The Global Economic Crisis & Iraq’s Future

The Global Economic Crisis & Iraq’s Future

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Last summer, when oil prices reached all-time highs virtually every day, it seemed that one of the few silver linings was a more stable future for Iraq. Surging oil prices appeared to give Iraq a windfall; experts forecast an improving economy that could diminish support for the insurgency and increase resources for Iraq’s nascent security forces. But now that the collapse in the world’s economy has caused oil prices to plummet, what does the future hold for Iraq?

While estimates of Iraq’s dependence on oil revenues vary wildly, oil clearly lies at the heart of the country’s economy. Indeed, median estimates hold that oil accounts for more than 80 percent of its revenues. Iraq now faces several challenges spawned by the global recession. These challenges come just as the U.S.—pursuant to agreements with Iraq’s government—is due to cease its patrols of cities. While a spiral into chaos is not inevitable, there is a clear opening for insurgent factions.

Impeding Iraqi Security

The decline in oil prices has left Iraq short of revenues. Speaking at a London-based think tank in early May, Iraqi deputy prime minister Barham Saleh said that the economic crisis “has had a serious impact” on Iraq’s economy, with “plummeting oil prices” forcing the country “to constrain our government spending.”

Accordingly, Iraq’s government slashed its 2009 budget by about 25 percent, from $80 billion to nearly $60 billion. Yet, despite this reduction in expenditures, around $20 billion of that figure will be deficit spending. This is made possible in part by the fact that a budgetary surplus of around $35 billion remains from the 2008 oil boom.

Jim Durso, who served in the transportation ministry of the Coalition Provisional Authority, predicts that Iraq will try to “make that money last as long as they can, spend it on essential services, and hope that foreign investment can pay for infrastructure.”

However, budgetary shortfalls will likely directly impact Iraq’s ability to maintain security. Over the past two years, the size of the Iraqi security forces has almost tripled—from 250,000 uniformed personnel to 609,000. With less money in its coffers for salaries, Iraq must curtail the expansion of these forces.

Bill Roggio, a civilian military affairs analyst and Iraq specialist, notes that budget problems will also slow down Iraq’s acquisition of military hardware. “There are cutbacks in equipment, armored personnel carriers, and helicopters,” he explained. “The army is also developing to protect the country from external threats, and growth in that capability will slow as well.”

While monetary shortfalls are not the only reason behind Iraq’s decision to curtail some counterinsurgency programs, the Iraqi armed forces are abandoning counterinsurgency tactics that have served the U.S. well since 2007. The Wall Street Journal notes a few examples:

In the Adhamiya neighborhood of Baghdad, once an al-Qaeda stronghold, contractor Hossam Hadi used to send 1,000 military-aged men out on U.S.-funded jobs to pick up trash and repair bullet-riddled storefronts. That work pacified potential troublemakers, but now he’s down to 60 workers. In Baghdad’s Shaab district, residents say that when the constant patrols of U.S. troops gave way recently to Iraqis who manned static posts, kidnappings and robberies rose. And just south of the capital, a former Sunni insurgent hired by the U.S. to keep the peace says his 145 militiamen are angry because they’ve received only a month’s pay since Baghdad took over their program in January.

Budgetary limitations have also impeded Iraq’s ability to pay the salaries of participants in the “Sons of Iraq,” a U.S. military-initiated program that authorized the formation of paramilitary security forces to ensure stability at the local level. The Sons of Iraq had a stabilizing effect, not only because of the capabilities of these local forces, but also because the program provided individuals an economic alternative to the insurgency.

The U.S. transferred responsibility for paying the salaries of Sons of Iraq fighters to Iraq’s government in early 2009, yet the process has been fraught with problems. Time reported in early May that “[n]umerous reports out of Iraq suggest that growing numbers of [Sons of Iraq] fighters have abandoned their posts, and that at least some have returned to the insurgent fold.”

Economy & Infrastructure

The fear that some people who leave Sons of Iraq could return to the insurgency is linked to the broader dynamics of violence in Iraq: many insurgents are driven by economic factors. Writing in the Winter 2009 issue of Middle East Quarterly, American Enterprise Institute (AEI) research fellow Jeffrey Azarva notes, “63 percent of detainees were married, 79 percent had children, and the overwhelming majority lived with their extended family.” When such individuals act as breadwinners for their family, Azarva concludes, “the allure of $200-$300 a month in supplemental income—al-Qaeda’s average recompense for planting a roadside bomb—was simply too strong to resist.”

For now, Iraq will be unable to do what government spokesman Ali al-Dabbagh predicted in 2008: shift its spending focus from security to economy, social spending, and investment. Aside from the high price of security outlays, another problem stems from the fact that government employees received hefty raises last year. The New York Times reported in February that wages ate up 35 percent of Iraq’s budget—and that was before the budget was trimmed.

Many Iraqi lawmakers now fear that the government has gone too far in cutting critical spending. The electricity ministry, for example, has had its capital expenditure budget chopped by over 80 percent, from $6.4 billion down to $1.1 billion. “What can we do with $1 billion?” a ministry spokesman lamented to the Wall Street Journal. “That is nothing compared to all the work we have to do to fix power.”

