Iraq is one of the countries in the globe that contribute significant amounts of oil energy to the global economy, accounting for approximately 4% of global oil production. This figure is ascribed to the country's enormous oil deposits and the government of Iraq's heavy investment in the oil business, which frequently spends a major percentage of the nation's budget to financing oil production, leaving limited funding for investment in other areas of the economy. The oil industry is largely capital-intensive and labor-intensive. As a result, despite the massive budget, the energy industry employs only 1% of the workforce (Manama, 2016). Following the 2003 political leadership change in Iraq (post-Saddam Hussein era), the country resolved to adopt structural changes based on market mechanisms (Jabir, 2002). The proposed system involved reformation of government spending imbalances that favored oil sector and rendered other areas of the economy such as tourism and agriculture unproductive. The previous uneven and non-scientific budgeting procedures used by the previous government saw the large proportion of the national budget allocated to recurrent expenditure. Massive corruption characterized the Saddam Hussein regime, and enormous and growing national debt was a glaring manifestation (Jabir, 2002). Amid the proposed reformation of the Iraqi economy lied an impediment in the name of external debts. The international community raised concerns over the massive debts, while the reforms heavily relied on the external financing.
Problem Statement
Overreliance on oil as the primary source of revenue in Iraq continues to threaten the economic stability of the nation. The world financial crisis resulted in the reduction of aggregate demand for oil and deteriorating prices of oil in the global markets. Consequently, oil-dependent countries such as Iraq experienced little revenue collections, which led to weak economic activity in these nations. Little revenue collections implied increased debt as Iraq turned to borrowing to finance the national budget. Such tendencies were coupled with the growing unemployment rate.
Purpose of the Study
The study aims at determining the effects of global oil prices on the growth of Iraqi economy.
Importance of the Study
Establishing the relationship between world oil prices and economic growth and development of Iraq is useful to the government economic planners. The research outcome would benefit policy formulators in developing strategies aimed at ensuring the stability of Iraqi economy, even in the face of fluctuations in world oil prices. Also, the research will add to the stock of knowledge of Iraqi energy and economy.
Methodology
The research utilizes an interpretive case study to establish the relationship between world oil prices and economic growth and development of Iraq. This involves studying the existing research done on the topic in various OPEC countries of the world. Iraq shares the experience of global financial crisis with other oil-producing nations. Thus, oil revenues decline as a result of the global oil price fluctuations is a common experience.
The method of the case study is a valid research approach. Many international business studies have successfully used the case study research methodology in different circumstances. An example is the “Uppsala model” introduced by Jan Johanson and Finn Wiedersheim-Paul in 1975. As opposed to a single research, researching on multiple cases protects against observer bias and compliment validity (Voss et al., 2002). Case study method is useful in finding out, describing, and establishing the relationship between economic agents. It is also used in testing theories, developing new hypotheses, projections, and identifying areas for conducting future studies (Siggelkow, 2007). The method is beneficial as it draws a generalization from observation of relevant multiple existing studies. It traverses local borders of the cases reviewed and develops new testable and evidence-based assertions and concepts (Voss, Tsikriktsis, & Frohlich, 2002).
Literature Review
A study carried out by Sulaiman D.M (2010) to determine the effect of the fluctuations in oil prices on export revenues of Pakistan established a positive correlation. The research employed Johnsean co-integration method and 1975-2008 yearly data to develop the long-term relationship between the variables under study. The study revealed relationships between oil prices fluctuations and Pakistan export revenues, labor, and gross domestic product growth rate.
Shehu (2009) conducted research aimed at determining the impacts of fluctuating prices of oil in world markets and volatility of exchange rate on Nigeria's economic growth. The author used data from the first quarter of 1986 to 2007 first quarter information in the process. The findings of this study showed that fluctuations in the world oil prices and volatility of rate of exchange have significant impacts on Nigeria's economic growth.
Hamilton conducted several pieces of research in 1983, 1996, 2000, and 2008 to establish the effects of oil prices on the general economy. In these studies, he concluded that oil plays a critical role in the recession witnessed in the US. He emphasizes the importance of having steady oil prices in an economy.
In 2001, Abeysinghe and Forbes developed VAR structural model to aid in quantifying the effects caused by fluctuations in one country on another's gross domestic product. The method uses trade connections to approximate the multiplier. The results of the model used on various trade linkages showed that fluctuations in oil prices significantly affect countries reliant on imported oil than the oil producing and exporting countries.
