Iraq - ECONOMY

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Iraq - GROWTH AND STRUCTURE OF THE ECONOMY

In the 1960s, investment in industry accounted for almost one-quarter of the development budget, about twice the amount spent under the monarchy in the 1950s. After the 1968 Baath revolution, the share allocated to industrial development grew to about 30 percent of development spending. With the advent of the Iran-Iraq War, however, this share decreased to about 18 percent. Development expenditure on agriculture fell from about 40 percent under the prerevolutionary regime to about 20 percent under the Baath regime in the early 1970s. By 1982, investment in agriculture was down to 10 percent of the development budget.

Total Iraqi GDP, as well as sectoral contribution to GDP, could only be estimated in the 1980s. On the eve of the Iran-Iraq War, the petroleum sector dominated the economy, accounting for two-thirds of GDP. The outbreak of war curtailed oil production, and by 1983 petroleum contributed only one-third of GDP. The nonpetroleum sector of the economy also shrank, and, as a consequence, total real GDP dropped about 15 percent per year from 1981 to 1983. To a lesser extent, nominal GDP also shrank, from about US$20 billion to US$18 billion, an indication of high wartime inflation. The decline in GDP was reversed between 1984 and 1986, when oil production grew at about 24 percent per year as the government secured outlets and resumed exports. But over the same period, the nonpetroleum sector of the economy continued to contract by about 6 percent per year, offsetting gains from increased oil production. In 1986, the petroleum sector revived to the extent that it contributed about 33.5 percent of GDP, while the nonpetroleum sector, including services, manufacturing and agriculture accounted for the remainder. Business services, the largest component of nonpetroleum GDP, amounted to about 23 percent of GDP. Agriculture accounted for about 7.5 percent of GDP, mining and manufacturing for slightly less than 7 percent, construction for almost 12 percent, transportation and communications for about 4.5 percent, and utilities for between 1 and 2 percent. The total estimated GDP for 1986 was equivalent to US$35 billion.

Projections based on economic trends indicated that total GDP would grow about 6 percent annually over the five-year period from 1987 to 1991. In fact, however, 1987 GDP was estimated at a 1.7 percent real growth rate. The petroleum sector would continue to grow, although at a slower rate of about 8 percent per year, and it would account for more than half of GDP. The nonpetroleum sector was expected to resume modest growth in 1987. Construction would be the fastest growing sector, at about 7 percent per year. Agriculture would grow only marginally, and therefore its share of overall GDP would decline from 1986 levels. Other nonpetroleum sectors would grow at a rate of between 3 and 4 percent per year and, because these projected growth rates were smaller than the overall GDP growth rate, would likewise decline as a percentage of total GDP.

In early 1988, Iraq's total external liabilities were difficult to determine accurately because the Iraqi government did not publish official information on its debt. Moreover, Iraqi debt was divided into a number of overlapping categories according to the type of lender, the terms of disbursement or servicing, and the disposition of the funds. For example, some loans were combined with aid grants in mixed credits, and some loans were authorized but never disbursed. And, in a process of constant negotiation with its creditors, Iraq had deferred payment by rescheduling loans. Finally, some loans were partially repaid with oil in counter-trade and barter agreements. Nevertheless, experts estimated that Iraqi debt in 1986 totaled between US$50 billion and US$80 billion. Of this total, Iraq owed about US$30 billion to Saudi Arabia, Kuwait, and the other Gulf states. Most of this amount was derived from crude oil sales on Iraq's behalf. Iraq promised to provide reimbursement in oil after the war, but the Gulf states were expected to waive repayment.

A second important category of debt was that owed to official export credit agencies. The authoritative Wharton Econometric Forecasting Associates estimated in 1986 that Iraqi debt guaranteed by export credit agencies totalled US$9.3 billion, of which US$1.6 billion was short-term debt and US$7.7 billion was medium-term debt.

In the category of private sector debts, Iraq owed up to US$7 billion to private companies that had not secured the trade credit they extended to Iraq with their government export credit agencies. The firms that were owed the most were based in Turkey, in the Republic of Korea (South Korea), and in India, which lacked access to official export credit guarantees. European companies were also owed large amounts. By the late 1980s, Iraq had placed a priority on settling these private sector debts. In addition, Iraq owed an estimated US$6.8 billion to commercial banks as of mid-1986, although much of this sum was guaranteed by government export credit agencies.

In the realm of government debts, Iraq had accrued considerable debts to Western governments for its purchases of military materiel. Iraq owed France more than US$1.35 billion for weapons, which it was repaying by permitting Elf-Aquitaine and Compagnie Fran�aise des Petroles-Total (CFP)--two oil companies affiliated with the French government--to lift 80,000 barrels of oil per day from the Dortyol terminal near Iskenderun, Turkey. Finally, Iraq owed money to the Soviet Union and to East European nations. Iraq's debt to the Soviet Union was estimated at US$5 billion in 1987.

Iraq

Iraq - THE ROLE OF GOVERNMENT

Following the Baath Party's accession to power in 1968, the government began using central planning to manage the national economy. The government separated its expenditures into three categories: an annual expenditure budget for government operations, an annual investment budget to achieve the goals of the five-year plans, and an annual import budget. Economic planning was regarded as a state prerogative, and thus economic plans were considered state secrets. The government rarely published budget or planning information, although information on specific projects, on total investment goals, and on productivity was occasionally released.

Extremely high revenues from oil exports in the 1970s made budgeting and development planning almost irrelevant in Iraq. The responsibility of the state was not so much to allocate scarce resources as to distribute the wealth, and economic planning was concerned more with social welfare and subsidization than with economic efficiency. One consistent and very costly development goal was to reduce the economy's dependence on a single extractive commodity--oil--and, in particular, to foster heavy industry. Despite this objective, in 1978 the government began an attempt to rationalize the non-oil sector. The process of costcutting and streamlining entailed putting a ceiling on subsidization by making state-run industries and commercial operations semiautonomous. The expenditures of such public entities were not aggregated into the governmental expenditure budget. Instead, state-run companies were given their own budgets in an attempt to make them more efficient.

Because Iraqi economic development planning was predicated on massive expenditure, the onset of the Iran-Iraq War in 1980 brought central planning to an impasse. Despite an effort to maintain the momentum of its earlier development spending, the government was forced to revert to ad hoc planning as it adjusted to limited resources and to deficit spending. Economic planning became not just a perceived national security issue, but a real one, as the government devoted its attention and managerial resources to obtaining credits. The Fourth Five-Year Plan (1981- 85) was suspended, and as of early 1988, the Fifth Five-Year Plan (1986-90) had not been formulated.

In early 1987, President Saddam Husayn abruptly reversed the course of Iraq's economic policy, deviating sharply from the socialist economic ideology that the government had propounded since the 1968 Baath revolution. Saddam Hussayn advocated a more open, if not free, market, and he launched a program of extensive reform. Because the liberalization was aimed primarily at dealing with the nation's mounting and increasingly unmanageable war debt, Saddam Husayn's motivation was more strategic than economic. He had four related goals--to conserve money by cutting the costs of direct and of indirect government subsidies, to tap private sector savings and to stem capital outflow by offering credible investment opportunities to Iraqi citizens, to reduce the balance of payments deficit by fostering import substitution and by promoting exports, and to use the reforms to convince Western commercial creditors to continue making loans to Iraq.

The reform process began with Revolutionary Command Council (RCC) Decree Number 652, which in May 1987 abolished Iraq's labor law. This law had institutionalized the differences among white collar, blue collar, and peasant workers. Under the law, every adult had been guaranteed lifetime employment, but workers had almost no freedom to choose or to change their jobs or places of employment, and they had little upward mobility. One result was that labor costs in Iraq accounted for 20 percent to 40 percent of output, compared to about 10 percent in similar industries in nonsocialist economies. Nonproductive administrative staff accounted for up to half the personnel in state-run enterprises, a much higher proportion than in private sector companies in other countries. The government immediately laid off thousands of white-collar workers, most of whom were foreign nationals. Thousands of other white-collar civil servants were given factory jobs. Previously, all state blue collar-workers had belonged to government-sponsored trade unions, while unions for private sector employees were prohibited. After the labor law was abolished, the situation was reversed. Government workers could no longer be union members, whereas private sector employees were authorized to establish and to join their own unions. To compensate state blue collar-workers for their lost job security, Saddam Husayn established an incentive plan that permitted stateenterprise managers to award up to 30 percent of the value of any increase in productivity to workers.

Decree Number 652 aroused resentment and controversy among government bureaucrats, many of whom were stalwart Baath Party members, not only because it contradicted party ideology, but also because it imperiled their jobs. Feeling compelled to justify his new economic thinking and to reconcile it to Baathist ideology, Saddam Husayn wrote a long article in Ath Thawrah, the major government-run newspaper, criticizing the labor law for perpetuating a caste and class system that prevented people from being rewarded according to merit and from using their capacities fully. Perhaps writing with intentional irony, Saddam Husayn stated that unless people were rewarded for producing more, some might start to regard the capitalist system as superior because it permitted the growth of wealth and the improvement of workers' lives.

In June 1987, Saddam Husayn went further in attacking the bureaucratic red tape that entangled the nation's economy. In a speech to provincial governors, he said, "From now on the state should not embark on uneconomic activity. Any activity, in any field, which is supposed to have an economic return and does not make such a return, must be ignored. All officials must pay as much attention to economic affairs as political ideology."

To implement this policy, Saddam Husayn announced a move toward privatization of government-owned enterprises. Several mechanisms were devised to turn state enterprises over to the private sector. Some state companies were leased on long terms, others were sold outright to investors, and others went public with stock offerings. Among the state enterprises sold to the public were bus companies serving the provinces, about 95 percent of the nation's network of gas stations, thousands of agricultural and animal husbandry enterprises, state department stores, and factories. In many instances, to improve productivity the government turned stock over to company employees.

The most significant instance of privatization occurred in August 1987, when Saddam Husayn announced a decree to abolish the State Enterprise for Iraqi Airways by early 1988. Two new ventures were to be established instead: the Iraqi Aviation Company, to operate commercially as the national airline, and the National Company for Aviation Services, to provide aircraft and airport services. Stock was to be sold to the public, and the government was to retain a minority share of the new companies through the General Federation of Iraqi Chambers of Commerce and Industry.

In a further move consistent with the trend toward privatization, the RCC announced in November 1987 that the government would offer new inducements for foreign companies to operate in Iraq by loosening direct investment restrictions. Details of the new proposal were not specified, but it was expected to entail modification of Resolution Number 1646 of the RCC, enacted in November 1980, which forbade foreign capital participation in private sector companies. Changes in the longstanding government policy of preventing foreign ownership of state institutions might also occur. According to the new regulations, all foreign firms engaged in development projects would also be exempt from paying taxes and duties, and foreign nationals who were employees of these companies would pay no income tax. At the same time, Saddam Husayn announced that development projects would no longer be paid for on credit. The new legislation indicated that Iraq was encountering difficulty paying for or obtaining credits for turnkey projects and was therefore willing to permit foreign companies to retain partial ownership of the installations that they built. Previously, Iraq had rejected exchanging debt for equity in this manner as an infringement on its sovereignty.

