Iraq - The Role of Government

The role of government

Following the Baath Party's accession to power in 1968, the government began using central planning to manage the national economy. The government separated its expenditures into three categories: an annual expenditure budget for government operations, an annual investment budget to achieve the goals of the five-year plans, and an annual import budget. Economic planning was regarded as a state prerogative, and thus economic plans were considered state secrets. The government rarely published budget or planning information, although information on specific projects, on total investment goals, and on productivity was occasionally released.

Extremely high revenues from oil exports in the 1970s made budgeting and development planning almost irrelevant in Iraq. The responsibility of the state was not so much to allocate scarce resources as to distribute the wealth, and economic planning was concerned more with social welfare and subsidization than with economic efficiency. One consistent and very costly development goal was to reduce the economy's dependence on a single extractive commodity--oil--and, in particular, to foster heavy industry. Despite this objective, in 1978 the government began an attempt to rationalize the non-oil sector. The process of costcutting and streamlining entailed putting a ceiling on subsidization by making state-run industries and commercial operations semiautonomous. The expenditures of such public entities were not aggregated into the governmental expenditure budget. Instead, state-run companies were given their own budgets in an attempt to make them more efficient.

Because Iraqi economic development planning was predicated on massive expenditure, the onset of the Iran-Iraq War in 1980 brought central planning to an impasse. Despite an effort to maintain the momentum of its earlier development spending, the government was forced to revert to ad hoc planning as it adjusted to limited resources and to deficit spending. Economic planning became not just a perceived national security issue, but a real one, as the government devoted its attention and managerial resources to obtaining credits. The Fourth Five-Year Plan (1981- 85) was suspended, and as of early 1988, the Fifth Five-Year Plan (1986-90) had not been formulated.

In early 1987, President Saddam Husayn abruptly reversed the course of Iraq's economic policy, deviating sharply from the socialist economic ideology that the government had propounded since the 1968 Baath revolution. Saddam Hussayn advocated a more open, if not free, market, and he launched a program of extensive reform. Because the liberalization was aimed primarily at dealing with the nation's mounting and increasingly unmanageable war debt, Saddam Husayn's motivation was more strategic than economic. He had four related goals--to conserve money by cutting the costs of direct and of indirect government subsidies, to tap private sector savings and to stem capital outflow by offering credible investment opportunities to Iraqi citizens, to reduce the balance of payments deficit by fostering import substitution and by promoting exports, and to use the reforms to convince Western commercial creditors to continue making loans to Iraq.

The reform process began with Revolutionary Command Council (RCC) Decree Number 652, which in May 1987 abolished Iraq's labor law. This law had institutionalized the differences among white collar, blue collar, and peasant workers. Under the law, every adult had been guaranteed lifetime employment, but workers had almost no freedom to choose or to change their jobs or places of employment, and they had little upward mobility. One result was that labor costs in Iraq accounted for 20 percent to 40 percent of output, compared to about 10 percent in similar industries in nonsocialist economies. Nonproductive administrative staff accounted for up to half the personnel in state-run enterprises, a much higher proportion than in private sector companies in other countries. The government immediately laid off thousands of white-collar workers, most of whom were foreign nationals. Thousands of other white-collar civil servants were given factory jobs. Previously, all state blue collar-workers had belonged to government-sponsored trade unions, while unions for private sector employees were prohibited. After the labor law was abolished, the situation was reversed. Government workers could no longer be union members, whereas private sector employees were authorized to establish and to join their own unions. To compensate state blue collar-workers for their lost job security, Saddam Husayn established an incentive plan that permitted stateenterprise managers to award up to 30 percent of the value of any increase in productivity to workers.

Decree Number 652 aroused resentment and controversy among government bureaucrats, many of whom were stalwart Baath Party members, not only because it contradicted party ideology, but also because it imperiled their jobs. Feeling compelled to justify his new economic thinking and to reconcile it to Baathist ideology, Saddam Husayn wrote a long article in Ath Thawrah, the major government-run newspaper, criticizing the labor law for perpetuating a caste and class system that prevented people from being rewarded according to merit and from using their capacities fully. Perhaps writing with intentional irony, Saddam Husayn stated that unless people were rewarded for producing more, some might start to regard the capitalist system as superior because it permitted the growth of wealth and the improvement of workers' lives.

In June 1987, Saddam Husayn went further in attacking the bureaucratic red tape that entangled the nation's economy. In a speech to provincial governors, he said, "From now on the state should not embark on uneconomic activity. Any activity, in any field, which is supposed to have an economic return and does not make such a return, must be ignored. All officials must pay as much attention to economic affairs as political ideology."

To implement this policy, Saddam Husayn announced a move toward privatization of government-owned enterprises. Several mechanisms were devised to turn state enterprises over to the private sector. Some state companies were leased on long terms, others were sold outright to investors, and others went public with stock offerings. Among the state enterprises sold to the public were bus companies serving the provinces, about 95 percent of the nation's network of gas stations, thousands of agricultural and animal husbandry enterprises, state department stores, and factories. In many instances, to improve productivity the government turned stock over to company employees.

The most significant instance of privatization occurred in August 1987, when Saddam Husayn announced a decree to abolish the State Enterprise for Iraqi Airways by early 1988. Two new ventures were to be established instead: the Iraqi Aviation Company, to operate commercially as the national airline, and the National Company for Aviation Services, to provide aircraft and airport services. Stock was to be sold to the public, and the government was to retain a minority share of the new companies through the General Federation of Iraqi Chambers of Commerce and Industry.

In a further move consistent with the trend toward privatization, the RCC announced in November 1987 that the government would offer new inducements for foreign companies to operate in Iraq by loosening direct investment restrictions. Details of the new proposal were not specified, but it was expected to entail modification of Resolution Number 1646 of the RCC, enacted in November 1980, which forbade foreign capital participation in private sector companies. Changes in the longstanding government policy of preventing foreign ownership of state institutions might also occur. According to the new regulations, all foreign firms engaged in development projects would also be exempt from paying taxes and duties, and foreign nationals who were employees of these companies would pay no income tax. At the same time, Saddam Husayn announced that development projects would no longer be paid for on credit. The new legislation indicated that Iraq was encountering difficulty paying for or obtaining credits for turnkey projects and was therefore willing to permit foreign companies to retain partial ownership of the installations that they built. Previously, Iraq had rejected exchanging debt for equity in this manner as an infringement on its sovereignty.

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