the economy of iraq

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T H E E C O N O M YOF I RAQ


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Recent Titles in Contributions in Economics and Economic HistoryThe American Pulp and Paper Industry, 1900-1940: Mill Survival, FirmStructure, and Industry RelocationNancy Kane OhanianAsp irations and R ealities: A Do cumen tary H istory of Econom ic Development.Policy in Ireland since 1922James L. Wiles and Richard B. FinneganMultinational Culture: Social Impacts of a Global EconomyCheryl R. Lehman and Russell M. M oore, editorsThe A ge of G iant Corporations: A Microeconomic H isto ry of Am ericanBusiness, 1914-1992, A Third EditionRobert SobelIntern ationa l Agriculture Tra de and Ma rket Developm ent Policy in the 1990sJohn W. Helmuth an d Don F. Hadwiger, editorsComparative Studies of Local Economic Development: Problems inPolicy ImplementationPeter B. M eyer, editorUnited States-Japan Trade in Telecommunications: Conflict and CompromiseMeheroo Jussawalla, editorPacific-Asia and the Future of the World-SystemRavi Arvind Palat, editorDevelopment versus Stagnation: Technological Continuity and AgriculturalProgress in Pre-Modern ChinaOang DengCommodity Chains and Global CapitalismGary Gereffi and Miguel E. Korzeniewicz, editorsGlobal Telecommunications Policies: The Challenge of ChangeMeheroo Jussawalla, editorThe State and Capitalism in IsraelAmir Ben-Porat


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T H E E C O N O M YOF IRAQOil, Wars, Destruction ofDevelopment and Prospects,1950-2010

Abbas Alnasrawi

Contributions in Economics and Economic History, Number 154

Greenwood PressW estpo rt, Con necticut London


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Library of Congress Cataloging-in-Publication DataAlnasrawi, Abbas.The economy of Iraq : oil, wars, destruction of development and

prospects, 1950-2010 / Abbas Alnasrawi.p. cm. - (Contributions in economics and economic history,ISSN 0084-9235 ; no. 154)Includes bibliographical references and index.ISBN 0-313-29186-1 (alk. paper)1. Petroleum industry and trade - Iraq - History - 20th century.2. Petroleum industry and trade-Iraq-Forecasting. 3. Iran-IraqWar, 1980-1988-Economic asp ects- Iraq . 4. Persian Gulf War, 199 1-- Economic aspects-Iraq. 5. Iraq-Economic conditions. I. Title.II . Series.HD9576.I72A647 1994330.9567'0442 -dc20 93-37510

British Library Cataloguing in Publication Data is available.Copyright 1994 by Abbas AlnasrawiAll rights reserved. No portion of this book may bereproduced, by any process or technique, without theexpress written consent of the publisher.Library of Congress Catalog Card Number: 93-375 10ISBN: 0-313-29186-1ISSN: 0084-9235First published in 1994Greenwood Press, 88 Post Road West, Westport, CT 06881An imprint of Greenwood Publishing Group, Inc.Printed in the United States of America@ rThe paper used in this book complies with thePermanent Paper Standard issued by the NationalInformation Standards Organization (Z39.48-1984).P

In order to keep this title in print and available to the academic community, this editionwas produced using digital reprint technology in a relatively short print run. This wouldnot have been attainable using traditional methods. Although the cover has been changedfrom its original appearance, the text remains the same and all materials and methodsused still conform to the highest book-making standards.


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To the Children of Iraq


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ContentsTables xiAcknowledgments xiiiIntroduction xv

1. The Evolution of Iraq's Oil Industry 1Oil Concessions in Iraq and the Agreem ent of 195The Growth of Output and Revenue 2Oil Output 3The Pricing ofIraq CPrice Developments, 1950-1960 6Nationalization and Oil Price Developm ents in theOPECEra 8The 1973 Oil Price Revolution 10The Emergence of Iraq's National Oil Industry 12Notes 13

2. Oil and Development under the Monarchy, 1950-1958 17The Development Board and Its Programs, 1950-1958 17Planned versus Actual Development Spending,1951/52-1957/58 19Highlights of Allocations forDevelopment, 1950-1958 21The Development Board and the Agricultural Sector 24 The Developm ent B oard and the Industrial Sector 29Notes 33

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viii CO NTENTS3 . Oil and Development Planning, 1958-1968 35

Development Planning in the Qasim Era, 1958-1963 36Development Planning under the Aref Brothers 43 The Economy's Past Performance as a Guide for the Plan 45Sectoral Expend iture under the FYP 46Actual Performance of the FYP 49Notes 52

4. The Ba ath P arty and I ts National Development Plans 55Evolution of Arab Nationalism 55The Political Economy of Arab Nationalism 58The National Developm ent Plan, 1970/71-1974/75 62The Strategy of the Plan 62Quantitative Goals of the Plan 63 Assessment of the National Developm ent Plan 68The 1975 Investment Program 71Development Planning after 1975 72Notes 75

5. The Ira n- Ira q W ar and the Demise of Development 79The War and the Iraqi Economy 79The War, Iraq's Oil, and Saudi Arabia's Oil Po licy 83 The War and the Deterioration of the Iraqi Econom y 87The Wa r and the End of Development 89War Labor Mo bilization and the Economy 91Military Expenditures and IraqJs GN P and O il Revenue 94 The W ar and Military and Nonmilitary Imports 95Privatization under W ar Conditions 96 An Estimate of the Cost of the Destruction 99Notes 103

6. The Invasion of Kuw ait and the Destruction of Developm ent 105Abundance of Problems versus Scarcity o f Resources 105Government Borrowing, M oney Supply, and Inflation 106The Emerging Problem of External Debt 109Military Industries and the Use of Scarce Resources 109OPEC Failure and the Iraq-Kuwait Oil Confrontation 111


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CONTENTS ixThe Invasion and the Economic Sanctions 118An Estimate of Iraq's Human Losses 120An Estimate of Iraq

vs Economic Losses 121Impact on Personal Income, Consumption, andCost of Living 123

Notes 124 7. Iraq's Economic Development, 1950-1990: An A ssess m ent 127

Evolution of the New State 127Regional and International Context 130Ideological Dimensions 133An Assessment of Iraq's Development, 1950-1990 136Development Problems, 1958-1980 139Development Problems, 1980-1993 145 Notes 147

8. W hat Economic Fu tur e for Iraq? 151Sanctions, Reparations, Debt, and Reconstruction 151The $58&Billion Question 153 An Estimate of Oil Revenue to 2010 153The Burden of Foreign Debt 157The Burden of War Reparations 158 United Nations Sanctions 158Other Claims on Scarce Resources 159The Continued Crisis of the Economy 160 The Problem of Hyperinflation and the Exchange Rate 164What Economic Future for Iraq ? 167Notes 168Selected Bibliography 171 Index 183


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Tables1.1 Oil Revenue, Oil Output, Gross Dom estic Product,

and Population, 1950-1990 112.1 General Programs of Development Board's Projects 182.2 Total Planned and Actual DevelopmentExpenditures and Revenues, 1951/52-1957/58 203.1 Provisional and Detailed Economic Plans 383.2 Planned and Actual Development Expenditures,1958/59-1962/63 403.3 Allocated, Budgeted, and Actual Expenditure andRevenue: Five-Year Plan, 1965/66-1969/70 473.4 Projected and Actual Growth Rates under theFive-Year Econom ic Plan, 1965-1969 504.1 NDP: Annual Average Sectoral Growth Rates,1970-1974 644.2 NDP: Projected Total Increases in Certain EconomicIndicators, 197 0-1974 654.3 NDP: Sectoral Allocations and Revenue, 1970-1974 654.4 NDP: Aggregate Sectoral Distribution of PlannedExpenditures, 1970-1974 674.5 NDP: Distribution of Development Projects bySector, 1970-1974 694.6 NDP: Revised Allocations, Actual Expenditures, andRevenue, 1970 -1974 714.7 NDP: Target and Actual Values of Certain Economic

Indicators, 1974 72


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xii T A B L E S

4.8 Sectoral Allocations under Annual Plans, 1976-1980 745.1 Investment Programs and Annual Plans, 1976-198 3 825.2 Labor Force and Armed Forces, 1970-1988 925.3 Military Expenditures, Oil Revenue, and GDP,

1970-1989 935.4 Nonmilitary and Military Imports, 197 0-19 89 965.5 Changing Composition of GDP, 1975-1988 1016.1 Estimates of Labor Earnings in Iraq, August 1991,Compared with Various Benchmarks 1247.1 Planned and Actual Development E xpenditures,1951-1980 1428.1 Gross Domestic Product and GDP per Capita inConstant 1980 Prices, 1950-199 3 152


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AcknowledgmentsIt gives me great pleasure to take this opportunity to acknowledgewith gratitude the support I received in researching and writing thisbook.A sabbatical leave from the University of Vermont helped me todevote my time to work on the manuscript. A small grant from theGraduate College at the U niversity of Vermont helped with the researchwork which was carried out at the libraries of Harvard University.Discussions with many friends and colleagues in th is country, Europe,and the Arab world helped clarify many issu es.At Greenwood Press, I am grateful for the support and guidance Ireceived from Dr. Jam es R. Ice. I owe Sandy M able and Dottie LaBriespecial thanks for their invaluable assistance in the preparation ofseveral drafts of the manuscript.The constant support and encouragement shown by my family isgreatly appreciated.

I alone am responsible for any errors that may remain.


