Iraqi Economy Limping Along Because Of

Iraqi Economy Limping Along Because of Poor Security

The Financial Times has a suggestive story on the Iraqi economy and its continued woes. One conclusion I draw from it is that a lot of the new money in people’s hands is going right out of the country for the purchase of electronics and automobiles from abroad. If there is a huge consumer-driven balance of trade deficit with the outside world, that would be negative in a number of ways. It would weaken the value of the Iraqi dinar. And it would limit the circulation, and the velocity of circulation, of capital inside Iraq itself. Combine that trend with continued sabotage of oil and gas pipelines (thus limiting Iraqi exports of these fuels and cutting down on receipts), with undercapitalization of Iraqi banks, and with skittishness among foreign investors about putting money into Iraq, and you get a deflationary situation.

The bad news is that many of the fixes for these problems could create more problems of their own. If Iraq could pump more petroleum, that would harden its currency and make manufactured and primary commodities from Iraq more expensive to neighbors like India and Pakistan, which lack much petroleum. Petroleum wealth can be a curse, causing the “Dutch disease” and hurting producers of other goods. Moreover, a big petroleum income combined with an influx of foreign aid could create hyper-inflation.

Getting the Iraqi economy right will be no easy task. Just having a lot of money sloshing around is not the same as development. Ask the Shah of Iran.