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MERIP Press Information Note 65 (shortly to be posted at: http://www.merip.org/pins/pin65.html) How the Sanctions Hurt Iraq Colin Rowat August 2, 2001 (Colin Rowat is a lecturer in economics at the University of Birmingham, UK.) Over May and June 2001, the US, British, French and Russian governments all proposed alterations to the eleven-year old UN sanctions on Iraq. Consensus was not reached, and the Security Council extended, unmodified, the Oil for Food program that allows Iraq to sell its oil to import civilian goods. As the extension expires in December, the proposals for reforming the sanctions are likely to resurface later this year. Since concerns about the sanctions often center on their harm to Iraqi civilians, the economic and humanitarian implications of the new proposals must be considered. The US-UK proposal -- officially promoted as "smart sanctions" -- may have some positive effects on civilian life, but it fails to address the current sanctions' major sources of harm. Sanctions, of course, intentionally harm to obtain political gains; what those gains might be is not considered here. TWENTY YEARS OF TRAUMA The past 20 years have been economically traumatic for Iraq. Almost the entire Iraqi gross domestic product in the 1980s was consumed by the 1980-88 war with Iran. War's end fueled Iraqis' expectations of rising prosperity, but left the government deeply in debt, pursued by creditors and trying to absorb a large conscript army into a diminished and distorted civilian economy, dependent upon migrant labor and imports. The government's austerity program, undertaken to reduce its debt, exacerbated serious economic difficulties. Kuwait's violation of its OPEC quotas helped lower oil prices significantly throughout 1990, worsening the crisis. Iraq's subsequent invasion of Kuwait seems at least partly a desperate bid to stave off economic collapse, by boosting oil prices, securing new sources of revenue and signaling a tough bargaining stance to other regional creditors. The gamble failed. Oil prices jumped 50 percent in August 1990 alone, but sanctions kept the windfall out of Iraq's coffers. The ensuing Gulf war destroyed more of Iraq's civilian infrastructure than had years of war with Iran. A decade of sanctions imposed by the UN Security Council has prevented any real economic recovery, both directly and by politicizing economic and humanitarian issues. At first, the sanctions were nearly total. The Security Council granted exemptions only to import "supplies intended strictly for medical purposes, and, in humanitarian circumstances, foodstuffs." The Iraqi government rejected a prototype "oil for food" program later that year, in part because the proposed amounts of oil sales were insufficient to restore Iraqi social expenditures to pre-war levels. The Security Council consciously overrode then Secretary-General Javier Perez de Cuellar's recommendation to permit larger sales. For the next five years, Iraq traded on a largely ad hoc basis, under a variety of arrangements approved by the UN Sanctions Committee. In 1996, unable to stop the worsening humanitarian crisis, the Iraqi government accepted a slightly larger Oil for Food program. The Security Council has extended the program since then, raising and then removing the cap on permitted oil sales, extending permissible imports to include oil industry spare parts and streamlining its procedures. TODAY'S CONSTRAINTS The sanctions directly reduce Iraq's potential exports and, hence, income. Non-oil exports are forbidden. As such exports accounted for a small share of Iraq's pre-sanctions exports, this prohibition may have a small effect. Nevertheless, it reduces income and employment, speeding the loss of skills among Iraq's workers and encouraging their emigration. In theory, Oil for Food now permits unlimited oil exports. But in practice, the Iraqi oil industry has decayed under sanctions. Peak production under Oil for Food remains below the pre-sanctions peak (2.765 million barrels per day instead of 3.5 million) and cannot be sustained without large investments in equipment and skilled labor. Since 1998, Iraq's oil industry has ordered $2.3 billion of the $3 billion in spare parts allowed it, and received $793 million of them. Given these limited inputs to date, UN oil experts report that the industry "continues to face significant technical and infrastructural problems, which unless addressed will inevitably result in the reduction of crude oil production from the current levels." The sanctions also cripple Iraq's once large public sector. Revenues from Iraq's nationalized oil industry once paid public sector salaries, something now forbidden. Increased smuggling and domestic taxes cannot fully offset this loss, in part because Iraq's domestic tax base remains small. As Iraq's military and security apparatus almost certainly are paid first from these funds, the rest of the public sector suffers the most from today's smaller budgets. The UN Secretary-General's Oil for Food reports hint at the effects. The most recent warned of "pronounced disincentives to the academic cadres," and noted that oil spare parts were piling up. Poorly paid teachers and oil workers must supplement their small incomes, often at the expense of full attention to their formal jobs. Similar problems affect nurses, doctors, engineers, warehouse managers and other civil servants. Working without proper equipment, often part-time, their expensive skills decline. Some observers worry that the breakdown in formal employment is breeding a culture of opportunism and corruption. CIVILIAN INFRASTRUCTURE Civilian infrastructure has suffered disproportionately from lack of maintenance and investment. For example, Iraq's electrical sector is barely holding production steady at one third its 1990 capacity even though government expenditure in this sector consistently exceeds plans. Electrical shortages, worst during the hot summers, spoil food and medicine and stop water purification, sewage treatment and irrigated agriculture, interfering with all aspects of life. Last summer, a power plant accident threatened a catastrophic failure of the national grid. In 1991, the UN estimated that Iraq's electrical sector needed $12 billion ($16 billion in 2001 dollars) to return to pre-war levels. With depreciation and population growth, electrical repairs alone could consume much of the $27 billion that Oil for Food has generated for Iraq to date. While the Iraqi