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
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
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.
Data as of May 1988