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IntroductionIn 1960, Iraq's real GDP measured in 1980 prices was $8.7 billion. In1979 G DP peaked at $54 billion. And by 1993 Iraq's GDP has declinedto $10 billion, the equivalent of what it was in 1961. Put another way,these figures inform us that more than three decades of real GDPgrowth have been erased. Bu t these dismal sta tistics tel l a small partof this unique episode in the history of the second half of th is century.This is so because the GDP in 1961 had to support 7 million people; in1993 it had to support a population that has grown to nearly 21 million.Such a drastic collapse in per capita G DP translates into the nullification of nearly half a century of growth and improvement in the livingstandards of the population.To place this change in some international context, Iraq in th e yearsprior to its invasion of Kuwait was at the top of the per capita GDPladder of developing countries. By 1993, real monthly earnings werelower than the monthly earnings of unskilled agricultural workers inIndia-one of the poorest countries in the world.What happened to an economy noted for the wealth of it s oil reserves,agricultural potential, water resources, relatively high rates of literacyand skills, vast access to foreign technology and expertise, an enviablebalance-of-payments surplus and foreign reserves, and a long historyof determined effort to develop and diversify the economy?Simply stated, the central concern of th is work is to find an explanation or explanations of what happened to cause this unprecedented andunparalleled collapse. To this end, the first chapter is devoted to anexamination of the critical role of the oil sector in the Iraqi economy.Chapter 2 is devoted to a study of Iraq's development policies underthe monarchy and asses ses development programs and policies in the


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xvi INTRODUCTION1950s. In the following chapter, the development plans of the republicanregime in the period 1958 -68 are evaluated. In Chapter 4, the Baathparty's economic philosophy, development strategies, and plans areanalyzed. The demise of development that started with the outbreak ofthe Iran-Iraq war of 1980-88 is examined in Chapter 5. In Chapter 6,the economic consequences of the 1990 invasion of Kuwait, includingthe impact of the United Nations sanctions on the Iraqi economy, areexamined. Chapter 7 examines Iraq's changing economic fortunes in th eperiod 1950-93, and the last chapter attempts to shed some light onIraq's economic future against the background of the economic destruction of the two Gulf wars.


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THE ECONOMYOF IRAQ


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C H A P T E R 1The Evolution ofIraq's Oil Industry

One of the most striking features of the world oil map i s the concentration of crude oil reserves in a few countries. In the W estern Hemisphere,most of the oil reserves are concentrated in the Un ited Sta tes, Venezuela, Mexico, and Canada. In the Eastern Hemisphere, they are concentrated in the former Soviet Union, North Africa, and the MiddleEast. Because of the stage of their economic development, the UnitedStates and the former Soviet Union developed their oil industries primarily to meet their countries' own demands for energy. But sinceother oil-producing countries have a very low indigenous demand forenergy, their oil resources were developed to meet world demand foroilmainly that of the industrialized countries of Western Europe,Japan, and later on the United States.Foreign capital and technology had to be called upon to develop oilresources since capital requirements for developing, producing, transporting, refining, and finally marketing oil products were well beyondthe capabilities of countries like Venezuela, Iraq, Iran, Kuwait, SaudiArabia, Libya, Indonesia, Nigeria, and Algeria.The pattern of relationships between Iraq, as well as other oil-producing countries, and the oil companies exploiting oil resources wasregulated by concession agreements. According to the provisions ofthe concession, the foreign-owned oil company obtained an exclusiveright to develop and export Iraq's oil; it was the sole determinant ofthe level of oil output and export; and it alone had the prerogative toset the price of oil. In short the government had no input in the development or the pricing of what became the m ost important commodityof the national economy. The role of the government was a passive onein that it became a recipient of a fixed sum per unit of export.1


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2 T H E ECONOMY OF IRAQ

OIL CONCESSIONS IN IRAQ ANDTHE AGREEM ENT OF 1952The history of foreign capital seeking investment in Iraq oil goesback to the latter part of the nineteenth century when Iraq was stillpart of the Ottoman Empire.2 It was not until 1925, however, that thefirst concession for the exploration and production of oil w as grantedto the Turkish Petroleum Company (subsequently renamed Iraq Petroleum Company -I PC ) for a period of seventy-five years. Oil was firststruck in commercial quantities in 1927. Two affiliates of IPC, MosulPetroleum Company (MPC) and Basra Petroleum Company (BPC),

secured additional concessions from the Iraqi Government. MPC wasawarded a seventy-five-year concession in 1932; and BPC obtainedanother seventy-five-year accord in 1938. The three concessions coveredthe total area of Iraq.3These three companies were owned in equal shares of 23.75 percent byBritish Petroleum (BP), Shell Petroleum (Shell), Compagnie Frangais desPetroles (CFP), and Near Eastern Development Corporation, which wasowned equally by Standard Oil of New Jersey (Exxon) and Mobil. Theremaining 5 percent went to Participation and Exploration Company.The 1951 nationalization of the oil industry in Iran, the adoption ofthe principle of profit-sharing between some of the companies and hostgovernments such as Venezuela and Saudi Arabia, and the persistentdemand of Iraq for more royalties led to a series of negotiations betweenIPC, MPC, and BPC and the government. These negotiations culminated in the agreement of 19524 -henceforth called the Agreement-the tw o m ost important provisions of which are: (1) The hitherto fixedpayment per unit of production w as replaced by a new formula of profit-sharing according to which the governm ent would receive annually 50percent of the profits resultingfromthe operations of the companies inIraq. Profits were defined as the difference between the posted price ofoil exports and the cost of production, and (2) the government wasentitled to receive f.o.b. seaboard terminal, as part of its 50 percentshare, up to 12.5 percent of the net production. The government hadthe option to sell this amount at whatever price it could obtain.

THE GROWTH OF OUTPUT AND REVENUEThe Agreement was an important landmark in Iraq's petroleum history and economy in that i t ushered in an era of unprecedented growthin the oil sector.The growth of the oil industry was a response to the worldwide increase in demand for petroleum in the post-World War II period. Itresulted from the need to rebuild the shattered economies of Europe,


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THE EVOLUTION OF IRAQ'S OIL INDUSTRY 3the exceptional increase in military demand for oil in peacetime, mechanization of agriculture in many parts of the world, th e em ergence ofpetroleum-based industries, the substitution of oil for coal as a sourceof energy, the general explosion in the demand of the transportationsector, and general boom conditions which prevailed in the industrialized countries. In addition, it was projected that the United States,which became a net importer in 1948, would rely to an increasing degreeupon importing low-cost foreign oil to meet its rising energy requirements.6While the worldwide increase in demand for crude oil helped Iraq toexpand its output, the newly introduced profit-sharing principle provided for a much higher revenue per unit of output, which increased to$0.84 per barrel in 1952-59 , compared with $0.22 per barrel in 1950.6Under the new contractual arrangements, the level of oil revenuebecame a function of (1) cost of production, (2) price of crude at the Iraqiborder, (3) share of the government in profit, and (4) the level of output.Since (1) and (3) were fixed by the Agreement itself, the determinantsof oil revenue become, therefore, output and price, both of which werebeyond government control.

OIL OU TPUTUntil the early 1970s, most of the oil outside the U nited Sta tes andthe former U SSR was produced by a few vertically integrated multinational oil corporations. These international oil firms are E xxon, Shell,BP, Mobil, Texaco, Gulf Oil Corporation (Gulf), Standard Oil of California (Chevron), and CFP.In 1960, these firms produced 34.1 percent of U .S. oil and 87 percentof Venezuelan oil. The eight companies in the same year produced 92percent of Middle Eastern oil. In Iraq, as well as in other oil countries,the operating company that produced the crude was owned jointly bymore than one of these eight companies. Thus, in one combination oranother, a number of or all of the major oil companies owned 100 percent of the operating companies in Kuwait and Saudi Arabia, 94 percent of those in Iran, and 95 percent of those in Iraq. In addition tothese joint ventures, five major firms were parties to long-term con

tracts of the sale and purchase of oil from Kuwait and Iran.7In Iraq, prior to the enactment of the 1972 nationalization measures,oil was produced by IPC and it s affiliates on behalf of it s shareholders.The volume of output was jointly determined by the shareholders,knowing that Iraq was only one of several sources of supply. An elaborate mechanism was instituted to guide IPC. The 1948 Agreementamong IPC shareholders stipulated that each partner must submit itsoil requirement for a five-year period five years before th e beginning of


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4 T H E ECONOMY OF IRAQthe period. A shareholder should, for example, submit in 1960 its oilrequirements for the period 1965-70. The oil so produced wasdelivered to the shareholders' terminals at the Mediterranean or thePersian Gulf at cost of production, since IPC was organized as a nonprofit production company. This delivery at the cost of production islimited to th a t pa rt of th e owner's requirement t h a t does no t exceed itsshare in IPC capital.8Those who nominated more tha n their share in th e join t ownershiphad to buy the increment from pa rtne rs who nom inated less th an theirIPC ownership share. The oil so transacted was priced a t a "productioncost plus" formula. The cost element w as the actu al cost of p roduc tionand delivery. The plus element w as half the difference between production cost and the posted price at th e terminals. This clause of the A greement provided, in other words, for equal profit sharing between anunderlifter and an overlifter.It goes without saying that it was to the advantage of any singlecountry that oil be produced at maximum capacity since higher volum es would generate higher revenue at th e prevailing price. B ut suchou tpu t, however, would hav e to be at th e expense of othe r sou rces ofsupp ly. Should every country's demand for higher o utpu t be m et simultaneously, a glut was bound to push prices downward.To prevent this situation from arising, any single firm w as requiredto regu late its offtake from the various sources, including Iraq , in sucha way as to meet the market's demand for oil at a price that wouldmaximize its profits, which in turn would maximize the n et integ ratedreturn across a wide network of investment around the globe.9

TH E PRICING OF IRAQ CRUDE OIL TO 1950Un der the oil concession system , the power to determ ine ou tpu t andposted prices was vested in the concession holders. The governmentwas a passive recipient of oil revenue. Prior to 1952, as was indicatedearlier, such revenue w as fixed; while under th e prov isions of th e 1952Agreement, th e revenue varied as it became a function of the differencebetween cost of production and the posted prices.Th e price of Iraq i crude oil, like th at of the other producing countriesof the Middle East, was set at oil-exporting terminals in the PersianGulf region and the East Mediterranean. At these two locations, thesellers published (posted) the price at which they were willing to sellthe oil at their disposal f.o.b. In th e absence of large num ber of sellersand buyers, since the international oil industry was dominated by afew firms, the determ ination of posted prices became an adm inistrativedecision rathe r th an the outcome of ordinary forces of ma rket supplyand demand.