government has occasionally curtailed its UN-approved oil sales and does have smuggling revenue, the point remains: Iraq's productive capacity is such that restoring its civilian infrastructure to pre-war levels will take a long time. Foreign investment, which could speed reconstruction, is forbidden by sanctions. Even were it allowed, debt reduction would be necessary to attract investors. Iraq's pre-sanctions debts may now be $120 billion. A further $23 billion in damages for invading Kuwait has been assessed; if the remaining $204 billion in claims are as successful as past claims were, they will add another $70 billion. Even without the remaining claims, Iraq's debt is 450 percent of its GDP, beating Mozambique, which tops the World Bank's list (which excludes Iraq). SANCTIONS BUSTED Perhaps surprisingly, the sanctions do not seem to obstruct Iraq's import of civilian goods. Jordan, Turkey, Iran and Syria bypass UN controls. In Jordan's case, this dates to 1991, when independent economists found little price difference between Jordan and Iraq for wheat flour and other staple foods, meaning that it was not costly to import goods across their border. Iraqi hardship is not a function of externally sealed borders, but of the factors raised above, such as poverty and destruction of civilian infrastructure. To impoverished Iraqis, the goods in Baghdad's shops may be as unattainable as if they were on display in Amman. Smuggling is attractive to the extent that UN-permitted trade is not. For security and political reasons, the Sanctions Committee often places contracts for items that could be used to rebuild infrastructure on hold. Potential suppliers may face inexplicable delays of uncertain duration, interfering with their production plans. To ensure UN control of Iraq's oil funds, the Committee also removes commercial protection clauses from import contracts, leaving Iraq without recourse if a contract's terms are violated. The Iraqi government could reduce, but not remove, the commercial protection problem by contracting more with reputable, rather than politically expedient, suppliers. Apart from the material harm done by sanctions, the perception that they are harmful is itself harmful, reducing Iraqis' expectations and therefore the government's incentives to meet them. Equally, the indirect nature of sanctions' harm reduces pressure on Security Council members to acknowledge responsibility for, and perhaps reduce, their harmfulness. "SMART SANCTIONS" The US-UK proposal for self-proclaimed "smart sanctions" streamlines import procedures. Potential imports currently fall into one of three categories: goods subject to "fast track" approval, "dual-use" items and other non-military items. The Sanctions Committee handles items in the last two categories; the Office of the Iraq Program processes those in the first. The US-UK proposal abolishes the third category, dividing its domain between the remaining two. This plan would also tighten border controls to reduce smuggling. Neither measure addresses the sanctions' principal means of harm. Its expansion of the "fast track" is economically beneficial but likely of limited significance: smuggling circumvented the sanctions as early as 1991. Although "fast track" procedures began in March 2000, their effect on the arrival of goods in Iraq is unknown. The effect may be small as the "fast track" has largely applied to goods not previously delayed by the Committee. Also, the expansion of the "dual-use" category may worsen matters, given the US history of using this category to block imports. The proposed tightened borders could have detrimental effects on Iraqi civilians. As only 72 percent of Iraq's Oil for Food sales are used to meet civilian needs (25 percent going to compensation claims and 2.2 percent to UN expenses), converting smuggling to Oil for Food trade could reduce the money available to meet them. A smuggled dollar is also more flexible than an Oil for Food dollar: it can pay salaries and other cash expenses, and can avoid the UN's potentially costly procedures. These concerns can almost certainly be dismissed: smuggled oil is usually sold at a discount, reducing the money that it generates for Iraq; regime members, rather than the public, receive much of the ensuing revenue; and reputable foreign companies may avoid smuggling. There is a more likely side effect of reduced smuggling: Iraq's Kurdish regional authorities risk losing revenue gained by smuggling diesel from south-central Iraq to Turkey. However, as the Turkish and Iraqi governments are discussing a direct trade route, this may occur independently of UN proposals. If, in spite of these drawbacks, the US and UK successfully present their proposal as ending sanctions' harm, the Iraqi government may face heightened expectations to alleviate civilian suffering. Presumably, the US and UK would then face less pressure to lighten sanctions' burden. The US-UK proposal's economic and humanitarian consequences are highly uncertain, but unlikely to be large. The French proposal goes further in reducing the sanctions' economic constraints: it would give Iraq's oil industry cash to pay salaries and would permit foreign investment; it sidelines tightening of the borders. The Russian proposal suspends all non-military sanctions once weapons inspectors return to Iraq. For better or worse, this proposal goes furthest towards ending the sanctions' restrictions. (When quoting from this PIN, please cite MERIP Press Information Note 65, "How the Sanctions Hurt Iraq," by Colin Rowat, August 2, 2001. The author can be contacted at c.rowat@bham.ac.uk. The views expressed are not necesarily those of the University of Birmingham.) ----- For background on the politics of "smart sanctions," see MERIP Press Information Note 62: Smart Sanctions: Rebuilding Consensus or Maintaining Conflict? http://www.merip.org/pins/pin62.html The fall 2001 issue of Middle East Report (MER 220), "Shaky Foundations," will focus heavily on the question of Iraq in US foreign policy. To order individual copies or to subscribe, please call Blackwell Publishers at 1-800-835-6770. ----- Press Information Notes are a free service of the Middle East Research and Information Project (MERIP). To subscribe to the MERIP PIN distribution list, simply respond to ctoensing@merip.org and provide your address in the text message box, indicating "SUBSCRIBE PIN" in the subject line. To unsubscribe, indicate "UNSUBSCRIBE" in the subject line. 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