V.

Economy

The modern Iraqi economy is largely based on petroleum. Most of the few large manufacturing industries have to do with oil.

A.

Iraqi Economy Under Hussein

During the rule of dictator Saddam Hussein, the Iraqi economy was adversely affected by four major factors: the Iran-Iraq War during the 1980s, an international oil glut in the 1980s and 1990s, the economic sanctions imposed by the United Nations (UN) after the invasion of Kuwait in 1990, and the Persian Gulf War in 1991. The combined effect of all these factors was the destruction of Iraq’s basic infrastructure (roads, bridges, power grids, and the like) and the country’s financial bankruptcy.

Studies done at the end of the 20th century revealed that Iraq’s real gross domestic product (GDP)—that is, its GDP adjusted for inflation—fell by 75 percent from 1991 to 1999. In the late 1990s the country’s real GDP was estimated at about what it was in the 1940s, prior to the oil boom and the modernization of the country. As a result, per capita income and the people’s calorie intake plunged from the levels of relatively better-off Third World countries to those of the desperately poor Fourth World states, such as Rwanda, Haiti, the Democratic Republic of the Congo, and Somalia. Other reports indicated that following the end of the Persian Gulf War all aspects of Iraq’s economy were devastated. Its valuable assets, as well as its basic social and economic infrastructure, were squandered, eroded, or irrevocably destroyed. Iraq’s best-educated people fled, and the value of its national currency, the dinar, continued to decline, driving prices ever upward. Under Hussein, the government continued to finance its spending commitments by printing money, thus guaranteeing that inflation would continue unabated.

The UN sanctions created widespread unemployment, skyrocketing inflation, and severe shortages of previously imported commodities, including medicine, medical equipment, animal vaccines, farm machinery, electricity-generating equipment, and water purification supplies. As a result of these shortages and the damage done to water and sewage treatment systems during the Persian Gulf War, the incidence of disease and malnutrition rose sharply.

In 1996 the UN began to allow Iraq to swap oil for food and medical supplies, marking the country’s first step away from near-total diplomatic and economic isolation since its invasion of Kuwait. However, this program was not going to solve the fundamental problems of a devastated economy and of a population impoverished by two successive wars and about a decade of severe economic sanctions. To make matters worse, Iraq’s official foreign reserves (estimated at $35 billion to $40 billion at the beginning of the 1980s) were totally drained, either spent to finance the war with Iran or misallocated on projects such as building dozens of luxury palaces for Hussein and his family. On top of this, the country was sinking in a mire of foreign debt, war reparations, and other financial obligations, which were certain to keep it in economic shambles for decades to come.

Following the U.S.-Iraq War, the United States spent billions of dollars to revive Iraq’s oil industry. The U.S. expenditures were also aimed at restoring and upgrading Iraq’s oil fields and refineries. Much of the work was contracted to U.S. and other foreign oil companies. By March 2004 Iraq was producing about 2.5 million barrels of oil per day, nearly as much as it produced prior to the 2003 war. However, the continued insurgency against the U.S. occupation in Iraq targeted oil pipelines and oil workers, and these attacks drastically cut oil production. According to the International Energy Agency (IEA), Iraq produced an average of 1.8 million to 2 million barrels a day through most of 2004 and 2005. In the last three months of 2005 production sank to 1.7 million barrels, and in January 2006, it declined even further to 1.5 million barrels per day. By the end of 2006 production had increased to 2.2 million barrels per day.

B.

Government Role in the Economy

The early 1970s was a time of important development for the Iraqi economy and the government’s role in it. In 1972 the government nationalized the Iraq Petroleum Company (IPC), which had been owned by foreign oil companies. The nationalization, together with the steep rise in the price of crude oil that the Organization of Petroleum Exporting Countries (OPEC) engineered in 1973, had the effect of raising Iraq’s oil revenues more than eightfold—from $1 billion in 1972 to $8.2 billion in 1975. This sharp increase in revenue solidified the government’s role in the economy, making the government the primary agent for transferring wealth from the petroleum industry to the rest of the economy. In this way the government acquired the unprecedented power to allocate economic resources to various sectors of the economy and among different social classes and groups. Beginning in the 1970s, the Iraqi government came to be the primary determiner of employment, income distribution, and development, both of economic sectors and of geographical regions. It carried out extensive economic planning and exercised heavy control over agriculture, foreign trade, communication networks, banking services, public utilities, and industrial production, leaving only small-scale industry, shops, farms, and some services to the private sector.