Under these conditions, posted prices were derived directly from a


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T H E EVOLUTION OF IRAQ'S OIL INDUSTRY 5historical pattern in which the prices of oil at the United Sta tes Gulf ofMexico (USGM) were the ruling prices.10 According to this formula,which was the foundation of the oil price structure until 1941, thebuyer of crude oil was billed at the ruling prices at USGM, plus thefreight chargesfromUSGM to the point of destination, irrespective ofthe actual source of supply. Moreover this formula had the effect ofequalizing the delivered price of oil for any buyer regardless of the location of the seller.With all other producing centers secondary in importance to theUnited States, it was not only convenient but also profitable for thesuppliers of non-American oil to link their prices to USGM prices,since the latter were based on the higher production cost of the marginal producer.11 The anomalous nature of this system from the perspective of the consumer may be seen in the case of the Iraqi consumerwho was charged prices based upon quotations in U SGM , regardlessof the facts that (1) the crude oil was produced in Iraq; (2) it was produced at low cost; (3) it was refined in a nearby refinery; and (4) it w asmarketed by a local company.12

This single basing point system came under pressure a s the capacityof the Middle East oil industry expanded, and outlets for the increasedoutput had to be found either in the adjacent markets or in m arketscloser to the United States.13 In either case the M iddle E ast exporterwas faced with two alternatives. The first was to reduce his f.o.b. pricein order to displace American oil, and the second was to make freightabsorption while continuing to quote the USGM prices.Given the pattern of the world oil markets and of ownership amongthe international suppliers, it was only natural to follow the secondcourse of action.14 Bu t the adoption of this course of action meant thatthe exporter of Middle East oil would not only have to make freightabsorption on the sales he made in the direction of the United Statesbut also have to be content with either the lessening or complete elimination of phantom freight on the sales he made in his vicinity.15 To putit differently, the Middle East began to emerge as a new productioncenter quoting USGM prices and charging the actual freight costsfrom its sources of supply.16This development had the effect of establishing a "natural" marketarea for M iddle E ast oil. The westward limit of this area was the "watershed" where it was to the benefit of the seller to ship Middle Eastern oilrather than Western Hemisphere oil. This "watershed," at the freightrate prevailing then , was in the region of Italy.17However, as the United States began to lose its position as a net oilexporting country and as Middle East oil continued to increase andnew markets for it had to be found, a break in the linkage with USGMpricing formula had to be effected.The adjustment to the new conditions was facilitated when the re-


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6 T H E ECONOMY OF IRAQmoval of the price controls by the U .S. Office of P rice A dm inistra tioncoincided with a period of oil shortage, th us allowing a series of increasesin the prices of American and Venezuelan oils. Th e Middle Ea st priceswere also raised, but not by the same proportion. The differential inf.o.b. prices in the tw o regions helped the ex po rter of M iddle E a st oil topush his oil westward beyond the equalization point. 18 By mid-1948,the Un ited Kingdom became the new wa tershed; an d b y 1950, this newwatershed was pushed further westward to the U.S. Atlantic coastthrough reductions in Middle E as t prices to comp ensate for the region'sdistance from the new consumption centers in th e Un ited St ate s.W ith th e selection of New York a s the new watersh ed where M iddleEas t and W estern H emisphere oils meet, the wheel had turn ed full circle from a USGM-plus formula to a U.S. Atlantic coast-m inus formula.19Th is series of developm ents ended w ith M iddle E a st prices publiclyposted for the first time in 1950. Moreover, this shift to publiclyposted prices coincided with the replacement of fixed ro ya lties per unitof ou tpu t by an income ta x th at w as set to give Ir a q 50 percent of theprofit. The significance of the new system for the Iraqi economy wasthat the government acquired, for the first time, a direct interest incrude oil prices.20

PRICE DEVELOPM ENTS, 1950-1960W hen M iddle E as t crude oil prices were po sted in 1950, th e m arke tconsisted of a few sellers produ cing for their own nee ds and participating w ith each other in production en terprises and long-term co ntrac ts.If we add to this th e fact tha t the demand was stron g and output w ascarried out at near capacity, we can see no reason why prices should

not rem ain stab le. Price stability during th is period reflected th e closeadju stm ent between supply and dem and in crude oil prices, which intur n w ere reflected in the m arke t prices a t which pro du cts were sold toconsumers.21In an oligopolistic ma rke t where the re are only a few sellers, a cut inthe price initiated by one seller is bound t o be followed by h is rivals inorder to protect their market shares. On the other hand, a rise in theprice ma y n ot be followed, and t h u s th e price cu tte r m ay lose his ownshare of th e m arket. Once a satisfactory level of pr ices is reached, thesellers prefer to ad here to it an d th us m inimize their rivals' reactionsrather than at temp t a ne t gain in the volume of their sales by cha ngingthe price. But should marke t forces mak e a change in th e price desirablefor th e group , then on e of th e sellers will take the lead in se ttin g a newprice which, if acceptable to his rivals, will be adhered to.22Middle East crude prices, which moved parallel with (though below)those in the W estern H emisphere, began to show signs of strain toward


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THE EVOLUTION OF IRAQ'S OIL INDUSTRY 7the end of this period. This was mainly due to the emergence of excesscapacity that manifested itself in the discounting of posted prices. Butwith the emergence of this excess capacity, the few sellers lost theirpower to control prices and output, as can be seen in the followingparagraphs.Basically, for every oil firm, especially the integrated ones, sparecapacity is unavoidable from time to time. This surplus capacity isimportant for the firm as an insurance against a variety of embarrassments such as an unexpected high demand, natural disasters, or unexpected interruption of normal trade channels.23However, the surplus capacity that developed during the 1950s wasof a different nature. The oil industry comm itted itself to an expansionof its productive capacity in the hope that the initial high demandwould continue. This expectation did not materialize, and surpluscapacity began to appear.24

This excess capacity would have been worked off if th e oil companieswere free to lower their prices and import all the oil they wished intothe European and American markets. For one thing, coal protectionism in Europe presented a serious problem to any oil firm attempting to cut its prices, for fear that low crude oil price might provokeretaliation in the form of import restrictions.26 Another reason wasthat the oil protection policy in the United S tates acted as a depressanton the attempt to cut prices in order to increase imports. To protectthe domestic oil industry from the effect of the cheap Middle Easternoil, the United Sta tes restricted oil imports, first on a voluntary basisin 1957 and then by m aking the restriction m andatory in 1959.26

If we add to these factors the nature of market itself-few sellersjointly involved in oil production ventures and long-term supply contr ac ts -th en it should be expected that no seller was in a position toprecipitate a downward movement in prices.27 In a situation like this,nonprice competition had to be intensified. Discounts off the postedprices became an important tool in this competition.More important, however, was the entry toward the end of the1950s, of nonintegrated firms into the M iddle East oil industry. Theirsuccessful entry proved that the height of the barrier to entry was notas prohibitive as it had been earlier. This was illustrated by the entryof such firms as the Japanese Arabian Oil Company, Ente NazionaleIdrocarburi, and other independent companies.28 The consequences ofsuch entry are clear: the displacement, partially at least, of integratedoil from some markets, increase in surplus capacity, and intensification of pressure on posted prices.In addition to the entry of independent firms, there w as the destabilizing influence of the reentry of Soviet oil exports into the world markets in 1958. These exports were part of a policy of the Soviet oil trust


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8 T H E ECONOMY OF IRAQto regain th e traditional share of 19 percent of world tra de which it h adin the early 1930s.29Moreover, a pressu re on th e prices of crude oil cam e from the opposite end of the market (i.e., the products' market). The expandingcapacity of independent refiners, especially in Europe, and the availability of "distress" oil, made it possible to sell oil products at priceslower th an those offered by th e integrate d firms.30 Th is practice helpedthese refiners to expand sales and market share and eventually bringprodu ct prices down.31 This in tu rn reac ted upon crud e prices with further pressure and discounts.32As the num ber of sellers and buyers increased, tran sac tion s outsidethe in tegrated netwo rk expand ed. W hile the new sellers were in a position to sell to independent bu yers a t lower tha n th e posted prices, th eintegrated firms had either to compete and offer their oil at similarprices or to lose their markets. Since they were unable to reduce thepostings, discounts off these postings had to be made.

