Oil in Iraq: How to overcome the Resource Curse?
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Textbook
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Summary
This paper will have a closer look at the overwhelming importance of non-renewable resources for the Iraqi economy and how the profits made by oil exports should be invested to ensure the best possible outcome, in order to finally overcome ‘the resource curse’. Channeling oil and gas revenues to lead the charge in generating non-oil based growth is of paramount importance to make the Iraqi economy sustainable in a long run and finally overcoming the resource curse. This implies investments that support economic diversification as a key driver of economic activity through the creation of an enabling environment and investments that remove the binding constraints to growth. While international oil prices remain high, action must be taken.
Excerpt
Table Of Contents
8
Chapter 1: Resource Curse
1.1.
Definition and implications
The so called "resource curse" is a widely used term describing the
phenomenon that often countries with oil or other natural resource
wealth experience slower economic growth. What seems like an
counter-intuitive statement at first, was proven widely in a large
number of studies.
2
3
There are several hypothesis to explain how
resource abundance is a threat to economic growth:
most oil producers are price-takers and therefore vulnerable to
price-fluctuation. Saudi-Arabia stands out to certain extend, due to
its large size in world oil markets. However the assumption
generally proves right, especially taking into account the
diminishing monopoly of OPEC and its low success in binding its
members to their assigned quotas.
4
Oil wealth can hit non-oil exports as a result of exchange rate
valuation.
An increased budget allows the government to employ more civil
servants, to strengthen political support. Oil rich states often find
themselves with an exorbitant, inefficient public sector.
5
The perspective of Oil wealth can be subject to the whims of
various groups leading to structural imbalances, which could
potentially fuel further conflict.
6
2
For a large sum of such studies see: Frankel, J. (2010). The Natural Resource
Curse: A Survey. HKS Faculty Research Working Paper Series, p.1-45.
3
Bjorvatn, K., Farzanegan, M. R., & Schneider, F. (2012, 7 0). Resource Curse and
Power Balance: Evidence from Oil-Rich Countries. World Development, 40,
1308--1316.
4
For more details see: Frankel, J. (2010). The Natural Resource Curse: A Survey.
HKS Faculty Research Working Paper Series, p.5
5
Humphreys, M., Sachs, J., & Stiglitz, J. E. (Eds.). (2007). Escaping the resource
curse (pp. 11-13). New York: Columbia University Press. p.207
6
Kjetil Bjorvatn, Mohammad Reza Farzanegan, Friedrich Schneider, Resource
Curse and Power Balance: Evidence from Oil-Rich Countries, World Development,
Volume 40, Issue 7, July 2012, Pages 1308-1316, ISSN 0305-750X,
http://dx.doi.org/10.1016/j.worlddev.2012.03.003.
9
Several recent papers suggest that the negative association between
natural resource intensity and economic growth can be
reversed if institutional quality is high enough.
7
Therefore the resource
curse should not be interpreted as a rule that resource-rich countries
are doomed to failure, but rather be perceived as a double-edged
sword, with both benefits and dangers. In countries with sufficiently
good institutions resource dependency may instead contribute
positively to economic growth.
8
1.2.
The Resource Curse in Iraq
Iraqi oil reserves are among the largest of the world (143 Million
barrels).
910
In the 1970's Iraq had reached middle income status, and
possessed in regional comparison, a high quality education and
healthcare system, as well as a modern infrastructure. World oil prices
were high, and Iraq's oil production rose from 1.5 million barrels per
day in 1970 to 3.5 million bpd in 1979.
11
Soaring oil revenues allowed
the government to investment into non-oil-related sectors so that both,
the oil and non-oil sectors grew rapidly.
12
With the beginning of the Iran-Iraq war 1980, oil production almost
ceased overnight. Production levels averaged at 1 million barrels per
day 1981-1985. With Gulf War I in 1990 Oil production stagnated
7
Boschini, A., Pettersson, J., & Roine, J. (2013, 3 0). The Resource Curse and its
Potential Reversal. World Development, 43, 19--41.
8
For more detail see: Mehlum, H., Moene, K., & Torvik, R. (2006). Institutions and
the resource curse. The Economic Journal, 116(508), 1-20.
9
Talal A. Al-Kassar & Jared S. Soileau (2014) New development: Accounting and
accountability for government revenues in Iraq, Public Money & Management, 34:1,
p. 67, DOI: 10.1080/09540962.2014.865944
10
According to some papers, second largest oil reserves in the world after Saudi-
Arabia: Talal A. Al-Kassar & Jared S. Soileau (2014) New development: Accounting
and accountability for government revenues in Iraq, Public Money & Management,
34:1, p. 67, DOI: 10.1080/09540962.2014.865944 , others say third behind Saudi
Arabia and Canada: Mausner, Loi, Cordesman "Iraq's Coming National Challenges:
Developing the Petroleum Sector." Center for Strategic and International Studies,
January 5, 2011.
11
Foote, C., Block, W., Crane, K., & Gray, S. (2004-08-01T00:00:00). Economic
Policy and Prospects in Iraq. The Journal of Economic Perspectives, 18, pp.47-70.
12
Foote, C., Block, W., Crane, K., & Gray, S. (2004-08-01T00:00:00). Economic
Policy and Prospects in Iraq. The Journal of Economic Perspectives, 18, p.49
10
entirely once again.
13
After the war, exports were constrained by an
United Nations embargo. Oil production did not exceed the national
consumption level until 1996 when Iraq agreed to the Oil-for-Food
program, which allowed Iraq to export oil for humanitarian supplies
from 1997 until 2003.
14
15
Shattering wars, inefficient economic and financial policies and
international sanctions impaired previous social and economic gains
and damaged political institutions. The GDP per capita has fallen from
US$3400 in 1980 to less than US$800 in 2004.