Saddam Hussein, in power from 1979 until 2003, maintained the government’s central role in the economy. The crushing nature of the UN sanctions meant that Iraq’s economic policy at the start of the 21st century focused mainly on building a coalition of nations to support the removal of the sanctions. The primary way the Iraqi government could win support from other nations was by promising lucrative post-sanction oil contracts to potential allies. Most experts believed that Russia, China, and France would have been the main beneficiaries of these promises. The Hussein government focused on circumventing the sanctions, primarily through oil smuggling.

Following the U.S. invasion of Iraq in 2003, the U.S. civil administrator for Iraq, L. Paul Bremer III, undertook a number of unilateral initiatives to convert Iraq from a state-run economy to a market economy. Bremer ordered the privatization of all state-owned enterprises, with the exception of the oil industry, and allowed those enterprises to be wholly owned by foreign investors. The orders also allowed foreign investors to withdraw all of their profits and dividends without reinvestment in Iraq. The banking sector was also privatized, and foreign banks were allowed to enter Iraq and own up to 50 percent of an Iraqi bank.

C.

Labor

The Iran-Iraq War, the Persian Gulf War, and the UN sanctions crippled the Iraqi economy, resulting in an unprecedented rate of unemployment. According to World Bank statistics, in 2004 the labor force consisted of 8.06 million workers. In 1996, 66.4 percent of the labor force was employed in services, 17.5 percent in industry, and 16.1 percent in agriculture. Women accounted for 20 percent of the labor force. Before economic sanctions took effect in 1990, Iraq had many foreign workers, the majority of them Egyptian agricultural workers. Following the U.S.-Iraq war of 2003, Iraq’s minister of planning and international cooperation estimated unemployment at more than 50 percent.

D.

Mining

Petroleum is the most important natural resource of Iraq. The country is estimated to have about 10 percent of the world’s supply of proved petroleum reserves. The oil fields are located in two main regions: in the southeast, just inland from the Persian Gulf, near Ar Rumaylah, and in the north-central part of the country, near Mosul and Kirkūk. Small deposits of various other minerals are found, principally ores of iron, gold, lead, copper, silver, platinum, and zinc. Phosphates, sulfur, salt, and gypsum are fairly abundant, and seams of brown coal are numerous.

The production of petroleum is the mainstay of Iraq’s economy. The oil wells also yield sizable quantities of natural gas. Refineries are located at Baghdād, Al Başrah, Ḩadīthah, Khānaqīn, Kirkūk, and Al Qayyārah. A plant for processing and bottling liquefied petroleum gases is situated at At Tājī, near Baghdād.

Until the early 1970s four foreign-owned companies controlled the Iraqi petroleum industry. The two leading firms were the IPC, which held concessions in the north, around Kirkūk and Mosul, and the Basra Petroleum Company, which operated in the southeast, near Al Başrah. From 1972 to 1975 all the foreign oil companies were fully nationalized by the government, and their operations were taken over by the Iraq National Oil Company and the Northern Petroleum Organization.

Falling oil prices and the war with Iran severely hampered the petroleum industry during the 1980s. The industry was dealt another crippling blow in 1990, when Iraq invaded Kuwait and the UN responded with an embargo on Iraqi oil. In order to alleviate the suffering of the Iraqi people due to the embargo, the UN in 1995 voted to allow Iraq to export limited amounts of oil so the country could buy food, medicine, and other basic goods. Such oil exports began at the end of 1996. Iraq produced an estimated 478 million barrels of petroleum and 1.5 billion cu m (53 billion cu ft) of natural gas in 2003. By comparison, in 1979, the year of its peak production, Iraq produced almost 1.3 billion barrels of petroleum.

E.

