In section 3 we suggested that the UN sanctions against Iraq might be interpreted as a very specific form of external shock to the Iraqi economy. We traced the movement of various real and financial variables over the last six years in order to provide a basis for an assessment of the changes in livelihoods and living conditions (section 4). Underlying the changes in macro indicators such as price levels, exchange rates, and national income are numerous behavioural responses to the shock on the part of the various types of economic agents. For instance, sections 4.1 and 4.4 discuss labour participation and saving (or dissaving) behaviour of individuals and families in response to income declines. Likewise, the response of the government in first financing expenditure through monetary expansion, and then introducing a stabilisation package, is documented in section 3.2. In this section we put together some evidence on the extent of the structural adjustment in the Iraqi economy in response to a massive reduction in its international trade. The next one (section 6) examines some institutional responses of the public sector to the various crises that emerged in the wake of sanctions.
As shown in section 3 (and in the 1991 study) the macroeconomic impact of the imposition of sanctions was extremely sharp. The 1991 study was almost exclusively concerned with this impact itself. The main event, after all, was the decline in real incomes, of the order of over 90 per cent, and under those circumstances any questions about specific sectoral responses were simply part of the detail. It was also too early for a study of structural adjustment, given that the hostilities had ended barely five months before, and it was widely expected then that the sanctions were to end soon. Following five years of the sanctions, it is both desirable and possible to develop a better understanding of how the economy has responded to arguably one of the most dramatic external shocks experienced by any country in recent years.
5.1 Agriculture
In the absence of oil revenues, agriculture is the key sector for a number of reasons. Firstly, historically, Iraq was a largely agrarian economy prior to the large scale development of the oil sector. Its comparative advantage, in terms of relatively fertile agricultural land remains. Secondly, the diversification of the economy away from agricultural production was driven by oil revenues, both directly, in the sense that much of the non-agricultural employment in the public sector was directly financed by oil-based public revenues, and also indirectly, in the sense that private sector manufacturing and service activities were heavily dependent on direct and indirect state subsidies, also financed from oil revenues. Finally, from the point of view of overall food security, agriculture is, obviously, the key sector.
We have already noted in section 4.1 above that there has been a reverse movement of labour towards agriculture. This makes sense in the light of the fact that real incomes in this sector have declined less, and in relative terms are likely to have improved over the last six years (see section 4). In spite of an estimated trebling of the agricultural workforce (Table 5), and increases in cropped area of the order of 70 per cent, estimated agricultural output has increased relatively modestly.
Take the two main cereal crops (Table 6). Wheat yields are down on average by around 20 per cent, but with substantial increase in the area under crop, output has been higher, on average by about 30 per cent. In the case of barley, however, although the area under crop has increased by over 70 per cent, the increase in total output has been of the order of 25 per cent. This is due to a large decline in the yield. The yields for barley in the early 1990s, moreover, compare unfavourably with yields obtained in the 1950s and 1960s (see Table 6).
The main reasons that have been cited for the decline in the yields of both wheat and barley are the shortage of farm machinery, good quality seeds, and chemical inputs such as fertilisers and pesticides. While this might be true in the case of wheat, the case of barley is not so clear cut. The yields in the 1950s and 1960s were obtained prior to the massive farm mechanisation or the introduction of other new import-intensive technologies that have been affected by the sanctions regime. The fact that reported yields are now much lower than they were in the 1950s and 1960s cannot be explained entirely or even substantially with reference to the shortage of these imported or manufactured inputs. It is possible that official figures for agricultural output are downward biased.
5.2. Supply and Demand Constraints
As noted in sections 3.1 and 3.3 above, Iraq's economic structure was highly dependent on oil revenues for the financing of imports. Other sectors of the economy such as manufacturing relied heavily on imported inputs such as raw materials, machinery and spare parts. The economic blockade affected different industries in a different manner. For larger enterprises with specialized or bulky input requirements quantitative restrictions on imports were sufficient to cause a substantial reduction in capacity.
For numerous small-scale consumer industries, however, inputs could be and were smuggled through neighbouring countries. These enterprise could, indeed, purchase their inputs on the black market. The main problem that such industries faced was the sharp rise in the relative price of their inputs. Whereas in the past they had rationed access to foreign exchange at the overvalued official exchange rate, now they had to achieve profitability at world prices. The main problem that these types of enterprises were facing in 1991 was to make a transition to this change.
It is reasonable to expect that the surviving economic enterprises in Iraq today would be those that were able to make an adjustment to the new situation. In other words, for industries that did not face very serious quantitative constraints in obtaining imported supplies, only those firms that remained competitive at world prices would have survived.
Our interviews with small-scale industrial units revealed, that such an adjustment had, indeed, taken place. The main constraint that the surviving firms reported in their expansion of output and employment, or the utilisation of capacity, was the demand for their products. The fall in incomes had resulted in the decline in demand for these goods. With a pick-up in incomes and consumer demand, many industries would be able to expand output and employment within a short period.
We did find evidence, therefore, that the private sector had adjusted to the new economic situation in accordance with the broad predictions of theory. An unintended effect of the sanctions has been the revival of the private sector and the weeding out of activities that flourished under the protective regime of the dual exchange rate.