Iraq’s Money and America’s Responsibility

$80 billion can buy a lot of things – a tropical island or ten Caecescu palaces jump to mind – but what it can’t buy is infrastructure for a country with a population of almost 28 million people that is emerging from five years of ruinous geo-political and sectarian conflict.

As violence tapers off, oil exports increase, and global crude prices remain high, Iraq’s economy is set to grow by 8 percent in 2008 and will end the year with a predicted $79 billion budget surplus, according to a report by the U.S. Government Accountability Office.

But with the U.S. presidential campaign in full swing the Democrats are lashing out at Iraq for draining American money and American lives. The media machine has been in overdrive, with scathing attacks from both neo-con and liberal commentators scoring points on the same issues: U.S. lives, U.S. money, and the impact on the lives of U.S. consumers.

They demand that Iraq now pay is own way for reconstruction and embrace a potentially tragic cut-and-run strategy that could lead to further internal and regional instability.

It is clear that only a prolonged long-term investment, combining economic, military and political initiatives can restore the home of Arab cultural and economic development.

As Naomi Klein put it in a piece for the Guardian newspaper, “The country’s invaders should be paying billions in reparations not using the war as a reason to pillage its richest resource.” She was of course talking about Big Oil in Iraq, but the sentiment sticks: The U.S. and the Allies at the very least owe the people of Iraq a basic infrastructure, let alone a guarantee of minimum security in which to rebuild.

American dollars, $48 billion to be precise, have been spent since 2003 on reconstruction and rebuilding projects. US Aid, Provincial Reconstruction Teams and Microfinance credit initiatives are all examples of U.S. efforts to rebuild the country, not to mention the hundreds of schools, hospitals, water plants and generating stations built by Allied forces.

Having closely monitored Iraq’s economic development for the past 18 months, I can testify to the changes taking place. Daily reports from local media and regular feature stories from foreign news agencies talk of reconstruction projects in Baghdad and beyond: solar street lighting, repaving of city streets, beautification projects in public squares, new parks and leisure attractions and the return of some sort of nightlife in urban areas.

But these projects – some complete, some in progress, most not even begun – are barely a start to what is required. A cliché such as ‘tip of the iceberg’ would not do justice to the mess the country is in.

Daily conversations with our correspondent in Baghdad or with a friend in Anbar province paint a picture of such incredible hardship that you wonder how anything at all gets done. Reports flood my inbox: of sewage piling up like mountains, hours upon end without electricity in 40 degree heat, no running water, and 40% unemployment.

Iraq lacks even the most basic of infrastructure for its residents. Electrical generating capacity runs at just over 40% of demand; in a country awash with oil the government spends billions each year on fuel imports; and overpriced, shoddy goods from Syria and Iran flood the consumer market.

And so the call grows ever louder: “Don’t sit on it, spend it.”

U.S. and Iraqi officials have privately admitted that money has not been spent quickly enough, and that not enough is being done to improve the lives of ordinary Iraqis. Local businessmen blame the authorities’ lack of experience and a shortage of skilled local contractors (due to the brain drain since 2003). Security is cited as the biggest issue.

Corruption has eaten away plenty of funding. The Iraqi government launched its own watchdog, the Integrity Board, to go after official fraudsters, but reports indicate that its members have been thwarted by internal party politics – although a recent statement from a senior official indicated that many of those accused of crimes have now fled the country for fear of prosecution.

Safeguards have been put in place by Iraqi and U.S. officials to regulate government spending better, but even these can have a limited impact. A report on Tuesday revealed that the U.S. has spend over $100 billion on private contractors in Iraq since 2003, and several America-based firms have been charged with waste.

Sub-standard construction, projects unfinished, wildly over-inflated costs arising from no-bid or single bid offers are all indicative of this. Everyone knows the story of Dick Cheney and Haliburton.

Iraqis themselves are naturally bitter that the government is sitting on all this money that’s going nowhere, but piles of cash alone don’t solve social and public service problems.

A glance need only be cast at the oil flush GCC states to prove this: The government of Kuwait on Sunday had the cheek to link Iraq’s budget surplus to the war debt it owes the Kingdom, totalling $16 billion, the very same government that earlier in the year spend billions to subsidise private bank debts run up by its own citizens.

If you read the comments of Democratic Senator Carl Levin, a pattern of shirking responsibility emerges: “We should not be paying for Iraqi projects while Iraqi oil revenues continue to pile up in the bank, including outrageous profits from $4-a-gallon gas prices in the U.S,” he said last week.

Yes, indeed. Why should innocent Iraqis, who have been tortured and impoverished, receive support when the governments of the U.S., Saudi Arabia, and Kuwait have to subsidise the reckless spending of their own citizens? Would someone like to remind me how many hundreds of billions have been lost in this credit crunch, or how many jumbo jets oil-rich sheikhs need for their private use?

For the sake of parity however, and for the sake of preserving my capitalist credentials, I invite you to play the numbers game with me:

Iraq announced a supplementary budget of $21 billion which was approved by the parliament last week, on top of a record $47 billion budget set at the start of the year. The lion share of this money is for expenses, with only a fraction for investment.

The Coalition Provisional Authority, which ran Iraq from April 2003-June 2004, threw the country’s economy wide open to the principles of the free market and wound down many state run factories, with tens of thousands of job losses as the result. The insurgency then all but halted private sector growth and foreign investment, and the FDI has remained “depressed since 2003” according to the Economist Intelligence Unit.