Agriculture

Although oil dominates its economy, Iraq is also an agricultural country. Approximately 13 percent of the land is under cultivation. Most farmland is in the region of the Tigris and Euphrates rivers. The most important crops are wheat, barley, and rice. Before the imposition of UN sanctions, exports of dates from Iraq accounted for a major share of world trade in dates. Other fruits produced include apples, figs, grapes, olives, oranges, pears, and pomegranates.

Livestock raising is an important occupation for Iraq’s nomadic and seminomadic peoples. Sheep, goats, cattle, and poultry are the most commonly raised livestock animals. In addition, the world-famous Arabian horse is extensively bred.

F.

Manufacturing

Despite efforts by Hussein to reduce the country’s dependence on oil, Iraq’s manufacturing industry is not well developed. Besides petroleum and natural gas products, manufactures are largely limited to goods such as processed foods and beverages, textiles and clothing, metal products, furniture, footwear, cigarettes, and construction materials. Baghdād is the leading manufacturing center of Iraq.

G.

Services

Many Iraqis work for the government in social services such as health and education. Financial and personal services are also important income earners.

H.

Energy

Power plants fueled by oil or natural gas produce 98 percent of Iraq’s electricity. Hydroelectric facilities operate on the Tigris River and some of its tributaries.

I.

Transportation

Iraq has railroad connections through Syria with Turkey and Europe. The Iraqi state railway system consists of about 2,440 km (about 1,515 mi) of track. The country’s road network is well developed: About 84 percent of roads are paved. International airports serve Baghdād and Al Başrah. Al Başrah, on the Shatt al Arab, and Umm Qaşr, on the Persian Gulf, are the main ports for oceangoing vessels, and river steamers are able to navigate the Tigris from Al Başrah to Baghdād.

During the Persian Gulf War, bombing by United States-led coalition air forces demolished many transport facilities, such as bridges, ports, and airports. Some estimates suggest that the bombing destroyed more than 80 bridges. Iraq was able to rebuild some bridges and other facilities in the years after the war.

J.

Communications

Much of Iraq’s telecommunication network was also destroyed in the Persian Gulf War. After Hussein’s overthrow in 2003, the new Iraqi administration began rebuilding and upgrading the country’s telephone mainline and mobile telephone systems. The Iraqi Media Network oversees the operation of a number of television and radio stations. Under Hussein’s rule, only a small number of newspaper and periodicals were printed, but since his overthrow, dozens of new publications have been founded.

K.

Foreign Trade

Before the UN imposed a trade embargo on Iraq following Iraq’s invasion of Kuwait in 1990, average annual exports were estimated at $10.4 billion and imports at about $6.6 billion. Petroleum sales accounted for almost all the export earnings; other exports were dates, raw wool, and hides and skins. Leading imports were machinery, transportation equipment, foodstuffs, and pharmaceuticals.

With the trade embargo in place, Iraq virtually ceased earning income from exports. In 1996, under the oil-for-food agreement, the UN permitted Iraq to export oil worth $2 billion every six months to purchase food and medicine for its civilian population. However, Iraq could not pump that much oil for a variety of reasons, such as damage to equipment and loss of skilled workers. Therefore Iraq did not export as much oil as was allowed. Consequently, in 1996 Iraq exported oil worth only $400 million and imported food and medicine worth $492 million. The UN agreed in 1998 to increase the value of the oil-for-food arrangement to $5.2 billion every six months.

After Hussein’s overthrow in 2003, the UN ended the Iraqi trade embargo. The U.S.-led transitional authority established the Trade Bank of Iraq to oversee the return of unfettered foreign trade.

L.

Currency and Banking

The monetary unit is the Iraqi dinar, consisting of 1,000 fil or 20 dirham (1,472 dinars equal U.S.$1; fixed rate). Currency is issued by the Central Bank of Iraq, which was entirely state-run and controlled the banking system and foreign exchange transactions until Hussein’s overthrow in 2003. The banking sector was subsequently privatized, and foreign banks were allowed to enter Iraq and own up to 50 percent of an Iraqi bank.

Wajeeh Elali contributed the Economy section of this article.