Economic reform of Iraq
Encyclopedia
Economic reform in Iraq describes decisions by the Coalition Provisional Authority
to dramatically change the economy of Iraq
in the aftermath of the 2003 U.S.-led invasion.
Prior to US occupation, Iraq had a centrally planned economy. Among other things, it prohibited foreign ownership of Iraqi businesses, ran most large industries as state-owned enterprises, and imposed large tariff
s to keep out foreign goods. After the 2003 Invasion of Iraq
, the Coalition Provisional Authority
quickly began issuing many binding orders privatizing Iraq's economy
and opening it up to foreign investment.
Economic reform was implemented alongside reform of government institutions, the Iraqi legal system, and significant international investment to repair or replace damaged infrastructure of Iraq
.
In The Shock Doctrine
, Naomi Klien describes the economic restructuring of Iraq as the main reason for US invasion.
While reform efforts have produced some successes, problems have arisen with the implementation of internationally funded Iraq reconstruction efforts. These include inadequate security, pervasive corruption, insufficient funding and poor coordination among international agencies and local communities.
Paul Bremer, chief executive the Coalition Provisional Authority
of Iraq, planned to restructure Iraq's state owned economy with free market
thinking.
Bremer dropped the corporate tax rate from around 45% to a flat tax rate of 15% and allowed foreign corporations to repatriate all profits earned in Iraq. Opposition from senior Iraqi officials, together with the poor security situation, meant that Bremer's privatization plan was not implemented during his tenure, though his orders remain in place. In addition to approximately 200 other state owned businesses, privatization of the oil industry was scheduled to begin sometime in late 2005, though it is opposed by the Federation of Oil Unions in Iraq
.
The Iraq oil law is a proposed piece of legislation submitted to the Iraqi Council of Representatives in May 2007.
The Iraqi government has yet to reach an agreement on the law. In June 2008, the Iraqi Oil Ministry announced plans to go ahead with small one or two year no-bid contracts to Exxon Mobil, Shell
, Total
and BP
— once partners in the Iraq Petroleum Company
— along with Chevron
and smaller firms to service Iraq’s largest fields. These plans were canceled in September because negotiations had stalled for so long that the work could not be completed within the time frame, according to Iraqi oil minister Hussain al-Shahristani
. Several United States senators had also criticized the deal, arguing it was hindering efforts to pass the hydrocarbon law.
Bremer's transitional government featured figures close to the George W. Bush administration
, such as grain-trading industry lobbyist Dan Amstutz
, who was put in charge of agricultural policy in Iraq.
By this order, critics assert that the CPA drastically altered Iraq's economy, allowing virtually unlimited and unrestricted foreign investment and placing no limitations on the expatriation of profit. However, these policies accord with current international standards on foreign direct investment
which most of the developed world adheres to
The order concluded, "Where an international agreement
to which Iraq is a party provides for more favorable terms with respect to foreign investors undertaking investment activities in Iraq, the more favorable terms under the international agreement shall apply."
According to critics such as Naomi Klien, this order was designed to create as favorable an environment for foreign investors as possible, thereby allowing American and multinational corporations to dominate Iraq's economy.
Significant criticism has suggested these policies are fundamentally anti-democratic, that such rules can only be legitimate if passed by an elected Iraqi government free of foreign occupation.
Others argue that the rules merely bring Iraq's economic law into conformity with modern norms of international trade
, and that the previous government and its laws were not democratically legitimate since Saddam Hussein's government was not elected.
CPA Order 17 granted all foreign contractors operating in Iraq immunity from "Iraqi legal process
," effectively granting immunity from any kind of suit, civil or criminal, for actions the contractors engaged in within Iraq.
CPA Order 12, amended by Order 54, suspended all tariffs, thus removing the advantage that domestic Iraqi producers had over foreign producers.. However, a 5% "reconstruction levy" on all imported goods was later reimposed to help finance Iraqi-initiated reconstruction projects.
The Jubilee Iraq campaign argued that much of these debts were odious
(illegitimate). However, as the concept of odious debt is not accepted, trying to deal with the debt on those terms would have embroiled Iraq in legal disputes for years. Iraq decided to deal with its debt more pragmatically and approached the Paris Club
of official creditors.
