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WEEKLY NEWSLETTER
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Iraq
Index
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FOLLOWING THE 1968 Baath (Arab Socialist Resurrection) Party
revolution, Iraq's government pursued a socialist economic
policy. For more than a decade, the economy prospered, primarily
because of massive infusions of cash from oil exports. Despite a
quadrupling of imports between 1978 and 1980, Iraq continued to
accrue current account surpluses in excess of US$10 billion per
year. In 1980 on the eve of the outbreak of the Iran-Iraq War,
Iraq held reserves estimated at US$35 billion. When Iraq launched
the war against Iran in 1980, the Iraqis incorrectly calculated
that they could force a quick Iranian capitulation and could
annex Iranian territory at little cost in either men or money.
Using a number of means, Iraq opted to keep the human costs of
the war as low as possible, both on the battlefield and on the
home front. In battle, Iraq attempted to keep casualties low by
expending and by losing vast amounts of materiel. Behind the
lines, Iraq attempted to insulate citizens from the effects of
the war and to head off public protest in two ways. First, the
government provided a benefits package worth tens of thousands of
dollars to the surviving relatives of each soldier killed in
action. The government also compensated property owners for the
full value of property destroyed in the war. Second, the
government adopted a "guns and butter" strategy. Along with the
war, the government launched an economic development campaign of
national scope, employing immigrant laborers to replace Iraqi
fighting men.
In 1981, foreign expenditures not directly related to the war
effort peaked at an all-time high of US$23.6 billion, as Iraq
continued to import goods and services for the development
effort, and construction continued unabated. Additionally, Iraq
was paying an estimated US$25 million per day to wage the war.
Although the Persian Gulf states contributed US$5 billion toward
the war effort from 1980 to 1981, Iraq raised most of the money
needed for war purposes by drawing down its reserves over several
years. Iraq could not replenish its reserves because most of its
oil terminals were destroyed by Iran in the opening days of the
war. Iraqi exports dropped by 60 percent in 1981, and they were
cut further in 1982 when Syria, acting in accord with Iran,
closed the vital Iraqi oil export pipeline running through Syrian
territory.
The total cost of the war to Iraq's economy was difficult to
measure. A 1987 study by the Japanese Institute of Middle Eastern
Economies estimated total Iraqi war losses from 1980 to 1985 at
US$226 billion. This figure was disaggregated into US$120.8
billion in gross domestic product
(GDP--see Glossary) lost in the
oil sector, US$64 billion GDP lost in the nonoil sector, US$33
billion lost in destroyed materiel, and US$8.2 billion lost in
damage to non-oil sector fixed capital investment. Included in
the lost GDP was US$65.5 in lost oil revenues and US$43.4 billion
in unrealized fixed capital investment.
As the 1980s progressed, the Iran-Iraq conflict evolved into
a protracted war of attrition, in which Iran threatened to
overwhelm Iraq by sheer economic weight and manpower. Although
Iraq implemented some cost-cutting measures, the government
feared that an austerity plan would threaten its stability, so it
turned to outside sources to finance the war. Iraq's Persian Gulf
neighbors assumed a larger share of the economic burden of the
war, but as the price of oil skidded in the mid-1980s, this
regional support of Iraq diminished. For the first time, Iraq
turned to Western creditors to finance its deficit spending.
Iraq's leadership calculated correctly that foreign lenders, both
government and private, would be willing to provide loans and
trade credit to preserve their access to the Iraqi economy, which
would emerge as a major market and an oil supplier after the war.
But the sustained slump in oil prices made foreign creditors more
skeptical of Iraq's long-term economic prospects, and some
lenders apparently concluded that providing more loans to Iraq
amounted to throwing good money after bad. Some creditors were
also wary of Iraq's postwar prospects because of Iranian demands
for tens of billions of dollars in reparations as the price for
any peace settlement. Although Iraq would probably pay only a
fraction of the reparations demanded (and that, most likely, with
the help of other Persian Gulf countries), a large settlement
would nonetheless delay Iraq's postwar economic recovery.
In 1988, as the war entered its eighth year and Iraq's debt
topped US$50 billion, the government was implementing
comprehensive economic reforms it had announced in 1987. Iraq's
new economic policy was designed to reverse twenty years of
socialism by relinquishing considerable state control over the
economy to the private sector. It was not immediately clear if
this move would result in a fundamental and enduring
restructuring of Iraq's economy, or if it was merely a stopgap
measure to boost productivity, to cut costs, to tap private
sector savings, and to reassure Western creditors.
Data as of May 1988
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