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You are here: Home > Current Topics > Mind your Business > 18 April 2005 |
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April marks the two-year anniversary of the downfall of Saddam Hussein. The removal of the dictator was meant to be the start of a new era for Iraqi people - the beginnings of a new prosperity and of being welcomed into the international fold. Economic growth in Iraq was estimated at 52% in 2004 - impressive by anyone's standards - or is it? Inflation currently stands at 30% and unemployment is estimated to be as high as 70% whereas other estimates put the figure at between 25% and 50%. The supply of public utilities such as water and electricity is very patchy and the ongoing violence is a significant factor in limiting the much-needed investment in the infrastructure of the country. 
Image: Iraqis swim in a temporary lake formed following an attack on a major water pipeline in 2003 in Baghdad. The attack, believed to be the work of anti-coalition saboteurs, cut off water supplies throughout northern parts of the city. The American army are still viewed with suspicion and downright hate by some Iraqis who do not see them as the liberating forces that Mr Bush likes to portray. The US forces, however, are unlikely to pull out soon even if they wanted to - the security situation is still extremely fragile. It is a 'Catch 22' situation for the Americans - the Iraqi authorities have yet to build up a sufficiently large and efficient security force to be able to police the country themselves but the violence against US forces and those often working for companies funded by the US taxpayer to re-build the country necessitates the continued presence of the US. Yet, it is that very presence which is the subject of so much of the insurgency! The country, however, is still, potentially, a very wealthy country. One of the reasons for the US involvement in Iraq has always been, according to the sceptics, its oil reserves. A recent book by investigative journalist Linda McQuaig, suggests that the Bush administration had identified Iraq as being an important foreign policy objective because of its oil reserves long before 9/11 - not the most astonishing of claims maybe but one which McQuaig claims to offer evidence for rather than mere anecdote. One source she cites suggests that Iraq 'is the most sought after real estate on the face of the Earth. It is the superstar of the future'. 
Image: A US soldier and an Iraqi fireman discuss how to extinguish burning oil pipelines as a result of sabotage. Iraq has plentiful oil supplies but the successive conflicts in the region involving Iran, the first Gulf War and the war over the last two years have dramatically reduced Iraq's capacity to extract this valuable resource and earn the revenues to invest in the country. If Iraq's natural resources are as valuable as this quote suggests, when are the people of Iraq and the rest of the world, currently facing record oil prices, going to benefit from them? This is a question all Iraqis are asking as they struggle to come to terms with not only what has happened to them in the last two years but in the previous 25 years. Iraq should be a prosperous country but the experiences of the past three decades have now left Iraq on a par with Haiti in terms of its level of poverty. 
Image: Disruption to Iraq's oil supplies, its major source of export revenue, is not a new problem. A Sea King from 846 Squadron based at Yeovilton in Somerset, south west England negotiates its way through the burning oil fields of Iraq during the first Gulf War of 1991. Saddam Hussein's troops set fire to the oil fields as they retreated causing massive disruption to oil supplies. |
Economic growth is measured by changes in the value of output of goods and services in an economy during a given period - normally a year. By value of output, we mean the number of goods and services produced during that time period multiplied by their price.
Image: Despite it being two years since Saddam was overthrown, many Iraqis still have to rely on handouts to survive.
Title: Humanitarian Aid Reaches Iraqi Town Of Safwan. Copyright: Getty Images, available from Education Image Gallery
For example, if an economy produced just oil (for the sake of this illustration) and produced 500 barrels priced at $50 per barrel in 2004, its Gross Domestic Product (GDP) would be $25,000. If, in 2005, it produced 550 barrels still priced at $50 then its GDP in 2005 would be $27,500. This would represent economic growth between 2004 and 2005 of 10% (the difference between the growth in 2005 and 2004, divided by the value of output in 2004, multiplied by 100).
Notice that the price level in the simple example above has been kept the same. It is important to note the impact of prices on GDP figures as inflation, different price levels and exchange rate differences can give false impressions of what is really happening.
