The Financial Implications of Economic Sanctions against Iraq

By Al-Roubaie, Amer; Elali, Wajeeh | Arab Studies Quarterly (ASQ), Summer 1995 | Go to article overview

The Financial Implications of Economic Sanctions against Iraq


Al-Roubaie, Amer, Elali, Wajeeh, Arab Studies Quarterly (ASQ)


INTRODUCTION

IRAQ'S INVASION OF KUWAIT IN AUGUST 1990 led the United Nations Security Council to authorize economic sanctions against Iraq, followed soon after by the freezing of Iraq's financial assets in Western countries. These actions suspended all trade and financial relations between Iraq and a good part of the world. Today, these sanctions have not only curtailed the rate of growth of the Iraqi economy with serious economic and financial consequences, but also have had social and psychological consequences as well.(1) According to the Iraqi government the embargo has cost Iraq an estimated US$18 billion between August 1990 - January 1991.(2) Another study calculated that it cost the country the equivalent of US$21.6 billion per annum in lost income.(3) There has been a tremendous loss in export earnings, a depreciation in the unofficial exchange rate of the Iraqi dinar, a substantial decrease in national income, and a dramatic increase in the price of goods and services. The annual inflation rate is now estimated at 2,000 percent.(4) This has produced a depressed economy and a lower standard of living not only for this generation, but perhaps for many generations to come. Dreze and Gazdar wrote: "War and prolonged sanct87ions have caused such comprehensive damage to the Iraqi economy that it is now impossible to maintain these sanctions in their present form without perpetuating, and perhaps even accentuating, the state of acute poverty in which a large part of the population is now plunged. The debate about sanctions cannot ignore this simple truth."(5)

Economic sanctions are not the only cause of Iraq's financial and economic crisis, but they have exacerbated the problem owing to Iraq's weak economic structure and its high degree of dependence on trade, which make economic recovery more difficult.

DEFINITION AND EFFECTIVENESS OF SANCTIONS

Sanctions are enacted to force the target nation to comply either with conditions imposed on it by other nations, or with a set of international laws or norms, and to bring it back into line.(6) Their effectiveness depends on the extent of damage to the economy and the nation's willingness to capitulate to the conditions imposed on it.(7)

Sanctions are supposed to deter aggressor states from their aggression. They are applied in many ways ranging from denying access to capital, prohibiting international movement, curtailing communication and transportation, and, finally, the most frequently chosen tactic, restricting imports and exports. Sanctions, therefore, have the greatest impact on manufacturing. How great that impact is depends on the output produced by the industry, its demand for import components, its percentage of the total GDP, the ability of the economy to substitute local for imported goods, and the degree of technological sophistication used by local industry.

Imposing sanctions against Iraq could not have come at a worse time. The eight years of war with Iran had diverted its resources to the war which undermined the country's development. The war also damaged oil installations, refineries, roads, irrigation systems, power plants, and communication facilities. The cities were crowded with people from the war-torn areas. Public services deteriorated, and the most essential of them such as health care, education, security and social services were especially hard hit.(8)

THE IMPORTANCE OF TRADE

Until 1950, Iraq traded only a very limited number of commodities, a direct reflection of its backwardness and low productivity, the isolation of its market and the inadequacy of transportation, communications, and marketing facilities. As part of the Middle East trading area, Iraq's trade was also influenced by the low levels of demand in the other countries of the region. Its capacity to allocate its existing resources to produce commodities which would give it an advantage was also low.

After World War II, Iraq was able to trade with new and larger markets, with a wider range of capital and consumer commodities so that it could diversify its external transactions. …

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