Iraq

Iraq - BANKING AND FINANCE

When Iraq was part of the Ottoman Empire, a number of European currencies circulated alongside the Turkish pound. With the establishment of the British mandate after World War I, Iraq was incorporated into the Indian monetary system, which was operated by the British, and the rupee became the principal currency in circulation. In 1931, the Iraq Currency Board was established in London for note issue and maintenance of reserves for the new Iraqi dinar. The currency board pursued a conservative monetary policy, maintaining very high reserves behind the dinar. The dinar was further strengthened by its link to the British pound. In 1947 the government-owned National Bank of Iraq was founded, and in 1949 the London-based currency board was abolished as the new bank assumed responsibility for the issuing of notes and the maintenance of reserves. The National Bank of Iraq continued the currency board's conservative monetary policy, maintaining 100 percent reserves behind outstanding domestic currency.

Initiated during the last years of Ottoman rule, commercial banking became a significant factor in foreign trade during the British mandate. British banks predominated, but traditional money dealers continued to extend some domestic credit and to offer limited banking services. The expansion of banking services was hampered by the limited use of money, the small size of the economy, and the small amount of savings; banks provided services for foreign trade almost exclusively. In the mid-1930s, the Iraqi government decided to establish banks in order to make credit available to other sectors of the economy. In 1936, the government formed the Agricultural and Industrial Bank. In 1940, this bank was divided into the Agricultural Bank and the Industrial Bank, each with substantially increased capital provided by the government. The government established the Rafidayn Bank in 1941 as both the primary commercial bank and the central bank, but the National Bank of Iraq became the government's banker in 1947. The Real Estate Bank was established in 1948, primarily to finance the purchase of houses by individuals. The Mortgage Bank was established in 1951, and the Cooperative Bank in 1956. In addition to these government-owned institutions, branches of foreign banks and private Iraqi banks were opened as the economy expanded.

In 1956 the National Bank of Iraq became the Central Bank of Iraq. Its responsibilities included the issuing and the management of currency, control over foreign exchange transactions, and the regulation and supervision of the banking system. It kept accounts for the government, and it handled government loans. Over the years, legislation has considerably enlarged the Central Bank's authority.

On July 14, 1964, all banks and insurance companies were nationalized, and, during the next decade, banking was consolidated. By 1987 the banking system consisted of the Central Bank, the Rafidayn Bank, and the Agricultural, Industrial, and Real Estate banks.

In the 1980s, the Rafidayn Bank was in the contradictory position of trying to maintain its reputation as a viable commercial bank while acting on behalf of the government as an intermediary in securing loans from private foreign banks. With deposits of more than US$17 billion in 1983, the Rafidayn was reportedly the largest commercial bank in the Arab world. It managed to maintain a relatively sound commercial reputation for the five years of the war, and in 1985 its total assets stood at about ID10.4 billion and its total deposits, at more than ID9.5 billion--both figures having tripled since the Iran-Iraq War began in 1980. This huge increase in deposits was attributed to increased saving by the public because of the scarcity of consumer products. Profits of ID290 million in 1985 represented an increase of nearly 50 percent over 1980 levels. By 1985 the Ralidayn had established 215 branches in Iraq, 104 of which were in Baghdad; according to the Iraqi government, it also had seven branches abroad. In 1986, however, the bank started to delay payment of letters of credit owed to foreign exporters, and its failure to make installment payments on a syndicated loan of 500 million Eurodollars, forced rescheduling of the debt payments. In 1987, with the exception of the Baghdad office of a Yugoslav bank, the Rafidayn was Iraq's only commercial bank. In this same year, the government ordered the Rafidayn Bank to double its capital to ID100 million. This increase was to enable the bank to improve and to extend its commercial services, so that it could tap the public for the increased deposits that would enable the bank to offer more loans. To the extent that new loans could bolster the emerging private sector, the move appeared consistent with other government efforts to make state-run operations more fiscally efficient.

The other three banks in Iraq were so-called special banks that provided short- to long-term credit in their respective markets. Since its establishment in 1936, the Agricultural Bank had grown to forty-five branches, of which four were in Baghdad. In 1981, its capital stood at ID150 million and its loans totaled ID175 million. The Agricultural Bank had also started a project whose objective was to encourage rural citizens to establish savings accounts. Meanwhile, the Industrial Bank had grown to nine branches and offered loans both to private and to public sector industrial and manufacturing companies. The Real Estate Bank was composed of twenty-five branches and provided loans for construction of housing and tourist facilities. The Iraq Life Insurance Company, the Iraq Reinsurance Company, and the National Life Insurance Company conducted the nation's insurance business. Post offices maintained savings accounts for small depositors.

Iraq

Iraq - THE OIL SECTOR

Developments Through World War II

Natural seepage aroused an early interest in Iraq's oil potential. After the discovery of oil at Baku (in what is now the Soviet Union, on the west side of the Caspian Sea) in the 1870s, foreign groups began seeking concessions for exploration in Iran and in the area of the Ottoman Empire that became Iraq after World War I. The Anglo-Persian Oil Company (later renamed the Anglo-Iranian Oil Company and still later British Petroleum) was granted a concession in Iran and discovered oil in 1908. Shortly before World War I, the British government purchased majority ownership of the Anglo-Persian Oil Company.

The discovery of oil in Iran stimulated greater interest in potential Iraqi oil resources, and financial groups from several major nations engaged in protracted negotiations and in considerable intrigue with the Ottoman Empire in order to obtain concessions to explore for oil in Mosul and in Kirkuk, two locations in what later was north-central Iraq. Although a few concessions were granted prior to World War I, little surveying or exploration was done.

Iraq

Iraq - The Turkish Petroleum Company

In 1912, several rival groups banded together to establish the Turkish Petroleum Company (TPC), which would seek a concession to explore for Iraqi oil. The original purpose of the TPC was to eliminate rivalry among the partners and to outflank American concession seekers. The TPC's guiding hand was Calouste Gulbenkian, who had been hired by British banking interests because of his knowledge and his ability to influence the decisions of the Turkish government. His 5 percent holdings in TPC reputedly made him the richest individual in the world for many years, and were the source of his nickname, "Mr. Five Percent."

Establishment of the TPC did not eliminate the rivalry among the shareholders representing various national interests. Britain had a long-standing strategic interest in Mesopotamia because of its location in relation to Britain's military and commercial routes to India. The British government's decision before World War I to convert its naval fleet from coal to oil increased the importance of the area. By 1914, the British-government- controlled Anglo-Persian Oil Company had bought 50 percent of the shares of TPC and was exerting pressure on the Turkish government to grant the Anglo-Persian Oil Company a concession, but World War I delayed negotiations.

World War I demonstrated to the major powers the importance of securing their own sources of oil. The British-French San Remo Conference of 1920 provided for permanent British control of any company established to develop Mesopotamian oil, but allocated Iraqi interests 20 percent if they chose to invest. France claimed the German shares of TPC that had been seized as enemy property and formed the CFP to hold the French shares in TPC. The Italian and United States governments protested their exclusion. After prolonged and sharp diplomatic exchanges, American oil companies were permitted to buy into TPC, although negotiations were not completed until 1928.

Although Iraq became a British mandate in 1920, that did not guarantee TPC an exclusive concession. Using the promise of a concession from the prewar Turkish government, TPC began negotiating for one in 1921. A major point of contention was Iraq's 20 percent share of any oil development company, a condition stipulated at the San Remo Conference. By the early 1920s, TPC consisted almost entirely of oil companies that did not want Iraq's representation or its interference in the management of TPC. They successfully resisted Iraqi efforts to participate despite pressure by the British government to accept Iraqi shareholders.

A concession was granted to TPC in March 1925. Many Iraqis felt cheated from the beginning of the concession. Its term was for seventy-five years, and it covered twenty-four plots selected by TPC. The Iraqi government was to receive royalties at a flat fee per ton to be paid in English pounds sterling, but with a gold clause to guard against devaluation of the pound. Royalty payments were linked to oil company profits, but this clause became effective only after twenty years. The Iraqi government had the right to tax TPC at the same rate levied on other industrial concerns. TPC was to build a refinery to meet Iraq's domestic needs and a pipeline for the export of crude oil. The Iraqi government had the right to lease other plots for oil exploration and development, and TPC was not excluded from bidding on these additional plots.

TPC began exploratory drilling after the concession was ratified by the Iraqi government. Oil was discovered just north of Kirkuk on October 15, 1927. Many tons of oil were spilled before the gushing well was brought under control. This indication of a large, valuable field soon proved well-founded.

The discovery of oil hastened negotiations over the composition and the functions of TPC. The shareholders signed a formal agreement in July 1928. The Anglo-Persian Oil Company, the Dutch Shell Group, the CFP, and the Near East Development Corporation (which represented the interests of five large American oil companies) each held 23.7 percent of the shares, and Gulbenkian the remaining, but nonvoting, 5 percent. TPC was organized as a nonprofit company registered in Britain that produced crude oil for a fee for its parent companies, based on their shares. TPC was limited to refining and marketing for Iraq's internal needs to prevent any competition with the parent companies. The Anglo-Persian Oil Company was awarded a 10 percent royalty on the oil produced, as compensation for its reduced share in TPC.

A major obstacle facing United States firms had been a clause in the 1914 reorganization of the TPC that stipulated that any oil activity in the Ottoman Empire by any shareholder would be shared by all partners. Gulbenkian had insisted on the clause so that the oil companies could not circumvent his interests by establishing other companies without him. This arrangement, continued in the 1928 reorganization, came to be known as the Red Line Agreement because the TPC partners were forbidden to act independently within the boundaries of the now-defunct Ottoman Empire. This "red line" effectively precluded the United States and other TPC partners from concession hunting and from oil development in much of the Persian Gulf region until after World War II.

In 1929 the TPC was renamed the Iraq Petroleum Company (IPC). IPC represented oil companies that had diverse and sometimes conflicting interests. The Anglo-Persian Oil Company and Standard Oil of New Jersey (also known as Esso and subsequently known as Exxon), for example, had access to major sources of crude oil outside Iraq, and they therefore wished to hold the Iraqi concessions in reserve. CFP and other companies, in contrast, pushed for rapid development of Iraqi oil to augment their short crude oil supplies.

