Reassessing Development in Iraq: Investing in its Citizenry

by Michael G. Seyer

When the last convoy of American troops exited Iraq on 18 December 2011, left behind was a government designed to be a power-sharing agreement among Shia, Sunni, and Kurdish representatives. This, it was posited, would provide a sufficient framework for cooperation and the basis for universal, countrywide development and political enfranchisement. However, soon after the last U.S. troops crossed the Iraqi border to Kuwait, there were already reports that cast doubt on the durability and effectiveness of the Iraqi government in its new arrangement. A year and a half later, the daily news coming out of Iraq presents a portrait of a country on the brink of civil war. It appears that attempts, however genuine, to advance the well-being of the country have somehow been derailed. Therefore, the question remains: Why, despite committed efforts to foster development and cooperation, is the conflict in Iraq not truly over?

Political and Economic Enfranchisement

A partial answer to this question may reside in the manner in which Iraq’s financial and natural resources have been used, their ownership, and their distribution to the population. It is well understood that Iraq is heavily endowed with oil and gas and that these resources are widely considered to form the foundation upon which much of Iraq’s economy and broader development can be built. However, when discussing the future of Iraq, commodities such as oil and gas and the investment opportunities into their production should not be the substance of the initial dialogue concerning healthy and sustained development. Rather, discussions concerning oil production in the country will be fruitful only after more immediate and vital issues regarding the well-being of the country have been addressed.

…before any judgments concerning Iraq’s positive development are made, policy guaranteeing the access of the citizenry to political and economic enfranchisement is necessary.

A brief snapshot of Iraq’s recent history shows a country that has suffered from thirty years of armed conflict, repression under an authoritarian regime, and crippling international sanctions. Currently, despite efforts over the past decade to establish a democratic state, Prime Minister Nouri al-Maliki’s government has repeatedly failed to provide for the fair distribution of resource revenues and has not made genuine efforts to address extreme levels of corruption and the lack of universal political freedoms within the country. Instead, the focus of al-Maliki’s government is the smothering of violence without addressing its root causes. Despite the conflict’s characterization as a sectarian clash, today’s violence in Iraq does not exist due to primordial, irreconcilable disagreements between different religious and ethnic groups. Rather, the underrepresentation of these groups in the political arena and their economic marginalization stand as more concrete explanations for the continued violence. As the political system seems to be consolidating in a manner distinctly in favor of the political allies of al-Maliki and threatens the rights, interests, and well-being of significant percentages of the citizenry, it is not surprising that the population has expressed its grievances violently. Therefore, before any judgments concerning Iraq’s positive development are made, policy guaranteeing the access of the citizenry to political and economic enfranchisement is necessary. Genuine government investment into the well-being of its citizenry, equal protection under the law, and equal access to resources would best serve to heal the divisions that currently exist within society.

Challenges to Development

As identified by the most recent National Development Plan of Iraq (2010-2014), the challenges facing the country are as follows: increasing unemployment, 23% of the population living below the poverty line, severe lack of housing, damaged critical infrastructure, and limited access to water, electricity, and sanitation services. Furthermore, the level of development in rural and peripheral areas is much lower than in the federal center. Populations living outside of the metropolitan sphere of Baghdad experience even higher levels of poverty, lack of services, illiteracy, and school dropout rates. These factors further depress economic productivity and the well-being of the population in these areas.

…the population is in conflict over the revenue and related benefits from the few rent-bearing resources currently marketable in the country – oil and gas.

Another roadblock to development is violence. During the month of May 2013, 1045 people were killed, a figure even higher than April’s 712, which had marked the highest casualty rate in nearly five years. However, this tragedy runs deeper than the count of those who have lost their lives. Violence is, by nature, a reaction to broader conditions and, fundamentally, the effect of causes that have largely gone unaddressed. The consolidation of power by al-Maliki’s government, the unequal distribution of resources, the marginalization of political opposition, and the uneven application of the laws of the state all exist as rational pretexts for conflict. Thus, so long as it remains the policy of government simply to quell the violence, casting violence itself as the object of strategic discourse and not its root causes, Iraq will continue to suffer from violent conflict.

The Resource Factor

In a state that is just now defining itself, its legal and political structures, and the manner by which resources are to be distributed to the citizenry, violence is possible if these processes are deemed unfair and thus threatening to one’s well-being. In Iraq, amidst a growing movement by the central government to entrench itself in positions of power, the population is in conflict over the revenue and related benefits from the few rent-bearing resources currently marketable in the country – oil and gas. This brings us to discussion of the remaining challenge: oil dependence. Oil is the resource upon which the federal budget is almost completely dependent and this resource accounts for half of the country’s GDP in an economy which is driven heavily by government and service employment. Ultimately, Iraq’s dependence upon one industry that feeds into the state budget places its economy at risk of shocks, precipitated by any fall in the price of oil or by a decline in investment into this sector. Leaning upon oil, Iraq’s economy is subjected to this volatility of price and investment and its economy is thus at risk of developing in an irregular, unbalanced manner.

