Iraq - Industrialization

Industrialization

The nonpetroleum industrial sector of the Iraqi economy grew tremendously after Iraq gained independence in 1932. Although growth in absolute terms was significant, high annual growth rates can also be attributed to the very low level from which industrialization started. Under Ottoman rule, manufacture consisted almost entirely of handicrafts and the products of artisan shops. The availability of electricity and lines of communication and transportation after World War I led to the establishment of the first large-scale industries, but industrial development remained slow in the first years after independence. The private sector, which controlled most of the nation's capital, hesitated to invest in manufacturing because the domestic market was small, disposable income was low, and infrastructure was primitive; moreover, investment in agricultural land yielded a higher rate of return than did investment in capital stock. World War II fueled demand for manufactured goods, and large public sector investments after 1951, made possible by the jump in state oil revenues, stimulated industrial growth. Manufacturing output increased 10 percent annually in the 1950s.

Industrial development slowed after the overthrow of the monarchy during the 1958 revolution. The socialist rhetoric and the land reform measures frightened private investors, and capital began leaving the country. Although the regime led by Abd al Karim Qasim excepted industry from the nationalization imposed on the agricultural and the petroleum sectors, in July 1964 a new government decreed nationalization of the twenty-seven largest privately owned industrial firms. The government reorganized other large companies, put a low limit on individual shareholdings, allocated 25 percent of corporate profits to workers, and instituted worker participation in management. A series of decrees relegated the private sector to a minor role and provoked an exodus of managers and administrators, accompanied by capital flight. The government was incapable of filling the vacuum it had created, either in terms of money or of trained manpower, and industrial development slowed to about 6 percent per year in the 1960s.

After the 1968 Baath revolution, the government gave a higher priority to industrial development. By 1978 the government had revamped the public industrial sector by organizing ten semi- independent state organizations for major industry subsectors, such as spinning and weaving, chemicals, and engineering. Factory managers were given some autonomy, and an effort was made to hold them responsible for meeting goals. Despite Iraq's attempt to rationalize and reorganize the public sector, state organizations remained overstaffed because social legislation made it nearly impossible to lay off or to transfer workers and bureaucratization made the organizations top-heavy with unproductive management. The government acknowledged that unused capacity, overstocking of inventories, and lost production time, because of shortages or disruptions of supply, continued to plague the industrial sector.

The government attempted to strengthen public sector industry by pouring money into it. According to official figures, annual investment in the nonpetroleum industrial sector rose from ID39.5 million in 1968 to ID752.5 million in 1985. As a consequence, industrial output rose; the government put the total value of Iraq's industrial output in 1984 at almost ID 2 billion, up from about ID300 million in 1968 and up more than 50 percent from the start of the Iran-Iraq War. The total value of industrial input in 1984 was ID981 million, so value added was in excess of 100 percent. Productivity relative to investment, however, remained low.

Because of revenues from oil exports, the government believed it could afford to pursue an ambitious and expensive policy of import substitution industrialization that would move the economy away from dependence on oil exports to obtain foreign exchange. In the early 1970s, Iraq made capital investments in large-scale industrial facilities such as steel plants. Many of the facilities were purchased from foreign contractors and builders on a turnkey basis. But Iraq neglected development of the next stage in the industrial process, the transformation of processed raw materials into intermediate products, such as construction girders, iron pipes, and steel parts. These bottlenecks in turn hampered the development of more sophisticated industries, such as machinery manufacture. Plant construction also outpaced infrastructure development. Many plants, for example, were inadequately linked by road or rail to outlets. Excess capacity remained a problem, as the large industrial plants continued to strain the economy's ability to absorb new goods. In an attempt to overcome these problems, Iraq imported the finished products and materials it required, defeating the purpose of its import substitution industrialization strategy and making the large extractive industries somewhat redundant. Imports of various basic commodities, such as plastics and chemicals, doubled and tripled in the 1970s. Most imports were consumed rather than used as intermediate components in industry; when imports were used as industrial inputs, value added tended to be low. Concurrently, tariffs and other trade barriers erected to protect domestic infant industry from foreign competition impeded the importation of certain vital materials, particularly spare parts and machinery. The growth of small-scale industries in the private sector and the rise in the standard of living in general were inhibited by such restrictions. Subsidized by oil revenues, the industrialization strategy yielded growth, but only at great cost.

In the late 1980s, the cumulative fiscal effects of the war with Iran forced Iraq to reverse priorities and to focus on the export side of the trade equation. Although the government previously had attempted to diversify the economy in order to minimize dependence on natural resources, it was now forced to concentrate on generating export income from extractive industry, in which it had a comparative advantage, rather than on producing more sophisticated manufactured goods. At the same time, in conjunction with its gradual move toward privatization, the government ceded greater responsibility to the private sector for the manufacture of light consumer items as import substitutes. In 1983 legislation exempted the private sector from customs duties and from excise taxes on imported spare parts and on machinery needed to build factories. The private sector was also given tax exemptions for capital investment and for research and development spending. Finally, the replacement of sole proprietorships by joint stock companies was encouraged as a means of tapping more private investment. In a 1987 reorganization, the Ministry of Light Industries was renamed the Ministry of Industry, and the Ministry of Industry and Minerals was renamed the Ministry of Heavy Industry. New ministers were appointed and were charged with improving both the the quality and quantity of industrial output; large parts of the state bureaucracy that had controlled industry were abolished.