IPC's parent companies delayed development of the Iraqi fields, and IPC's concession expired because the companies failed to meet certain performance requirements, such as the construction of pipelines and of shipping terminals. IPC's concession was renegotiated in 1931. The new contract gave IPC a seventy-year concession on an enlarged 83,200-square-kilometer area, all east of the Tigris River. In return, however, the Iraqi government demanded and received additional payments and loans as well as the promise that IPC would complete two oil pipelines to the Mediterranean by 1935.

Iraqi politicians remained suspicious of IPC's motives. Many Iraqis believed that IPC was deliberately withholding Iraqi crude from the market to boost the price of the parent companies' oil produced elsewhere. In 1932 Iraq granted a seventy-five-year concession to the British Oil Development Company (BODC), created by a group of Italian and British interests, to 120,000 square kilometers west of the Tigris River. The terms were more favorable to the Iraqi government than those of earlier agreements. BODC financing was insufficient, however, and the company was bought out by IPC in 1941 and was renamed the Mosul Petroleum Company (MPC). IPC shareholders asserted their monopoly position again when they won the concession rights to southern Iraq and in 1938 founded the Basrah Petroleum Company (BPC) as their wholly owned subsidiary to develop the region.

Transport remained the main obstacle to the efficient export of Iraqi oil. When France joined IPC after World War I, it wanted the Iraqi pipeline to transit its mandate in Syria to a coastal terminal at Tripoli, Lebanon. The Iraqis and the British preferred a terminal at Haifa, in Palestine. In 1934, a pipeline was completed from the Kirkuk fields to Al Hadithah, where it divided, one branch going to Tripoli (the Tripoli branch was closed by Syria--which supported Iran--in 1982 after the outbreak of the Iran-Iraq War in 1980) and the other to Haifa (the Haifa line was closed in 1948). In 1938, nine years after the discovery of oil, Iraq began to export oil in significant quantities. Iraqi production averaged 4 million tons per year until World War II, when restricted shipping in the Mediterranean forced production down sharply.

Iraq

Iraq - Post-World War II Through the 1970s

With the end of World War II, IPC and its affiliates undertook repair and development of facilities in Iraq as rapidly as financing and materials became available. Exploration and drilling were pressed, particularly in the Basra and the Mosul areas, to meet concession terms. Although considered a priority, the elimination of transport constraints was set back when a larger second, nearly completed pipeline to Haifa was abandoned in 1948 as a result of the first Arab-Israeli war. Use of the existing Haifa line was also discontinued. In 1951, however, commercial exports by the BPC of good quality crude began via a new pipeline to Al Faw, on the Persian Gulf. Exports were boosted further with the completion in 1952 of a thirty-inch pipeline linking the Kirkuk fields to the Syrian port of Baniyas, which had a throughput capacity of 13 million tons per year. In that year, production from Basra and Mosul approached 2.5 million tons while the Kirkuk fields increased production to more than 15 million tons. In the space of a year (1951-52), total Iraqi oil production had doubled to almost 20 million tons.

Iraqi officials still harbored ambitions, dating back to the 1920 San Remo Conference, to take control of their nation's oil resources. The elimination of transportation bottlenecks and the subsequent rapid growth of exports encouraged Iraqi assertiveness. IPC's costly, irretrievable investments in Iraq's oil infrastructure gave the government even greater leverage.

One particularly sore point among the Iraqis concerned IPC's contractual obligation to meet Iraq's domestic requirements for gasoline and other petroleum products. An IPC subsidiary operated a small refinery and distribution company based near Kirkuk that supplied two-thirds of Iraq's needs. But IPC imported the remaining third from a large refinery in Abadan, Iran. Iraq considered this arrangement politically imprudent, a judgment that was vindicated when, in the early 1950s, Iranian production was cut during that country's oil industry nationalization crisis. In 1951 the Iraqi government took over, with compensation, the small Kirkuk refinery and hired a United States contractor to build a refinery near Baghdad. This represented Iraq's first concrete step toward taking control of the oil industry.

In 1952 Iraq followed the examples of Venezuela and of Saudi Arabia by demanding and receiving a 50 percent tax on all oil company profits made in the country. The tax more than doubled Iraqi profits per ton on exported oil.

The 1958 Iraqi revolution had little effect at first on the government's attitude toward IPC. The government needed the oil revenues generated by IPC; moreover, Iran's experience when it nationalized its oil industry was a vivid reminder to the Iraqis of the power the oil companies still wielded. In 1959 and in 1960, surpluses led the international oil companies to reduce the posted price for Middle Eastern oil unilaterally, which reduced government revenues significantly. IPC's policy of exploiting and developing only .5 percent of the total concessions it held in Iraq, and of holding the remainder in reserve also reduced Iraqi revenues. Perhaps in response to the general situation, Iraq convened a meeting in Baghdad of the major oil-producing nations, which resulted in the September 1960 formation of the Organization of Petroleum Exporting Countries (OPEC). In December 1961, the Iraqi government enacted Law No. 80, which resulted in the expropriation of all of the IPC group's concession area that was not in production. The expropriation locked the government and the oil companies in a controversy that was not resolved for more than a decade. The companies had two paramount objectives in seeking to mitigate the law's effect. One was to regain control of the concession to the North Rumaylah field in southern Iraq, which was expected to be a major source of oil. In particular, the companies did not want competitors to gain access to it. The companies' second major objective was to limit the impact of Iraq's actions on IPC concession agreements in other oil- exporting nations.

In February 1964, the government established the state-owned Iraq National Oil Company (INOC) to develop the concession areas taken over from IPC. INOC was eventually granted exclusive rights by law to develop Iraq's oil reserves; granting concessions to other oil companies was forbidden, although INOC could permit IPC and other foreign companies to participate in the further development of existing concessions. Nevertheless, IPC continued to lift the bulk of Iraqi oil from the Kirkuk field that it had retained, and, more important, to export and to market it. IPC therefore remained the arbiter of existing, if not potential, Iraqi oil production.

Iraq's disillusionment with newly formed OPEC began just after the enactment of Law 80. Iraq applied pressure on OPEC to adopt a unified negotiating stance vis-a-vis the oil companies. Instead, OPEC members negotiated separately. This allowed the oil companies to extract concessions that permitted them to switch production away from Iraq and therefore to pressure Iraq with the prospect of lower oil revenues. Iraq's relationship with IPC was further aggravated in 1966 when Syria raised transit fees on the pipeline that carried two-thirds of Iraqi oil to port and demanded retroactive payments from IPC. When IPC refused to pay, Syria closed the pipeline for several months, an action that cost the Iraqi government much revenue.

The eight-year shutdown of the Suez Canal that followed the June 1967 Arab-Israeli War increased the importance of Mediterranean oil producers because of their proximity to European markets. In 1970 Libya took advantage of this situation to win higher prices for its oil. Iraq, which was in the unusual position of exporting oil through both the Gulf and the Mediterranean, demanded that it be paid for its oil at the Libyan price. IPC countered that Iraqi oil, because of its higher sulfur content, was inferior to Libyan oil. Meanwhile, exports of Iraqi oil via the Mediterranean began to decline, which IPC attributed to falling tanker rates that made Gulf oil more competitive. Iraq, however, interpreted the declining exports as pressure from the oil companies. In general, Iraq believed that IPC was intentionally undercharging customers for oil it sold on behalf of Iraq and was cutting back Iraqi production to force Iraq to restore the nationalized concession areas. In response, Iraq attempted to make INOC a viable substitute for IPC. The INOC chairman of the board was given cabinet rank and greater authority, but INOC's activities were hampered by lack of experience and expertise. Iraq therefore sought assistance from countries considered immune to potential IPC sanctions and to retaliation. In 1967 INOC concluded a service agreement with Entreprise des Recherches et des Activites Petrolieres (ERAP)--a company owned by the French government--covering exploration and development of a large segment of southern Iraq, including offshore areas. Some foreign observers doubted that the terms of the arrangement were more favorable than IPC's terms, but more important from Iraq's point of view, the ERAP agreement left control in Iraqi hands. By 1976 ERAP started pumping the oil it had discovered, at which point INOC took over operation of the fields and began delivering the oil to ERAP.

In 1967 INOC tapped the Soviet Union for assistance in developing the North Rumaylah field. The Soviet Union provided more than US$500 million worth of tied aid for drilling rigs, pumps, pipelines, a deep-water port on the Persian Gulf, tankers, and a large contingent of technicians. In 1972, the North Rumaylah field started production and produced nearly 4 million tons of crude.

In the same period, Iraq obtained aid from French, Italian, Japanese, Indian, and Brazilian oil companies under service contracts modeled on the 1967 ERAP agreement. The service contracts, which Iraq did not regard as concessions, allowed the foreign oil companies to explore and to develop areas in exchange for bearing the full costs and the risks of development. If oil were discovered, the companies would turn their operations over to INOC, which would sell them the oil at a discounted rate.

Iraq's increasing ability to manage its petroleum resources finally induced IPC to negotiate. In 1972 IPC promised to increase its production in Iraq and to raise the price it paid for Iraqi oil to the Libyan level. In return, IPC sought compensation for its lost concession areas. Iraq rejected this offer and, on June 1, 1972, nationalized IPC's remaining holdings in Iraq, the original Kirkuk fields. A state-owned company, the Iraqi Company for Oil Operations (ICOO), was established to take over IPC facilities. BPC was allowed to continue its operations.

In February 1973, Iraq and IPC settled their claims and counterclaims. IPC acknowledged Iraq's right to nationalize and agreed to pay the equivalent of nearly US$350 million to Iraq as compensation for revenue lost to Iraq over the years when IPC was selling Iraqi oil. In return, the government agreed to provide to IPC, free of charge, 15 million tons of Kirkuk crude, valued at the time at over US$300 million, in final settlement of IPC claims. Some observers believed that IPC had received a liberal settlement.

The October 1973 Arab-Israeli War impelled the Iraqis to take complete control of their oil resources, and Iraq became one of the strongest proponents of an Arab oil boycott of Israel's supporters. Although Iraq was subsequently criticized by other Arab countries for not adhering to the agreed-upon production cutbacks, Iraq nationalized United States and Dutch interests in BPC. By 1975 all remaining foreign interests were nationalized. Fifty-three years after the humiliating San Remo agreement, Iraq had finally gained complete sovereignty over its most valuable natural resource.

Throughout the mid- to late-1970s, increases in the price of oil caused Iraqi oil revenues to skyrocket even as production fluctuated. Iraq funneled much of this revenue into expanding the oil industry infrastructure. Refinery capacity was doubled, and in 1977 a key pipeline was completed from the Kirkuk fields across Turkey to a Mediterranean terminal at Dortyol.