Revenue from oil production is the one ace that exists in the card deck of Iraqi domestic politics. Currently, this ace is in the hands of Prime Minister Nouri al-Maliki and the government he has constructed around himself and his allies. With seemingly little intention on fairly distributing the revenues and benefits from this resource to all members of the population, thus marginalizing both Kurdish and Sunni citizens, it is little wonder that the dialogue among these groups has not been peaceful. As observed from experiences of development throughout the previous century, a state facing violent opposition has before it several options in regards to the manner in which this ace of resource rent is played.

One option, in the face of opposition and violence, is for the government to adopt a bunker mentality and militarize the state, whether through an active martial presence or through the establishment of a police force designed expressly for the protection of the state apparatus. Authoritarianism is often further entrenched, especially if there exists an easily controlled revenue flow from a unitary source, by cliental relationships among members of the elite. Power structures between factions that otherwise would be in competition can be established based upon the tight control of the flow of resource rent from the center to the elites within such opposition groups. In the case of Iraq, it is evident that, as a country seeking to develop, the silencing or co-option of opposition through violence or corrupt policies does not favor constructive, universal improvement in economic, political, or social conditions.

Oil and gas revenues can potentially be used to bring parties together, into cooperative relationships based upon the equal distribution of benefits and services flowing from this source. However, the success of such a scenario would require an Iraqi government committed to the genuine development of its country and its people. Elections may be the means by which such a government might be established.

Citizens as Vital Actors

In this year’s April elections, Prime Minister Nouri al-Maliki’s party, State of Law Alliance, lost over 30% of its total seats nationwide, illustrating a clear wane in support of the party’s policies pursued, which have been characterized by increasing authoritarianism. Furthermore, one article written by Mark LeVine in May, a professor of Middle Eastern history who reported directly from Iraq, pointed to signs that Iraqi opposition groups were starting to achieve for themselves a degree of greater political expression in civil society and within the court systems. According to the author, “Iraqis are becoming increasingly adept at defending and advancing their rights” and the Parliament, though still an immature body, has been able to offer some counterbalance, however faint, to the power of al-Maliki.” Hopefully these trends will be expressed even more strongly in 2014 when Iraq holds federal elections and the transition to a new parliament and government transpires.

The government of Iraq recognizes that development of the country’s economy is bound to the success of its oil and gas sectors. 

It is here that a constructive discussion about hydrocarbons, investments, and the distribution of resource rent can begin. When the citizens of Iraq succeed in forming a government that engages in open dialogue with all interest groups and employs revenues from oil and gas in a responsible and just manner, the potential for development and improvement of the human condition is distinct. According to the International Energy Agency’s, Iraq Energy Outlook 2012, Iraq is in possession of 143 billion barrels of oil and 3.4 trillion cubic meters of natural gas, ranking 5th and 13th respectively in terms of hydrocarbon reserves worldwide. Furthermore, some predictions, which take into consideration the possibility of vast undiscovered resource reserves, place these figures even higher. These adjusted figures should provide further incentives for actors within the field of hydrocarbon production and development to invest in Iraq.

State of the Hydrocarbon Sector

The government of Iraq recognizes that development of the country’s economy is bound to the success of its oil and gas sectors. This realization is reflected in the fact that the Iraqi state budget of 2013 is formulated with the projection that oil will remain at least $90 dollars per barrel and, so as to keep this lifeline healthy, the government applied the highest allotment of budgetary funds to the development of the energy sector. According to the U.S. Energy Information Agency’s 2012 publication regarding the oil industry in Iraq, current production for the previous year was listed as 3 billion barrels. Development plans for this sector, as set by the Iraqi government and Ministry of Oil, has established 9.5 billion barrels as the target level of production by 2017. However, if oil production in Iraq is truly to triple within the period of 4 years, the following challenges require address and should be the target of the budgetary funds that have been allocated for the development of the energy sector.

Perhaps most critically, the infrastructural requirements to support such a high level of production, or even to increase production, simply do not exist or are in acute disrepair. Currently, in accordance with their level of repair, Iraq’s refining and export facilities are already operating at nearly full capacity. Any significant increase in future production requires an equal investment into refining capacity and into export routes. Pipelines, both the internal Strategic Pipeline and those designed for export, which are not of adequate throughput volume, require repair and expansion. Expansion of this system, whether through the reopening of old routes such as the IPSA to Saudi Arabia, or through the construction of new lines such as that proposed to transport oil to the Jordanian port of Aqaba, is required so as to circumvent the bottlenecks that currently restrict Iraqi export capabilities. The port of Basra, in the south, stands as Iraq’s most important export facility with a capacity of 1.6 million barrels per day. Additional plans for this facility include the addition of 3.2 million barrels in daily capacity. However, this ambitious goal stands only to highlight the vital need for investments into this sector.

