A striking characteristic of the present Iraqi economy is the disparate images that it presents.  Buoyed by improving security, the economy has been experiencing consistent, if unspectacular, growth since 2008, on the one hand.  Foreign businesses, notably oil companies, are anxious to work in Iraq once again.  On the other hand, unemployment continues to be high, corruption is rampant, and major human welfare indices remain poor.  While violence has declined, it is still widespread, and Iraqis continue to emigrate or stay away in large numbers.  This represents a major loss of human capital of all sorts, including the highly skilled and professional labor needed in reconstruction.  

Understanding the structure of Iraq’s economy helps shed light on this paradoxical picture.  Iraq’s oil sector accounts for most of GDP.  Any increase in price or exported volume of oil is reflected in elevated nominal GDP, regardless of whether domestic consumption or investment increases-—that is, without reference to whether Iraqis are actually better off.  Oil revenues provide funds that can potentially be invested or consumed, but may also accumulate as financial assets.  The oil sector itself is highly capital-intensive and typically employs a minute fraction of the labor force.  Receipts from the sale of oil accrue to the government directly.   This, in turn, enables the state to use those revenues to finance spending and investment, which can stimulate demand and employment in non-oil sectors.  

This has been the hope of many focused on the promise of oil revenue to improve Iraqis’ economic wellbeing. However, global oil price increases rather than increased production in Iraqi oilfields have produced the observed GDP rise.  Agriculture and manufacturing, at the same time, have stagnated since the US-directed liberalization of imports following the 2003 invasion.  Iraqi agriculture has found it difficult to compete, especially with subsidized cereals produced in the West, while manufacturing has been particularly hard hit by the loss of electrical capacity resulting from sanctions and the US invasion.

While government use of oil revenues has boosted consumption, rebuilding and capital formation have proceeded more slowly. The US inability to provide adequate security, along with policies that aimed to radically restructure Iraq’s economy, explains the slow pace of reconstruction.  Only since 2008 has capital formation accelerated, facilitated by improved security rather than expanded oil revenues.

The future economy of Iraq may be one which is oil-revenue rich but which Iraqis continue to flee and which remains under-developed.