In 1976, the structure of the Iraqi oil industry was revamped. A new Ministry of Oil was established to direct planning and construction in the petroleum sector and to be responsible for oil refining, gas processing, and internal marketing of gas products through several subsidiary organizations. INOC would be responsible for the production, transport, and sale of crude oil and gas. Some of its operations were contracted out to foreign service companies. The State Organization for Northern Oil (SONO), subordinate to INOC, replaced ICOO as the operating company in the northern fields. In subsequent reorganizations, SONO was renamed the Northern Petroleum Organization (NPO), and a Central Petroleum Organization (CPO), as well as a Southern Petroleum Organization (SPO) were also established. The State Organization of Oil Projects (SOOP) took over responsibility for infrastructure from INOC, and the State Organization for Marketing Oil (SOMO) assumed responsibility for oil sales, leaving INOC free to oversee oil production.

Iraq

Iraq - Oil in the 1980s

In 1987 petroleum continued to dominate the Iraqi economy, accounting for more than one-third of nominal gross national product (GNP--see Glosssary) and 99 percent of merchandise exports. Prior to the war, Iraq's oil production had reached 3.5 million bpd (<"glossary.htm#barrels">barrels per day--see Glossary), and its exports had stood at 3.2 million bpd. In the opening weeks of the Iran-Iraq War, however, Iraq's two main offshore export terminals in the Persian Gulf, Mina al Bakr and Khawr al Amayah, were severely damaged by Iranian attacks, and in 1988 they remained closed. Oil exports were further restrained in April 1982, when Syria closed the pipeline running from Iraq to the Mediterranean. In response, Iraq launched a major effort to establish alternative channels for its oil exports. As an emergency measure, Iraq started to transport oil by tanker-truck caravans across Jordan and Turkey. In 1988 Iraq continued to export nearly 250,000 bpd by this method. In mid-1984, the expansion of the existing pipeline through Turkey was accomplished by looping the line and by adding pumping stations. The expansion raised the line's throughput capacity to about 1 million bpd. In November 1985, Iraq started work on an additional expansion of this outlet by building a parallel pipeline between Kirkuk and Dortyol that used the existing line's pumping stations. Work was completed in July 1987. The result was an increase in exports through Turkey of 500,000 bpd.

In September 1985, construction of a spur line from Az Zubayr in southern Iraq to Saudi Arabia was completed; the spur linked up with an existing pipeline running across Saudi Arabia to the Red Sea port of Yanbu. The spur line had a carrying capacity of 500,000 bpd. Phase two of this project was begun in late 1987 by a Japanese-South Korean-Italian-French consortium. Phase two was to be an independent pipeline, parallel to the existing pipeline, which would run 1,000 kilometers from Az Zubayr to Yanbu and its own loading terminal. The parallel pipeline was expected to add 1.15 million bpd to Iraq's export capacity when completed in late 1989. Iraq negotiated with the contractors to pay its bill entirely in oil at the rate of 110,000 bpd. According to Minister of Petroleum Isam Abd ar Rahim al Jalabi, Iraq negotiated special legal arrangements with Saudi Arabia guaranteeing Iraqi ownership of the pipeline. Iraq also considered construction of a 1-million bpd pipeline through Jordan to the Gulf of Aqaba, but in 1988 this project was shelved.

The expansion of export capacity induced Iraq to try to boost its oil production, which in 1987 averaged 2.8 million bpd of which 1.8 million bpd were exported. The remainder was retained for domestic use. In addition, Iraq continued to receive oil donations of between 200,000 and 300,000 bpd from Kuwait and Saudi Arabia pumped out of the Neutral Zone on the east end of Iraq's southern border with Saudi Arabia. By the end of 1989, Iraq's goal was to have the capacity to produce oil for export at the prewar level of 3.5 million bpd without having to depend on any exports by ship through the Persian Gulf; however, at a posted price of approximately US$18 per barrel, and with spot prices at less than US$13 per barrel, oil was worth less than half as much in 1988 as it was when the Iran-Iraq War started. Iraq's oil revenue in 1987 was estimated at US$11.3 billion, up about 60 percent from the 1986 level of US$6.8 billion (see <"appendix.htm#table6">table 6, Appendix).

The expanded export capacity theoretically gave Iraq greater leverage in negotiating an increase in its OPEC quota. For the first several years of the Iran-Iraq War, Iraq attempted to stay within its OPEC quota in order to bring OPEC pressure to bear on Iran to curtail its production. In early 1988, this issue was moot, however, because Iraq had announced in 1986 that it would not recognize its 1.54 million bpd quota and would produce whatever amount best served Iraqi national interests. In 1987, however, Iraqi oil minister Jalabi reasserted Iraq's willingness to hold its oil production to the 1.54 million bpd OPEC quota if Iran adhered to an identical quota level. This would represent a decrease of about 40 percent from the 2.61 million bpd that Iran was authorized by OPEC to produce.

When Jalabi was appointed Iraq's oil minister in March 1987, he instituted a new round of reorganizations in the petroleum sector. The Ministry of Oil assimilated INOC, thus consolidating management of Iraq's oil production and distribution. The NPO absorbed the CPO. This organization, along with SOOP, was to be granted corporate status in an effort to make it more efficient. Jalabi was also concerned about the proper handling of Iraq's large hydrocarbon reserves. Although estimates of Iraqi hydrocarbon reserves in the late 1980s varied considerably, by all accounts they were immense. In 1984, Iraq claimed proven reserves of 65 billion barrels plus 49 billion barrels of "semiproven " reserves. In November 1987, Iraq's state-owned Oil Exploration Company calculated official reserves at 72 billion barrels, but the company's director, Hashim al Kharasan, stated that this figure would be revised upward to 100 billion barrels in the near future. In late 1987, oil minister Jalabi said that Iraqi reserves were "100 billion barrels definite, and 40 billion barrels probable," which would constitute 140 years of production at the 1987 rate. Western petroleum geologists, although somewhat more conservative in their estimates, generally concurred with Iraq's assessment; some said that Iraq has the greatest potential for new discoveries of all Middle Eastern Countries.

Besides petroleum, Iraq had estimated natural gas reserves of nearly 850 billion cubic meters, almost all of which was associated with oil. For this reason, most natural gas was flared off at oil wells. Of the estimated 7 million cubic meters of natural gas produced in 1987, an estimated 5 million cubic meters were flared. Iraq's Fifth Five-Year Plan of 1986-90 included projects to exploit this heretofore wasted asset.

The war did not impede Iraqi investment in the oil sector. On the contrary, it spurred rapid development. The government announced in 1987 that, during the previous 10 years, 67 oilrelated infrastructure projects costing US$2.85 billion had been completed and that another 19 projects costing US$2.75 billion were under way. One Iraqi priority was to exploit natural gas reserves. Because natural gas is more difficult to process and to market than petroleum, the Ministry of Oil in late 1987 called for the substitution of natural gas for oil in domestic consumption, a move that could free more oil for export. Therefore, it became a key goal to convey natural gas from oil fields to industrial areas, where the gas could then be used. In 1987 the Soviet Union's Tsevetmetpromexport (TSMPE) was constructing a main artery for such a system, the strategic trans-Iraq dry gas pipeline running northward from An Nasiriyah. In 1986 work was started on liquefaction facilities and on a pipeline to transport 11.3 billion cubic meters per day of natural gas from Iraq's North Rumaylah oil field to Kuwait.

Another focus of Iraqi investment was the maintenance and augmentation of the oil industry's refining capacity. Before the war, Iraq had a refining capacity of 320,000 bpd, 140,000 barrels of which were produced by the southern refinery at Basra and 80,000 of which were produced by the Durah refinery, near Baghdad. In the opening days of the Iran-Iraq War, the Basra refinery was damaged severely, and as of early 1988 it remained closed. The Durah refinery, however, remained in operation, and new installations, including the 70,000 bpd Salah ad Din I refinery and the 150,000 bpd northern Baiji refinery, boosted Iraq's capacity past 400,000 bpd. About 300,000 bpd were consumed domestically, much of which was used to sustain the war effort.

A second thrust of Iraqi oil policy in the late 1980s was the development, with Soviet assistance, of a major new oil field. In September 1987, during the eighteenth session of the Iraqi-Soviet Joint Commission on Economic and Technical Cooperation, held in Baghdad, Iraq's SOOP signed an agreement with the Soviet Union's Techno-Export to develop the West Al Qurnah oilfield. This oilfield was regarded as one of Iraq's most promising, with an eventual potential yield of 600,000 bpd. Techno-Export planned to start by constructing the degassing, pumping, storage, and transportation facilities at West Al Qurnah's Mishrif reservoir, expected to produce 200,000 bpd.

Iraq

Iraq - INDUSTRIALIZATION

The nonpetroleum industrial sector of the Iraqi economy grew tremendously after Iraq gained independence in 1932. Although growth in absolute terms was significant, high annual growth rates can also be attributed to the very low level from which industrialization started. Under Ottoman rule, manufacture consisted almost entirely of handicrafts and the products of artisan shops. The availability of electricity and lines of communication and transportation after World War I led to the establishment of the first large-scale industries, but industrial development remained slow in the first years after independence. The private sector, which controlled most of the nation's capital, hesitated to invest in manufacturing because the domestic market was small, disposable income was low, and infrastructure was primitive; moreover, investment in agricultural land yielded a higher rate of return than did investment in capital stock. World War II fueled demand for manufactured goods, and large public sector investments after 1951, made possible by the jump in state oil revenues, stimulated industrial growth. Manufacturing output increased 10 percent annually in the 1950s.

Industrial development slowed after the overthrow of the monarchy during the 1958 revolution. The socialist rhetoric and the land reform measures frightened private investors, and capital began leaving the country. Although the regime led by Abd al Karim Qasim excepted industry from the nationalization imposed on the agricultural and the petroleum sectors, in July 1964 a new government decreed nationalization of the twenty-seven largest privately owned industrial firms. The government reorganized other large companies, put a low limit on individual shareholdings, allocated 25 percent of corporate profits to workers, and instituted worker participation in management. A series of decrees relegated the private sector to a minor role and provoked an exodus of managers and administrators, accompanied by capital flight. The government was incapable of filling the vacuum it had created, either in terms of money or of trained manpower, and industrial development slowed to about 6 percent per year in the 1960s.

After the 1968 Baath revolution, the government gave a higher priority to industrial development. By 1978 the government had revamped the public industrial sector by organizing ten semi- independent state organizations for major industry subsectors, such as spinning and weaving, chemicals, and engineering. Factory managers were given some autonomy, and an effort was made to hold them responsible for meeting goals. Despite Iraq's attempt to rationalize and reorganize the public sector, state organizations remained overstaffed because social legislation made it nearly impossible to lay off or to transfer workers and bureaucratization made the organizations top-heavy with unproductive management. The government acknowledged that unused capacity, overstocking of inventories, and lost production time, because of shortages or disruptions of supply, continued to plague the industrial sector.