For example, if the price of oil had risen from $50 to $75 per barrel, economic growth in our illustration would have been $41,250 - a rise of 65%! For this reason, prices are usually expressed in constant terms - this means that changes in prices are stripped out of the calculation so that we can compare the rise in the volume of production only. Real GDP figures, therefore, give a more accurate picture of what is happening to economic growth.
Another thing to be careful of when looking at economic growth figures is the use of percentage changes. The rate of growth is important but it must be viewed cautiously. A 25% rise in economic growth might sound impressive but you might need to ask what the starting point of the calculation is (remember how the calculation is performed!). In addition, strong growth in the economy might suggest that aggregate demand is rising faster than the ability of the economy to supply the goods and services demanded. As a result there can be shortages, which lead to continued price rises (inflation) and result in balance of payments problems as the level of demand 'sucks in' imports from abroad.
Aggregate demand (AD) is the sum of all expenditures in the economy and can be viewed as the constituent parts of economic growth. AD = C + I + G +(X - M), where:
C = consumption expenditure (spending on all manner of goods and services - food, clothing, furniture leisure, etc.)
I = Investment expenditure (spending on capital equipment, machinery and buildings)
G = spending by government on public services - health, education, defence, etc.
and (X - M) or net exports = the difference between the revenue earned from selling goods abroad (exports) minus the amount spent on buying goods from abroad (imports)
Looking at AD can give us the clue to what might drive economic growth in a country, and equally, what might limit such growth. In a country like Iraq, consumption spending and investment will have been seriously disrupted because of the war. Getting investment going is essential to economic growth. Such investment represents the spending on machinery, equipment and buildings - things that are not used for their own sake but for the contribution they make to production.
Investment is so important because if there are the means to produce consumer goods and other capital goods, then this in turn will generate incomes for those involved who in turn will demand more goods and services which require machinery and equipment to produce and so on. Such a process is how wealth is created.
Image: The health services in Iraq are stretched to the limit in dealing with the problems of insurgency as well as the effects of years of malnutrition caused in part by the sanctions imposed by the West, Saddam's treatment of his people and the lack of investment in the health service by his government.
Title: Landmine Victims Treated At Kurdish Hospital. Copyright: Getty Images, available from Education Image Gallery
For wealth creation to be really effective, a country needs to have supplies of raw materials that it can exploit. This means effectively having enough to satisfy the needs of the country itself and a surplus that you can sell to others. The income generated from that surplus is what can be used to invest in further industrial plants to help generate surpluses in other products and so continue to generate wealth. That is how the UK became such a powerful economic force during the industrial revolution. Investment helps to improve efficiency and output thus adding to the surplus that can be sold.
When income and wealth is generated, governments are able to tax part of that income and wealth to form government revenue. Once governments receive this revenue they are able to use it to spend on public and merit goods.
Public goods are goods and services that could not be provided by the market because of something called non-excludability in consumption. This means that if it was provided by a private firm (for example, street lighting or justice), then it would be difficult if not impossible to prevent those that do not pay from gaining the benefit.
In addition, there may be something called non-rivalry in consumption. Using the same examples, this means that one person's consumption of street lighting or justice does not diminish the amount available for anyone else to use. Because of these principles, governments normally provide these types of goods or services through taxpayer's money for the benefit of society as a whole.
Merit goods are goods and services that could be provided by the market but may not be bought by consumers either because they believe the price is too high or because they do not appreciate fully the benefits from such services. Examples of merit goods are normally quoted as being education and health.
These are the very basics that Iraq needs to be able to recover. In addition, major infrastructure projects that will help to encourage enterprise and business is needed. Such infrastructure includes the provision of reliable water and energy supplies, roads, bridges, public buildings for government, communications networks such as computer links, telephone lines and so on. Whilst these remain damaged or un-repaired, new business will be slow to develop thus hindering potential economic growth.
Finally, the other side of the equation in economic growth is aggregate supply (AS). Aggregate supply refers to the capacity of the economy - the potential it has to be able to produce goods and services. This then includes all the productive plants that exist in the country. As we have seen, this relies on investment and to a certain extent the incentives that exist for members of the population to get involved in business activity in one way or another.
