FOLLOWING THE 1968 Baath (Arab Socialist Resurrection) Party
revolution, Iraq's government pursued a socialist economic policy.
For more than a decade, the economy prospered, primarily because
of massive infusions of cash from oil exports. Despite a quadrupling
of imports between 1978 and 1980, Iraq continued to accrue current
account surpluses in excess of US$10 billion per year. In 1980
on the eve of the outbreak of the Iran-Iraq War, Iraq held reserves
estimated at US$35 billion. When Iraq launched the war against
Iran in 1980, the Iraqis incorrectly calculated that they could
force a quick Iranian capitulation and could annex Iranian territory
at little cost in either men or money. Using a number of means,
Iraq opted to keep the human costs of the war as low as possible,
both on the battlefield and on the home front. In battle, Iraq
attempted to keep casualties low by expending and by losing vast
amounts of materiel. Behind the lines, Iraq attempted to insulate
citizens from the effects of the war and to head off public protest
in two ways. First, the government provided a benefits package
worth tens of thousands of dollars to the surviving relatives
of each soldier killed in action. The government also compensated
property owners for the full value of property destroyed in the
war. Second, the government adopted a "guns and butter" strategy.
Along with the war, the government launched an economic development
campaign of national scope, employing immigrant laborers to replace
Iraqi fighting men.
In 1981, foreign expenditures not directly related to the war
effort peaked at an all-time high of US$23.6 billion, as Iraq
continued to import goods and services for the development effort,
and construction continued unabated. Additionally, Iraq was paying
an estimated US$25 million per day to wage the war. Although the
Persian Gulf states contributed US$5 billion toward the war effort
from 1980 to 1981, Iraq raised most of the money needed for war
purposes by drawing down its reserves over several years. Iraq
could not replenish its reserves because most of its oil terminals
were destroyed by Iran in the opening days of the war. Iraqi exports
dropped by 60 percent in 1981, and they were cut further in 1982
when Syria, acting in accord with Iran, closed the vital Iraqi
oil export pipeline running through Syrian territory.
The total cost of the war to Iraq's economy was difficult to
measure. A 1987 study by the Japanese Institute of Middle Eastern
Economies estimated total Iraqi war losses from 1980 to 1985 at
US$226 billion. This figure was disaggregated into US$120.8 billion
in gross domestic product (GDP--see Glossary) lost in the oil
sector, US$64 billion GDP lost in the nonoil sector, US$33 billion
lost in destroyed materiel, and US$8.2 billion lost in damage
to non-oil sector fixed capital investment. Included in the lost
GDP was US$65.5 in lost oil revenues and US$43.4 billion in unrealized
fixed capital investment.
As the 1980s progressed, the Iran-Iraq conflict evolved into
a protracted war of attrition, in which Iran threatened to overwhelm
Iraq by sheer economic weight and manpower. Although Iraq implemented
some cost-cutting measures, the government feared that an austerity
plan would threaten its stability, so it turned to outside sources
to finance the war. Iraq's Persian Gulf neighbors assumed a larger
share of the economic burden of the war, but as the price of oil
skidded in the mid-1980s, this regional support of Iraq diminished.
For the first time, Iraq turned to Western creditors to finance
its deficit spending. Iraq's leadership calculated correctly that
foreign lenders, both government and private, would be willing
to provide loans and trade credit to preserve their access to
the Iraqi economy, which would emerge as a major market and an
oil supplier after the war. But the sustained slump in oil prices
made foreign creditors more skeptical of Iraq's long-term economic
prospects, and some lenders apparently concluded that providing
more loans to Iraq amounted to throwing good money after bad.
Some creditors were also wary of Iraq's postwar prospects because
of Iranian demands for tens of billions of dollars in reparations
as the price for any peace settlement. Although Iraq would probably
pay only a fraction of the reparations demanded (and that, most
likely, with the help of other Persian Gulf countries), a large
settlement would nonetheless delay Iraq's postwar economic recovery.
In 1988, as the war entered its eighth year and Iraq's debt topped
US$50 billion, the government was implementing comprehensive economic
reforms it had announced in 1987. Iraq's new economic policy was
designed to reverse twenty years of socialism by relinquishing
considerable state control over the economy to the private sector.
It was not immediately clear if this move would result in a fundamental
and enduring restructuring of Iraq's economy, or if it was merely
a stopgap measure to boost productivity, to cut costs, to tap
private sector savings, and to reassure Western creditors.
Data as of May 1988