According to official Iraqi figures, the total industrial labor force in 1984 consisted of about 170,000 workers. State- operated factories employed slightly more than 80 percent of these workers, while 13 percent worked in the private sector. The remaining 7 percent worked in the mixed economy, which consisted of factories operated jointly by the state--which held a major share of the common stock--and the private sector. Men constituted 87 percent of the industrial work force. According to the Iraqi government, in 1984 there were 782 industrial establishments, ranging in size from small workshops employing 30 workers to large factories with more than 1,000 employees. Of these, 67 percent were privately owned. The private sector owned two-thirds of the factories, but employed only 13 percent of the industrial labor force. Privately owned industrial establishments were, therefore, relatively numerous, but they were also relatively small and more capital-intensive. Only three privately owned factories employed more than 250 workers; the great majority employed fewer than 100 people each. Private-sector plant ownership tended to be dispersed throughout industry and was not concentrated in any special trade, with the exception of the production of metal items such as tools and utensils. Although the private sector accounted for 40 percent of production in this area, the metal items sector itself constituted no more than a cottage industry. Figures published by the Iraqi Federation of Industries claimed that the private sector dominated the construction industry if measurement were based not on the number of employees or on the value of output, but on the amount of capital investment. In 1981, such private- sector capital investment in the construction industry was 57 percent of total investment. By this alternative measurement, private sector involvement in the textile and the food processing industries was above average. In contrast, about fourty-six state-owned factories employed more than 1,000 workers apiece, and several industrial sectors, such as mining and steel production, were entirely state-dominated.

In 1984 Iraq's top industry, as measured by the number of employees, was the nonmetallic mineral industry, which employed 18 percent of industrial workers and accounted for 14 percent of the value of total industrial output. The nonmetallic mineral industry was based primarily on extracting and processing sulfur and phosphate rock, although manufacturing of construction materials, such as glass and brick, was also included in this category. Production of sulfur and of sulfuric acid was a priority because much of the output was exported; phosphates were likewise important because they were used in fertilizer production. Mining of sulfur began at Mishraq, near Mosul, in 1972; production capacity was 1.25 million tons per year by 1988. With the help of Japan, Iraq in the late 1980s was augmenting the Mishraq sulfur works with the intent of boosting sulfur exports 30 percent from their 1987 level of 500,000 tons per year and of increasing exports of sulfuric acid by 10,000 tons annually. Iraq was also attempting to increase the rate of sulfur recovery from oil from its 1987 level of 90 percent.

Phosphate rock reserves were located mainly in the Akashat area northwest of Baghdad and were estimated in 1987 at 5.5 billion tons--enough to meet local needs for centuries. A fertilizer plant at Al Qaim, linked by rail to the Akashat mine, started production in 1984; it was soon converting 3.4 million tons of phosphate per year into fertilizer. As the Al Qaim operation came onstream, Iraq became self-sufficient in fertilizer, and three-quarters of the plant's output was exported. Iranian attacks on Iraqi fertilizer plants in the Basra area, however, cut Iraq's surplus. In 1986 Iraq obtained a US$10 million loan from the Islamic Development Bank to import urea fertilizer, and in 1987 Iraq continued to import fertilizer as an emergency measure. Meanwhile, additional fertilizer plants were under construction in 1987 at Shuwairah, near Mosul, and at Baiji. Their completion would bring to five the number of Iraqi fertilizer plants and would increase exports considerably.

Another important component of the mineral sector was cement production. Iraq's 1987 cement production capacity was 12 million tons, and the government planned a near doubling of production. Domestic consumption in 1986 was 7.5 million tons, and the surplus was exported, 1 million tons to Egypt alone.

In addition to the nonmetallic minerals industry, several other industries employed significant percentages of the work force. The chemical and petrochemical industry, concentrated at Khawr az Zubayr, was the second largest industrial employer, providing work for 17 percent of the industrial work force. Chemicals and petrochemicals accounted for a relatively high 30 percent of the total value of industrial output because of the high value of raw material inputs and the higher value added-- more than 150 percent. The labor-intensive textile industry employed 15 percent of industrial workers but accounted for only 7 percent of the value of total industrial output. A major state- owned textile factory in Mosul produced calico from locally grown cotton. The foodstuffs processing and packaging industry, which employed 14 percent of the total industrial labor force, accounted for 20 percent of total output, but the value added was less than 50 percent. Light manufacturing industries based on natural resources, such as paper, cigarettes, and leather and shoe production, together accounted for 10 percent of the value of total industrial output.

By the mid-1980s, efforts to upgrade industrial capacity from the extracting and processing of natural resources to heavy industry, to the manufacturing of higher technology and to the production of consumer items were still not fully successful. An iron and steel works built in 1978 by the French company, Creusot-Loire, at Khawr az Zubayr, was expected to attain an annual production level of 1.2 million tons of smelted iron ore and 400,000 tons of steel. Other smelters, foundries, and form works were under construction in 1988. (In 1984 this sector of the economy accounted for less than 2 percent of total output.) Manufacture of machinery and transport equipment accounted for only 6 percent of output value, and value added was fairly low, suggesting that Iraq was assembling imported intermediate components to make finished products. A single factory established in the 1980s with Soviet assistance and located at Al Musayyib, produced tractors. In 1981, Iraq contracted with a company from the Federal Republic of Germany (West Germay) to develop the domestic capability to produce motor vehicles. Plans called for production of 120,000 passenger cars and 25,000 trucks per year, but the project's US$5 billion cost led to indefinite delays.

By the late 1980s, Iraq had had some success in establishing light industries to produce items such as spark plugs, batteries, locks, and household appliances. The electronics industry, concentrated in Baghdad, had grown to account for about 6 percent of output with the help of Thompson-CSF (that is, Compagnie sans fil) of France and the Soviet Union. Other more advanced industries just starting to develop in Iraq in the late 1980s were pharmaceuticals and plastics.

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