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THE MIDDLE EAST MEDIA RESEARCH INSTITUTE

Economic Studies - No. 25

March 4, 2002

No. 25

I. Iraqi Economists in Exile Analyze Economic Problems and Chart a Course for the Future
By: Dr. Nimrod Raphaeli *

Introduction
This analysis draws on the work of Iraqi economists. It does not pretend to provide a complete blueprint for the future. Rather, the analysis touches upon some obvious issues which would need to be addressed quickly to introduce an element of rationality into a system which seems to have become haywire.[1]

As speculations about the future of Saddam's regime grow, an increasing number of Iraqi economists in exile have begun to articulate their ideas about the lifting of the Iraqi economy from its present morass. As recent events in Afghanistan have demonstrated, some of these economists could one day occupy high policy-making positions in their country and, for this reason, it is interesting and, indeed instructive, to listen to what they have to say.

In Iraq today there is no real or meaningful discussion of economic issues since everything has been subjected to the personal whims of Saddam Hussein, his two sons and a small entourage of loyalists. A search for economic analysis in the only economic weekly published in BaghdadAl Iqtisadi (trans: The Economist) would be in vain. A recent editorial in Al-Iqtisadi brags about one of the journal's great achievements—publishing a centerfold picture of Saddam and his two sons and, thereby, making the weekly a bestseller as buyers sought the picture to display on the walls of their offices. We are loath to make comparisons with a well-known pictorial magazine whose centerfolds make it into a bestseller.

Nor is there a regular budget that records revenues and expenditures. The budget is known as "open budget" which permits the president to authorize expenditures and "generous Presidential Gifts" as he sees fit. In fact, there is hardly a day in which the Iraqi newspapers do not announce a special grant or "a generous presidential gift" for projects or for individuals. For example, Babil, the daily newspaper owned by Saddam's son Uday, writes on its front page this week that the President has ordered [doesn't say whom or from what budget line] the allocation of 4.126 billion Iraqi dinars (approximately $2 million) to construct offices and provide potable water to the Anbar Governorate. State revenues are also a murky area. While the United Nations Sanctions Committee maintains, and publish, exact figures on revenues from oil sold under the "Oil for Food" program and how they are allocated, there is no record of revenues generated by taxes or from the sale of crude oil, at discounted prices, to Jordan and Syria, the sale of diesel oil to Turkey (shipped by trucks) from northern Iraq or the smuggling of oil by tankers to destinations unknown (the only evidence of that is the occasional interception of an Iraqi tanker by the U.S., Iranian or Kuwaiti navies in the Persian Gulf.) Iraq also collects "a commission" of $0.25-$0.50 on each barrel of oil sold under the auspices of the United Nations. Attempts to stop the practice by the introduction of an ex post pricing mechanism of oil has not been successful because buyers reluctantly pay the "commission" to stay on good terms with the Iraqi supplier.

Economic Strategy for the Future
The Iraqi economists in exile suggest that the Iraqi economy in the modern era, meaning after the termination of the Turkish administration in 1918, has gone through four stages: agricultural economy, oil economy, war economy and Mafia economy. To correct the damaging effects of the "mafia" economy which has enriched Saddam and his entourage through illicit and, often violent means[2], these economists present a strategy based on getting rid of debts and compensation, the introduction of modern principles of financial management (including budgeting and accountability), the development of the petroleum sector to its full potential together with the development of non-petroleum industry, and addressing poverty.

Debt and compensation: In 1980, shortly before the war with Iran, Iraq had reserves of $40 billion. By the end of that war, the reserves vanished and Iraq borrowed heavily to sustain the war economy. It is estimated that Iraq's external debt as a result of the war had reached anywhere between $86 and $100 billion but, in the absence of reliable data, no one but few Iraqis know for sure. Since most of the debt was owed to the Gulf countries, particularly Kuwait and Saudi Arabia, Iraq could have negotiated a favorable rescheduling of its debt after the war. Instead, it invaded Kuwait, and by the time it was expelled from Kuwait, the Security Council has required Iraq to pay compensations to states, companies and individuals harmed by its failed adventure. To ensure that the compensations are paid, the Security Council passed a resolution requiring that oil revenues are deposited in a special escrow account administered by a Compensation Committee appointed by the United Nations. Twenty seven percent of oil revenues (later reduced to 25%) were to be earmarked for compensation and another 3% to cover the cost of the weapons inspection panel as well as administrative costs of the UN bodies managing the program.