In a December 2006 Newsweek International article, a study by Global Insight
in London
was reported to show "that Civil war or not, Iraq has an economy, and—mother of all surprises—it's doing remarkably well. Real estate is booming. Construction, retail and wholesale trade sectors are healthy, too, according to [the report]. The U.S. Chamber of Commerce reports 34,000 registered companies in Iraq, up from 8,000 three years ago. Sales of secondhand cars, televisions and mobile phones have all risen sharply. Estimates vary, but one from Global Insight puts GDP growth at 17 percent last year and projects 13 percent for 2006. The World Bank has it lower: at 4 percent this year. But, given all the attention paid to deteriorating security, the startling fact is that Iraq is growing at all."
Between 100000 oilbbl/d and 300000 oilbbl/d of Iraq’s declared oil production over the past four years could have been siphoned off through corruption or smuggling, according to a US Study from May 12, 2007.
Because of the economic potential of Iraq, a niche market for Iraqi Dinar
currency has emerged. Speculators are making investments in the Iraqi Dinar
in hopes of receiving a return once Iraq
stabilizes as a country. Jim Cramer's October 20th, 2009 endorsement of the Iraqi Dinar
on CNBC
has further piqued interest in the investment.
, because an occupying power is prohibited from rewriting the laws of the occupied country.
Others reply that the privatization of Iraq's economy is necessary to help it rebuild after years of state mismanagement and centrally planned economics, and that market economics does not conflict with the interests of Iraqis or provide undue advantage to American or foreign investors versus Iraqi investors. In addition, if the changes to Iraq's economic laws were illegal, than so would be the Transitional Administrative Law, which serves as Iraq's constitution under the Transitional Government
.
Coalition Provisional Authority
The Coalition Provisional Authority was established as a transitional government following the invasion of Iraq by the United States and its allies, members of the Multi-National Force – Iraq which was formed to oust the government of Saddam Hussein in 2003...
to dramatically change the economy of Iraq
Economy of Iraq
Iraq's economy is dominated by the petroleum sector, which has traditionally provided about 95% of foreign exchange earnings. In the 1980s, financial problems caused by massive expenditures in the eight-year war with Iran and damage to oil export facilities by Iran led the government to implement...
in the aftermath of the 2003 U.S.-led invasion.
Prior to US occupation, Iraq had a centrally planned economy. Among other things, it prohibited foreign ownership of Iraqi businesses, ran most large industries as state-owned enterprises, and imposed large tariff
Tariff
A tariff may be either tax on imports or exports , or a list or schedule of prices for such things as rail service, bus routes, and electrical usage ....
s to keep out foreign goods. After the 2003 Invasion of Iraq
2003 invasion of Iraq
The 2003 invasion of Iraq , was the start of the conflict known as the Iraq War, or Operation Iraqi Freedom, in which a combined force of troops from the United States, the United Kingdom, Australia and Poland invaded Iraq and toppled the regime of Saddam Hussein in 21 days of major combat operations...
, the Coalition Provisional Authority
Coalition Provisional Authority
The Coalition Provisional Authority was established as a transitional government following the invasion of Iraq by the United States and its allies, members of the Multi-National Force – Iraq which was formed to oust the government of Saddam Hussein in 2003...
quickly began issuing many binding orders privatizing Iraq's economy
Economy of Iraq
Iraq's economy is dominated by the petroleum sector, which has traditionally provided about 95% of foreign exchange earnings. In the 1980s, financial problems caused by massive expenditures in the eight-year war with Iran and damage to oil export facilities by Iran led the government to implement...
and opening it up to foreign investment.
Economic reform was implemented alongside reform of government institutions, the Iraqi legal system, and significant international investment to repair or replace damaged infrastructure of Iraq
Infrastructure of Iraq
Infrastructure of Iraq describes the infrastructure of the country of Iraq. Throughout the history of Iraq, the country's infrastructure, along with its politics and economy, have been affected by armed conflicts; none more serious than the 2003 Invasion and subsequent...
.
In The Shock Doctrine
The Shock Doctrine
The Shock Doctrine: The Rise of Disaster Capitalism is a 2007 book by Canadian author Naomi Klein, and is the basis of a 2009 documentary by the same name....
