Iraq’s economic winners and losers

News headlines about Iraq’s civil war are dominated by its political, social and even religious impacts. Yet, little attention has been paid to the economic impacts, beyond the price of oil, said Frank Gunter. a professor of economics at Lehigh University. In a recent article for the Foreign Policy Research Institute, Gunter identifies the economic “winners and losers” created by the division of Iraq into sections controlled by the government in Baghdad, the Kurdish Regional Government (KRG) and Islamic State of Iraq and Levant (ISIL, also known as ISIS). Gunter, a retired Colonel of Marines and senior fellow of the Institute who spent two years in Iraq as an economic advisor, is the author of “The Political Economy of Iraq: Restoring Balance in a Post-Conflict Society.”

In his article, “The ISIL Invasion of Iraq: Economic Winners and Losers,” Gunter concludes:

A cynical way of interpreting the current situation in Iraq is that Baghdad has unintentionally disposed of an area that it could not control – the KRG – and an area that was a net drain on Iraq’s economic resources – the ISIL-controlled territory. As a result, Baghdad not only has a territory with a much more homogeneous population but also continues to control most of the country’s most important asset, its oil and gas. The situation of the other territories is not nearly as favorable.

The KRG may be closer to independence but faces severe short-term budget challenges as it attempts to pay for a bloated public sector labor force and increased military expenditures without the substantial subsidies that it formerly received from Baghdad. With its petroleum resources, Mediterranean type climate, and the influx of skilled Christians and Islamic Kurds fleeing the ISIL, the KRG has the potential of achieving a substantial acceleration of private sector growth. However, this will require a reduction in regulatory hostility towards the private sector and a reasonably successful anti-corruption campaign.

Economically, ISIL’s current situation is untenable. A continuing stream of political and military victories may satisfy the population of the occupied territory for a time but further deterioration of the economy will have an adverse political impact. The leadership of the ISIL has shown little interest in economics beyond a crude socialism – confiscating the property of their enemies and distributing it to their supporters. However, if current electrical outages and fuel shortages are followed by increased unemployment and sharply higher food prices, then support for the ISIL authorities will weaken. And this loss of support will accelerate if rumors of widespread corruption of the ISIL leadership turn out to be true.”