The financial implications of economic sanctions against Iraq.

AuthorAl-Roubaie, Amer


IRAQ'S INVASION OF KUWAIT IN AUGUST 1990 led the United Nations Security Council to authorize economic sanctions against Iraq, followed soon after by the freezing of Iraq's financial assets in Western countries. These actions suspended all trade and financial relations between Iraq and a good part of the world. Today, these sanctions have not only curtailed the rate of growth of the Iraqi economy with serious economic and financial consequences, but also have had social and psychological consequences as well.(1) According to the Iraqi government the embargo has cost Iraq an estimated US$18 billion between August 1990 - January 1991.(2) Another study calculated that it cost the country the equivalent of US$21.6 billion per annum in lost income.(3) There has been a tremendous loss in export earnings, a depreciation in the unofficial exchange rate of the Iraqi dinar, a substantial decrease in national income, and a dramatic increase in the price of goods and services. The annual inflation rate is now estimated at 2,000 percent.(4) This has produced a depressed economy and a lower standard of living not only for this generation, but perhaps for many generations to come. Dreze and Gazdar wrote: "War and prolonged sanct87ions have caused such comprehensive damage to the Iraqi economy that it is now impossible to maintain these sanctions in their present form without perpetuating, and perhaps even accentuating, the state of acute poverty in which a large part of the population is now plunged. The debate about sanctions cannot ignore this simple truth."(5)

Economic sanctions are not the only cause of Iraq's financial and economic crisis, but they have exacerbated the problem owing to Iraq's weak economic structure and its high degree of dependence on trade, which make economic recovery more difficult.


Sanctions are enacted to force the target nation to comply either with conditions imposed on it by other nations, or with a set of international laws or norms, and to bring it back into line.(6) Their effectiveness depends on the extent of damage to the economy and the nation's willingness to capitulate to the conditions imposed on it.(7)

Sanctions are supposed to deter aggressor states from their aggression. They are applied in many ways ranging from denying access to capital, prohibiting international movement, curtailing communication and transportation, and, finally, the most frequently chosen tactic, restricting imports and exports. Sanctions, therefore, have the greatest impact on manufacturing. How great that impact is depends on the output produced by the industry, its demand for import components, its percentage of the total GDP, the ability of the economy to substitute local for imported goods, and the degree of technological sophistication used by local industry.

Imposing sanctions against Iraq could not have come at a worse time. The eight years of war with Iran had diverted its resources to the war which undermined the country's development. The war also damaged oil installations, refineries, roads, irrigation systems, power plants, and communication facilities. The cities were crowded with people from the war-torn areas. Public services deteriorated, and the most essential of them such as health care, education, security and social services were especially hard hit.(8)


Until 1950, Iraq traded only a very limited number of commodities, a direct reflection of its backwardness and low productivity, the isolation of its market and the inadequacy of transportation, communications, and marketing facilities. As part of the Middle East trading area, Iraq's trade was also influenced by the low levels of demand in the other countries of the region. Its capacity to allocate its existing resources to produce commodities which would give it an advantage was also low.

After World War II, Iraq was able to trade with new and larger markets, with a wider range of capital and consumer commodities so that it could diversify its external transactions. Thanks to the rapid increase in crude petroleum production, Iraq's major export commodity, the value of Iraq's trade increased from US$856 million in 1960 to US$22.275 billion in 1989 or by more than 2,500 percent. As a consequence, the country's balance of payments position improved, providing the economy with much of the needed foreign exchange to pay for imports, particularly capital goods and raw materials. Based on the prospects of higher revenues, government economic policies were formulated to utilize these revenues to correct sectoral imbalances and to reduce the country's dependence on international trade. It was recognized then that oil was a non-renewable resource and its contribution to the economy would lessen over time.

It was very obvious that any damage to the Iraqi economy from the sanctions would come first from the trade sector. The Iraqi economy is an open economy highly concentrated in external trade, and it seems unlikely that its productive capacity will be capable, at least in the short term, of producing enough goods and services to substitute for imported goods. Iraq's industrial base is not solid enough for the domestic production of capital goods. Its output has a large import component. Industrial production in particular depends heavily on imported machinery, spare parts, and raw materials. Imports are paid for in foreign currencies which the country earns through trade mainly petroleum, making this commodity the most valuable item in Iraq's trade transactions. The imposition of sanctions has gradually weakened the capacity to expand production as industries use up the available stocks of spare parts.

Dependency on trade is believed to make an economy sensitive to changes in world markets. For instance, because the value of oil exports accounts for more than 95 percent of Iraq's total exports, its economic development is directly linked to the ability of oil exports to supply the required financial resources. Most of its investments are made by its public sector, and most of its oil income goes to the government, so its ability to function also depends entirely on earnings from oil. The fluctuations in volume and prices of oil are transmitted to the national economy via balance of payments affecting income, employment, government revenues, prices and output. By boycotting Iraq's exports, considerable damage has been inflicted upon the productivity of the economy.

The degree of openness of Iraq's economy can be illustrated by the ratios of export and import to Gross National Product. As shown in Table 1, the share of export to total GDP increased from 27.7 percent in 1960, to 62.1 percent in 1989. Similarly, the ratio of total imports to GDP increased from 23.1 percent in 1960, to 31.5 percent in 1980 and declined to 14.2 percent in 1989. The larger the ratio of export and import to income, the greater the expected damage on the economy. The wide variations in these ratios reflects the volatility of Iraq's trade and also its importance to the national economy.

Theoretically, heavy investment and modern technology in the export sector would increase the divergence in productivity between the export sector and the rest of the economy. If the linkages of the export sector are weak, it is most likely that the multiplier effect would generate very little stimulus to other sectors of the economy. In an open economy, the level of income and employment would be linked together through trade. Changes in the domestic economy of one country affects the economies of...

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