Since the establishment of the program, 1.6 million claims from individuals, public and private bodies were made for a total of $300 billion. Through September 2000, the committee paid $8.5 billions to individuals and $3 billions to Kuwait, which was due to receive an additional amount of $12 billions to compensate for the damage to the Kuwaiti oil fields torched by Saddam before his forces were driven out of Kuwait. Iraq has not had the money to service its external debt which could become an explosive issue in any post-Saddam configuration unless the lenders decide to forgive some of the debt and reschedule the remainder in an effort to create an amicable relationship with the country.

The Iraqi economists maintain that the failure to resolve the debt and compensation issues in the future would jeopardize any effort to reconstruct the shattered economy and may even cause the conflict with some of the neighboring countries to persist. In fact, these economists believe that a peaceful Iraq that would denounce aggressive intents towards its neighbors and enjoying the support of the West will eventually cause some of the claims for compensation to be withdrawn and for the debt to be cancelled or rescheduled on generous terms. They cite the case of Germany after WWII as an example.

Introduction of Proper Financial Management. Economic statistics on Iraq don't exist. There are no data on revenues, expenditures, foreign trade, the size or cost of public administration, or the size of military expenditures. There are three reasons for this state of data deficiency: first, the concept of "open budget" which allows Saddam Hussein to determine national priorities single-handedly; second, the conditions created by the embargo which deny Iraq full control over most of the oil revenues; and third, the secretive nature of the regime, particularly with regard to expenditures on its armament program, a large military and the various interlocking security agencies under the control of Saddam's son, Qusai. All of these practices will have to be subjected to financial discipline through transparent budgeting procedures based on a set of national priorities arrived at through democratic means or at least through a national consensus.

Development of the Oil Sector. Oil is the mainstay of the Iraqi economy. However, oil installations have suffered from air strikes and, in recent years, from unsatisfactory maintenance. The issue of maintenance is tied to the approval of contracts for spare parts and other equipment for the oil sector by the UN Sanctions Committee. For example, Iraq has submitted to the committee 5,186 contract proposals for oil spare parts for a total of $3.9 billion. The Committee has approved 3939 contracts for $2.7 billion but, according to the United Nations, only $1.06 worth of spare parts have arrived in Iraq by the end of last year.[3]

At present, Iraq exports, legally (under "Oil for Food" program, and illegally (through Syria, Turkey and Jordan) approximately 2.5 million b/d. With a proven capacity of 112 billion barrels and with many regions of the country still unexplored, Iraq could export as many as 4-5 million b/d relatively quickly if oil installations are restored to the pre-war condition and new installations are added.

Iraq will require a lot of capital to develop its oil sector. The Iraqi economists recognize that, for Iraq to reach its full production capacity, international oil companies will have to be invited back to invest in Iraq (interestingly enough, Saudi Arabia has recently done exactly that.)

The growth of the oil sector as a component of GDP has been phenomenal. The oil sector represented 2% of GDP in 1950s, 15% in the early 1970s and 50% by mid-1970s. Currently, oil exports represent 90% of total exports and 95% of foreign exchange. The oil sector depends very much on economic and political forces, often outside the control of the oil producing countries, Iraq included. Iraq will have to use surplus oil revenues, foreign direct investments and perhaps even aid money to rebuild its infrastructure, revitalize its agriculture (which have lacked fertilizers because of restriction on their importation for fear of linkage with Iraq's chemical weapon production) take advantage of its enormous gas reserves and develop petrochemical industry. One economist observed that oil, like coal, is "a threatened wealth," and it is important for "oil to become again part of the economy rather than the Iraqi economy becoming a part of oil."

Freeing the Economy from its Shackles. Thirty years of Ba'ath party brand of socialism both in Syria and Iraq have left both economies crippled and shackled by oppressive bureaucratic controls and an infinite number of counterproductive rules and regulations. Economic energies were stultified, entrepreneurial spirit all but destroyed and economic technocrats occupied all critical positions. In the case of Iraq, private initiative was limited to illicit activities by a small group of party leaders, as well as senior commanders of the armed forces and the all-intrusive secret services. Under the Ba'ath form of socialism, the waqf were nationalized because they were considered "dead capital," land was confiscated in the name of agrarian reform, and domestic and external trade were taken over by the central government to fight exploitation. A post-Saddam, post-Ba'ath economic regime would have to liberate the entrepreneurial energies of the Iraqi businessmen, privatize public and nationalized industries and businesses and encourage the introduction of modern business practices.


II. Regional Economic News

Water Struggle in the Nile Basin
This is the title of a third book by Sahib Al-Rabi'i on the issue of water in the Middle East. His two previous books dealt with the Jordan River basin and the Euphrates and Tigris basin (see our report No. 14 on the Euphrates and Tigris basin).