The government attempted to strengthen public sector industry by pouring money into it. According to official figures, annual investment in the nonpetroleum industrial sector rose from ID39.5 million in 1968 to ID752.5 million in 1985. As a consequence, industrial output rose; the government put the total value of Iraq's industrial output in 1984 at almost ID 2 billion, up from about ID300 million in 1968 and up more than 50 percent from the start of the Iran-Iraq War. The total value of industrial input in 1984 was ID981 million, so value added was in excess of 100 percent. Productivity relative to investment, however, remained low.

Because of revenues from oil exports, the government believed it could afford to pursue an ambitious and expensive policy of import substitution industrialization that would move the economy away from dependence on oil exports to obtain foreign exchange. In the early 1970s, Iraq made capital investments in large-scale industrial facilities such as steel plants. Many of the facilities were purchased from foreign contractors and builders on a turnkey basis. But Iraq neglected development of the next stage in the industrial process, the transformation of processed raw materials into intermediate products, such as construction girders, iron pipes, and steel parts. These bottlenecks in turn hampered the development of more sophisticated industries, such as machinery manufacture. Plant construction also outpaced infrastructure development. Many plants, for example, were inadequately linked by road or rail to outlets. Excess capacity remained a problem, as the large industrial plants continued to strain the economy's ability to absorb new goods. In an attempt to overcome these problems, Iraq imported the finished products and materials it required, defeating the purpose of its import substitution industrialization strategy and making the large extractive industries somewhat redundant. Imports of various basic commodities, such as plastics and chemicals, doubled and tripled in the 1970s. Most imports were consumed rather than used as intermediate components in industry; when imports were used as industrial inputs, value added tended to be low. Concurrently, tariffs and other trade barriers erected to protect domestic infant industry from foreign competition impeded the importation of certain vital materials, particularly spare parts and machinery. The growth of small-scale industries in the private sector and the rise in the standard of living in general were inhibited by such restrictions. Subsidized by oil revenues, the industrialization strategy yielded growth, but only at great cost.

In the late 1980s, the cumulative fiscal effects of the war with Iran forced Iraq to reverse priorities and to focus on the export side of the trade equation. Although the government previously had attempted to diversify the economy in order to minimize dependence on natural resources, it was now forced to concentrate on generating export income from extractive industry, in which it had a comparative advantage, rather than on producing more sophisticated manufactured goods. At the same time, in conjunction with its gradual move toward privatization, the government ceded greater responsibility to the private sector for the manufacture of light consumer items as import substitutes. In 1983 legislation exempted the private sector from customs duties and from excise taxes on imported spare parts and on machinery needed to build factories. The private sector was also given tax exemptions for capital investment and for research and development spending. Finally, the replacement of sole proprietorships by joint stock companies was encouraged as a means of tapping more private investment. In a 1987 reorganization, the Ministry of Light Industries was renamed the Ministry of Industry, and the Ministry of Industry and Minerals was renamed the Ministry of Heavy Industry. New ministers were appointed and were charged with improving both the the quality and quantity of industrial output; large parts of the state bureaucracy that had controlled industry were abolished.

According to official Iraqi figures, the total industrial labor force in 1984 consisted of about 170,000 workers. State- operated factories employed slightly more than 80 percent of these workers, while 13 percent worked in the private sector. The remaining 7 percent worked in the mixed economy, which consisted of factories operated jointly by the state--which held a major share of the common stock--and the private sector. Men constituted 87 percent of the industrial work force. According to the Iraqi government, in 1984 there were 782 industrial establishments, ranging in size from small workshops employing 30 workers to large factories with more than 1,000 employees. Of these, 67 percent were privately owned. The private sector owned two-thirds of the factories, but employed only 13 percent of the industrial labor force. Privately owned industrial establishments were, therefore, relatively numerous, but they were also relatively small and more capital-intensive. Only three privately owned factories employed more than 250 workers; the great majority employed fewer than 100 people each. Private-sector plant ownership tended to be dispersed throughout industry and was not concentrated in any special trade, with the exception of the production of metal items such as tools and utensils. Although the private sector accounted for 40 percent of production in this area, the metal items sector itself constituted no more than a cottage industry. Figures published by the Iraqi Federation of Industries claimed that the private sector dominated the construction industry if measurement were based not on the number of employees or on the value of output, but on the amount of capital investment. In 1981, such private- sector capital investment in the construction industry was 57 percent of total investment. By this alternative measurement, private sector involvement in the textile and the food processing industries was above average. In contrast, about fourty-six state-owned factories employed more than 1,000 workers apiece, and several industrial sectors, such as mining and steel production, were entirely state-dominated.

In 1984 Iraq's top industry, as measured by the number of employees, was the nonmetallic mineral industry, which employed 18 percent of industrial workers and accounted for 14 percent of the value of total industrial output. The nonmetallic mineral industry was based primarily on extracting and processing sulfur and phosphate rock, although manufacturing of construction materials, such as glass and brick, was also included in this category. Production of sulfur and of sulfuric acid was a priority because much of the output was exported; phosphates were likewise important because they were used in fertilizer production. Mining of sulfur began at Mishraq, near Mosul, in 1972; production capacity was 1.25 million tons per year by 1988. With the help of Japan, Iraq in the late 1980s was augmenting the Mishraq sulfur works with the intent of boosting sulfur exports 30 percent from their 1987 level of 500,000 tons per year and of increasing exports of sulfuric acid by 10,000 tons annually. Iraq was also attempting to increase the rate of sulfur recovery from oil from its 1987 level of 90 percent.

Phosphate rock reserves were located mainly in the Akashat area northwest of Baghdad and were estimated in 1987 at 5.5 billion tons--enough to meet local needs for centuries. A fertilizer plant at Al Qaim, linked by rail to the Akashat mine, started production in 1984; it was soon converting 3.4 million tons of phosphate per year into fertilizer. As the Al Qaim operation came onstream, Iraq became self-sufficient in fertilizer, and three-quarters of the plant's output was exported. Iranian attacks on Iraqi fertilizer plants in the Basra area, however, cut Iraq's surplus. In 1986 Iraq obtained a US$10 million loan from the Islamic Development Bank to import urea fertilizer, and in 1987 Iraq continued to import fertilizer as an emergency measure. Meanwhile, additional fertilizer plants were under construction in 1987 at Shuwairah, near Mosul, and at Baiji. Their completion would bring to five the number of Iraqi fertilizer plants and would increase exports considerably.

Another important component of the mineral sector was cement production. Iraq's 1987 cement production capacity was 12 million tons, and the government planned a near doubling of production. Domestic consumption in 1986 was 7.5 million tons, and the surplus was exported, 1 million tons to Egypt alone.

In addition to the nonmetallic minerals industry, several other industries employed significant percentages of the work force. The chemical and petrochemical industry, concentrated at Khawr az Zubayr, was the second largest industrial employer, providing work for 17 percent of the industrial work force. Chemicals and petrochemicals accounted for a relatively high 30 percent of the total value of industrial output because of the high value of raw material inputs and the higher value added-- more than 150 percent. The labor-intensive textile industry employed 15 percent of industrial workers but accounted for only 7 percent of the value of total industrial output. A major state- owned textile factory in Mosul produced calico from locally grown cotton. The foodstuffs processing and packaging industry, which employed 14 percent of the total industrial labor force, accounted for 20 percent of total output, but the value added was less than 50 percent. Light manufacturing industries based on natural resources, such as paper, cigarettes, and leather and shoe production, together accounted for 10 percent of the value of total industrial output.

By the mid-1980s, efforts to upgrade industrial capacity from the extracting and processing of natural resources to heavy industry, to the manufacturing of higher technology and to the production of consumer items were still not fully successful. An iron and steel works built in 1978 by the French company, Creusot-Loire, at Khawr az Zubayr, was expected to attain an annual production level of 1.2 million tons of smelted iron ore and 400,000 tons of steel. Other smelters, foundries, and form works were under construction in 1988. (In 1984 this sector of the economy accounted for less than 2 percent of total output.) Manufacture of machinery and transport equipment accounted for only 6 percent of output value, and value added was fairly low, suggesting that Iraq was assembling imported intermediate components to make finished products. A single factory established in the 1980s with Soviet assistance and located at Al Musayyib, produced tractors. In 1981, Iraq contracted with a company from the Federal Republic of Germany (West Germay) to develop the domestic capability to produce motor vehicles. Plans called for production of 120,000 passenger cars and 25,000 trucks per year, but the project's US$5 billion cost led to indefinite delays.

By the late 1980s, Iraq had had some success in establishing light industries to produce items such as spark plugs, batteries, locks, and household appliances. The electronics industry, concentrated in Baghdad, had grown to account for about 6 percent of output with the help of Thompson-CSF (that is, Compagnie sans fil) of France and the Soviet Union. Other more advanced industries just starting to develop in Iraq in the late 1980s were pharmaceuticals and plastics.

Iraq

Iraq - AGRICULTURE

Since the beginning of recorded time, agriculture has been the primary economic activity of the people of Iraq. In 1976, agriculture contributed about 8 percent of Iraq's total GDP, and it employed more than half the total labor force. In 1986, despite a ten-year Iraqi investment in agricultural development that totaled more than US$4 billion, the sector still accounted for only 7.5 percent of total GDP, a figure that was predicted to decline. In 1986 agriculture continued to employ a significant portion--about 30 percent--of Iraq's total labor force. Part of the reason the agricultural share of GDP remained small was that the sector was overwhelmed by expansion of the oil sector, which boosted total GDP.

Large year-to-year fluctuations in Iraqi harvests, caused by variability in the amount of rainfall, made estimates of average production problematic, but statistics indicated that the production levels for key grain crops remained approximately stable from the 1960s through the 1980s, with yield increasing while total cultivated area declined. Increasing Iraqi food imports were indicative of agricultural stagnation. In the late 1950s, Iraq was self-sufficient in agricultural production, but in the 1960s it imported about 15 percent of its food supplies, and by the 1970s it imported about 33 percent of its food. By the early 1980s, food imports accounted for about 15 percent of total imports, and in 1984, according to Iraqi statistics, food imports comprised about 22 percent of total imports. Many experts expressed the opinion that Iraq had the potential for substantial agricultural growth, but restrictions on water supplies, caused by Syrian and Turkish dam building on the Tigris and Euphrates rivers, might limit this expansion.

