The Economic Consequences of the Iraqi Crisis on the Mashreq Countries

Abstract

This article examines the economic consequences of the Iraqi crisis on the Mashreq countries. The first part analyses the economic fruits reaped by these countries from the Iraqi crisis through a sharp increase in both the scale of trade with Iraq and oil revenues. The second part deals with the effects of the end of Saddam Hussein's regime on the economies of these countries with regard to developments in the oil industry, including production, revenues and plans for future production capacity, as well as the economic effects on the non-oil Mashreq countries. The final part examines the economic opportunities that could be created by these countries through the recovery of the Iraqi economy. The main conclusion of the article is that while the UN sanctions imposed on Saddam Hussein's Iraq provided substantial economic benefits for both the oil and non-oil Mashreq economies, the end of Saddam Hussein's regime continued to benefit the oil economies as oil prices increased, but at the same time caused severe economic hardships for the non-oil Mashreq countries.

Acknowledgements

The author would like to thank the Ezri Center for Gulf Studies at the University of Haifa for the financial support of this research.

Notes

¹ The GCC organization, founded in May 1981, includes Saudi Arabia, Kuwait, Qatar, Bahrain, Oman, and the United Arab Emirates (UAE).

² Iraq's oil production declined from a peak of 3.5m b/d, just prior to the invasion of Kuwait, to an average of 305,000 b/d in 1991, slightly increasing to 579,000 in 1996 (EIA, Table 4.1a).

³ By 2002, the total world oil demand amounted to 78.36m b/d, as compared with 77.66m b/d in 2001 (EIA, Table 2.1).

⁴ The official Iraqi reason for the embargo was the Israeli army's massive operation in the West Bank, Homat Magen (‘the Wall Shield’), which started on 29 March 2002.

⁵ On 2 December 2002, Petroleos de Venezuela (the Venezuela national oil company) employees, along with other labour unions and members of the opposition, launched a wide-scale strike to demand that President Chávez resign or hold early elections. The strike paralysed the production of oil in the country. Thus, crude oil production in Venezuela dropped from 2.9m b/d in November 2002 to only 600,000 b/d in January 2003 (EIA website; MEI, 10 January 2003: 13).

⁶ The Arab Common Market was established in 1964 by Egypt, Syria, Iraq, Jordan, Libya, Yemen, Mauritania, Somalia, Kuwait and Sudan.

⁷ Although Egypt's official unemployment rate was 9.9 per cent in the 2002/03 fiscal year, according to most independent estimates, the real unemployment rates in recent years amounted to 15–25 per cent (EIU, CP-Egypt, 2004: 37).

⁸ Thus, for example, Saudi Arabia's real GDP growth rate was 1.5 per cent in 1998 and as low as 0.4 per cent in 1999, representing a marked decline in per capita terms (SAMA, 2000: 38–9). Oman's real GDP growth rate in 1999 was − 1.0 per cent, namely, − 4 per cent in per capita terms (US, DoS, 2002: 1). In the other GCC countries, one can find a similar trend of extremely low economic growth rates during the second half of the 1990s, resulting first and foremost from the low oil prices.

⁹ In the case of Saudi Arabia, for example, 2000 was the first year since 1983 in which the governmental revenues were higher than the expenditures, leading to a budgetary surplus (MEED, 20 September 2002: 30; MEI, 23 March 2001: 20; SAMBA, 2003: 13). The same trend occurred in the other GCC countries (GSN, 6 August 2001: 10).

¹⁰ Immediately following the war, in April 2003, the ORB declined to $25.4/b.

¹¹ The ORB was $23/b in early January 1997, declining to $16.5/b in mid-April 1997 (Mohamedi, 1997).

¹² Proven oil reserves refers to crude oil that can be recovered using current technology.

¹³ According to many projections, Iraqi oil production will amount to 4 to 7m b/d within five to ten years, thus making Iraq the second largest oil exporter worldwide following Saudi Arabia (Givner-Forbes, 2003).

¹⁴ Regarding the oil factor in the US invasion of Iraq, there are two basic attitudes. The most common attitude in the Arab countries is that the US interest in Iraq is based on its huge potential for oil production. The second attitude is that contrary to the previous 1991 Gulf war, which had a clear oil incentive, namely, to protect the oil fields in the Arabian Gulf from Saddam Hussein's control, the US invasion of Iraq was not a war for Iraq's oil. According to Marcel and Mitchell (2003: 2), ‘If energy security … [was] the primary driver for American foreign policy and war … the US would have intervened in Venezuela to bring an end to the strikes … that brought Venezuela oil production to a grinding halt.’

¹⁵ The QIZs benefit from privileged access to the US market as part of the October 1994 Jordanian–Israeli peace treaty. These zones were established in order to promote Jordanian–Israeli economic cooperation. In order to qualify for QIZ status, products must have at least 35 per cent of their appraised value added within the zone, with a minimum of 11.7 per cent coming from Jordan, 8 per cent from Israel, and the remainder from a Jordanian QIZ, Israel, the US, or the Palestinian National Authority (PNA). Alternatively, Jordanian and Israeli companies can contribute 20 per cent of the value added (see MEED, 8 June 2001: 28; IMF, 2004: 15, box II.1).

¹⁶ On the recovery of the Jordanian tourism industry following the war in Iraq, see the data published by the Jordanian Ministry of Tourism (http://www.tourism.jo).