The Economics of Iraqi Reconstruction

Iraq has a rich and diverse resource base -the third largest oil reserves in the world, abundant water, and a national labor force of more than seven million people- much larger than any member of the Gulf Cooperation Council. This combination of resources should enable the country to regain its middle-income status it enjoyed earlier. However, as the World Bank notes, to do so the country will need to make three somewhat sequential transformations,2 each of which has an important economic component from conflict to rehabilitation, from state domination to market orientation, and from oil dependence to diversification. Unfortunately, in the initial area of recovery and reconstruction progress is much slower than initially hoped. Almost all growth has been in the oil sector, propped up by unusually strong world oil prices. Oil production, however has not risen above prewar levels, and in fact has been falling -reaching just 1.1 million barrels in December 2005, a new record low. The failure of the Iraqi government to expand oil production is one of the main obstacles to economic recovery.