Th us th e price of I raq oil ex-Basra before the Suez Crisis of 1956 was$1.87 per b arrel (36 A PI ). However, once th e crisis w as over, oil companies began to offer their oils at discount. By late 1958, Middle Eastcrudes were estima ted to be discounted by 11 to 13 cen ts per barrel.3 4In February 1959, BP took the lead in reducing the prices of all itsMiddle East oils by 18 cents a barrel. Thus Iraq oil of 36 API waspriced a t $1.82 and $2.31 per barrel at B asra and in th e ea st M editerranean respectively.33,36 In this move the sellers did no more than takeformal n ote of discou nts.3 6 In Au gus t 1960, there was an other round ofprice cu ts ending with pricing Ira q oil at $1.74 and $2.21 per ba rrel a tthe above two locations respectively.Th is price reduction is significant for two rea so ns . F irst , the way inwhich the prices finally settled at the new levels reflected the strainunder w hich the system was functioning. T his strai n w as reflected inthe mann er in which the integra ted companies differed in their evaluation of the timing and the m agn itude of the price cut. 3 7Second, as a direct reaction to t hi s price cut, th e oil-producing countries formed the Organization of the Petroleum Exporting Countries(OPEC). One of OPEC 's earliest resolutions w as the demand th a t p ricesbe restored to their pre-August 1960 level and th a t the y be stabilized.88

NATIONALIZATION AND OILPRICE DEVELOPMENTS IN THE OPEC ERAThe erosion of M iddle E as t and Venezuelan oil prices relativ e to th eprices of U.S.-produced oil; the introduction of an oil quota system inthe United States; the general downward pressure on prices as thenum ber of sellers increased; and the pow erlessness of any one govern-


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THE EVOLUTION OF IRAQ'S OIL INDUSTRY 9ment to legislate a change in its oil output, prices, and income persuadedoil-producing countries to coordinate their positions vis-A-vis the oilcompanies. The boycott of nationalized Iranian oil in the early 1950sserved as a painful reminder of the devastating econom ic and politicalconsequences of such acts, as well as the dispensibility of any onecountry's oil in the pattern of international oil supply. Although thenationalization of the Suez Canal by Egypt in 1956 demonstrated apotential for success, it was not until 1960 that the Organization ofPetroleum Exporting Countries was created.39While the imm ediate impetus for the creation of O PEC was the unilateral price reductions by the oil companies, the new organization didnot have the power, the means, or the unity of purpose to force thecompanies to change their pricing policies. Although several resolutions were passed by OPEC calling upon the companies to restoreprices to their Augu st 1960 levels, the companies simp ly ignored suchcalls. And by 1963 OPEC abandoned the price issue in favor of othermeans to raise per-barrel revenue for member countries. The priceissue remained dormant until 1970 when the Libyan government wassuccessful in negotiating an increase in its posted oil prices and a risein the tax ratefrom50 percent to 54 percent. Following the Libyan settlement, the companies unilaterally announced an increase in MiddleEast posted prices, as well as an increase in governm ents' share of theprofit to 55 percent, from the traditional 50 percent.

The decade of the 1970s ushered in a number of major changes in theworld oil market, international monetary system, the oil concessionregime, oil prices, and Iraq's oil revenue. Some of the significant changesin the world oil market include the emergence of the Un ited Sta tes asthe single most important oil-importing country, the gradual disappearance of excess capacity in oil-producing countries, the interest ofthe latter in conservation, and the continued rise in the number ofindependent oil companies willing to offer better terms to producingcountries. To preempt demands for higher prices, the companiesagreed to enter into OPEC-wide negotiations over prices. These negotiations, which culminated in the February 1971 Tehran price agreement, stabilized tax rates and prices over the next five years. The netresult of the changes amounted to an increase in per-barrel revenue forthe key 34-degree API Arabian Light crude from 91 cen ts in 1970 to$1.53 by 1975.A few months after the conclusion of the Tehran agreement, the international monetary system was thrown into a major cr isis when theU.S. government decided in August 1971 to suspend convertibility ofthe dollar into gold, leading to the dollar's depreciation in terms ofother currencies. Since the dollar was the currency in w hich oil priceswere expressed and government revenue was computed, the new crisis


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10 T HE ECONOMY OF IRAQprom pted O PEC to go back to the companies to seek upw ard price adjustments to offset the loss in the dollar purchasing power, a losswhich th e companies offset in part.

Concurrent with these fiscal changes, OP EC sou gh t a chang e in theconcession system that would allow member countries to purchaseequity interest in operating companies such as A ramco, K PC, IP C, andothers. By the end of 1972, an agreement was reached according towhich governments were allowed to acquire a 25 percent interest in1973, which was to rise to 30 percent in 1978 and then grad ually to 51percent by 1982.Iraq, however, distinguished itself from o ther O PE C m emb er countries by its decision in June 1972 to nationalize the IPC concessionafter twelve yea rs of dispu tes and negotiations, th u s end ing a sy stemof foreign control over it s oil resources which had been in existen ce fornearly fifty years.40

TH E 1973 OIL PRICE REVOLUTIONThe forces of change in th e internation al oil ind us try , th e crisis of t he

international mo netary system , and the continued rise in th e dem andfor oil and in prices of petroleum pro du cts persu aded m an y oil-producing countries that the provisions of the Tehran agreement ceased toprovide adequate compensation for their depletable national resourceoil. In order to protect member countries' interests, OPEC decided toask th e companies to set higher posted prices. W hen th e neg otiationssta rted on October 8, 1973, the price of th e A rabian-marke r crude oilwas ab out $3 per barrel, yielding governm ent revenu e of abo ut $1.76per barrel. The failure of oil companies to respond to OPEC demandth a t th e price be raised by $2 (they offered 45 ce nts only) and the continued A rab-Is raeli October war, which had already been rag ing whenthe negotiations started, prompted the governments to raise pricesunilaterally t o $5.12 per barrel, thu s increasing their rev enu e by $1.28per barrel to $3.04 per barrel.41Soon after the October price increase, an oil shortage em erged becauseof th e decision by A rab oil-producing countries (except Iraq ) to loweroutput and impose an embargo on oil exports to the United States inthe hope of influencing the outcome of the October war. These measures, which created panic buying, pushed oil prices to new heights.Taking advantage of these conditions, OPEC decided to double theprice of oil as of Janu ary 1,1974 when the price of the A rabian markerwas raised to $11.65 per barrel, giving the government a per-barrelrevenue of $7.42Iraq, w hose governmen t nationalized IPC in 1972, wa s now in a posi-


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T H E EVOLUTION OF IRAQ'S OIL INDUSTRY 11tion to receive the entire value of oil exports, giving i t a much higherper-barrel revenue. Such revenue was further augmented as the government started the process of nationalizing BPC in 197 3. The sharpincrease in Iraq's oil revenue in the 1970s m ay be appreciated from thedata in Table 1.1.The combination of Iraq's own policy and the OPEC price explosionsof 1973 and 1974 pushed Iraq's oil revenuefromID 214 million in 1970to ID 1.7 billion in 1974. Oil revenue increased from 16 percent ofIraq's GNP in 1970 to 57 percent in 1976. Data in Table 1.1 show theevolution of Iraq's oil output and revenue and the rise in the relativeimportance of the contribution of oil revenue to the economy.

This sudden and sharp rise in oil revenue, together w ith the newlyacquired control over its own oil resources and the availability of considerable reserves to be developed, convinced the governm ent that itwould be in the long-term interest of the country to build an integratedoil industry.Table 1.1Oil Revenue, Oil Output, Gross Domestic Product, and Population, 1950-1990

Year1950195519601962196419661968197019721974197619781980198219841986198819891990

OilRevenue(ID billion).005.074.095.095.126.140.203.214.2191.73.13.78.93.43.02.23.54.62.9

GDP(ID billion).196.413.601.695.805.9411.11.31.53.45.47.215.813.114.814.917.420.023.9

OilRevenueto GDP(Percentage)3181614161518161550575156262015202312

Output(MillionBarrel8per Day)0.140.700.971.01.31.41.51.51.52.02.42.62.61.01.21.92.72.82.1

Population(Million)5.26.16.97.37.88.38.99.410.010.811.512.413.214.115.416.517.618.118.9

Source: Government of Iraq, Ann ual Abstracts of Statistics; OPEC, Annu al StatisticalBulletin; Central Bank of Iraq, Annual Report; International Monetary Fund, International Financial Statistics Yearbook; United Nations, National Accounts Statistics: Analysis of Main Aggregates, 1980-1989, New York: 1991.Note: GNP for the period 1950-1955; GDP for 1960-1989. ID, Iraqi Dinar, equals$2.80 between 1950 and 1968; $2.79 in 1969; $2.78 in 1970; $2.96 in 1971 and 1972;$3.38 in 1973-1981; and $3.21 since 1982.


