Excess cash from Iraq’s oil wealth have led to massive spending on the property sector.
The New York Times observes, (bold highlights mine)
American-style malls, fixtures in most of Iraq’s wealthy Persian Gulf neighbors, have come late to war-torn Baghdad, but Iraqis are taking to them now like Valley Girls, as a consumer society fueled by the country’s booming oil profits begins to flourish here.
Big malls are being built across the capital. The largest will include a five-star hotel and a hospital, and at one already in operation, a truck arrives each week carrying frozen Big Macs from a McDonald’s in Amman, Jordan.
The construction boom is generally hailed as proof of Iraq’s progress and return to normalcy, more than nine years after the American invasion and six months after the last combat troops departed. But economists and other experts see a dark side. They say the emerging consumer culture masks fundamental flaws in an economy that, like those of other energy-rich countries like Saudi Arabia and Qatar, stifles productive enterprise by relying almost solely on oil profits and the millions of government salaries those profits finance as part of the country’s vast patronage system.
“Basically, Iraq is trying to build a consumer society, not on state capitalism like in China, but on socialism,” said Marie-Hélène Bricknell, the World Bank’s representative in Iraq.
One of Washington’s principal aims was to develop a free-market economy here. Yet with so much oil wealth at hand, Iraq’s leaders have taken few steps to develop a private sector. More than 90 percent of Iraq’s government revenues derive from oil, and with oil production rapidly expanding, the country’s annual revenues could triple over the next five years, to more than $300 billion. With that kind of wealth rolling in, one of the greatest questions the country faces is what it will do with all that cash.
Given the statist mentality of most top Iraqi officials and widespread corruption, diplomats are generally pessimistic that the expected boom in government revenues will be used either to help develop a private sector or to pay for an ambitious public works program — something the country, where 40 percent of the population still lacks access to safe drinking water, desperately needs. Instead, experts worry it will finance more of what Iraq already has: corruption and a huge government work force.
Most of the major industries remain in the hands of the state, and the greatest ambition of many Iraqis is to secure a government job. According to statistics from the Iraqi Ministry of Planning, almost a third of the labor force works for the government. That is more than five million people, and the number is rising, as political parties that run government ministries use paychecks to expand their constituencies.
“The state’s payrolls have massively expanded, not with technocrats but with party functionaries, because the state has become a way of funding party loyalty,” said Toby Dodge, a professor at the London School of Economics, at a recent panel discussion in London about Iraq. “That’s directly undermined and hindered the state’s ability. So we have a huge state.”
Because government salaries are much higher than those in the private sector, independent businesses operate at a disadvantage because, among other disincentives, would-be entrepreneurs cannot afford to hire the most skilled workers. The World Bank ranks Iraq 153rd out of 183 countries on the ease of doing business.
“Building a consumer society on top of nothing is like building a bubble that will burst in the future,” Ms. Bricknell said. With the shopping malls, she said, “you are putting a veneer over a rotting core, basically.”
This is an example of what has typically been called as the resource curse.
According to Wikipedia.org a resource curse is the paradox that countries…with an abundance of natural resources, tend to have less economic growth and worse development outcomes than countries with fewer natural resources.
For as long as there remains resources from which politicians can prey and feast on, channeled through the welfare state, the bureaucracy and state spending, then there will be less incentive to liberalize or make the economy competitive and productive. For now this has been free lunch to the political leaders, bureaucracy, technocrats and their political allies.
To the contrary, oil revenues leads to growing dependency on government and the accompanying spendthrift behavior by political agents, which also contributes to the economic imbalances.
Yet the combination of rapid expansion of parasitical relationship and finite resources (oil) eventually extrapolates to a speed bump or the law of diminishing returns.
Aside from the crowding out effect, government spending undermines the private sector by pricing them out.
Iraq’s resource based economy are reminiscent of the fabled Potemkin Villages or a façade of prosperity or progress.
In reality, Iraq’s oil generated progress from statism and cronyism constitutes no more than a property bubble, again from government policies, which like always, will have a tragic outcome.
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