The issue about the Nile basin is similar to the two other basins—a relatively fixed quantity of water to satisfy the needs of growing population. Specifically, Al-Rabi'i offers a number of reasons affecting the struggle for water in the Nile River basin:

First, the building of dams by countries at the river's headwater reduces the amount of water to the other riparian countries. Ethiopia's plan to build a dam on the Nile River will affect the flow of water to Sudan and Egypt.

Second, population explosion and its need for water, whether for agriculture or personal use (often at higher rates than before because of the urbanized pattern of living)

Third, there have been waves of drought in addition to growing desertification due to climatic changes in the world.

In the concluding chapter of his book, the author compares between the three principal basins in the Middle East and concludes that the basins are subject to "an outburst of struggles in the next two decades and perhaps even earlier if drought worsens and water declines below its normal levels."[4]

The World Bank has financed a project to improve the management of the Nile River Basin in both Sudan and Egypt. The first phase of the project at the headwater will seek to reduce desiccation. The second phase will provide an early warning system about floods to allow measures to be taken to protect agriculture and people, particularly in Sudan.[5]

European-Mediterranean Bank May be Established in Cairo
A mission from the European Investment Bank (an arm of the European Commission) will visit Cairo early next month to discuss the feasibility of establishing a European-Mediterranean Bank, to be headquartered in Cairo, in the framework of the Barcelona Initiative for European-Mediterranean cooperation.[6] International banking sources doubt the need for yet another multilateral bank in the region.

Arab Countries Attracts Small Share of Global Tourism
A report issued by the Egyptian Federation of Tourism indicates that inter-Arab tourism reached 24% of total Arab tourism worldwide.

Total global tourism revenues in 2000 were $475.8 billion of which about $13.2 billion was earned by Middle Eastern and North African countries, or 2.8% of the total. The report characterizes the amount as "insignificant" considering the tourism attractions in the Middle East. [It is not clear whether Israel was included in the report][7]

Decline in Oil Prices Causes Losses to Gulf States
The decline in oil prices in 2001 reduced the oil revenues of the members of the Gulf Cooperation Council from $120 billion in 2000 to $85 billion in 2001, or by 30%. Dr. Walid Khadouri, the chief editor of the Middle East Economic Survey (Cyprus) said that OPEC members cannot take decisions in isolation of global developments, chief among them are the difficulties faced by the American oil industry, the situation in Iraq and the common violations of the oil producers of the quota system. OPEC oil is also facing new challenges of additional producers coming into the market, and the introduction of alternative sources of energy, particularly in the transport sector. [8]

Egyptian Gas to Jordan
The Arab Fund for Economic and Social Development and the Kuwaiti Fund will contributed $50 million and $100 million, respectively, to construct a gas pipeline to carry Egyptian natural gas to Jordan at the first stage and, ultimately to Syria and Lebanon at later stages. The pipeline will have a capacity to carry1 billion cu.ft. of natural gas daily, extracted from the Mediterranean Sea near El Arish (in Sinai) to Taba on the Gulf of Aqaba and across the Gulf by underwater pipeline to Jordan [no location was identified.] The total distance is 258 km or 143 miles.

Egypt is currently producing 7.93 million tons of natural gas a year of which 4.13 million tons are for local consumption and the balance for export. Confirmed natural gas in Egypt stands at 1500 billion cubic meters and the total estimated but unconfirmed volume of natural gas stands at 3000 billion cubic meters.

Egypt is increasingly becoming a significant producer/exporter of natural gas. The country has already signed contracts with British Gas, Gas de France and ENI (Italy) to supply liquefied gas to Europe.[9]

Al-Azhar Condemns Copyright Infringement At his meeting with producers of computer programs, Sheikh Ibrahim Atta Allah, Director General of the Islamic Da'wa Al-Azhar, said that "piracy is the worst type of theft and is prohibited by Islam." He said Islam forbids software copying and the use of profit of copyrighted material without prior approval from the owners. He added: "Such illegal trade and profit are prohibited by Islam." He went on to say that "theft is a theft whether it is between Muslims and Muslims or between Muslims and non-Muslims." [10]

Syria and Turkey Ease Tensions and Renew Discussions on Water
As a sign of growing relaxation of relations between Turkey and Syria, the two countries opened their borders to thousands of citizens on the occasion of Eid Al-Adha (Feast of Sacrifice) celebrated by the Muslim world last week. In previous years, citizens of each country exchanged holiday greetings with each other's relatives across barbed wires.

