Senior Advisor, International Institute for Democracy and Electoral Assistance
Choman
Hardi
Director, Center for Gender and Development Studies, The American University of Iraq, Sulaimani
Safa
al-Sheikh Hussein
Former Deputy, National Security Council of Iraq
Kawa
Hassan
Non-resident Fellow, Stimson Center
Maysoon
al-Damluji
Former Culture Adviser to the President of Iraq; former Deputy Minister of Culture 2003–06; former Member of Parliament, Iraq
Ahmed
Tabaqchali
Chief Strategist, AFC Iraq Fund
Yanar
Mohammed
Co-founder and President, Organization of Women’s Freedom in Iraq
This Chatham House essay collection, published to mark 20 years since the 2003 US-led invasion of Iraq, brings together the observations and analysis of practitioners from a wide range of professional backgrounds who have lived and worked in Iraq over the past two decades.
This collection explores the complex and devastating legacy of the invasion, the occupation and decisions made by Iraqi and international leaders in the years following, what could have been done differently, and how Iraq’s current situation can be understood.
Taken together, these personal stories and the lessons learned offer insights for policymakers, analysts and others concerned with Iraq – and with other conflict and post-conflict zones – on the perils of promoting democracy through war, on the consequences of agreeing short-term political bargains at the expense of long-term stability, and on the importance of accountability as a founding principle for any new system of governance.
Missed opportunities for economic reform
Ahmed
Tabaqchali
Chief Strategist, AFC Iraq Fund
Publication date: 4 May 2023
In the summer of 2020, I was invited to join a government team tasked with reforming the Iraqi economy. It seemed to me that we had a promising foundation for structural change, as the government formed in May 2020 included Ali Allawi as minister of finance, who brought with him a wealth of experience in practice and in academia. To me, he understood the scale and the root causes of the economic crisis the country was facing in the wake of the emergence of COVID-19 and the collapse in oil prices.
The dependence on oil prices meant that for much of the year the government’s revenues were less than its expenditures, with particular fiscal pressures arising from the need to maintain public sector salaries, pensions and social welfare. These conditions created a potential ‘perfect storm’, or so it seemed, that might force the ruling elite and the institutional system to consider a change of course and avoid an economic collapse. We knew that the problem was systemic, and that we faced an uphill battle. But we also thought that the severity of the crisis created an opportunity – small as it was – to change the direction of economic management, and to correct wrongs stemming from post-2003 decisions. The team’s strategy, the White Paper for Economic Reform, was published later in 2020.
However, the recovery of oil prices shortly following the paper’s release meant that the worst of the crisis was averted, allowing the government to meet payments for public sector salaries, pensions and social welfare. This ultimately sealed the fate of the white paper’s reform proposals. As the threat of economic collapse faded in lockstep with increasing oil prices, the elite re-embraced the policies pursued since 2003, and abandoned all thoughts of a change of approach. In giving up a golden opportunity for reform, Iraq’s ruling elite followed an all too familiar pattern: much the same had happened after the 2014–17 crisis associated with the conflict with Islamic State (ISIS) and the crash in oil prices, as well as after the 2008–09 global financial crisis and related fall in oil prices.
As the threat of economic collapse faded in lockstep with increasing oil prices, the elite re-embraced the policies pursued since 2003, and abandoned all thoughts of a change of approach.
An unfulfilled promise of economic transformation
The expectation for the future of the country and its economic development, following the 2003 US-led invasion and the prior decade and a half of international isolation and sanctions, was that reconnection of Iraq with the global economy and a resumption of growth in oil exports would prove transformative. If successful, these changes would establish a modern market economy driven by a thriving private sector. Projected revenues from increased oil exports were expected to fuel GDP growth, finance the rebuilding of infrastructure destroyed by decades of conflict, and restore what had been one of the region’s largest and most advanced economies to its former glory.
As such, the country attracted significant investments from regional and international players seeking to benefit from an expected explosion in economic activity as structural transformation got under way. In banking, major regional and international banks either bought majority stakes in Iraqi banks or established branches in the country. This promised to accelerate the adoption of banking, and with it an expansion in economic activity as banks began to play an increasing role in providing capital to the private sector. In telecoms, three mobile operators – majority owned by regional and international mobile operators – started offering country-wide telecom and internet connectivity that increasingly made the provision of modern services, such as e-services and e-commerce, possible.