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12 T H E ECONOMY OF IRAQTHE EMERGENCE OF IRAQ'S NA TIONA L OIL INDU STRYThe seeds of a nationa l oil ind ustry were pla nte d as far back as 1961

when Law N o. 80 was passe d. According to th e prov isions of the law,the governm ent assum ed control over all lands th a t w ere no t a ctuallydeveloped by th e oil com panies, or 99.5 percent of th e are as covered b ythree concession agreements. The significance of the law was summedup as follows:Law No. 80, of 1961, constituted the first step towards the strategic objectiveof the oil policy, namely, freeing oil wealth from foreign domination and exploitation, bringing it back under national control and placing it in the serviceof people's welfare.43In order to realize this broad national policy objective, the Iraq National Oil Com pany (INOC) was created in 1964. B u t th e newly createdentity was not given the necessary legal and financial resources todevelop the reacquired resources. It took an other th ree yea rs and tw olaws before INOC w as given th e exclusive rig h ts t o exploit the country 's oil resources in 1967. In 1972, INOC was successful in produc ingand marketing oil from fields covered by Law No. 80. In addition toprod ucing oil, Ira q succeeded also in developing o th er facets of a well-developed national oil industry, including the training of specializedlabor force; building of pipelines, refineries, expo rt fac ilities, and loading term inals; acquisition of oil tank ers; and creation of m ark eting networks a t home and abro ad. The decision to develop a natio na l oil sectorwas intended to use the country's oil wealth as the mainstay of theeconomy: Iraq National Oil Company became responsible for the execution of th at p art of the national oil policy th at aimed a t cre ating anddeveloping a large, solid, and integ rated oil industry th a t w ould becomethe mainstay of accelerated economic development.44The inherent w eakness and da nger in such policy is its equa tion ofnational ow nership of the oil sector with freedom of action. I t is true ofcourse, as was indicated earlier, th a t by na tionalizing it s oil sector Iraqcould ap propriate to itself the en tire amou nt of the re nt (i.e., the difference between th e cost of production and th e price) inste ad of receivingonly a fraction of that rent as was the case under the concession system . It is also true th a t by takin g over the operations of th e oil sectorIraq was able to free itself from the uncertainty associated with decisions made by multinational firms over which it had no control. Yetthe mere transfer of ownership to a nationa l au tho rity did no t by itselffree Iraq from the uncertainty of the constantly changing forces ofsupply and dem and of th e wider world economy. To pu t it differently,while Ir aq succeeded in increasing it s oil income per uni t of ou tpu t and


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THE EVOLUTION OF IRAQ'S OIL INDUSTRY 13in mapping the size and direction of its oil sector, its dependency onthe world economy remained nevertheless unchanged.Another observation with respect to the new emphasis on th e oil sector is in order. The success of the nationalization m easures and the risein oil prices and the stress on developing the oil sector as the "mainstay of accelerated economic development in Iraq" bound rather dangerously Iraq's prospects of economic development t o on ly one sector,the performance of which is ultimately beyond the control of the government. In other words, should the demand for or the price of oildecline or new sources of supply outside Iraq and other OPEC countriesemerge, or should Iraq's exporting facilities be disrupted or destroyed,then the entire economy would suffer.The experience of Iraq in the 1980s and 1990s illustrates this point.When Iraq nationalized IPC in 1972, its oil output was 1.5 million barrels per day (MBD). By 1976, it rose to 2.4 M BD , and by 1979 it was3.5 MBD. The combination of higher output and higher prices pushedIraq's oil revenue from ID 219 million in 1972 to ID 3.1 billion in 1976and to ID 8.9 billion in 1980. The outbreak of the Iran-Iraq war, whichresulted in the destruction of Iraq's exporting facilities in the southernpart of the country and the closure of its pipeline across Syria, reducedIraq's oil output to 1 MBD in 1982, a level of output that had beenreached as far back as 1960. As a result of this decline in output andexports and the decline in oil prices after 1981, Iraq's oil revenue plummeted from ID 8.9 billion in 1980 to ID 2.2 billion in 1986.

The impact of what happened in the oil sector on the rest of the economy was immediate and widespread. The government was forced tocurtail imports, suspend development projects, introduce austeritymeasures, and become a major foreign debtor. Although oil production,exports, and revenue increased after the end of the war with Iran in1988, the 1990 invasion of Kuwait and the consequent embargo on alltransactions with Iraq forced the oil industry to produce at less than10 percent of its capacity to m eet the economy's local requirements.The importance of oil revenue as a source of economic developmentspending is explored in the following chapters.

NOTES1. Certain parts in this and the next two chapters draw on Abbas AlnasraFinancing Economic Development in Iraq: The Role of Oil in MiddleEconomy (New York: Praeger, 1967).2. For the historical development of the oil concessions, see Stephen HemsLongrigg, Oil in the Middle East (Oxford: Royal Institute of International Afairs, 1961); Benjamin Shwadran, The Middle East, OH and the Great Po(New York: Council for Middle Eastern Press, 1959); U.S. Congress, Senate,Subcommittee on Monopoly of the Select Committee on Small Business, Inte


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14 THE ECONOMY OF IRAQnational Petroleum Cartel (Washington: 1952) (henceforth cited as FTC ReportCharles Issawi and Mohammed Yeganeh, The Econom ics of M iddle EasternOil (New York: Praeger, 1962); Ian Seymour, OPEC: Instrument of Change(London: The Macmillan Press, 1980).3. In December 1961, the government passed Law No. 80 of 1961 restricting the operations of those companies to the areas where their producing oilfields are located. In other words, since December 12, 1961, the concessionareas of these companies have been reduced from 435,780 sq km to 1,938 sqkm . See Petroleum Press Service, January 1962, p. 7.4. Iraq Petroleum Company, Mosul Petroleum Company, and Basra Petroleum Company, Agreement with the G overnment of Iraq (Hertford, U.K.:Stephan Austin & Sons, 1952).

5. J. E. Hartshorn, Politics and World Oil Economics (New York: Praeger,1962), p. 37.6. See Middle East Economic Survey (MEES), August 27, 1965, andSeymour, OPEC, pp. 13-14.7. For the details of joint ownership and the long-term contracts, see FTCReport, Chapters 4-6 ; H artshorn, Politics, Chapter 11; Wayne A. Leeman, ThePrice of Middle East Oil (Ithaca: Cornell University Press, 1962), Chapter 2.8. Hartshorn, Politics, pp. 162-163; FTC Report, Chapter 4. See also WalterAdam s, James W. Brock, and John M . Blair, "Retarding the Development ofIraq's Oil Resources: An Episode in Oleaginous D iplomacy, 1927-1959," Jour-nal of Economic Issues 27(l):69-93.9. Hartshorn, Politics, p. 315.10. P. H. Frankel, "What Price Oil? The International Structure," CHI ForuNovember 1948.11. Walter J. Levy, "The Past, Present and Likely Future Price Structurefor the International Oil Trade," in U.S. Congress, The Third World PetroleumCongress, A Report to the Joint Select Committee on Small Business (Washington: 1952), pp. 21-3 7.

12. See FTC Report, p. 95.13. It should be mentioned that m ost of the European and Latin Americanimports during the 1930s and 1940s from the Western Hemisphere were actually drawn from the Caribbean region (Venezuela). This was achieved bypricing the Venezuelan crude oil f.o.b. Caribbean at the same USGM price forcrude oil of comparable quality minus the U .S. import tax . Since the transportation costs from the Caribbean and the USGM to the U.S. eastern seaboardare the same, this has resulted in identical delivered prices for the oil of thesetwo regions. The same prices for the Caribbean oil were also quoted for shipments to other destinations. See Levy, "The Past," p. 25; Hartshorn, Politics,p. 133.14. Hartshorn, Politics, p. 136.15. Arthur Smithies, "Economic Consequences of the Basing Point Decisions," Harvard Law R eview 62:308-318.16. Ibid.; Hartshorn, Politics, p. 136. It should be noted that the large-scalemilitary operations in the Eastern Hemisphere that stepped up the demandfor Middle East oil during World War II, prompted the British Government,as the major buyer of M iddle East oil, to question the practice of being billed


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THE EVOLUTION OF IRAQ'S O IL INDUSTRY 15for bunker supplies at the Persian Gulf w hat it would have had to pay for fuelshipped from USG M. A compromise solution was reached, according to whichthe British Government was to pay for the oil bought in the Persian Gulfregion the same f.o.b. price as for oil of comparable quality at the U nited StatesGulf, plus the actual freight cost s from the Persian Gulf to th e actual destination. See "Adjustment Prices of Bunker Oil Supplies," Petroleum Times, May13, 1944.17. Hartshorn, Politics, p. 137.18. Ibid.19. P. H. Frankel, "American Oil in a Changing World," Oil Forum, November 1950, p. 449.20. Hartshorn, Politics, p. 138.

21. Shell International Petroleum Company, Current International Oil Pricing (London: 1963), p . 8 .22. Crude oil market up to the end of th is period had all the features of oligopoly. For pricing under oligopoly, see William Fellner, Com petition am ongthe Few (New York: Augu stus M. Kelly, 1960); Joe S. Bain, Pricing, Distribution and Employment (New York: Henry Holt and Co., 1953); William Fellner,"Collusion and Its Limits under Oligopoly," American Econom ic Review, Proceedings 41 (May 1950): 54-6 2; P. M. Sweezy, "Demand under Conditions ofOligopoly," Journal ofPolitical Econ omy 47 (August 1939): 5 68 -673 , reprintedin Readings in Price Theory, ed. George J. Stigler and K enneth E. Boulding,(Homewood: Richard D. Irwin, 1952), pp. 404-409; Bernard F. Haley, "Valueand Distribution," in A Survey of Contemporary Economics, ed. Howard S.Ellis (Homewood: Richard D. Irwin, 1948); Jacob Weissman, "Is Oligopoly Illegal? A Jurisprudential Approach," Quarterly Journal of Econom ics 74 (August1960): 437-463, especially p. 459; Kenneth E. Boulding, Economic Analysis(New York: Harper and Bros., 1955); K. W. Rothchild, "Price Theory and Oligopoly," in Stigler and Boulding, Readings in Price Theory, pp. 440-464.23. M. A. Adelman, "The World Oil Outlook," in Natural Resources and International Development, ed. Marion Clawson (Baltimore: Johns HopkinsPress, 1964), pp. 27-125 ; Shell, Current International, p. 10.24. A. J. Meyer, "Economic Modernization," in The United States and theMiddle East (New York: American Assembly, Columbia University, 1964), p. 71.25. Adelman, "The World Oil Outlook," p. 83.26. Hartshorn, Politics, p. 129.27. Adelman, "The World Oil Outlook," p. 85 .28. Hartshorn, Politics, Chapters 17 and 20.29. Adelman, "The World Oil Outlook," p. 92.30. Shell, Current International, pp. 9-1 1.31. Adelman, "The World Oil Outlook," p. 97.32. Shell, Current International, pp. 9-1 1.33. Oil and Gas Journal, June 3,1957.34. Adelman, "The World Oil Outlook," p . 87.35. Petroleum Press Service, March 1959.36. Adelman, "The World Oil Outlook."37. On August 9,1 96 0, Esso (Exxon) took the lead in cutting the prices ofits oil in the Persian Gulf and the East Mediterranean by an amount ranging