<>Water Resources
<>Land Tenure and Agrarian Reform
<>Cropping and Livestock

Iraq

Iraq - Water Resources

Iraq has more water than most Middle Eastern nations, which led to the establishment of one of the world's earliest and most advanced civilizations. Strong, centralized governments--a phenomenon known as "hydraulic despotism"--emerged because of the need for organization and for technology in order to exploit the Tigris and Euphrates rivers. Archaeologists believe that the high point in the development of the irrigation system occurred about 500 A.D., when a network of irrigation canals permitted widespread cultivation that made the river basin into a regional granary. Having been poorly maintained, the irrigation and drainage canals had deteriorated badly by the twelfth and thirteenth centuries, when the Mongols destroyed what remained of the system.

About one-fifth of Iraq's territory consists of farmland. About half of this total cultivated area is in the northeastern plains and mountain valleys, where sufficient rain falls to sustain agriculture. The remainder of the cultivated land is in the valleys of the Euphrates and Tigris rivers, which receive scant rainfall and rely instead on water from the rivers. Both rivers are fed by snowpack and rainfall in eastern Turkey and in northwest Iran. The rivers' discharge peaks in March and in May, too late for winter crops and too early for summer crops. The flow of the rivers varies considerably every year. Destructive flooding, particularly of the Tigris, is not uncommon, and some scholars have placed numerous great flood legends, including the biblical story of Noah and the ark, in this area. Conversely, years of low flow make irrigation and agriculture difficult.

Not until the twentieth century did Iraq make a concerted effort to restore its irrigation and drainage network and to control seasonal flooding. Various regimes constructed several large dams and river control projects, rehabilitated old canals, and built new irrigation systems. Barrages were constructed on both the Tigris and the Euphrates to channel water into natural depressions so that floods could be controlled. It was also hoped that the water could be used for irrigation after the rivers peaked in the spring, but the combination of high evaporation from the reservoirs and the absorption of salt residues in the depressions made some of the water too brackish for agricultural use. Some dams that created large reservoirs were built in the valleys of tributaries of the Tigris, a measure that diminished spring flooding and evened out the supply of water over the cropping season. When the Euphrates was flowing at an exceptionally low level in 1984, the government was able to release water stored in reservoirs to sustain farmers.

In 1988 barrages or dam reservoirs existed at Samarra, Dukan, Darband, and Khan on the Tigris and Habbaniyah on the Euphrates. Two new dams on the Tigris at Mosul and Al Hadithah, named respectively the Saddam and Al Qadisiyah, were on the verge of completion in 1988. Furthermore, a Chinese-Brazilian joint venture was constructing a US$2 billion dam on the Great Zab River, a Tigris tributary in northeastern Iraq. Additional dams were planned for Badush and Fathah, both on the Tigris. In Hindiyah on the Euphrates and in Ash Shinafiyah on the Euphrates, Chinese contractors were building a series of barrages.

Geographic factors contributed to Iraq's water problems. Like all rivers, the Tigris and the Euphrates carry large amounts of silt downstream. This silt is deposited in river channels, in canals, and on the flood plains. In Iraq, the soil has a high saline content. As the water table rises through flooding or through irrigation, salt rises into the topsoil, rendering agricultural land sterile. In addition, the alluvial silt is highly saline. Drainage thus becomes very important; however, Iraq's terrain is very flat. Baghdad, for example, although 550 kilometers from the Persian Gulf, is only 34 meters above sea level. This slight gradient makes the plains susceptible to flooding and, although it facilitates irrigation, it also hampers drainage. The flat terrain also provides relatively few sites for dams. Most important, Iraq lies downstream from both Syria and Turkey on the Euphrates River and downstream from Turkey on the Tigris River. In the early 1970s, both Syria and Turkey completed large dams on the Euphrates and filled vast reservoirs. Iraqi officials protested the sharp decrease in the river's flow, claiming that irrigated areas along the Euphrates in Iraq dropped from 136,000 hectares to 10,000 hectares from 1974 to 1975.

Despite cordial relations between Iraq and Turkey in the late 1980s, the issue of water allocation continued to cause friction between the two governments. In 1986 Turkey completed tunnels to divert an estimated one-fifth of the water from the Euphrates into the Atat�rk Dam reservoir. The Turkish government reassured Iraq that in the long run downstream flows would revert to normal. Iraqi protests were muted, because Iraq did not yet exploit Euphrates River water fully for irrigation, and the government did not wish to complicate its relationship with Turkey in the midst of the Iran-Iraq War.

Iraq

Iraq - Land Tenure and Agrarian Reform

Iraq's system of land tenure and inefficient government implementation of land reform contributed to the low productivity of farmers and the slow growth of the agricultural sector. Land rights had evolved over many centuries, incorporating laws of many cultures and countries. The Ottoman Land Code of 1858 attempted to impose order by establishing categories of land and by requiring surveys and the registration of land holdings. By World War I, only limited registration had been accomplished and land titles were insecure, particularly under the system of tribal tenure through which the state retained ownership of the land although tribes used it.

By the early 1930s, large landowners became more interested in secure titles because a period of agricultural expansion was underway. In the north, urban merchants were investing in land development, and in the south tribes were installing pumps and were otherwise improving land. In response, the government promulgated a law in 1932 empowering it to settle title to land and to speed up the registration of titles. Under the law, a number of tribal leaders and village headmen were granted title to the land that had been worked by their communities. The effect, perhaps unintended, was to replace the semicommunal system with a system of ownership that increased the number of sharecroppers and tenants dramatically. A 1933 law provided that a sharecropper could not leave if he were indebted to the landowner. Because landowners were usually the sole source of credit and almost no sharecropper was free of debt, the law effectively bound many tenants to the land.

The land tenure system under the Ottomans, and as modified by subsequent Iraqi governments, provided little incentive to improve productivity. Most farming was conducted by sharecroppers and tenants who received only a portion--often only a small proportion--of the crop. Any increase in production favored owners disproportionately, which served as a disincentive to farmers to produce at more than subsistence level. For their part, absentee owners preferred to spend their money in acquiring more land, rather than to invest in improving the land they had already accumulated.

On the eve of the 1958 revolution, more than two-thirds of Iraq's cultivated land was concentrated in 2 percent of the holdings, while at the other extreme, 86 percent of the holdings covered less than 10 percent of the cultivated land. The prerevolutionary government was aware of the inequalities in the countryside and of the poor condition of most tenant farmers, but landlords constituted a strong political force during the monarchical era, and they were able to frustrate remedial legislation.

Because the promise of land reform kindled part of the popular enthusiasm for the 1958 revolution and because the powerful landlords posed a potential threat to the new regime, agrarian reform was high on the agenda of the new government, which started the process of land reform within three months of taking power. The 1958 law, modeled after Egypt's law, limited the maximum amount of land an individual owner could retain to 1,000 dunums (100 hectares) of irrigated land or twice that amount of rain-fed land. Holdings above the maximum were expropriated by the government. Compensation was to be paid in state bonds, but in 1969 the government absolved itself of all responsibility to recompense owners. The law provided for the expropriation of 75 percent of all privately owned arable land.

The expropriated land, in parcels of between seven and fifteen hectares of irrigated land or double that amount of rainfed land, was to be distributed to individuals. The recipient was to repay the government over a twenty-year period, and he was required to join a cooperative. The law also had temporary provisions maintaining the sharecropping system in the interim between expropriation and redistribution of the land. Landlords were required to continue the management of the land and to supply customary inputs to maintain production, but their share of the crop was reduced considerably. This provision grew in importance as land became expropriated much more rapidly than it was being distributed. By 1968, 10 years after agrarian reform was instituted, 1.7 million hectares had been expropriated, but fewer than 440,000 hectares of sequestered land had been distributed. A total of 645,000 hectares had been allocated to nearly 55,000 families, however, because several hundred thousand hectares of government land were included in the distribution. The situation in the countryside became chaotic because the government lacked the personnel, funds, and expertise to supply credit, seed, pumps, and marketing services--functions that had previously been performed by landlords. Landlords tended to cut their production, and even the best-intentioned landlords found it difficult to act as they had before the land reform because of hostility on all sides. Moreover, the farmers had little interest in cooperatives and joined them slowly and unwillingly. Rural-to- urban migration increased as agricultural production stagnated, and a prolonged drought coincided with these upheavals. Agricultural production fell steeply in the 1960s and never recovered fully.

In the 1970s, agrarian reform was carried further. Legislation in 1970 reduced the maximum size of holdings to between 10 and 150 hectares of irrigated land (depending on the type of land and crop) and to between 250 and 500 hectares of nonirrigated land. Holdings above the maximum were expropriated with compensation only for actual improvements such as buildings, pumps, and trees. The government also reserved the right of eminent domain in regard to lowering the holding ceiling and to dispossessing new or old landholders for a variety of reasons. In 1975 an additional reform law was enacted to break up the large estates of Kurdish tribal landowners. Additional expropriations such as these exacerbated the government's land management problems. Although Iraq claimed to have distributed nearly 2 million hectares by the late 1970s, independent observers regarded this figure as greatly exaggerated. The government continued to hold a large proportion of arable land, which, because it was not distributed, often lay fallow. Rural flight increased, and by the late 1970s, farm labor shortages had become so acute that Egyptian farmers were being invited into the country.

The original purpose of the land reform had been to break up the large estates and to establish many small owner-operated farms, but fragmentation of the farms made extensive mechanization and economies of scale difficult to achieve, despite the expansion of the cooperative system. Therefore, in the 1970s, the government turned to collectivization as a solution. By 1981 Iraq had established twenty-eight collective state farms that employed 1,346 people and cultivated about 180,000 hectares. In the 1980s, however, the government expressed disappointment at the slow pace of agricultural development, conceding that collectivized state farms were not profitable. In 1983 the government enacted a new law encouraging both local and foreign Arab companies or individuals to lease larger plots of land from the government. By 1984, more than 1,000 leases had been granted. As a further incentive to productivity, the government instituted a profit-sharing plan at state collective farms. By 1987, the wheel appeared to have turned full circle when the government announced plans to reprivatize agriculture by leasing or selling state farms to the private sector.

Iraq

Iraq - Cropping and Livestock

Most farming in Iraq entails planting and harvesting a single crop per year. In the rain-fed areas the winter crop, primarily grain, is planted in the fall and harvested in the spring. In the irrigated areas of central and southern Iraq, summer crops predominate. A little multiple cropping, usually of vegetables, exists where irrigation water is available over more than a single season.

Even with some double or triple cropping, the intensity of cultivation is usually on the order of 50 percent because of the practice of leaving about half the arable land fallow each year. In the rain-fed region, land is left fallow so that it can accumulate moisture. The fertility of fallow land is also increased by plowing under weeds and other plant material that grow during the fallow period. On irrigated land, fallow periods also contribute some humus to the soil.