, Naomi Klien describes the economic restructuring of Iraq as the main reason for US invasion.
While reform efforts have produced some successes, problems have arisen with the implementation of internationally funded Iraq reconstruction efforts. These include inadequate security, pervasive corruption, insufficient funding and poor coordination among international agencies and local communities.
Planning
Coalition Provisional Authority
The Coalition Provisional Authority was established as a transitional government following the invasion of Iraq by the United States and its allies, members of the Multi-National Force – Iraq which was formed to oust the government of Saddam Hussein in 2003...
of Iraq, planned to restructure Iraq's state owned economy with free market
Free market
A free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...
thinking.
Bremer dropped the corporate tax rate from around 45% to a flat tax rate of 15% and allowed foreign corporations to repatriate all profits earned in Iraq. Opposition from senior Iraqi officials, together with the poor security situation, meant that Bremer's privatization plan was not implemented during his tenure, though his orders remain in place. In addition to approximately 200 other state owned businesses, privatization of the oil industry was scheduled to begin sometime in late 2005, though it is opposed by the Federation of Oil Unions in Iraq
Federation of Oil Unions in Iraq
Founded in October 2005 from unions that had begun organizing after the invasion, the Federation of Oil Unions of Iraq is the largest independent union consortium in Iraq, with tens of thousands of members...
.
Oil
Order 39 laid out the framework for full privatization in Iraq, except for "primary extraction and initial processing" of oil, and permitted 100% foreign ownership of Iraqi assets.The Iraq oil law is a proposed piece of legislation submitted to the Iraqi Council of Representatives in May 2007.
The Iraqi government has yet to reach an agreement on the law. In June 2008, the Iraqi Oil Ministry announced plans to go ahead with small one or two year no-bid contracts to Exxon Mobil, Shell
Royal Dutch Shell
Royal Dutch Shell plc , commonly known as Shell, is a global oil and gas company headquartered in The Hague, Netherlands and with its registered office in London, United Kingdom. It is the fifth-largest company in the world according to a composite measure by Forbes magazine and one of the six...
, Total
Total S.A.
Total S.A. is a French multinational oil company and one of the six "Supermajor" oil companies in the world.Its businesses cover the entire oil and gas chain, from crude oil and natural gas exploration and production to power generation, transportation, refining, petroleum product marketing, and...
and BP
BP
BP p.l.c. is a global oil and gas company headquartered in London, United Kingdom. It is the third-largest energy company and fourth-largest company in the world measured by revenues and one of the six oil and gas "supermajors"...
— once partners in the Iraq Petroleum Company
Iraq Petroleum Company
The Iraq Petroleum Company , until 1929 called Turkish Petroleum Company , was an oil company jointly owned by some of the world's largest oil companies, which had virtual monopoly on all oil exploration and production in Iraq from 1925 to 1961...
— along with Chevron
Chevron Corporation
Chevron Corporation is an American multinational energy corporation headquartered in San Ramon, California, United States and active in more than 180 countries. It is engaged in every aspect of the oil, gas, and geothermal energy industries, including exploration and production; refining,...
and smaller firms to service Iraq’s largest fields. These plans were canceled in September because negotiations had stalled for so long that the work could not be completed within the time frame, according to Iraqi oil minister Hussain al-Shahristani
Hussain al-Shahristani
Hussain Ibrahim Saleh al-Shahristani is the current Iraqi Deputy Prime Minister for Energy.Born in 1942 in Karbala, Iraq, Shahristani received a BSc in Chemical Engineering from Imperial College London in 1965, and an MSc from the University of Toronto in 1967, from where he also received a PhD in...
. Several United States senators had also criticized the deal, arguing it was hindering efforts to pass the hydrocarbon law.
Bremer's transitional government featured figures close to the George W. Bush administration
George W. Bush administration
The presidency of George W. Bush began on January 20, 2001, when he was inaugurated as the 43rd President of the United States of America. The oldest son of former president George H. W. Bush, George W...
, such as grain-trading industry lobbyist Dan Amstutz
Dan Amstutz
Daniel G. Amstutz was a U.S. government official and grain-trading industry executive who played a prominent role during negotiation of the Uruguay Round of General Agreement on Tariffs and Trade rules on agriculture, and in the U.S. occupation of Iraq.- Early years :Amstutz was born November 8,...
