Tuesday, December 06, 2005

Economic Growth without Oil

One item that Western media often neglect to mention about Iraq is the state of the economy – or how well the economy is doing. According to Wikipedia, the growth rate (real rate, not nominal) for Iraq in 2004 is 52.3 percent. And the prediction is that the economy will continue to grow. The forecast according to the Economist will be 26 percent for the year 2005-2006.

The most interesting fact about the current Iraqi economy is that it is not petroleum based. Many war critics often criticized that oil production in Iraq is still below pre-war level; and they are correct. This means that Iraqi economic growth has little to do with oil. In fact a CNN Business article dated August 23rd, 2002 titles: “Iraq economy shrinking, despite oil.” The economy shrank despite higher oil production in 2002 but grew despite lower oil production in 2005.

I have argued before that raw material based economy – particularly petroleum based economy is unhealthy.

…oil [is] a curse because it creates a dysfunctional relationship between the people and the government. It further remove incentives for entrepreneurship, a key factor to economic progress. A future Iraqi government with a large oil revenue does not need to listen to her people since the money do not come directly from the people. There is no need for accountability. State revenue can be squandered on any frivolous project because oil revenue is readily available. Furthermore a large part of the economy, labor and capital, will revolve around the state-owned petroleum industry deprive Iraq of economic diversification.

Therefore, it is a very good sign that Iraq economy grew without oil. And no one (whether the Bush administration or the current Iraqi government) should takes credit for the economic growth. The credit belongs to the entrepreneurial spirit of the Iraqi people. There are several thousands new businesses are being registered every year (there are thousands more businesses that ignore the registration rule). It is the new enterprising spirit that allows a 52.3 percent growth in the worsening security environment (2004 is the most violence year since the fall of Baghdad).

The Iraqi people will find out that it is possible to experience wealth and prosperity without depending on the volatile oil market. It will allow them to diversify their economy by investing in many different industries. There are still many problems. Unemployment remains high – 30 percent. The banking industry, essential to investment, is nonexistent. But if the economy of Iraq grew despite numerous obstacle; one can only imagine the future when those obstacles are removed.


Anonymous Anonymous said...

great article!

9:15 PM  
Anonymous Anonymous said...

52 percent! Please, citing a source where anyone can update the data does not sure it's accuracy. I would love to hear about high growth rates in Iraq as a testament to their progress. I trust the Economist and mid 20's in this day and age is impressive.

7:56 AM  
Blogger NYkrinDC said...

I generally trust Wiki, but given recent incidents and knowing how politicized this issue has become I tend to look for other sources.

The Economist Intelligence Report states as follows:

Outlook for 2006-07: Economic growth

Real GDP growth in 2005 has been constrained by the stagnation over the year of oil output, which, although having picked up in November, contracted significantly in October. We now estimate that the average for 2005 will have failed to reach 1.9m b/d—almost 7% below the 2004 figure. Non-oil GDP (which is estimated to account for some 25% of total GDP) is estimated to have performed more robustly in real terms, although security problems have discouraged private consumption and investment, curbing the pace of growth. Given ongoing security problems in 2006, we expect oil output to rise only gradually, and the non-oil sector to continue to be subject to the constraints on reconstruction projects and slow disbursement of funds. As a result, we estimate that real GDP will have contracted by 3% in 2005, but project real growth of around 6% in 2006 and 8.5% in 2007. If the security situation deteriorates even further, then even the modest increases we forecast in oil output will not be possible, and the non-oil sector will also suffer.

So it seems, according to the EIU that although there has been growth it is less that 56%. That said, any growth in the non-petroleum sector is good for the future of Iraq.

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