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16 THE ECONOMY OF IRAQfrom $0.04 to $0.14 per barrel. Iraq oil at the E ast Mediterranean was pricedat $2.17 per barrel, a cut of $0.14, while that at the Persian Gulf was priced at$1.70, a cut of $0.12. The reactions of the rivals to these price changes were notuniform. While Shell followed the example of E sso by cutting both prices bythe same amount, BP reduced its price at the East Mediterranean to $2.21,Socony to $2.19, and CFP to $2.23 per barrel of crude oil of the sam e quality.As to the price of Iraq oil in the Persian Gulf, BP decided to set it at $1.74, andSocony at $1.70 per barrel. It is obvious that a situation like this cannot prevail, and some of the rivals are called upon to make further adjustments. WhenShell decided to change sides by revising its price changes to the levels se t byBP, Esso (the initiator of the price changes) was forced to abandon its earlierpostings and follow Shell in adopting those of BP. Other sellers followed suit.See Hartshorn, Politics, Chapter 1, especially p. 21; Oil and Gas Journal,August 15 and September 19, 1960.38. Hartshorn, Politics, p. 20; Seymour, OPEC, Chapter 2.39. OPEC was founded by Iraq, Iran, Saudi Arabia, Kuwait, and Venezuela.In addition to these five founding members, eight other countries were admitted to membership between 1961 and 1975. These countries are Qatar in 1961,Indonesia and Libya in 1962, Abu Dhabi (currently part of United Arab Emirates) in 1967, Algeria in 1969, Nigeria in 1971, Ecuador in 1973, and Gabonin 1975.

40. For a detailed treatment of OPEC-company relations in the decades ofthe 1960s and early 1970s, see Abbas Alnasrawi, "Collective Bargaining Powerin OPEC," Journal of World Trade Law 7(2):188-207; "The Petrodollar EnergyCrisis: An Overview and Interpretation," Syracuse Journal of InternationalLaw and Commerce 3(2):369-412.41. For a more comprehensive account of these and related developments,see Seymour, OPEC, Chapter 5.42. Ibid.43. Iraq National Oil Company, Iraq National Oil Compan y and D irect Exploitation of Oil in Iraq (Baghdad, 1973), p. 5.44. Ibid., p. 7.


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CHAPTER 2

Oil and Developmentunder the Monarchy, 1950-1958The idea that oil is an exhaustible national resource, producing revenues to be used for investment purposes, goes back to 1927 when thegovernment received its first royalties from oil. It was decided at thetime to view such royalties as a budgetary surplus to be used to financeinfrastructural projects such as roads, bridges, irrigation, and buildings. The dual budgeting system, distinguishing ordinary and capitalexpen ditures, continued to be in effect until 1950.lThe era of development planning in Iraq, which began in earnest in1950, may be divided into th ree distin ct pe riods: (1) developm ent planning under the monarchy , which extends from 1950 when the Development Board was created to 1958 when the monarchy w as ov erthrown;(2) development planning in the republican period 1958-68; and (3)development planning since 1968, when the present regime under therule of the Baath party seized power.

THE DEVELOPMENT BOARD A ND ITS PROGRAMS,1950-1958The acceleration of Ir aq 's oil production in the po stw ar period from.091 million barrel per day (MBD) in 1949 to .697 MBD in 1955, andth e increase in oil revenue, which went from ID 3 1 million to ID 74 million during the same period, prompted the government to embarkupon a policy of channe ling oil revenue for development pu rpo ses. T hispolicy was reinforced by th e World B ank which made th e g rant ing of a$12.8 million loan to Iraq conditional upon the creation of an autono

mous agency for development.2


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18 T H E E C O N O M Y O F I R A Q

This agency, which came to be known as the Development Board,was established in 1950. The law creating the board stipulated th at allrevenues from oil be credited to the board's account with the CentralBank of Iraq.3 The law entrusted the new board w ith these task s: (1)presenting a general economic and financial plan for developing theresources of Iraq and raising the standard of living of its people throughthe implementation of projects in the fields of water storage, flood control, irrigation, drainage, industry, mining, and communications; (2)conducting a survey of the country's exploited and unexploited resources; and (3) handing over the completed projects to the specializedministries for adm inistration and maintenance.

The General Program for the Development Board's Projects wasadopted in the following year for the period 1951/52-1955/56. Thisfive-year program envisaged a total expenditure of ID 66 m illion andrevenues of ID 95 million. The pattern of expenditure allocation andsources of revenues under th is new program are shown in Table 2.1.However, soon after th is program was adopted, the 1952 Agreementwith oil companies, which increased Iraq's per-barrel revenue considerably, was concluded. The increase affected the newly created Develop-Table 2.1General Programs of Development Board's Projects

First Second Third FourthGeneral General General General1951/52- 1951/52- 1955/56- 1955/56-1955/56 1956/57 1959-60 1960/61ID ID ID ID

Millions (%) Millions (%) Millions (%) Millions (%)ExpendituresAgriculture*IndustryTransport andCommunicationBuildings andHousingOthersTotal

30.015.912.67.265.7

45.724.219.210.9

100.0

53.431.026.818.026.2

155.4

34.419.917.211.616.9

100.0

114.43.74.60.11,

304.

,462,94,3

37.614.324.420.03.7

100.0

168.167.1124.4123.217.3500.1

33.613.424.624.63.5

100.0RevenuesOil 91.1 95.8 164.6 97.6 215.0 99.7 385.1 98.7Non-oil 4.0 4.2 4.1 2.4 0.7 0.3 4.9 1.3

Total 95.1 100.0 168.7 100.0 215.7 100.0 390.0 100.0

Source: Government of Iraq, Laws Nos. 35 of 1951,25 of 1952, 43 of 1955, and 54 of 1956.Includes flood control, reservoirs, irrigation and drainage projects, land reclamation,

and agriculture proper.


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OIL AND DEVELOPMENT UNDER THE MONARCHY, 1950-1958 19

ment Board in two ways. First, instead of channeling a ll the proceedsfrom oil to the boa rd, a law was passed allocating 70 percen t of the oilrevenues to the board w ith the remaining 30 percent channeled to theordinary budget. Second, the plan was revised by increasing programm edexpenditures to ID 155 million and revenues to ID 169 million whileextending the plan period by another year.4No sooner had th is new program been ado pted th an a chang e in th estructure of the development administration was instituted. The newstructure entailed the creation of the Ministry of Development whichwas to serve as the link between the boa rd an d the council of m inisters,on the one hand, and act as the executive arm of the board, on theother.6 Once again th e existing plan was revised and replaced by a newfive-year p lan for th e period 1955/56-1959/60. Th e new pla n env isageda total expenditure of ID 304 million and revenues of ID 216 million.6While this program was being implemented, the British economist,Lord S alter, was prep aring for the board a report on va riou s asp ects ofIraq 's economic development policy.7 This, together w ith an optimisticprojection of oil reven ues, led to the adoption of ye t a fourth programfor the period 1955/56-1960/61, with estimated total expenditures ofID 500 million and revenues of ID 390 million.8During the fourth year of the implementation of this program, therevolution of July 1958 overthrew the monarchy and abolished theDevelopment B oard, replacing it by a ministerial com m ittee. The newcom m ittee decided to continue the implem entation of th e prog ram at aslower rat e until a new mach inery for developm ent could be organ ized.

PLANNED VERSUS ACTUAL DEVELOPMENT SPE ND ING,1951/52-1957/58Table 2.2 (p. 20) contains a summary of total development expenditure and revenue as well as sectoral performance measured by actualspending relative to planned expenditure for fiscal years 1951/52-1957/58.One of the striking features of development expenditure is that actual expenditure lagged considerably behind planned expenditures.This is evident in every sector although the performance in some sec

tors w as much worse than th at in others. By contrast, actual revenuetended to be very close to planned revenue. Table 2.2 shows th at whilethe board planned to spend ID 3 12 million durin g this period actual expen diture was only I D 178 million, or 57 percen t of the tota l. A ctualrevenue for the period, on the other hand, was close to projected revenue, 93 percent. Th is mean s tha t the Development B oard's actual spending amounted to 70 percent of its receipts.The pattern of allocation and implementation gives rise to several


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20 THE ECONOM Y O F IRAQTable 2.2Total Planned and Actual Development Expenditures and Revenues,1951/52-1957/58

Planned A c t u a l( ID ) ( ID ) A c tu a l : P l an ned( M i l l i o n s ) ( M i l l i o n s ) ( P e r c e n t a g e )i- Expenditure

AgricultureIndustryTransportation an dCommunicationBuilding an d HousingOtherTotal

117.851.166.638.238.6

312.3

61.619.138.624.135.2

178.1I I . Revenue

O i l 269 .4 245 .9 91 .2T o t a l 2 7 5 .7 2 5 6 . 4 9 3 . 0

I I I .Ac tua l E x p e n d i t u r e : A c t u a l R e ve nu e 6 9 . 5Source: Calculated from Law No. 6of1952, schedules A and B ; Law No. 54 of 1956; Central Bank of Iraq, Quarterly Bulletin, selected issues; Ministry of Development,Annual Report on the Accounts of the Developm ent Board and the Ministry ofDevelopm ent for the Fiscal Year 1954 (Baghdad, 1957); Annu al Abstract of Statistics.Note: The fiscal year in Ira q ra n from April 1 to M arch 31. As of Janu ary 1,1976, thefiscal year w as changed to coincide with th e calendar year. D etails may no t add u p t ototals because of rounding.