, who was put in charge of agricultural policy in Iraq.
Foreign Investment and trade
CPA Order 39, entitled "Foreign Investment", provided that "A foreign investor shall be entitled to make foreign investments in Iraq on terms no less favorable than those applicable to an Iraqi investor," and that "[t]he amount of foreign participation in newly formed or existing business entities in Iraq shall not be limited...." Additionally, the foreign investor "shall be authorized to... transfer abroad without delay all funds associated with its foreign investment, including shares or profits and dividends...."By this order, critics assert that the CPA drastically altered Iraq's economy, allowing virtually unlimited and unrestricted foreign investment and placing no limitations on the expatriation of profit. However, these policies accord with current international standards on foreign direct investment
Foreign direct investment
Foreign direct investment or foreign investment refers to the net inflows of investment to acquire a lasting management interest in an enterprise operating in an economy other than that of the investor.. It is the sum of equity capital,other long-term capital, and short-term capital as shown in...
which most of the developed world adheres to
The order concluded, "Where an international agreement
Treaty
A treaty is an express agreement under international law entered into by actors in international law, namely sovereign states and international organizations. A treaty may also be known as an agreement, protocol, covenant, convention or exchange of letters, among other terms...
to which Iraq is a party provides for more favorable terms with respect to foreign investors undertaking investment activities in Iraq, the more favorable terms under the international agreement shall apply."
According to critics such as Naomi Klien, this order was designed to create as favorable an environment for foreign investors as possible, thereby allowing American and multinational corporations to dominate Iraq's economy.
Significant criticism has suggested these policies are fundamentally anti-democratic, that such rules can only be legitimate if passed by an elected Iraqi government free of foreign occupation.
Others argue that the rules merely bring Iraq's economic law into conformity with modern norms of international trade
International trade
International trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product...
, and that the previous government and its laws were not democratically legitimate since Saddam Hussein's government was not elected.
CPA Order 17 granted all foreign contractors operating in Iraq immunity from "Iraqi legal process
Legal process
Legal process , are the proceedings in any civil lawsuit or criminal prosecution and, particularly, describes the formal notice or writ used by a court to exercise jurisdiction over a person or property...
," effectively granting immunity from any kind of suit, civil or criminal, for actions the contractors engaged in within Iraq.
CPA Order 12, amended by Order 54, suspended all tariffs, thus removing the advantage that domestic Iraqi producers had over foreign producers.. However, a 5% "reconstruction levy" on all imported goods was later reimposed to help finance Iraqi-initiated reconstruction projects.
Taxation
CPA Order 49 provided a tax cut for corporations operating within Iraq. It reduced the rate from a maximum of 40% to a maximum of 15% on income. Corporations working with the CPA were exempted from owing any tax.Foreign debt
One of the key economic challenges was Iraq's immense foreign debt, estimated at $125 billion. Although some of this debt was derived from normal export contracts that Iraq had failed to pay for, some was a result of military and financial support during Iraq's war with Iran.The Jubilee Iraq campaign argued that much of these debts were odious
Odious debt
In international law, odious debt is a legal theory that holds that the national debt incurred by a regime for purposes that do not serve the best interests of the nation, should not be enforceable. Such debts are, thus, considered by this doctrine to be personal debts of the regime that incurred...
(illegitimate). However, as the concept of odious debt is not accepted, trying to deal with the debt on those terms would have embroiled Iraq in legal disputes for years. Iraq decided to deal with its debt more pragmatically and approached the Paris Club
Paris Club
The Paris Club is an informal group of financial officials from 19 of some of the world's biggest economies, which provides financial services such as war funding, debt restructuring, debt relief, and debt cancellation to indebted countries and their creditors...
of official creditors.