16
While in 1993 more than 50% of total state revenue stemmed from
taxation since 2008 taxation does not provide for more than 3%. As
seen in the table below in 2013 97% of total revenue derives from
other sources, including oil and gas revenue.
13
Foote, C., Block, W., Crane, K., & Gray, S. (2004-08-01T00:00:00). Economic
Policy and Prospects in Iraq. The Journal of Economic Perspectives, 18, p.49
14
Iraq was accused of underpricing the oil to attract bribes. To read more about this
controversy see: Hsieh, C.-T., & Moretti, E. (2006). Did Iraq Cheat the United
Nations? Underpricing, Bribes, and the Oil for Food Program. The Quarterly Journal
of Economics, 121, p. 1211-1248.
15
Donovan, T. W. (2010). Iraq's Petroleum Industry: Unsettled Issues. Washington
D.C.: Middle East Institute.p.20
16
Talal A. Al-Kassar & Jared S. Soileau (2014) New development: Accounting and
accountability for government revenues in Iraq, Public Money & Management, 34:1,
p. 67, DOI: 10.1080/09540962.2014.865944
11
17
Stated employed Iraqis were exempted from taxation prior to 2005.
18
The decreasing percentage of tax revenue as a percentage of total
state revenue further illustrates the high dependency on oil exports.
Moreover when citizens are not expected to pay for government
services, there is little tax bargain, to hold the government
accountable.
19
Oil-price fluctuation can harm the Iraqi economy drastically. It
becomes clear that channeling the revenues of non-renewable
resources in a way to promote non-oil based growth is a massive
challenge of utmost importance.
Due to the phenomenon of the so called "resource curse", as
explained above, the high dependency of non-renewable-energy
exports, threatens a democratic development of Iraq. The major
comparative advantage of Iraq and the crucial element for a potential
sustainable development, might itself be an impediment to broad-
based (equitable) economic growth.
17
Talal A. Al-Kassar & Jared S. Soileau (2014) New development: Accounting and
accountability for government revenues in Iraq, Public Money & Management, 34:1,
p. 68, DOI: 10.1080/09540962.2014.865944
18
Ibid. p.67
19
An alternative would be to transfer oil revenues directly to citizens, which would
then be taxed to finance public expenditures. The argument is that spending that is
financed by taxation accruing directly to the government--is more likely to be
scrutinized by citizens and hence subject to greater efficiency. For more information
see: Devarajan, Shantayanan and Raballand, Gaël and Le, Tuan Minh, Direct
Redistribution, Taxation, and Accountability in Oil-Rich Economies: A Proposal
(December 20, 2011). Center for Global Development Working Paper No. 281.
Available at
SRN: http://ssrn.com/abstract=2009385 or http://dx.doi.org/10.2139/ssrn.2009385
12
The challenge for the Iraqi government therefore will be to learn from
the successes and failures of other countries, which found themselves
in similar situations.
The US Aid report on Iraq states frankly: "Unfortunately, (...) Iraq's
resource wealth not only remains a threat to its democracy, it also
stands as a potential impediment to sustainable growth. Iraq is
therefore at a crossroads, with a largely dysfunctional economic
framework short-circuiting necessary investment, which leads to gross
imbalances and inefficiencies."
20
20
United States Agency - International Development. (2012). USAID-TIJARA
PROVINCIAL ECONOMIC GROWTH PROGRAM. New York: Report for Prime
Minister's Advisory Commission (PMAC). p.1
13
Chapter 2: Economic environment
2.1.
The current economic environment
The current Iraqi economy is primarily based on two sectors. The Oil
and Gas sector which accounts for almost 60% of GDP, but
characteristically only employs about 1% of workforce, and the public
sector, accounting for 10% of GDP while employing a 3
rd
of the
workforce.
21
2.2. The
Oil
Sector
Iraq is estimated to have the third largest oil reserves in the world after
Saudi-Arabia and Iran. The concrete number given is 115 billion
barrels. The US Department of Energy Information Administration
criticizes however, that the above estimate relies on data from three
decades ago and has not been revised since 2001.
22
Further reserves
are expected to be discovered. Estimations however vary between 45
and 99 billion barrels.
23
21
United States Agency - International Development. (2012). USAID-TIJARA
PROVINCIAL ECONOMIC GROWTH PROGRAM. New York: Report for Prime
Minister's Advisory Commission (PMAC). p.42
22
US Energy Information Administration. (2009). Country Analysis Brief: Iraq.
Washington.
23
Blanchard, C. M. (2010). Iraq: Oil and Gas Sector, Revenue Sharing and U.S.
Policy. Washington: Congressional Research Service. p.1
14
65% of Iraq's currently proven Oil reserves are located in the south,
particularly in the governorate of Al Basrah. Large proven oil
resources also are located in the northern governorate of Al Tamim
near the disputed city of Kirkuk.
24
There are 28 giant fields in Iraq, which hold an estimated 12% of the
entire proven global reserves. Four of these fields are among the
largest fields in the world.
25
The Iraqi Oil Ministry started offering service contracts to international
oil companies in June 2009. More than 80% of Oil reserves of the
bidding parties were Chinese corporates, which are now the largest
investor and consumer in Iraq.
26
A weak and unclear legal status of
investors prevented many international oil companies to take part in
the bidding process.
24
Blanchard, C. M. (2010). Iraq: Oil and Gas Sector, Revenue Sharing and U.S.
Policy. Washington: Congressional Research Service. p.1
25
Donovan, T. W. (2010). Iraq's Petroleum Industry: Unsettled Issues. Washington
D.C.: Middle East Institute.p.6
26
Donovan, T. W. (2010). Iraq's Petroleum Industry: Unsettled Issues. Washington
D.C.: Middle East Institute.p.6-7
