CSIS _______________________________ Center for Strategic and International Studies 1800 K Street N.W. Washington, DC 20006 (202) 775 -3270 Access: Web: CSIS.ORG Iraqi Economic Reconstruction and Development Onur Ozlu [email protected] Researcher at Arleigh A. Burke Chair in Strategy, Center for Strategic and International Studies Supervised by Dr. Anthony H. Cordesman Working Draft: Revised September 14, 2005 Ozlu -September 14, 2005 TABLE OF CONTENTS SECTION I: IRAQI ECO NOMY UNTIL MARCH 200 3 ................................ ............ 5 A. 1921 -1958: T HE HASHEMITE MONARCHY ................................ ................................ ........................ 5 B. 1958 - 1968: M ILITARY RULE ................................ ................................ ................................ ........... 7 C. 1968 - 2003: B A’ATH PARTY RULE & S ADDAM HUSSEIN ................................ ................................ .. 9 The National Development Plan 1970 - 19 74 ................................ .............................. 9 Development Planning After 1974 ................................ ................................ ............ 10 Iran - Iraq War: Demise of Economic Development ................................ ................. 12 Invasion of Kuwait: Destruction of Economic Development ................................ .... 14 Post Gulf War Sanctions and Oil For Food Program Period ...................................14 SECTION II: M ARCH 2003 - JUNE 2004 : CPA CONTROLLED ECO NOMY . …16 THE INITIAL PICTURE ................................ ................................ ................................ ......................... 16 CPA R EFORMS ................................ ................................ ................................ ................................ .. 17 Financial Sector ................................ ................................ ................................ ........ 19 Liberalization of Labor and Capital Markets and Foreign Investment .................... 19 SOEs, Subsidies and Oil ................................ ................................ ........................... 18 Use of US Funding During CPA Control ................................ ................................ 20 EFFECTS OF CPA P OLICIES ON IRAQIS ................................ ................................ ............................... 19 THE CPA L EGACY AT THE TRANSFER OF POWER ................................ ................................ ................ 20 SECTION III: IRAQ AF TER THE CPA UP TO AU GUST 200 5 ............................. 21 A. S TATUS OF VARIOUS SEC TORS OF THE ECONOMY AND THEIR NEEDS : ................................ ............... 21 Employment ................................ ................................ ................................ ............... 21 Infrastructure ................................ ................................ ................................ ............ 23 Water & sanitation ................................ ................................ ................................ .... 25 Telecommunications ................................ ................................ ................................ 25 Electricity ................................ ................................ ................................ .................. 27 Housing ................................ ................................ ................................ ..................... 26 Agricultu re ................................ ................................ ................................ ................ 28 Financial Sector ................................ ................................ ................................ ........ 29 State Owned Enterprises ................................ ................................ ........................... 30 Overall Sub sidies ................................ ................................ ................................ ...... 30 B. C URRENT IRAQI FINANCIAL STRUCTURE AND BUDGET : ................................ ................................ .. 31 C. S TATUS OF OIL REVENUES ................................ ................................ ................................ ............. 33 Nature of Oil Prices ................................ ................................ ................................ .. 34 Unfeasible Production & Export Expectations ................................ ....................... 34 Illegal Oil Trade ................................ ................................ ................................ ....... 36 Du tch Disease ................................ ................................ ................................ ........... 37 Unemployment Effects ................................ ................................ .............................. 37 D. DIFFERENCES IN ECONOMIC EXPECTATIONS AMONG IRAQIS: ................................ ...... 37 Kurdish Expectations ................................ ................................ ................................ 37 Shia Arab Expectations ................................ ................................ ........................... 38 Sunni Arab Expectations ................................ ................................ .......................... 39 E. C HALLENGES OF CONSTRU CTING A FUNCTIONI NG ECONOMY WITH WAR AS A BACKDROP :................ 40 Draining Resources ................................ ................................ ................................ .. 40 2 Ozlu -September 14, 2005 Burden on the Budget ................................ ................................ ................................ 41 Limitations on US and Other International Private Investments ............................. 41 F. S TATUS OF IRAQ ’S INTERNATIONAL FINANCIAL OBLIGATIONS :................................ ........................ 42 Gulf War Rep aration Claims ................................ ................................ .................... 42 Pending Contracts ................................ ................................ ................................ .... 43 Foreign Debt ................................ ................................ ................................ ............. 43 G. I RAQI GOVERNMENT ’S CAPACITY TO FINANCE R ECONSTRUCTION :................................ .................. 45 IV. STATUS OF FOREIG N RECONSTRUCTION AI D................................ ........... 47 A.US A ID ................................ ................................ ................................ ................................ ........... 47 Lack of Strategic Planning ................................ ................................ ........................ 48 Lack of Oversight, Benchmarks and Metrics ................................ ............................ 50 B. N ON - US F OREIGN AID ................................ ................................ ................................ ................. 53 The International Reconstruction Fund Facility for Iraq (IRFFI) ........................... 53 3 Ozlu -September 14, 2005 TABLE OF FIGURES FIGURE 1................................ ................................ ................................ ........................... 10 NDP: T ARGET AND ACTUAL VALUES OF CERTAIN ECONOMIC INDICATORS , 1974 (ID MILLIONS ) ................................ ................................ ................................ ................ 10 FIGURE 2................................ ................................ ................................ ........................... 10 CHANGING COMPOSITION OF GNP, 1970 -1989 ................................ .............................. 10 FIGURE 3................................ ................................ ................................ ........................... 13 MILITARY EXPENDITURES AND GDP, 1970 -1989 ($ BILLIONS )................................ ..... 13 FIGURE 4................................ ................................ ................................ ........................... 18 GDP 2000 - 2003 ................................ ................................ ................................ ............... 18 FIGURE 5................................ ................................ ................................ ........................... 31 2004 I RAQI BUDGET ................................ ................................ ................................ ......... 31 FIGURE 6................................ ................................ ................................ ........................... 32 2005, 2006 AND 2007 I RAQI BUDGET ................................ ................................ .............. 32 FIGURE 7................................ ................................ ................................ ........................... 34 IRAQI CRUDE OIL PRODUCTION & R EVENUE ................................ ................................ 34 FIGURE 8................................ ................................ ................................ ........................... 35 IRAQ ’S OIL PRODUCTION & C ONSUMPTION , 1980 - 2005E ................................ ............ 35 FIGURE 9................................ ................................ ................................ ........................... 44 IRAQ ’S INTERNATIONAL OBLIGATIONS ................................ ................................ ........... 44 FIGURE 10 ...............................