Effects
Since the peak of 1980, the nominal GDP of Iraq has steadily shrunk to merely $12.3 billion in 2000. However removal of sanctions, after the overthrow of Saddam, had immediate effect. The nominal GDP had reached $55.4 billion by 2007 due to increase in oil output as well as international prices. In 2006, the real GDP growth was estimated at almost 17 percent.In a December 2006 Newsweek International article, a study by Global Insight
Global Insight
Global Insight is the world's largest economics organization, serving over 3,800 clients in industry, finance and government worldwide, with revenues of over $95 million and employing more than 600 economists and other staff in 23 offices in 13 countries...
in London
London
London is the capital city of :England and the :United Kingdom, the largest metropolitan area in the United Kingdom, and the largest urban zone in the European Union by most measures. Located on the River Thames, London has been a major settlement for two millennia, its history going back to its...
was reported to show "that Civil war or not, Iraq has an economy, and—mother of all surprises—it's doing remarkably well. Real estate is booming. Construction, retail and wholesale trade sectors are healthy, too, according to [the report]. The U.S. Chamber of Commerce reports 34,000 registered companies in Iraq, up from 8,000 three years ago. Sales of secondhand cars, televisions and mobile phones have all risen sharply. Estimates vary, but one from Global Insight puts GDP growth at 17 percent last year and projects 13 percent for 2006. The World Bank has it lower: at 4 percent this year. But, given all the attention paid to deteriorating security, the startling fact is that Iraq is growing at all."
Between 100000 oilbbl/d and 300000 oilbbl/d of Iraq’s declared oil production over the past four years could have been siphoned off through corruption or smuggling, according to a US Study from May 12, 2007.
Iraqi dinar
The dinar is the currency of Iraq. It is issued by the Central Bank of Iraq and is subdivided into 1,000 fils , although inflation has rendered the fils obsolete.-History:...
currency has emerged. Speculators are making investments in the Iraqi Dinar
Iraqi dinar
The dinar is the currency of Iraq. It is issued by the Central Bank of Iraq and is subdivided into 1,000 fils , although inflation has rendered the fils obsolete.-History:...
in hopes of receiving a return once Iraq
Iraq
Iraq ; officially the Republic of Iraq is a country in Western Asia spanning most of the northwestern end of the Zagros mountain range, the eastern part of the Syrian Desert and the northern part of the Arabian Desert....
stabilizes as a country. Jim Cramer's October 20th, 2009 endorsement of the Iraqi Dinar
Iraqi dinar
The dinar is the currency of Iraq. It is issued by the Central Bank of Iraq and is subdivided into 1,000 fils , although inflation has rendered the fils obsolete.-History:...
on CNBC
CNBC
CNBC is a satellite and cable television business news channel in the U.S., owned and operated by NBCUniversal. The network and its international spinoffs cover business headlines and provide live coverage of financial markets. The combined reach of CNBC and its siblings is 390 million viewers...
has further piqued interest in the investment.
Moral debate
Critics of the CPA argue that these policies were not only rather blatant attempts to shape Iraq's economy in the interests of American (and other) investors and against the interests of Iraqis themselves, but also that they were illegal under international lawInternational law
Public international law concerns the structure and conduct of sovereign states; analogous entities, such as the Holy See; and intergovernmental organizations. To a lesser degree, international law also may affect multinational corporations and individuals, an impact increasingly evolving beyond...
, because an occupying power is prohibited from rewriting the laws of the occupied country.
Others reply that the privatization of Iraq's economy is necessary to help it rebuild after years of state mismanagement and centrally planned economics, and that market economics does not conflict with the interests of Iraqis or provide undue advantage to American or foreign investors versus Iraqi investors. In addition, if the changes to Iraq's economic laws were illegal, than so would be the Transitional Administrative Law, which serves as Iraq's constitution under the Transitional Government
Iraqi Transitional Government
The Iraqi Transitional Government was the government of Iraq from May 3rd, 2005, when it replaced the Iraqi Interim Government, until May 20th, 2006, when it was replaced by the first permanent government....
.
See also
- Iraq withdrawal benchmarksIraq withdrawal benchmarksThe Iraq withdrawal benchmarks are a series of benchmarks the U.S. Government under the Bush administration have asked the Iraqi government to meet before the withdrawal of U.S...
- The UN Security Council and the Iraq warThe UN Security Council and the Iraq warIn March 2003 the United States government announced that "diplomacy has failed" and that it would proceed with a "coalition of the willing" to rid Iraq under Saddam Hussein of weapons of mass destruction the US insisted it possessed...
- Baghdad Invest - Iraq Investment Research - Investment News