Michael Rubin, a former Department of Defense official now at AEI, believes that high oil prices had previously covered up inefficiencies in Iraq’s government. “While oil has subsidized the government bureaucracy,” he observed, “any visitor to Baghdad sees how few ‘cranes’ there are. The oil boom simply hasn’t translated into infrastructure projects.”

“Much of the insurgency was greased by cold, hard cash,” Rubin said. “When jobs disappear or young people enter the market to find there are no jobs, they will turn to other paymasters. So long as neighboring states can interject money, they can sponsor a resurgence in sectarian forces or even insurgent violence.”

Will U.S. Commitment Flag?

America’s economic woes, coupled with dwindling political will, make it unlikely that the U.S. will provide additional aid to cover Iraq’s budgetary shortfalls. But it is also unlikely that the U.S. will curtail substantially its current commitments to Iraq.

One reason U.S. commitment will not waver stems from the fact that the course has essentially been set for U.S. efforts. The Status of Forces Agreement (SOFA) signed on November 18, 2008, stipulates that American combat forces will withdraw in three years. The timetable for the drawdown of American commitments has dissipated calls for immediate cuts in war funding.

There are also political reasons that American commitments are unlikely to further decrease. The Obama administration is keenly aware that it could come under fire for “losing” Iraq if the country backslides into chaos. Though the administration is intent on reducing defense spending, cuts to date have mostly impacted conventional and ballistic warfare programs—not programs associated with the irregular warfare in Iraq and Afghanistan. Secretary of Defense Robert Gates said in April that about 10 percent of the budget—a significant portion—would be allocated to counterinsurgency.

Foreign Investment

Iraqi officials hope that foreign investment can make up the revenue shortfalls caused by declining oil prices. Incentives for investing in Iraq certainly exist: improving security makes investment less risky, and Iraq sits on some of the world’s largest oil reserves.

Oil-producers in the Persian Gulf may lead the charge. Sterling Jensen, who played a significant role in the U.S. government’s tribal engagements in Anbar Province, observes that “oil-producing countries got burned by the financial crisis, by investing in the West, and they’re looking to use their capital in the region instead.”

But Gulf money is not the only potential revenue stream. The “Invest Iraq 2009” conference in London earlier this year reportedly attracted more than 200 companies, including heavy hitters like General Electric and Vodafone. Iraq has also opened its oil fields to bids from multinational firms for the first time since 1973, when its oil industry was nationalized. As one British Petroleum (BP) spokesman told the Financial Times, “we could see ourselves back in Iraq by the end of the year barring any unforeseen delays.”

Bill Murray, a political correspondent for the Energy Intelligence Group in Washington, D.C., predicts that investments by foreign oil companies could help to address the country’s economic challenges. “If billions in up-front money from international oil firms becomes available in the fall through new oil contracts, this would obviously fill in part of the budget deficit in the short-term,” he said.

However, questions remain about exactly when foreign funds invested now will boost Iraq’s economy—particularly because these projects will not be operational immediately. Moreover, not all observers think that Iraq will attract the investments it requires.

“If I were a Gulf investor, I’d sit on my cash,” Durso said. “There’s plenty to develop in Qatar.”

Whither the Insurgency?

One might naturally hope that the economic crisis would hurt not only Iraq’s government, but also the insurgency. After all, Iran has been one of the insurgency’s primary backers, and its economy absorbed an enormous blow as oil prices fell.

However, Iran’s funding for the insurgency seems unlikely to slow, for two reasons. First, Iran’s political system is largely immune from the popular will. Demands from the Iranian public to reallocate funds from Iran’s schemes in Iraq to the Iranian infrastructure are unlikely to have an impact within the current system. Moreover, funding for the insurgency is well within the budgetary capabilities of the Iranian Revolutionary Guard Corps (IRGC), the primary state instrument that supports the insurgency.

Michael Rubin notes that the IRGC “have independent resources, through the revolutionary foundations and their own industries, and do not hesitate to apply them in Iraq.”

Looking Forward

Even if Iraq’s economy sags and Iran continues to sponsor insurgents, it is not inevitable that chaos will return. As Roggio posits, “the current problems are survivable as long as the violence doesn’t spiral. But if the enemy takes advantage of this situation, if they’re able to regroup and sustain a campaign, then this can have an impact.”

Independent of the economy, there is likely to be a spike in violence when the U.S. leaves Iraq’s cities. But as Durso notes, “the key question is whether violence goes down again when the Iraqi army and police start to address it.”

Violence aside, economic indicators will provide critical clues about Iraq’s future. One intelligence analyst who recently returned from the Anbar Province believes that major indicators for that region will include the flow of oil and development of the Okaz gas fields.

Other indicators will be important to watch for, too. For example, since economic conditions have fueled the insurgency, a drop in job creation could be a “warning sign.”

While Iraq’s decline is not preordained, the present situation will require its government to make smart, calculated fiscal decisions. Until the American departure, it will be critical for the Obama administration’s Iraq advisors to help guide them.

Daveed Gartenstein-Ross is director of the Center for Terrorism Research (CTR) at the Foundation for Defense of Democracies. He reported from Baghdad while embedded with the 2nd Battalion, 32nd Field Artillery, in May and June 2007. Joshua D. Goodman is CTR’s deputy director.

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