observations regarding the board's priorities and limitations. It can beseen that w hile irrigation, roads and bridges, and buildings more thanmaintained their relative importance in terms of actual versus plannedexpenditure, the industrial sector, on the other hand, received muchless attention in the execution stage. Only 37 percent of the appropriated funds were actually invested in this sector -1 1 percent of totalactual spending. In addition to the obvious neglect of industry, therewas also a serious neglect of the agricultural sector. As the data indicate, the board spent only 52 percent of the funds appropriated to thissector - 3 5 percent of its total spending.While it can be argued, and rightly so, that flood control and irrigation projects and other infrastructural projects were necessary, this isnot a sufficient explanation for the gross neglect of agriculture and industry. In a country heavily dependent on consumer goods importswhere more than three-fourths of its labor force depended on agricul-

51.837.458063.19.15.0


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ture, the neglect of the two most important goods-producing sectorsraises several questions as to the na tur e and direction of developm ent,as is seen in the following p ara gra ph s.HIGHLIGHTS OP ALLOCATIONS FOR DEVELOPM ENT,1950-1958

Basically, the essence of planning for economic development is tomobilize national savings into prod uctive investm ent in order to generate a rate of increase in national outpu t t h at is higher tha n th e ra teof increase in population. The difference between th e tw o gro w th rat eswould help increase the standard of living.9 This task requires alsoth at investmen t spending be made in such a way a s to yield the highestpossible rate of growth of output with the least possible waste. Thisdoes not explain who would be mak ing the necessary decisions to atta inthes e objectives. While in the industrialized coun tries th e que stion ha slong been settled in favor of the priv ate sector an d m ark et forces, thiswas not so in the case of developing economies.

There is general agreement that the numerous imperfections of them arket will impede the necessary process th at would transform a basically underdeveloped economy like Iraq's into a growing econom y. Giventh is reality, planning becomes a necessary tool to accelerate economicdevelopment. In Iraq, the governm ent found it necessary t o exp and itsrole in th e economy when it decided to utilize oil revenues to finance inves tm en t projects and to ad opt policies to stim ulate t h e nonoil sectorsof the economy.A comprehensive development program must therefore consist ofobjectives and ag gregate t ar ge ts in term s of the following: (1) natio na lincome and employm ent; (2) a public investm en t prog ram for th e econom y's different sec tors; (3) projection of pr ivate inv es tm en t am ongvarious major secto rs; (4) a combination of fiscal, m on etary , an d tra depolicies to stim ula te a nd influence p rivate in ves tmen t; (5) definition ofth e role of the priv ate sector; and (6) policies designed t o effect bas ic institutiona l changes.10Should it prove to be beyond the ability of a country like Iraq tomeet these requirements, then the nex t best thin g would be to try toprovide for broad ta rg et s in term s of income and employm ent. In o therwords, the plan m us t provide a sense of direction for th e economy, andnational income accounts should help planners determine growth tar-ge ts. If these agg regates are not used as a bas is for developm ent planning, then the plan will be no more than a list of investm ent projects.This was the case in Iraq during the first decade of its developmentexperiment.


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22 T H E ECONOMY OF IRAQDuring this period, the concept of development planning in Iraq wasunderstood to mean those government policies that were concernedwith capital spending directed and controlled by the DevelopmentBoard. Economic planning meant the utilization o f as much as possibleof the revenue from oil to build public investment projects.The first program, as a matter of fact, did not even mention suchconcepts as national income, employment targets, and fiscal and monetary policies. There was only a passing m ention that the program wasintended to raise the standard of living through th e development of thecountry's resources.The lack of basic understanding of economic planning and its goa ls

is reflected in the meager allocation for agriculture. In a country likeIraq, where agriculture is th e most important sector, th e first plan allocated only ID 1.5 million to agricultural development proper withthe bulk of the ID 30 million earmarked for irrigation projects. Thiswas done at a time when the overall program was drafted with a surplusof ID 29.4 million. This neglect of agriculture w as m atched by a comparable neglect of the industrial sector. M oreover, the program failedto establish a link between public and private investm ent. It also failedto anticipate the response of the nonoil sectors of the economy to theinjection of new investment funds and to predict th e leakage of incomein the form of payment for imports. Nor did the plan recognize the impact of i ts spending on prices and income distribution.The absence of meaningful planning can also be seen in the collectionof projects under the heading "Land Reclamation and Other Projects,"which covered an assortment of unrelated projects such as land reclamation, artisian wells, summer resorts, aerial survey, mining survey,telecommunication services, and expansion of the civil airport.11In 1952, only one year after the first plan was adopted, the secondplan projected total expenditures of ID 155.4 million or 237 percent ofthe first plan's total expenditure. This plan followed the path of thefirst in emphasizing the importance of irrigation, roads, and buildings.Industry and mining, as one sector, was introduced and given 20 percent of the investment funds. A casual look at the allocations for industrial development reveals that such allocations were not dividedeven at project level. Thus a sum of ID 31 million was allocated to

natural gas, cement, fertilizers, sugar, and textile industries.12The third program, adopted in 1955, had total planned expenditureof ID 304.3 million and revenue of ID 215.7 m illion. This meant thatthe new program contemplated an annual rate of spending of ID 60million, compared w ith only ID 30 m illion under the previous program.But as w ith the programs that preceded it, the relative importance ofthe various sectors in the program did not reveal any basic change inits approach or in its priorities. Irrigation and flood control projects


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OI L AND DEVELOPMENT UNDER THE MONARCHY, 1950-1958 23

still had a very high priority, receiving 35 percent of total allocation,while allocation for transport and communications and buildings andhousing increased to 44 percent, risingfrom29 percent in the previousplan. Funds for agricultural development proper were reduced from ID11.6 million (7 percent of the total in the previous plan) to only ID 6.5million (2 percent of the total in this plan). Industry, on the other hand,received ID 43.6 million (14 percent of the total) compared with 20 percent previously. B ut ID 10 million (22 percent of industrial allocation)was earmarked for power stations. Another ID 22 million (50 percentof the total) was allocated to a number of unrelated indu stries gatheredunder the heading "other industries," including woolen, cotto n, and silkindustries, and also industries based on the utilization of natural gas.It i s safe to infer that these industries were under stu dy and were notready for implementation. If we exclude these two headings from w hatwas allocated to industry, we find that what w as left represented only4 percent of the total.It should also be noted that what was actually spent was spent onprojects that did not provide permanent or sizable employment. Nordid the spending show tangible results as measured by national income data. This policy raised a number of questions as to its economicjustifications and political consequences.To help it find guidance to deal with these problems and the variousrecommendations given by a number of technical advisers, the boardcommissioned Lord Salter 'to give advice as to the timing and balanceof the different projects of the Development Board and their co-ordination with action by other authorities, having regard to the impact ofeach undertaking upon the others and upon the general economy of theCountry."18

The recommendations presented by Lord Salter, which coincidedwith the completion of certain studies on housing and drainage, constituted th e basis for the adoption of a new (fourth) program in 1956, covering a period of six years. Total spending under the fourth programwas projected at ID 500 million and total revenue was estimated at ID390 million.Irrigation, to which 31 percent of the total appropriation was allocated, once more continued to "occupy the pride of place among theprojects covered by the General Program."14 Other infrastructure projects received 44 percent of the appropriated funds, and 13.4 percent ofthe tota l went to industry, mining, and power stations.Again, if we exclude the appropriations for mining and power stations and for industries under consideration, the share of industrialdevelopment would declinefrom13.4 percent to 3 percent of total plannedexpenditure. Similarly, agricultural development had low prioritysince its allocation did not exceed 3 percent of the total.


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24 T H E ECONOMY OF IRAQ

THE DEVELOPMENT B OAR DAN D TH E AGRICULTURAL SECTORWhen the development programs were launched in the early 1950s,Iraq aside from the oil sector was an agricultural country with aboutfour fifths of its labor force employed in agr icultu re. This sec tor's contribution to Iraq's nonoil GDP during the period under considerationranged between 22 percent and 36 percent. Like oth er developing countries, Ira q had an agricultural sector th at suffered from chronic underemployment and from seasonal unemploym ent th a t reached as high a s75 to 80 percent.16It should be stressed th a t I raq ha s always been in the fortunate position of not being overpopulated, w ith large areas of cultivab le land andconsiderable water resource endowment. In comparison with otherunderdeveloped c ountries, the per capita po tentially cultivable land inIraq is 3 to 3.5 acres com pared w ith one-half acre in As ia and less th anone-third acre in Egypt.16It is imperative, therefore, that agriculture should be the primaryconcern of all efforts, in order to increase the ra te of economic grow th.The development of the agricultural sector is vital to the process ofeconomic development because (1) it releases agricultural labor fornonfarm employment, (2) it helps increase exp orts and reduce im po rts,(3) it is expected to m eet th e inevitable rise in dem and for food associated w ith growing popu lation and higher income, and (4) it gen eratesmore savings to finance investment in the agricultural sector andother sectors of the economy.Any development policy, therefore, should have as its foremosttarget the reduction, if not the elimination, of the high rate of unem

ploym ent. Bu t to achieve this, the indu strial sector mu st also grow inorder to provide employment opportunities for the absorption of thesurplus farm labor and for the grow th in the labor force. To channel th eunemployed to the newly created indu stries requires a rise in the productivity of agriculture in order to meet the rising urban demand foragricultural products. It also requires an increase in the purchasingpower of the rural population, thereby increasing the demand for industrial products. It is safe to say that without the simultaneous increase of investment and output in both sectors, the twin goals of ahigher stan dard of living and higher ra te of employmen t w ould not beattained.One of the most ou tstan din g an d influential features of agriculturein Iraq during th is period was the immense concen tration of land ownership among a tiny fraction of landholders.Given Iraq's agricultural population of 2.5 million in th e early 1950s,