Both foreign and Arab capital inflows into Iraq have been slow. Kuwaiti financial firms have taken small stakes in local banks, Turkish and Iranian companies have been doing brisk business in the north and south respectively, and the odd Saudi or Lebanese investor has popped up for construction projects, yet most of the money coming into the country stubbornly heads to the all but independent Kurdistan province. Furthermore, none of these sums together could make much headway, even if the projects they fund were completed overnight.

A news report on Monday said that Iraqis still depend heavily on the government for jobs and that 30,000 new government jobs are to be created this year. Most of the $125 billion worth of projects currently being undertaken in the country has been underwritten by the government.

Oil remains the biggest source of revenue in Iraq. It will account for over 90% of government funds for 2008 and the foreseeable future, and oil and gas are the only sectors to truly to be receiving foreign attention on a scale needed to rebuild the country. Most of these resources are earmarked for export.

Therefore, the biggest blow to those who say that Iraq should “pay its own way” is the slide in global oil prices. U.S. crude has fallen by about $35 from its record high struck in July, and this does not factor in Basra Light Crude (the main Iraqi export) which is sold at a discount and at a government controlled price set at the beginning of each month.

London-based research house Business Monitor International released a country economic forecast for Iraq on August 6th that criticizes those who think that Iraq is going to be able to pay is own way anytime soon.

Titled “From Surplus To Deficit”, it opens with: “While current high oil prices will provide a boon to central government finances this year, we expect the budget to fall into deficit in 2009, and for deficits to widen over the forecast period.”

Taking a negative view of oil prices and capping oil production at 3.3 million barrels per day, BMI expects “oil revenues to contract around 17% in 2009, and then to continue to fall, but at a slower rate, over the remainder of the forecast period [2008-2012].”

The report says that government subsidies will continue to grow and that current expenditure will increase 30% in 2008. BMI also believes that the government will embark on a costly economic stimulation programme: “We therefore expect current expenditure to continue to grow, and for investment expenditure to increase at double-digit rates over the forecast period.”

With 69% percent of the 2007 investment budget spent, up from the 22% achieved in 2006, and a better security situation allowing for these numbers to grow, Iraq’s finances will be stretched. As the last of the U.S. reconstruction allocation is spent, oil revenues contract, and economic diversification and private sector growth progress slowly, Iraq will reach a budget deficit in of 6% in 2009, and 20% in 2010, according to the report.

All of these predictions are based on an uncertain future for Iraq. Government spending may not rise drastically, but any collapse of security could send the oil firms running and revenue plummeting.

As global market conditions limit investment and multinationals shy away from risky propositions, Iraq will be the first to suffer. So in addition to the moral responsibility of the U.S., its Allies and Iraq’s Arab neighbours to stay the course, market principles further support this proposition.

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4 Comments

  1. Posted August 16, 2008 at 4:27 pm | Permalink

    It would be a more fair comparison to compare Iraq’s infrastructure to where it was before the US invasion. I have read reports that Iraq has more electrical power now than before 2003(though, it is more spread out).

    From everything that I have heard, Iraq’s infrastructure still has a long way to go, but is better off, as a whole, after US investments.

    What a strange world we live in when we think that the US has a ‘moral obligation’ to a conquered country? The US won, they can do what they want with the spoils. Fortunately, they are kind and are investing, at their own expense, in providing a brighter future for Iraq. The only way to properly describe it is charity.

  2. Oliver Pearce
    Posted August 18, 2008 at 9:11 am | Permalink

    Dear James,

    Thank you for your comment. I would like to take this opportunity to say that your comments on Iraq’s infrastructure are patently untrue.

    Yes, the U.S. has invested heavily in Iraq, and new hospitals, electricity stations, water plants and schools have popped up, as I wrote in my report.

    However, the number of uncompleted projects is high, and the GAO has reported in the past that billions have been wasted on unfinished U.S. reconstruction projects – awarded to both U.S. and Iraqi companies.

    Saddam’s regime did not provide for all areas of the country, indeed the national grid was built largely to serve Baghdad and isolate the Kurds and other rebellious regions, yet the basics were provided.

    Mounds of sewage were not the norm under his regime, nor was a massive lack of electricty in cities or running water.

    Saying that Iraq is “better off” when its urban areas are filled with depravity and lack of basic public utilies and services is incredibly insulting and patronising to the people whose lives have been ruined since 2003.

    I was, and still am, an advocate of the war, but we cannot turn a blind eye to events on the ground, despite some sections of the media to portray Iraq as a major improvement.

    Please feel free to take this up with my via my email.

    Regards,

    Oliver

  3. Oliver Pearce
    Posted August 18, 2008 at 3:35 pm | Permalink

    Iraq announced on Monday that it will take $400bn to rebuild.

    http://www.easybourse.com/bourse-actualite/marches/iraq-needs-S400-billion-to-rebuild-infrastructure–506782?PHPSESSID=c8c716e29caea5aec2d37d4163932a9a

  4. steve
    Posted February 8, 2010 at 4:16 am | Permalink

    As Iraq’s infrastructure was held together with string and sticky tape at best before the war, at the end of a very short war, what did the Iraqi’s do, go on a looting spree haveing it away on their toes with anything and everything, putting their country back into the dark ages, so of course rebuilding is going to take a lot longer, plus Iraqs infrastructure to start with was a lot worse than anyone had expected, Saddam useing the oil for food money to build more palaces instead of useing it for food and medicine for the people of Iraq as was the deal for that oil sale
    Saddam was the butcher of Baghdad and the rest of Iraq
    Now if the CBI would just get on with the RVing of the Iraqi dinar then the Iraqi’s will be OK
    Have a nice day and stay lucky, S.