Grain, primarily wheat and barley, was Iraq's most important crop. Cereal production increased almost 80 percent between 1975 and 1985, notwithstanding wide variations in the harvest from year to year as the amount and the timing of rainfall strongly affected both the area planted and the harvest. Between 1980 and 1985, the area under wheat cultivation increased steadily for a cumulative growth of 30 percent, to about 1,566,500 hectares. In 1985, the most recent year for which statistics were available in 1988, Iraq harvested a bumper crop of 1.4 million tons of wheat. In 1984, a drought year, Iraq harvested less than half the planted area for a yield of between 250,000 and 471,000 tons, according to foreign and Iraqi sources respectively. The north and central rain-fed areas were the principal wheat producers (see <"appendix.htm#table7">table 7, Appendix).

Barley requires less water than wheat does, and it is more tolerant of salinity in the soil. For these reasons, Iraq started to substitute barley production for wheat production in the 1970s, particularly in southern regions troubled by soil salinity. Between 1980 and 1985, the total area under barley cultivation grew 44 percent, and by 1985 barley and wheat production were virtually equal in terms both of area cultivated and of total yield. Rice, grown in paddies, was Iraq's third most important crop as measured by cultivated area, which in 1985 amounted to 24,500 hectares. The area under cultivation, however, did not grow appreciably between 1980 and 1985; 1985 production totaled almost 150,000 tons. Iraq also produced maize, millet, and oil seeds in smaller quantities.

A number of other crops were grown, but acreage and production were limited. With the exception of tobacco, of which Iraq produced 17,000 tons on 16,500 hectares in 1985, cash crop production declined steeply in the 1980s. Probably because of domestic competition from synthetic imports and a declining export market, production of cotton was only 7,200 tons in 1985, compared with 26,000 tons in 1977. Production of sugar beets was halted completely in 1983, and sugarcane production declined by more than half between 1980 and 1985.

Iraq may have cut back on production of sugar beets and sugarcane because of an intention to produce sugar from dates. Dates, of which Iraq produces eight distinct varieties, have long been a staple of the local diet. The most abundant date groves were found along the Shatt al Arab. In the early 1960s, more than 30 million date palms existed. In the mid-1970s, the Iraqi government estimated that the number of date palms had declined to about 22 million, at which time production of dates amounted to 578,000 tons. The devastation of the Shatt al Arab area during the Iran-Iraq War hastened the destruction of date palm groves, and in 1985 the government estimated the number of date palms at fewer than 13 million. Date production in 1987 dropped to 220,000 tons. The government-managed Iraqi Date Administration, however, planned to increase production in an attempt to boost export revenue. In 1987 about 150,000 tons, or 68 percent of the harvest, was exported, primarily to Western Europe, Japan, India, and other Arab countries. The Iraqi Date Administration also devised plans to construct large facilities to extract sugar, alcohol, vinegar, and concentrated protein meal from dates. Iraq produced a variety of other fruits as well, including melons, grapes, apples, apricots, and citrus. Production of such fruits increased almost 30 percent between 1975 and 1985.

Vegetable production also increased, particularly near urban centers, where a comparatively sophisticated marketing system had been developed. Vegetable gardening usually employed relatively modern techniques, including the use of chemical fertilizers and pesticides. Tomatoes were the most important crop, with production amounting to more than 600,000 tons in 1985. Other vegetables produced in significant quantity were beans, eggplant, okra, cucumbers, and onions. Overall vegetable production increased almost 90 percent between 1975 and 1985, even though the production of legumes dropped about 25 percent over the same period.

Crop production accounted for about two-thirds of value added in the agricultural sector in the late 1980s, and the raising of livestock contributed about one-third. In the past, a substantial part of the rural population had been nomadic, moving animals between seasonal grazing areas. Sheep and goats were the most important livestock, supplying meat, wool, milk, skins, and hair. A 1978 government survey, which represented the most recent official data available as of early 1988, estimated the sheep population at 9.7 million and the goat population at 2.1 million. Sheep and goats were tended primarily by nomadic and seminomadic groups. The 1978 survey estimated the number of cattle at 1.7 million, the number of water buffalo at 170,000, the number of horses at 53,000, and the number of camels at 70,000.

In the 1970s, the government started to emphasize livestock and fish production, in an effort to add protein to the national diet. But 1985's red meat production (about 93,000 tons) and milk production (375,000 tons) were, respectively, about 24 and 23 percent less than the in 1975 totals, although other figures indicated that total livestock production remained stable between 1976 and 1985. In the mid-1980s, however, British, West German, and Hungarian companies were given contracts to establish poultry farms. At the same time, the government expanded aquaculture and deep-sea fishing. Total production of processed chicken and fish almost doubled, to about 20,000 tons apiece, from 1981 to 1985, while egg production increased substantially, to more than 1 billion per year. The government planned to construct a US$160 million deep-sea fishing facility in Basra and predicted that, within 10 years, freshwater fishing would supply up to 100,000 tons of fish. Iraq nevertheless continued to import substantial quantities of frozen poultry, meat, and fish to meet local needs for protein.

Iraq

Iraq - TRANSPORTATION

Transportation was one of the Iraqi economy's most active sectors in the late 1980s; it was allocated a large share of the domestic development budget because it was important to the government for several reasons. Logistics became a crucial factor in Iraq's conduct of the Iran-Iraq War. The government also recognized that transportation bottlenecks limited industrial development more than any other factor. Finally, the government believed that an expanded transportation system played an important political role by promoting regional integration and by heightening the central government's presence in the more remote provinces. For these reasons, the government embarked on an ambitious plan to upgrade and to extend road, rail, air, and river transport simultaneously. Iraq's main transportation axis ran roughly northwest to southeast from Mosul via Kirkuk to Baghdad, and then south to Basra and the Gulf. In the 1980s, efforts were underway to link Baghdad more closely with the Euphrates River basin to the west.

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Iraq

Iraq - Roads

The total length of Iraq's network of paved roads almost doubled between 1979 and 1985, to 22,397 kilometers, augmented by an additional 7,800 kilometers of unpaved secondary and feeder roads. In 1987 Iraq's major road project was a 1,000 kilometerlong segment of a six-lane international express highway that would eventually link the Persian Gulf states with the Mediterranean. In Iraq, the road would stretch from the Jordanian border through Ar Rutbah to Tulayah near An Najaf, then to the southern Iraqi town of Ash Shaykh ash Shuyukh, and finally to the Kuwaiti border at Safwan. Construction was underway in the late 1980s. Plans were also being made for another highway, which would link Baghdad with the Turkish border via Kirkuk and Mosul. There was progress as well on a program to build 10,000 kilometers of rural roads.

Iraq

Iraq - Railroads

Iraq possessed two separate railroads at independence, one standard gauge and one meter gauge. The standard gauge line ran north from Baghdad through Mosul to the Syrian border and to an eventual connection with the Turkish railroad system, and the meter gauge line ran south from Baghdad to Basra. Because the two systems were incompatible, until the 1960s cargo had to be transloaded at Baghdad to be transported between the two halves of the country. The Soviet Union helped extend the standard gauge system to Basra, and by 1977 fully 1,129 kilometers of Iraq's 1,589 kilometers of railroad were standard gauge. By 1985 the total length of railroad lines had been extended to 2,029 kilometers, of which 1,496 kilometers were standard gauge. In 1985 the railroads were being traveled by 440 standard-gauge locomotives that moved 1.25 billion tons of freight per kilometer. A 252-kilometer line linking Kirkuk and Al Hadithah was completed by contractors from the Republic of Korea (South Korea) in 1987 after five years of work. Built at a cost of US$855 million, the line was designed to carry more than 1 million passengers and more than 3 million tons of freight annually. The system included maintenance and control centers and more than thirty bridges crossing the Tigris and Euphrates rivers. By the end of the century, Iraq planned to triple the line's passenger capacity and to double its freight capacity. A 550-kilometer line, built by a Brazilian company and extending from Baghdad to Qusaybah on the Syrian border, was also opened in the same year. In 1987 Indian contractors were finishing work on a line between Al Musayyib and Samarra. Iraqi plans also called for replacing the entire stretch of railroad between Mosul and Basra with modern, high-speed track, feeding all lines entering Baghdad into a 112-kilometer loop around the city, and improving bridges, freight terminals, and passenger stations. In addition, Iraq has conducted intermittent negotiations over the years with Turkey, Kuwait, and Saudi Arabia concerning the establishment of rail links to complete a continuous Europe-Persian Gulf railroad route.

Iraq

Iraq - Ports

At independence, Iraq had little port capacity, a fact that reflected the low level of foreign trade and the country's traditional overland orientation toward Syria and Turkey rather than toward the Gulf. Since then, the Gulf port of Basra has been expanded many times, and a newer port was built at Umm Qasr to relieve pressure on Basra. Oil terminals were located at Khawr al Amayah, and Mina al Bakr, Al Faw, and a port was built in tandem with an industrial center at Khawr az Zubayr. Because Iraq's access to the Gulf was an Iranian target in the Iran-Iraq War, port activities were curtailed severely in the 1980s. Before shipping can be resumed after the war, the Shatt al Arab will have to be cleared of explosives and wreckage, which will take years.

Despite long-standing government interest in developing the Tigris and the Euphrates rivers into major arteries for inland transport, little had been accomplished by the late 1980s, primarily because of the massive scale of such a project. Dredging and the establishment of navigation channels had been completed on several stretches of the Tigris south of Baghdad, and in 1987 a river freight route using barges was opened between Baghdad and Al Amarah. Iraq investigated the possibility of opening the entire Tigris River between Mosul and Baghdad, as well as the feasibility of opening a stretch of the Euphrates between Al Hadithah and Al Qurnah, but lack of funds precluded further action.

Iraq

Iraq - Airports

In 1988 Iraq had two international airports, one at Baghdad and one at Basra. In 1979 a French consortium was awarded a US$900 million contract to build a new international airport at Baghdad. By 1987 the facility was partially completed and in use. The Basra airport was also being upgraded with an extended 4,000- meter runway and other facilities at a cost in excess of US$400 million. A third international airport was planned for Mosul.

The State Enterprise for Iraqi Airways was the sole domestic airline in operation in 1988. The company was established in 1945 by Iraqi State Railways. In 1987, the airline's fleet included thirty-five Soviet-built Antonov and Ilyushin cargo planes and fourteen Boeing passenger jets, as well as smaller commuter aircraft and VIP jets. The airline provided service throughout the Mediterranean, the Middle East, and Europe, as well as to Brazil and to the Far East. In 1987 Saddam Husayn announced a decree to privatize Iraqi Airways. Two new ventures were to be established instead the Iraqi Aviation Company to operate commercially as the national airline, and the National Company for Aviation Services to provide aircraft and airport services. Stock would be sold to the public, and the government would retain a minority share.

