Crude Oil, Conflict and COVID-19: The Political Economy of State Fragility in Iraq
International Institute for Middle East and Balkan Studies (IFIMES) from Ljubljana, Slovenia, regularly analyses developments in the Middle East, Balkansand also around the world. Will Marshall is an intern at Gulf State Analytics a Washington. In his comprehensive analysis entitled “Crude Oil, Conflict and COVID-19: The Political Economy of State Fragility in Iraq” he is analysing the situation in Iraq and if it is possible to break the cycle of state failure which has plagued the country for the past seventeen years.
● Will Marshall
Crude Oil, Conflict and COVID-19: The Political Economy of State Fragility in Iraq
After months of unprecedented calm amid a global pandemic, Iraq’s streets have once again been gripped by protest as anti-government demonstrations resumed with vengeance in recent weeks. Despite newly appointed Prime Minister Mustafa al-Kadhimi’s extension of an olive branch to demonstrators with his promise to release unlawfully detained protestors, pent up anger over dilapidated public services, stagnant economic growth, endemic corruption and chronic underemployment have erupted once more across large swathes of central and southern Iraq.
Even absent the unprecedented strain placed on the Iraqi economy by the Covid-19 pandemic, Baghdad would face an uphill battle resolving the intractable social, economic, demographic, and political issues propelling unrelenting mass protests. However, as Baghdad struggles to contain a burgeoning public health crisis, analysts look on in trepidation at a confluence of factors, including repeated coronavirus lockdowns, surging militant activity, collapsing global crude oil demand, and a devastating Russia-Saudi oil price war, which threatens to overwhelm Iraq’s fragile political and economic system.
Covid-19 is a trigger, not the root cause of a crisis of governance long in the making. Rather, the pandemic has merely laid bare the fundamentally unsustainable nature of a dysfunctional political economy trapped in hiatus between the fragile balancing act of post-conflict reconstruction and the potential dynamism of a rapidly growing frontier market, much of which can be traced to the aftermath of the U.S-led invasion of 2003.
The core dynamics underpinning the entrenched political economy of state fragility, which stubbornly hinders Iraq’s development to the present day have their roots in the weeks and months which followed Saddam Hussein’s ouster in 2003. In light of the thinly stretched coalition forces and systematic deconstruction of Ba’athist-era governance structures, which had hitherto kept a lid on latent ethno-sectarian tensions between the Shi’a-dominated south, the Sunni center, and the Kurdish north, the Coalition Provisional Authority (CPA) was incapable of preventing extensive power vacuums from rapidly emerging across significant swathes of Iraqi territory.
Thus, the governance arrangements implemented under the Iraq Governing Council, the first Iraqi civilian body tasked with rebuilding the post-Saddam political infrastructure, were specifically constructed for the purpose of post-conflict stabilisation and the reestablishment of governance, however weak, across large swathes of a country where state authority was de facto non-existent.
The political system that emerged from the post-2003 consensus on the imperative of post-conflict stabilization, the so-called muhasasa al-ta’ifia system, was the result of an elite pact, which dissected Baghdad along the principles of sectarian apportionment, distributing control over government ministries amongst Shi’a, Sunni, and Kurdish parties. Given the close links between such political parties and regional militias—for example between the Shi’a-dominated Islamic Supreme Council of Iraq and the Badr Brigades—such ad hoc arrangements which de facto outsourced the security responsibilities of Baghdad’s weak central government represented an effective short-term fix to the security vacuum afflicting post-invasion Iraq. In return for guaranteeing security through their militia proxies, sectarian political parties were given free rein to ‘colonize’ the various ministries under their control, facilitating the construction of sprawling ethic- and clan-based patronage networks, which has swollen the corrupt, inefficient public sector to the extent that 60 percent of full-time employment occurs within government services. The result is that narrow political interests claiming to ‘represent’ all sectarian groups predate upon state institutions, particularly the lucrative oil industry, to the extent that the primary purpose of the state is the enrichment of vested interests controlling the levers of political power.