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O IL AND DEVELOPMENT UNDER THE MONARCHY, 1950-1958 25

it was found (as noted earlier) that agricultural land per person wasseveral times larger than in Egypt.17 Bu t the landownership structurewas such that most of the land was owned by a relatively few large landowners. According to a 1952-53 agricultural census of six provinceswith 14.5 million donums (56 percent of agricultural lands), thirteenproprietors owned between 50,000 and 100,000 donums, twenty-oneproprietors owned between 100,000 and 200,000 donums, and two landowners owned more than 1 million donums each.18

More important than the structure of landownership was the patternof the prevailing practices of distribution of agricultural output between landowners and cultivators. Depending on the region of thecountry, extent of investment by owners, and methods of irrigation,the landlord's share ranged between one-half and five-sevenths of thecrop. But the relationships between the landlord and his cultivatorswent beyond the mere distribution of benefits. The practice of cultivating only one-half of the land and the low productivity of cultivable landnot only forced the peasants to accept meager returns for their laborbut also ensured that they were never able to pay back the debt theyperpetually owed to landlords. The historical evolution of these relationships, which outlined peasant obligations to landlords and werecodified by a series of laws, turned cultivators into virtual serfswithmonumental human, social, and economic costs for the entire country.19

Such a system of land tenure gave rise to two interrelated problemsof income distribution. W ithin the rural sector, a minority of landlordsreceived most of the output while the majority of rural poptdation livedin conditions of grinding poverty.20 And since the majority of the population was made up of rural peasantry, with agriculture contributingabout one-fourth of the national product, the distribution of nationalincome tended to have another bias in favor of the urban population.This resulted in a pattern of income distribution in which the per capitaincome of the rural villager was les s than one-half of that of the town orcity dweller.21 Such an impoverished rural majority could not be expected to provide the necessary market for expanding local industry,not to mention the ability to generate savings for investment.22Another problem that plagued agriculture in Iraq was the inadequacy of a natural drainage system. Since irrigation water carriessome dissolved salts , it becomes necessary to u se more water to washthe salt away. However, if the salt to be washed away is below the rootlevels it is necessary to prevent the water table from rising, since therising water table may carry the salt to the surface where it is leftbehind after the water evaporates. To avoid this disastrous outcome, adrainage system becomes a necessity. In many areas, there must be atleast as many drainage ditches as there are irrigation ditches; but


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26 T HE ECONOMY OF IRAQsince the drainage ditches must be deeper, the cost for the construction and maintenance of the drainage system may exceed the cost ofirrigation canals.23

With these fundamental problems, one would have expected thedevelopment programs to include an agricultural development policythat would lead to a better distribution of landownership, better methods of cultivation, and a different system of irrigation and drainage.The introduction of agrarian reform to solve the land problem wasnot possible since the very nature of the power structure of the politicalsystem was such that the landed class and their political supportersdominated the legislative apparatus and other decision-making bodies.Schemes for the solution of the other two problems of expandingland under cultivation and drainage were possible to draw up andwould have benefited the landowners directly and the peasants indirectly because of the sharecropping system . But judg ing from the insignificant allocation of funds, neither of these problems received th enecessary attention. Instead, a considerable part of the board's resourceswent to irrigation, which actually included projects for flood control,water storage, and irrigation.The board's approach to the question of agricultural developmentseems to have been influenced by two m ajor groups of consultants whopresented blueprints for flood control and for the utilization of thestored water. They recommended the building of a series of dam s forthe storage of water during the flood season and it s subsequent use forsummer irrigation. These blueprints represented the culmination ofthe engineer's approach, into which the people of Iraq did not enter except insofar as they provided labor. When the oil money began to floodthe board, the plans for spending seemed ready made in the long list of

irrigation projects.24 But bringing new land under cultivation beforeimproving the system of land already under cultivation was unjustifiable since it left the system of exploitation and agricultural backwardness intact.Given the land tenure system at the time, the benefits from thestored waters had to accrue to the already privileged minority thusraising the value of their land as summer irrigation was made possibleby the expenditure of public funds at virtually zero cost to them.This disparity in the distribution of the benefits of public investment programs, needless to say, gave rise to social, economic, andpolitical consequences th at neither the board nor it s engineers chose toinclude or could include in their calculation.To mitigate this inequality of income distribution, one of two coursescould have been followed. One was to institute an agrarian reform; butthe possibility of its adoption, as mentioned earlier, was remote. Thesecond was to adopt fiscal measures to capture at least som e of the incremental income from land proprietors. Bu t even a moderate measure


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like this was not possible to adopt in a country where the levers ofpolitical and legislative powers were in the hands of land proprietors.In commenting on th is kind of spending Lord Salter had this to say:It is not unnatural that sections of the community should regard it as unjustthat one section, already more privileged than others, should now be furtherenriched to such an extent at the public expense and should resent a policywhich would have that effect.In these circumstances one tempting course is to outflank the problem instead of attacking it directly. There are large areas of Miri Serf land, ownedthe Government. With the aid of new irrigation and drainage works this landcan be made cultivable. Small settlers can be established without any questioof enriching the alreadyricharising. And in this case, apartfromthe directbenefits to the new settlers of farming their holdings, either as small ownersas tenants of the State, the existence of such opportunities of new settlemenwould perhaps, lead to an improvement of the conditions of work of workersthe great estates. It is along this line, the line of least resistance, that thepolicy has tended to develop.35

The difficulty with such a policy of least resistance, however, is thatthe creation of a new settlement is a much more difficult and complexundertaking than building a dam or opening an irrigation canal since itrequires carefully adjusted and intricate actions of many kinds. Theremust be survey and classification of the land to be settled-much moredetailed than the general survey already available-to determine thekind of cultivation suitable and therefore the size of the p lots to be distributed. The settlers m ust be carefully selected, with suitable experience; and equipment and credit facilities must be arranged. Specialmeasures must be taken to reduce health hazards and to ensure thatthere are houses, schools, hospitals, and essential public services .26Even if we assume the government of Iraq of the 1950s had all thedetermination, the necessary technical expertise and skills, and administrative machinery (which it did not have at the time), this indirect approach to the problem was bound to fail for a number of reasons. F irst,the pace of implementing this policy proved to be very slow. Up to1958, only 20,000 families were settled, with another 5,000 familiesslated for settlement in the next five years.27 This is a very small number in a country where agriculture absorbed about three-fourths of thelabor force. It is highly unrealistic, therefore, to hope that this slowrate of settlement would have benefited a large number of peasan ts orexercised any beneficial influence on the conditions of those who remained on the privately held land or on the problem of unemployment.Second, a considerable part of the land so distributed found it s way tothe privileged landlord by virtue of his position as a tribal chief, thusreinforcing the existing pattern of landownership. Third, the government's desire to show fast results led it to start the process of land dis-


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28 T H E ECONOMY OF IRAQtribution prior to the completion of the necessary irrigation and drainagenetworks.A policy that failed to address the root cause of the stagnation ofIraq's agricultural sector, the land tenure system and the pattern ofdistribution of benefits that flowed from it, could not be expected tosucceed. Suffice it to say that between 1953 and 1958 the area undercultivation for the principal three field crops-wheat, barley, and rice-increased by 20 percent; yet the value of the output of the entire agricultural sector in real terms, 1956 prices, from all sources includingfield crops, livestock, fishery, fruits, dates, and vegetables increasedby only 4.4 percent. And within th is sector, the value of field cropswheat, barley, beans, cotton, and tobacco-actually declined from ID30.8 million in 1953 to ID 28.5 in 1958. Within the agricultural sector,the share of field crops declined from 39 percent in 1953 to 30 percentin 1958. This decline took place at a time when the population increasedfrom 5.6 million to 6.5 million.28It can be seen from the data that the policies of the DevelopmentBoard failed to achieve the elementary task of increasing the output ofthe m ost important sector of the nonoil economy, a sector that w as thesource of employment and income for the majority of the population.This failure was not surprising given the inability and unwillingnessof policy makers to tackle the central problem of landownership and itsfeudal nature, which determined the pattern of relationships betweenlandlords and peasants. In the final analysis, the Development Boardpolicies had to conform to th e orientation of the political leadership ofthe country at the time, a leadership that believed in the benevolenceof the land tenure system . Thus, in a 1957 statement, the prime minister, Nuri Al-Said, not only denied the need to change the landowner-ship system but went as far as to assert that the whole problem w as amere communist ploy designed to undermine the social and politicalsystem:The tribal system considers the sheikh of the tribe as the father or the manager of the affairs of the tribe living in his area The sheikh receives one hof the crop . . . and when he dies his land will be distributed among his sonsand other inheritors and so in one generation the large landholdings will becosmall holdings. But Communism started to incite the tribes against theirsheikhs when these sheikhs are working to develop the country and increaseproduction.29

It is clear from this position of the country's political leadership thatany change in the land tenure system was neither contemplated norconsidered beneficial. The change had to await the July 1958 revolution, which overthrew the monarchy and with it the land tenure system .


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THE DEVELOPMENT BOARDAN D THE INDUSTRIAL SECTORThe failure of

the economy of iraq

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