Iraq

Iraq - TELECOMMUNICATIONS

In 1988 Iraq had a good telecommunications network of radio communication stations, radio relay links, and coaxial cables. Iraqi radio and television stations came under the government's Iraqi Broadcasting and Television Establishment, which was responsible to the Ministry of Culture and Information. The domestic service had one FM and nine AM stations with two program networks. The domestic service broadcast mainly in Arabic, but also in Kurdish, Turkoman, and Assyrian from Kirkuk. The short wave foreign service broadcast in Arabic, Azeri Turkish, English, French, German, Hebrew, Kurdish, Persian, Russian, Spanish, and Urdu. Television stations were located in the major cities, and they carried two program networks. In 1988 Iraq had approximately 972,000 television sets; the system was connected to both the Atlantic Ocean and Indian Ocean systems of the International Telecommunications Satellite Organization (INTELSAT) as well as to one Soviet Intersputnik satellite station. It also had coaxial cable and radio relays linking it to Jordan, Kuwait, Syria, and Turkey. Iraq had an estimated 632,000 telephones in 1988.

Iraq

Iraq - ELECTRICITY

Iraqi electric power consumption increased by a factor of fourteen in the twenty-year period between 1968 and 1988, and in the late 1980s it was expected to double every four to five years. Ongoing rural electrification contributed to increased demand; about 7,000 villages throughout the nation were provided electricity in the same twenty-year period. The destruction in 1980 of power-generating facilities near the Iran-Iraq border interrupted only temporarily the rapid growth in production and consumption. In 1981 the government awarded US$2 billion in contracts to foreign construction companies that were building hydroelectric and thermal generating plants as well as transmission facilities. By 1983 the production and consumption of electricity had recovered to the prewar levels of 15.6 billion kwh (kilowatt hours) and 11.7 billion kwh, respectively. As previously commissioned projects continued to come onstream, Iraq's generating capacity was expected to exceed 6,000 megawatts by 1986. In December 1987, following the completion of power lines designed to carry 400 million kwh of power to Turkey, Iraq became the first country in the Middle East to export electric power. Iraq was expected to earn US$15 million annually from this arrangement. Long-range plans entailed exporting an additional 3 billion kwh to Turkey and eventually providing Kuwait with electricity.

Iraq's plans to develop a nuclear generating capacity were set back by Israel's June 1981 bombing of the Osiraq (OsirisIraq ) reactor, then under construction. In 1988 French, Italian, and Soviet technicians were exploring the feasibility of rebuilding the reactor at a different site. Saudi Arabia had promised to provide financing, and Brazil and Portugal reportedly had agreed to supply uranium.

Iraq

Iraq - FOREIGN TRADE

The pattern of Iraqi foreign trade in the 1980s was shaped primarily by the Iran-Iraq War, its resulting deficit and debt problems, and developments in the petroleum sector. Iranian attacks on petroleum industry infrastructure reduced oil exports sharply and Iraq incurred a trade deficit of more than US$10 billion in 1981. The pattern continued in 1982 as the value of Iraqi imports peaked at approximately US$23.5 billion, while exports reached a nadir of US$11.6 billion, leading to a record trade deficit. In 1983, however, imports were cut roughly by half. Figures for Iraq's imports and exports from 1984 onward vary widely and cannot be considered authoritative. Despite the partial recovery of Iraqi oil exports in 1986, exports were valued at only about US$7.5 billion because of the plunge in world oil prices. In 1987 imports were expected to rise to about US$10 billion. Export revenues were also expected to rise, as Iraq compensated for low oil prices with a higher volume of oil exports (ssee; <"appendix.htm#table8">table 8, Appendix).

Iraq had counted heavily on solving its twin debt and deficit problems by reestablishing and eventually by augmenting its oil export capacity. But increases in volume were insufficient to offset lower prices, and because demand remained low, expanded oil exports served only to glut the market and further drive down the price of oil. The depressed price of oil and the low prices of other raw materials that Iraq exported, coupled with higher prices for the goods it imported, trapped the nation in the classic dilemma of declining terms of trade. Although Iraq was cutting the volume of its imports and was increasing the volume of its exports, the relative values of imports and exports had shifted fundamentally. More than 95 percent of Iraq's exports were raw materials, primarily petroleum. Food stuffs accounted for most additional exports. Conversely, nearly half of Iraq's imports were capital goods and consumer durables. According to Iraqi statistics, 34.4 percent of 1984 imports were capital goods, 30 percent were raw materials, 22.4 percent were foodstuffs, and 12.5 percent were consumer items.

Iraq's declining imports resulted not so much from belt- tightening or from import substitution, as from the increasing reluctance of trading partners to extend credit. Despite its socialist orientation, Iraq had long traded most heavily with Western Europe. Initially, Iraq's debt accumulation worked in its favor by creating a hostage effect. Western creditors, both governments and private companies, continued to supply Iraq in an effort to sustain the country until it could repay them. Additionally, the debt helped to secure outlets for Iraqi petroleum in a tight international market through barter agreements in which oil was exchanged for a reduction in debt. In 1987 however, as some West European companies prepared to cut their losses and to withdraw from the Iraqi market, and as others curtailed sales by limiting credits, other countries were poised to fill the vacuum by offering goods and services on concessional terms. Companies from Brazil, South Korea, India, Yugoslavia, and Turkey, backed by their governments' export credit guarantees, were winning an increasing share of the Iraqi market. In 1987 the Soviet Union and East European nations were also offering goods and services on highly concessional terms. Eventually, Iraq's exports might also be diverted from the West toward its new trading partners.

Iraq continued to seek Western imports when it could afford them. In 1987 Iraq was forced to ration imports for which payment was due in cash, although nonessential imports were purchased if the seller offered credit. Imports contributing to the war effort had top priority. Imports of spare parts and of management services for the maintenance of large industrial projects were also deemed vital, as Iraq sought to stave off the extremely high costs it would incur if facilities were shut down, mothballed, and then reopened in the future. Consumer goods were given lowest priority.

In 1985 Iraq purchased 14.4 percent of its total imports from Japan. Iraq bought an array of Japanese products, ranging from transport equipment, machinery, and electrical appliances to basic materials such as iron and steel, textiles, and rubber goods. In 1987, as Iraqi debt to Japan mounted to US$3 billion, the government of Japan curtailed the export insurance it had offered Japanese companies doing business with Iraq; nevertheless, Japanese companies continued to trade with Iraq. Iraq bought 9.2 percent of its imports from West Germany. Neighboring Turkey provided the third largest source of Iraqi imports, accounting for 8.2 percent of the total. Italy and France each accounted for about 7.5 percent, followed by Brazil with 7 percent and Britain with 6.3 percent. Kuwait was Iraq's most important Arab trading partner, contributing 4.2 percent of Iraq's imports (see <"appendix.htm#table9">table 9, Appendix).

In 1985 Brazil was the main destination of Iraqi exports, accounting for 17.7 percent of the total. France was second with 13 percent, followed by Italy with 11 percent, Spain with 10.7 percent, Turkey and Yugoslavia with about 8 percent each, Japan with about 6 percent, and the United States with 4.7 percent.

In April 1987, the government attempted to streamline the trade bureaucracy by eliminating five state trading companies that dealt in various commodities. Although the state trading companies had been established in the 1970s to foster increased domestic production, they had evolved into importing organizations. In view of this orientation, their operations were incorporated into the Ministry of Trade. Three Ministry of Trade departments, which had administered trade with socialist, with African, and with Arab nations, were abolished. The responsibilities of these disbanded organizations were centralized in a new Ministry of Trade department named the General Establishment for Import and Export.

The Ministry of Trade implemented a national import policy by allocating portions of a total budget among imports according to priority. The import budget varied from year to year, depending on export earnings and on the amount in loans that had been secured from foreign creditors. The government's underlying intention was gradually to replace imported manufactured products with domestic manufactured products and then to increase export sales. In the mid-1980s, however, the government recognized that increased domestic production required the import of intermediate goods. In 1987 state companies were permitted for the first time to use private agents or middlemen to facilitate limited imports of necessary goods.

The private sector, which had long been accorded a quota of total imports, was also deregulated to a limited extent. In 1985 the quota was increased to 7.5 percent of total imports, and the government gave consideration to increasing that percentage further. All imports by the private sector had previously been subject to government licensing. In 1985, Law No. 60 for Major Development Projects exempted the private sector from the obligation to obtain licenses to import basic construction materials that would be used in major development projects. In an attempt to increase remittances from Iraqis abroad, the government also gave special import licenses to nonresident Iraqis, if the value of the imports was invested in Iraq and was not transferred outside the country.

In 1987 the rules concerning private sector imports were liberalized further when private sector manufacturers were granted special licenses that permitted them to import raw materials, spare parts, packaging, machinery, and equipment necessary for plant modernization and for expansion. In some cases no ceiling was placed on such imports, while in other cases imports were limited to 50 percent of the value of the export earnings that the manufacturer generated. Such imports were not subject to quotas or to foreign exchange restrictions. Moreover, the government announced that it would make no inquiry into the companies' sources of financing. In a remarkably candid statement in a June 1987 speech, Saddam Husayn promised that citizens would not be asked where they had acquired their money, and he admitted that the private sector had not imported any goods because of its fear of prosecution by the security services for foreign exchange violations.

While the government permitted more imports by the private sector, it nevertheless continued to promote exports at the same time. Starting in 1969 it maintained an Export Subsidy Fund, which underwrote the cost of eligible nonpetroleum exports by up to 25 percent. The Export Subsidy Fund was financed with a tax of .5 percent levied on imports of capital goods and .75 percent levied on imports of consumer goods. Most imports were also charged both duty and a customs surcharge that varied from item to item. Export licenses were granted freely both to public and to private sector firms with only a few exceptions. The Board of Regulation of Trade had the authority to prohibit the export of any commodity when domestic supplies fell short of demand, and the control over export of certain items was reserved for the General Organization of Exports. The degree to which government economic policies would be liberalized in the late 1980s remained to be seen. The government had taken several steps in that direction but state controls continued to play a major role in the economy in 1988.

Both primary and secondary source information on the Iraqi economy tends to be both scant and dated. The government of Iraq has regarded data on national economic performance as a state secret, particularly since the start of the Iran-Iraq War in 1980. The government does not publish a budget, although it releases a yearbook, the Annual Abstract of Statistics, which contains some economic figures. The Iran-Iraq War has also diverted scholarly attention from economic issues. One exception is Phebe Marr's The Modern History of Iraq, which contains a chapter titled "Economic and Social Changes under the Revolutionary Regime." The most detailed and authoritative periodic reports on the Iraqi economy are produced by the Wharton Econometric Forecasting Associates in their semiannual Middle East Economic Outlook. The Economist Intelligence Unit's Country Report: Iraq, a quarterly, contains much useful information and analysis. Another good source of up-to-date information is the Middle East Economic Digest.

Iraq