An imperfect compromise between a corrupt, inefficient, and predatory state that at least guarantees some degree of basic security and no state at all may have been acceptable in the weeks and months after the destruction of Saddam Hussein’s regime. Yet the entrenchment of the muhasasa al-ta’ifia system has created a political economy characterised by perverse incentives which have structurally inhibited the development of the Iraqi economic and political system beyond the stage of post-conflict stabilisation. Widespread perceptions of sectarian bias under Nouri al-Maliki, a Shi’a whose pursuit of a narrow sectarian agenda through his packing of the security services and special forces from amongst militias linked with his own Islamic Dawa Party during his tenure as Iraq’s Prime Minister from 2006 to 2014, fuelled the 2012-13 protests amongst marginalised Sunnis, provoking a civil conflict which ultimately facilitated Islamic State (ISIS)’s dramatic rise to power in 2014. The fact that the successors to al-Maliki’s Shi’a militias have reoccupied their privileged position within the Iraqi security state (along with the associated lucrative governmental contracts) under the guise of the Popular Mobilisation Forces since the collapse of ISIS’s caliphate in 2017 is indicative of the cyclical nature of a fragile political economy whereby insecurity begets insecurity.
In this context, the immense profits to be generated from Iraq’s disproportionately large oil sector (oil accounts for 90 percent of Iraqi exports), combined with the cycle of civil conflict stemming from the muhasasa al-ta’ifia system makes Baghdad’s economic performance acutely vulnerable to exogenous macroeconomic shocks such as oil price swings and geopolitical risks from intractable sectarian conflict, discouraging diversification due to the plethora of challenges confronting potential foreign investors. Similarly, as sought after government positions are seen as a means of acquiring personal power and wealth rather than valuable public service, endemic corruption and profiteering off state institutions at all levels has further contributed to a dilapidated public infrastructure and chronic lack of government investment in economic development, acting to structurally inhibit Iraq’s transformation into a dynamic emerging market economy.
Now, Covid-19 has shattered what little optimism remained for Iraqi citizens looking for change. Initially, Iraq appeared to effectively contain the virus due to rapid lockdowns and border closures (particularly given the crisis that engulfed neighboring Iran in February). However, this has come at a catastrophic price for the 90 percent of non-public sector employees who lack the security of a fixed salary to fall back, exacerbating existing inequalities between the beneficiaries of the status quo and those who lack the patronage and contacts to achieve basic financial security. Simultaneously, ISIS militants have sought to exploit the pandemic to stage a resurgence, burning thousands of hectares of agricultural land in Salahuddin, Kirkuk, and Diyala provinces, further exacerbating the woes of those dependent on the agricultural sector and setting the stage for further food insecurity over the coming months.
More critically, collapsing global demand for crude oil amidst the pandemic, exacerbated by an ill-timed price war between fellow OPEC members Russia and Saudi Arabia has triggered a precipitous drop in barrel prices, fundamentally undermining a key pillar of Iraqi public finances. In April, Baghdad only received USD 1.4bn in oil revenues despite the USD 5bn overhead cost necessary to cover the bloated public sector payroll, leading to lengthy salary delays which have precipitated mass strikes from oil and electricity workers in Basra and healthcare workers risking their lives fighting Covid-19 in Kurdistan. The result is that even those who ostensibly benefit from the increasingly fragile status quo are turning against a system which lacks the sustainability and vision to move beyond its conflict-ridden past and provide a more optimistic future to Iraqis of all walks of life.
Iraq stands at a crucial inflection point. As both the protests and the pandemic gather momentum, Iraqis confront a perfect storm of economic collapse, rising insurgency and a looming public health catastrophe with which Baghdad’s dysfunctional political system is uniquely ill-prepared to cope, threatening to plunge the country back into the vice-like grip of civil conflict for years to come. Paradoxically, the impending crisis simultaneously represents perhaps the best opportunity in a generation for a nationwide reset allowing Iraq to emerge from the shadows of the post-2003 era.
As the crisis lays bare the fundamentally dysfunctional nature of Iraq’s political and economic system, a short window of opportunity exists for Kadhimi’s government to push through much needed reform and break the cycle of state failure which has plagued the country for the past seventeen years. Baghdad’s first priority, however, must be to weather the current storm, a feat which is far from certain in a country already crippled by its own leadership.
About the author:
Will Marshall is an intern at Gulf State Analytics (@GulfStateAnalyt), a Washington, DC-based geopolitical risk consultancy.
Ljubljana, 7 July 2020
 IFIMES - The International Institute for Middle-East and Balkan Studies, based in Ljubljana, Slovenia, has a special consultative status with the Economic and Social Council ECOSOC/UN since 2018.