Jail et al. (2009) carried out a study on the effects of prices of oil in Malaysia's gross domestic price. He variously classified the oil prices into domestic oil price, world oil price in local currency, and world oil price. He then adopted the VAR model in his study. The results of this study established a significant positive relationship between prices of oil and gross domestic product. Another study carried out by Darby in 1982 using an econometric model approximated that the 1983 oil price fluctuation resulted in a decline in the US gross national product (GNP) by 2.5 percent.
Empirical studies have shown that decreases in prices of oil have the effect of slowing the pace of growth in oil producing and exporting countries. Likewise, increases in oil price in the world markets benefits the oil-producing nations by increasing their revenues and therefore development. The extent of the effects of fluctuations in prices of oil on the gross domestic product depends on the level of reliance of the economy on the oil sector. Those countries which depend on oil revenues suffer magnanimous economic effects in case of oil price falls.
Recommendations
To curb the adverse effects of dependence on oil in Iraq, the government needs to develop a strategy founded on economic diversification. Such policies should be aimed at promoting the development of other key sectors of Iraqi economy such as agriculture and tourism. Agricultural sector revival would provide an alternative revenue source in the eventuality of exhaustion of oil. Iraq is situated in a fertile region that hosted ancient civilizations of Mesopotamia, having abundant water for irrigation. Diversified economy implies reducing the risk of economic deterioration in case of a decline in oil prices since other sectors may not be affected by the same.
There is a direct relation between the stability of macroeconomic variables and diversification in an economy. Economies with multiple established sectors are less affected by negative externalities in the global markets. During the 2008-2009 recession, nations with diversified economies and several export commodities experienced relatively less adverse effects as compared to one-sector economies. The volatility of output is also reduced in diversified economies. Correspondingly, the more diversified and complex an economy is, the less instable is the revenue of a nation (Manama, 2016).
Diversification of the economy would ensure sustainable economic growth in the event of depletion of oil from the reserves. With time, oil reserves will run dry since oil is an exhaustible natural resource. Hydrocarbon resources in oil-rich countries like Bahrain and Oman are nearing their depletion levels signifying the trend in oil-endowed countries (Manama, 2016). Depletion of oil will limit the government's capacity to facilitate the economy. Immediate measures for sustainable growth to take care of the future generations' interests became necessary, creating the dire need of developing such sectors of the economy with the potential to provide alternative revenue sources to Iraq in the eventuality of exhaustion of oil.
Developing a robust private sector investment through supporting policies is important in maintaining the steady economy in the event of depletion of oil fields. The revenues collected in the non-oil related sectors would compensate the lost revenue from the oil industry. A complex economy with multiple export commodities would ensure the sustenance of current account of the nation. The Strong private sector would also create employment for the citizens (Jabir, 2002).The government should provide an enabling environment for operation of the private sector. It also needs to align policies on public employment and wages to provide incentive and skilled labor for the industry. Competitiveness of the private sector is accelerated by investing in human resource and infrastructure (Jabir, 2002).
The Iraqi government should adopt strategies aimed at attracting foreign investors in other sectors of the economy. Foreign direct investment (FDI) will come with technology transfer and promote technological adoption and adaptation in the non-oil sectors of the economy (Joint Research Centre, 2016). Furthermore, foreign direct investment will increase job opportunities, thus helping to solve the unemployment problem in the Iraqi economy. Increased employment opportunities would relieve the burden of the public sector crowding, thereby increasing the efficiency and productivity of the public corporations. Improving foreign direct investment includes providing ample political and economic environment for smooth operation of the private businesses (Jabir, 2002). It also includes conducting promotions of the country, removing entry barriers, and restructuring the tax system.
In conclusion, the Iraqi economy faces many challenges such as unemployment, which are majorly caused by reliance on the oil sector that uses capital-intensive production methods. The country's GDP also depends on the oil revenues, thus being vulnerable to external economic shocks. As such, diversification of the economy becomes a definite way of ensuring sustainable economic growth in Iraq. Developing a robust private sector and attracting foreign direct investment in non-oil sectors as well as supporting agricultural, industrial, and tourism sectors would shield the Iraqi economy from deterioration caused by fluctuations in world oil prices.
References
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Voss, C., Tsikriktsis, N., & Frohlich, M. (2002). Case research in operations management. International journal of operations & production management, 22(2), 195-219.