The warming up of relations between the two countries is reflected in more than 12 rounds of negotiations at the ministerial level, the visit to Damascus of more than 1000 Turkish businessmen and the formation of a Joint Businessmen Council. Trade volume has increased in 2001 by 35% compared with previous year and reached $1 billion, including $750 million of Syrian exports to Turkey, primarily crude oil.

As a result of these developments, Turkey has agreed to re-convene the tripartite technical water committee comprising Turkey, Syria and Iraq. The committee has been in abeyance for the last 9 years. It is also expected that President Asad will visit Turkey—the first for a Syrian president.[11]

Turkish Trade Delegation Will Visit Baghdad
A delegation of 150 Turkish businessmen, under state secretary Kursat Tuzmen, will visit Baghdad on March 4 to negotiate trade agreements with Iraqi officials. The timing of the visit will coincide with the opening of the fourth exhibition of Turkish products which will be hosted by Baghdad on March 1-5.

While it is seeking to expand its trade relations with Iraq Turkey is concerned that an American attack on Iraq will undermine one of Turkey's major markets. Turkey is also concerned that the destabilization of Iraq will lead to the creation of a Kurdish state on its border which Turkey opposes strongly. [12]

Moscow Threatens "a Price War" with OPEC
Indications are that Russia may terminate the restrictions on the export of its oil, beginning the second half of next month. Russian oil companies are pressing their government to withdraw from any ceiling on production agreed with OPEC and allow Russian oil companies, almost all privatized, to garner a larger share of the market. This would mean, according to OPEC sources, "a price war" between OPEC and the second largest exporter of oil (after Saudi Arabia.) At the same time, the Russian Minister of Energy, Igor Yusufov said that Russia should refocus its oil exports from crude oil to oil derivatives.[13]

Egyptian Exports to Iraq May Reach $3 billion
Iraqi Minister of Trade Dr. Muhammad Mahdi Saleh said that Egyptian exports to Iraq have reached $2 billion and will reach $3 billion at the end of this calendar year. It was not clear in what time frame the $2 billion of Egyptian exports have taken place. He said Iraq gives priority to Egypt in the spirit of "brotherhood and collaboration" and in recognition of the efforts by Amru Musa, the Secretary General of the Arab League to restore Arab unity. [14]

Strengthening Regional Telecommunications
Egypt and Syria have agreed to establish a committee that would review the feasibility of strengthening telecommunications between them as well as with Lebanon and Jordan. The equipment would be supplied by a joint Egyptian-German company and a joint Syrian-Korean company. [15]

Iraqi-Syrian Oil Connection
Oil sources indicate that Syria is receiving 150,000 b/d of Iraqi crude oil through the Kirkuk-Banias pipeline which was reopened in November 2000 after being closed for about 2 decades. The flow of oil is a violation of the Security Council resolution establishing an embargo on the export of Iraqi oil other than through the "Oil for Food" program. Syria, which occupies a seat on the Council since January 1, told the Council that Baghdad and Damascus have only "tested" the pipeline, but it is not used for the transfer of crude oil on a regular basis. [16]

III. Country Economic News

Uncertainties and Hesitation about Privatization in Egypt
Economic circles in Egypt found themselves in a quandary regarding the government's policy with regard to privatization to which it has committed itself during the recent donors' meeting in Sharm Al-Sheikh. The Minister of Public Works, Mukhtar Khattab, declared on February 20 that the sale of companies in the public sector will be stopped because of failure of domestic and foreign investors to submit bids to buy them. Twenty four hours later he reversed his position and declared that the state was determined to continue the privatization program "due to the successes achieved." In a press conference, he said the program is progressing satisfactorily despite the economic circumstances after September 11. He added that the program is an important instrument to innovate the Egyptian industry because it brings new styles of management to the privatized companies.

With regard to the privatization of the power and telecommunications companies, there appears to be a disagreement between the prime minister and a majority within his cabinet about the timing for action. The prime minister favors immediate privatization in the national interest (and fulfilling commitments made to the donors at the Sharm al-Sheikh donors' meetings) while the majority counsels a delay for reasons that were not made public (most likely concerned about the employment status of a large number of workers who may be thrown out of work by a private employer.) [17]

Egypt has also decided to postpone the privatization of banks. According to Al-Hayat, control over the banks allows the government to make grants and loans to ensure the loyalty of the "national capitalist class"[18]

Iraq: Fellowships for Males Only
The Iraqi Ministry of Higher Education and Scientific Research announced the availability of a number of graduate scholarships for studies in Russia in the fields of science, engineering, agricultural mechanization, accounting, and financial management.

The ministry also announced the availability of fellowships at the Indian Institute of Technology for graduate studies in alternative water energies.

