War and the Iraqi Economy: A Case Study

Iraq’s economy is only one of the factors that divides the country, encourages violence, has led to civil conflict, and has helped empower ISIS. Sectarian and ethnic divisions, population pressure, religious extremism, intervention from outside states, poor and grossly corrupt governance, authoritarianism, and a fractured political system have all made their own contribution to the present level of violence in what in many ways has long been a failed state.

What is possible is to provide an overview of the complex interactions between economics and the other factors driving violence in Iraq, and the extent to which Iraq’s deep structural economic problems interact with its sectarian and ethnic divisions, help empower ISIS, and help increase the tensions between Arab and Kurd.

These issues are explored in depth in graphic, map, and narrative form in a new Burke Chair report entitledWar and the Iraqi Economy: An Experimental Case Study. This study is available by clicking upon the above PDF, or by going to the CSIS web site at https://csis-website-prod.s3.amazonaws.com/s3fs-public/legacy_files/files/publication/150915_Cordesman_Iraq_War_Economy.pdf.

The study begins by stressing the importance of focusing on the full range of reasons why a country like Iraq now faces the levels of violence and internal tensions that now divide it, and the differences between the economics of terrorism and counterinsurgency and the classic econometrics of development.

It does not argue that economics contribute more to Iraq’s violence and problems than other causes, but it does show that there are some important correlations between the broad problems in Iraq’s economics, governance, and demographic pressures and the levels of violence in other failed states in the MENA region like Libya, Syria, and Yemen.

It is also clear from an analysis of Iraq’s economy that while ideology and politics are key causes of the violence in Iraq, it faces extraordinary challenges in the fact that Iraq has an extremely young population and massive numbers of young men and women desperate for careers, jobs, marriage, a home, and a family. The CIA estimates that an extraordinary 36.7% of Iraq’s population is 0-14 years of age, and 19.6% is 15-24 years of age, and Iraq is nearly 70% urbanized. Its economy, politics, and social tensions will be under acute population pressure for at least another two decades.

Iraq’s economy is has also been badly distorted by mis-governance in a country dominated by its state sector, by the government’s need to buy popular support through employment and subsidies, by the cost of war, and by extreme corruption. Iraq is rated the 170^th most corrupt nation out of the 175 countries rated by Transparency international, and -- as the analysis shows -- it has an extremely large and badly managed state sector, and the world Bank rates it as the 156^th worst of 185 Countries in its Global Ranking of Ease of Doing Business rankings.

Iraq is also a country whose economy has been shaped in part by the fact that Iraq has been at war or in war-related crises ever since 1980. Its past conflicts have had a cumulative economic impact that has sharply restricted Iraq’s development and divided the country’s economy and income along sectarian and ethnic lines, as well as created broad areas where the impact of violence has created its own sub-economies ands divisions.

The analysis traces these patterns of violence in detail since the U.S.-led invasion in 2003, but they are only the latest phase in a history that has included a civil war between the central government and the Kurds in the 1970s, the Iran-Iraq War from 1980-1988, the invasion of Kuwait and the Gulf War in 1990 and 1991, the impact of UN sanctions from 1992 to 2003.

A separate section traces the scale of the collapses of Iraq’s military forces in 2003, the economic impact of the fighting since 2003, and the patterns in recreating Iraqi military forces before ISIS invaded Iraq in late 2013. It shows the rising economic burden of recreating military forces and paying for the current fighting, although the Iraqi central government has so far made limited progress in recreating effective military forces.

It also traces the rising pattern of both violence and internal divisions between Arab and Kurd and Sunni Shi’ite, and shows that the impact of ISIS is only one part of a much broader pattern of violence and divisions that affect a much larger portion of the Iraqi population. Sectarian and ethnic tensions and fighting have also divided Iraq’s population into urban and regional subeconomies whose problems and inequities make national unity, security, and stability more difficult to achieve.

It is clear from the analysis that some of the fighting with ISIS has greatly compounded the problems Iraqi Kurds and Arabs will have in agreeing to the size, financing, and nature of a future Kurdish Zone. At the same time, the rise of various militias and ethnic and sectarian forces has increased the problems in sharing territory, political power, and petroleum income between Sunni and Shi’ite in a country whose economy and population is roughly 70% urbanized.

The analysis then looks beyond the economics of violence to examine the deep structural problems in Iraq’s economy that are not produces of violence and warfighting, but inevitably increases its divisions and tensions. These include:

o An economy whose petroleum wealth has created its own form of the “Dutch disease” that the CIA rates Iraq as receiving 90% of its government income and 80% of its export revenues from the petroleum sector – a sector with one of the lowest rates of necessary employment relative to capital and dependence on locally made equipment and technology of any sector in the country.

o The government has a long history of mismanaging its budget, creating unrealistic and overambitious plans, failing properly to execute given portions of the budget, and losing money to corruption and waste. This will become a far more serious near-term problem because of low oil export revenues, and Iraq’s growing deficit is already being funded in increasingly uncertain ways.

o A massive and continuing employment crisis driven by a very young population, a lack of meaningful job creation, far too much reliance on unproductive employment in the government and state sector, and imbalances between the level of employment and share of the GDP.

o Meaningful youth unemployment is probably well above 25%. Agriculture only contributes 3.3% of GDP but is 21.6% of labor force (6.5X GDP). Industry (largely Petroleum) is 65.6% of GDP, but largely unproductive state industries make it some 21.6% of labor force Services are 32.2% of GDP, but are 59.8% of labor force (largely government and security services) The compensation of all government and SOE employees has consumed a steadily growing portion of the GDP, and a far larger percentage of the GDP than in other regional states.

o The over-large SOE sector has grown to the point where it places major burden on the economy for poor productivity and results, in a public sector public sector that provides 43% of total jobs and almost 60% of overall full-time employment, where employees in state-owned companies make up about 20 percent of total public employment, for far too little output.

o There are many critical economic and social infrastructure challenges – many war-related – in power, water, the financial and banking, education, food subsidy, medical, agricultural and other sectors.

It is not possible to fully quantify many aspects of Iraq’s current economic problems, but it is clear that war is making them worse, that play a major role in dividing the country and that defeating ISIS will not end the divisions and pattern of violence in Iraq without far more government action and reform effort than have been planned to date. The reforms announced so far by Prime Minister Abadi will only have a limited effect at best, and at least to date, the Iraqi government may well present at least as much of a threat to itself as ISIS does.

Trends in Iraqi Violence, Casualties and Impact of War: 2003-2015: http://csis.org/publication/trends-iraqi-violence-casualties-and-impact-war-2003-2015-0

Constructing a New Syria: Dealing with the Real Outcome of the “ISIS War”: http://csis.org/publication/constructing-new-syria-dealing-real-outcome-isis-war .

Iraqi Stability and the “ISIS War”: https://www.csis.org/analysis/iraqi-stability-and-isis-war.

21st Century Conflict: From “Revolution in Military Affairs” (RMA) to “Revolution in Civil-Military Affairs” (RCMA): http://csis.org/files/publication/150702_Speech_RMA_RCMA_Rev_in_Mil_Affairs.pdf

The Revolution in Civil Military Affairs: Case Studies in “Failed State Wars” in Libya, Iraq, Syria, Yemen and Afghanistan: http://csis.org/files/publication/150702_PPT_Slides_RCMA_and_Failed_State_Wars.pdf