Concurrent with these developments was the evolution of the Iraq Stock Exchange (ISX) to support the development of an efficient economy as a vehicle for providing capital for companies to grow. By 2012 it was about to undergo significant growth as a consequence of requirements that the three mobile operators launch initial public offerings (IPOs). Such a transformation promised to bring the ISX to the attention of major international emerging and frontier market investors. Underpinning the IPOs were aspirations for the country to benefit in the same way as other emerging and frontier markets had done when they had begun to attract foreign capital in the past. By that time, I had over 20 years of financial industry experience working in international and regional capital markets. This provided me with the opportunity to be involved in 2013–14 as part of the advisory team for the IPO of one the mobile operators, and ultimately allowed me a deeper involvement with Iraq’s economy.
The makings of a perfect storm
However, the opportunities presented both by the inflows of foreign capital and by the evolution of the ISX were not sufficient on their own in enabling wider structural reform, or in sustaining those reforms that were undertaken. Working against the transformation to a diversified market-based economy driven mostly by the private sector were the policies pursued by members of the ruling elite, who instead used the country’s increasing oil wealth to enlarge the state’s role in the economy and society, in exchange for social acquiescence to their rule.
That is not to say that reforms were never attempted, but they were tentative, lacked depth and were not sustained. This ultimately meant they were either abandoned or reversed. For example, in 2016 it had seemed that the double whammy of the ISIS conflict and lower oil prices might provide just the impetus needed for far-reaching policy change: indeed, an IMF Stand-By Arrangement (SBA) in that year was linked to fiscal adjustments and improvements in public financial management. However, the rise in oil prices that occurred when the conflict ended soon relieved the pressure to sustain reforms; instead, the elite doubled down on the policies of the past and reversed most of the measures implemented under the SBA.
By 2020, Iraq’s economy was largely dependent on government spending, either directly through state provision of goods and services or indirectly through the public sector payroll. Funding for this spending was in turn almost entirely dependent on the government’s oil revenues. The severity of the economic disruptions brought about by the COVID-19 pandemic and the collapse in oil prices meant that for most of that year the government’s oil revenues were below its level of expenditure, magnifying the negative effects of these disruptions. A key risk was that if the situation continued, it could cause a major fiscal crisis that would have especially dire economic and societal consequences given the centrality of the public sector’s role in the economy. This meant a real change of direction seemed essential – or so we thought.
During the deliberations on the white paper, we devised a twofold strategy to address the crisis: the first element was to rebalance the budget to avert a fiscal crisis; the second was to propose policies on ‘retooling’ the economy to shift it away from its overwhelming dependence on government spending. As daunting as it seemed to address such issues in the prevailing environment of low oil prices, an even greater challenge was to overcome resistance from the political class and the population at large. While there was grudging acceptance of the need for real change – and a gradual realization that the 2020 crisis was unlike prior ones – this did not result in actual buy-in for structural reforms. A real change of course was never deeply accepted.
While there was grudging acceptance of the need for real change – and a gradual realization that the 2020 crisis was unlike prior ones – this did not result in actual buy-in for structural reforms.
The improbability of reform
Looking back now, two and a half years since the white paper’s publication, I can see that three critical vulnerabilities doomed our proposals, and may threaten meaningful economic reform in the future. Firstly, the economy’s structural imbalances were inextricably interwoven with the post-2003 political order, so that reform of one could not be undertaken in isolation from reform of the other. Secondly, the population’s deep alienation from the political class meant that any reform package coming from the government would be distrusted. Thirdly, given the first two vulnerabilities, any impetus for reform was susceptible to being reversed if oil prices recovered sufficiently to restore the status quo ante.
The current economic outlook is much improved since the 2020 crisis, but the economy’s structural imbalances have been deepened by the fact that the political elite is once again doubling down on the policies of the past. Consequently, the economy’s underlying vulnerabilities are likely to manifest themselves once more should oil prices decline for an extended period in the future. In addition, over time demographic pressures – which have been persistently reducing the effectiveness of economic management that relies on ever-increasing expenditure on the public sector payroll, and eroding the buying power of oil rents that have underwritten the system – will create similar conditions for a crisis. In essence, the current political economy is unsustainable, as the state in future will struggle to provide public sector salaries and pensions, let alone sustain social welfare, on a scale sufficient to prevent social unrest.
Lessons for the future
In a few years’ time, I can imagine myself dusting off the white paper, updating the data, and making pretty much the same arguments that we made in 2020. However, our inability to persuade the elite, and to a large extent the population, to take up the paper’s proposals supports my conviction that economic reform cannot be pursued – irrespective of any economic crises or their severity – without first addressing the three critical vulnerabilities mentioned above.
Until then, we are destined to perpetuate the dysfunctional patterns of the past in which successive crises – each ultimately stemming from falls in oil revenue, and each more severe than the one preceding it – have not led to economic policies to minimize dependence on oil revenues, but instead to policies that have magnified and deepened this dependence.
