq’s only significant export goods have been dates and cement.
Transport and Communications
Iraq’s communications network was greatly expanded in the 1970s, but was hit during the first Gulf War, and even more so during the second. The major cities are linked by a state-owned railway network of approximately 2400 km, divided into three main lines; Baghdad-Basra-Umm Qasr; Baghdad-Mosul-Tel Kotchek; Baghdad-Kirkuk-Arbil. The rail network is connected to the Syrian network at Tel-Kotchek, thus providing a continuous connection from Basra on the Gulf of Persia to Turkey and Europe. A connection to Husaiba in Syria was opened in 1983 and provides a connection to the Syrian port city of Latakia. However, these connections have occasionally been closed due to acts of war or purely political conditions. The road network comprises a year-round main road system of approximately 45,500 km, linking the most important cities and providing connections to neighboring countries. A new road network specially designed for the carriage of goods and troops was built in the border areas against Iran in connection with the first Gulf War. During the sanctions in the 1990s, the road connection to Aqaba in Jordan was of particular importance.
Aviation was on its way to a halt in the 1990s, when France, the United Kingdom and the United States imposed severe restrictions on air traffic in Iraqi airspace. There are international airports in Baghdad, Basra and Mosul. Both civilian and military airports suffered major material damage during the Second Gulf War. The same was true of the telecommunications network, which had been modernized in the late 1980s.
Shatt al-Arab is navigable for offshore vessels to Basra, while smaller vessels can go all the way to Baghdad. The Euphrates has little significance for transport. Basra and Umm Qasr have traditionally been the country’s most important port cities, but Basra has been closed for long periods.