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Ali is an economist and political analyst, working at a private UK-based company. He worked previously at the World Health Organisation and has an MSc in Development Studies from SOAS. You can follow him on Twitter (@alialsaffar).

Perils of an oil economy

“No taxation without representation”. That was the slogan people in America used to use against the British colonialists. It’s short, salient and packs a punch. But how about “no representation without taxation”? You see, the oil-rich countries in the Gulf don’t really tax their citizens and are economically autonomous from society. They are not beholden to them in any way. When oil revenues come into the coffers, it is up to the king (or emir or sultan) to then bestow gifts upon his subject, who in turn, owe him complete loyalty . The state, the government, and the king become one – any act of dissent against the king is an act of disloyalty not only to the crown, but to the country as a whole.

Iraq is the same. The social contract between the state/the government and the people is perverted. More importantly, the fact that it is so financially autonomous means that it can inflate, become a leviathan and intrude into aspects of people’s lives that it has no intrinsic right to get involved in. In Iraq, the government is the employer, the service provider and…well…the government.

But how do we go about solving this problem? This is a tough one. The solution requires not only really uncomfortable adjustments in the way the economy is organised, but in people’s mentalities too. It has been done before though, in Norway, where a brilliant Iraqi, Farouk al-Kassim (article well worth a read), advised the government to make legislate that the only money it could make from oil, is the interest on the savings from the account the entire export revenue went to. This made sure that the government didn’t become too independently wealthy and that the economy didn’t become so over-reliant on a commodity that it would neglect other productive sectors and industries.

This is probably a caricatured solution for Iraq, and I am not saying that this can ever be done in its entirety there. But there are clear lessons to be learnt from Norway’s Kassim-led success.


2 Comments on “Perils of an oil economy”

  1. Ali January 10, 2012 at 2:58 pm #

    Fascinating. Norway is perhaps the most well managed oil-rich state in the world, held up as a shining example to other nations, and the architect behind it all is an Iraqi.

    I think the one certainty that can be taken is that oil revenues must never, ever be managed directly by the state. It inevitably leads to inefficiency, complacency, corruption and general economic mismanagement that adversely affects every other part of the economy. Worse still, the bottomless cash pot at the centre of government actually fosters the conditions for authoritarian rule.

    The Arab Gulf countries have tried to replicate the Norwegian approach of creating a standalone wealth fund, but the majority seem poorly insulated from the state and they end up funding vanity projects such as building sky scrapers or buying English football clubs. As you say, this is a problem of mentalities as much as it is of economics.

    In Iraq, the sheer scale of the infrastructure reconstruction necessary means there is no choice but to use oil as the primary funding stream, and this is going to have to be centrally managed to a large degree. The prospect of Iraq creating an oil fund independent of the government is pretty remote at the moment, so perhaps the answer lies in outsourcing the fund management to a group of international technocrats (chaired by someone like Farouk El-Kassim)? Either that, or hope the Iraqi people tire of voting for parties that are instituted and bound together by nothing but religious zeal and/or shameless self-interest.


  1. Identity and the Iraqi Budget | British Iraqi Forum - January 31, 2012

    […] be 7,940 billion ID. This is a fall from 11.2 % of total income to 7.8 %. We have talked about the negatives of an oil economy in Iraq in other posts, but according to the budget document, the problem is only going to get […]

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