Oil export capacity is further hampered by the domestic economy’s nearly complete dependence on this resource. Natural gas, which currently is mostly flared, could be utilized in the future to achieve a more balanced energy mix. Instead of being flared, gas could be re-injected to increase pressure and production levels in oil fields. Finally, budgetary funds allocated for the development of the oil and gas sector need also to take into account the country’s severe lack of electricity capacity. Because a large share of Iraq’s already low electricity output is consumed by the energy industry, improvement and expansion of the electricity sector is vital to the success of wider development plans for the country.

Investing in the Future

Fortunately, based upon the results of bidding rounds over the past several years granting production and exploration rights to international companies, it is clear that there exists explicit interest on the part of such enterprises to become involved in and to invest heavily into the energy sector in Iraq. However, if the government of Iraq genuinely seeks to open up the market space to allow for the activity of international companies in both the upstream and downstream industrial space, the legal framework regulating the oil and gas sectors should be reformulated.

…cooperative, multi-party discussions between all parties in Iraq, will do much to ease the tension between factions fighting for their share of resource revenues.

The most recent World Bank report ranked Iraq as 165th out of 185 total countries in regards to the ease of doing business within the country. This figure can be improved through the adoption of legal frameworks addressing the following three subjects: the resolution of creditor claims, the authority of the government to sign development and production agreements, and federal sharing agreements. As illustrated by the conflict that has arisen over the central government’s recent allocation to the Kurdistan regional government of only a fraction of the funds which were requested to compensate regional oil-production costs, it is especially this absence of a clear and legally grounded rent-sharing agreement that is concerning moving forward. Such a framework, once established in a manner reflective of cooperative, multi-party discussions between all parties in Iraq, will do much to ease the tension between factions fighting for their share of resource revenues.

The idea of “Iraq [as] a regional economic power,” cannot be taken seriously without a sincere commitment to the future of those who live there. 

However, regardless of whether or not these legal frameworks are put in place and the necessary, wide-scale, expansions are made in terms of Iraq’s critical infrastructure, it is natural that energy companies and other enterprises will invest strictly into the hydrocarbon sector. Because foreign investments into the country will be heavily concentrated in the energy sector, balanced economic development across multiple sectors will be unlikely. This means a shift in budgetary application to other services, sectors, and issues will have to take place so as to achieve genuine economic diversity and strength of development. In 2012, the budget surplus of the Iraqi government was 4.5% of GDP, amounting to nearly 6 billion dollars. Thus, due to rent from the natural resource sector, there is already a marked potential for the government to invest in human development, which in turn has the potential to place the country on a path towards sustained, even economic development, founded upon the well-being of the population as a whole.

As expressed by the National Development Plan, the vision of the Iraqi government is the nurturing of a “competitive and diversified economy” lead by the private sector, and supported by a government which would “ensure a fair distribution of national income so as to allow the more vulnerable groups…to carry out their roles effectively in achieving socio-economic progress.” A more perfect expression of benevolent intent need not be formulated. And the resources, human and financial, which are required for the realization of the goals as set forth by this plan, are available. However, if the headlines coming out of Iraq are to be changed, the idea of “Iraq [as] a regional economic power,” cannot be taken seriously without a sincere commitment to the future of those who live there. Socio-economic progress is not assisted by helicopters and checkpoints. The foundation upon which a healthy Iraq can be built is the well-being of the Iraqi people: their health, their education, their ideas, their civil rights, and their collective desire for peace and prosperity. Revenue from hydrocarbons has the potential to help and the presence of oil and gas is not a curse. It cannot by virtue of its existence be considered a miracle, either. Resource rent will be used at the volition of those in power. Thus understood, it is hoped that there will soon be an Iraqi government that will recognize that a strong Iraq is dependent upon the devotion of its population, Shia, Sunni, and Kurd, to a common future. Ultimately, if the government fairly distributes the resource revenue so as to advance the well-being of the Iraqi citizenry as a whole, there is every reason to believe that Iraq can leave behind its recent history of violence and irregular development and truly achieve the goals it has set for itself in its National Development Plan.

Michael G. Seyer is an MA candidate in the ENERPO program at the European University at St. Petersburg.

Sources:

2013 Freedom House Report: Iraq 2013 Iraq Federal Budget

2012 World Energy Outlook: Iraq

Knights, Michael. “Iraq’s Budget Threat Against the Kurds.” The Washington Institute for Near East Policy: Policy Analysis, 11 March 2013.

Zedalis, Rex J. The Legal Dimensions of Oil and Gas in Iraq: Current Reality and Future Prospects. Cambridge University Press, Cambridge, December 2009.

“Iraq Reaches Power-Sharing Deal to Form Government.” The National. 7 November 2010.

Tim Arango. “Prime Minister Puts Power-Sharing at Risk in Iraq.” New York Times. 21 December 2011.

Dan Murphy. “Iraq Risks ‘Return’ to War? Maybe the Wrong Question.” The Christian Science Monitor. 6 June 2013.

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