In both instances, the scholarships and fellowships are available for males only.[19]

Syria: $2.5 Billion Transferred Illegally through Travel Agencies
In the absence of private banks, the inefficiency of government banks and the restrictions on foreign exchange (forex), Syrian businessmen and citizens have found alternative, if illegal, means to address their needs for forex.

These travel agencies work in complete secrecy and through reliable intermediaries who can transfer any amount of money overseas, charging a commission of 1-5%.

According the Syrian ministry of transport there are 400-500 such agencies. It is estimated that 50% of Syrian imports, or LS125 billion (approximately $25 billion) are financed through these agencies. They are the main channel for the transfer of money from Syrians working abroad to their families. In fact, they are so efficient that they are also used for a quick transfer of money within Syria.

The penalty for illegal trading in forex is up to 15 years in prison. [20]

Lebanon Concerned About Economic Siege
'Ali Qansu, the Lebanese Minister of Labor said that Lebanon is being subjected to economic siege by the great powers for political reasons. This siege may mean the cancellation of Paris Conference 2 (to reschedule Lebanese debt) as well as the termination of aid to Lebanon. The cancellation of the meeting, says Qansu, does not mean that Lebanon must surrender its principles, particularly with regard to the resistance movement, the relations with Syria and the spreading the army to the south [on the border with Israel, currently under the control of Hezbollah].

The minister expressed his regret about the public debate in the country that has acquired an open communal orientation, following the government decision to abrogate the exclusive dealerships [which were under the Christian domain][21].

IMF Questions Israel Assumptions on Deficits
The International Monetary Fund (IMF) maintains in its semi-annual consultation with Israel that the budget continues to deviate from the government's medium-term objective of reducing expenditure and debt as a share of GDP. The IMF questions whether the government can achieve its deficit target of 3% of GDP this year. It suggests that this figure could be higher by as much as 1.5 or 3%.

On the other hand, the IMF says that the Israeli economy has withstood major exogenous shocks remarkably well so far. Once global demand begins to recover, there is a good chance that the economy will return to its high potential growth path relatively quickly. [22]

Jordan to Sell its share in Cement Company to Palestinian Authority
The Jordanian Government has decided to sell its 41% share in the Jordanian Cement Company to the Palestinian Authority. The company is one of the five largest companies in Jordan [and Israel is one of leading markets.] Jordan has previously sold 33% of its share to Lafarge, one of the major French companies. No price was quoted.[23]


[1] Kadhem Jawad Shibr, "Oil for Food," Al-Mu'tamar, February 2-8, 2002; Shibr, "Economists call for a Strategy to Rid the Iraqis of Debts and Compensations;" 'Adel Abdel Mehdi, "Early Strategic Consideration to Deal with Foreign Debts and Compensations;" and D. Ayyad ‘Abbas, "Capitalists in Socialist Garb," all three articles appeared n Al-Mu'tamar, February 9-15, 2002.

[2] Recently, Vice Premier Tariq Aziz's son spent more than 100 days in prison for cheating Uday Saddam Hussein of his share in a business transaction. His sentencing last September for "economic crimes" was a first page news item in the Iraqi newspapers.

[3] United Nations Office of the Iraq Programme –oil for food. Weekly Update (16-22 February 2002), February 26, 2002.

[4] Al-Mou'tamar (London), February 16-22, 2002.

5] Al-Hayat, February 18, 2002.

[6] Al-Hayat, February 25, 2002.

[7] Al-Sharq Al-Awsat, February 26, 2002.

[8] Al-Hayat, February 19, 2002.

[9] Al-Hayat, February 26, 2002, and Al-Ahram, February 27, 2002,

[10] Al-Hayat, February 26, 2001.

[11] Al-Hayat, February 22, 2002.

[12] www.Al-Jazeera. Net/economics. February 26, 2002.

[13] Al-Hayat, February 22, 2002.

[14] Al-Thawra (Baghdad), February 25, 2002.

[15] Al-Sharq Al-Awsat, February 26, 2002.

[16] www.al-jazeera.nt/economics. February 22-3, 2002.

[17] Al-Hayat, February 22, 2002.

[18] Al-Hayat, February 24, 2002.

[19] Al-Iqatisadi, February 23, 2002.

[20] Tishreen, February 16, 2002; Al-Hayat, February 24, 2002.

[21] Al-Safir, February 25, 2002.

[22] IMF, "Israel – Interim IMF Staff Visit," February 26, 2002. Also, Al-Hayat, February 27, 2002.

[23] Al-Hayat, February 26, 2002.


*Dr. Nimrod Raphaeli is Senior Analyst of MEMRI's Middle East Economic Studies Program.


 

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