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Vol. 224 No. 12 |
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| DR. A. F. ALHAJJI, CONTRIBUTING EDITOR, MIDDLE EAST |
Privatization of Iraq’s oil industry. Will Iraq privatize its oil industry? This question is far too complex to answer easily. One thing appears certain – the government should not give priority to privatizing the oil sector. Privatization would not create jobs, and it would weaken governmental control over an already divided country. Iraq will not, and should not, privatize oil reserves. All economic, political, social and religious beliefs fly against such an idea. However, the nation might consider privatizing its oil companies, most of all transportation and distribution outlets.
Calls for nationalization of Iraq’s oil industry originally began in the early 1950s, after Mohammed Musaddaq nationalized Iran’s sector during March 1951. Despite tremendous public pressure, subsequent Iraqi governments resisted the temptation to nationalize after similar efforts failed in Iran.
Twenty years of Arab nationalism and communist agitation, combined with major changes in oil geopolitics, made it possible for Iraq to nationalize its oil industry in 1972. The history of Iran and Iraq reveals that economic, political, legal, ideological and religious factors contributed to nationalization, the latter two being foremost.
Secular political figures and Muslim religious leaders provided the legal basis for nationalization. In areas like Iran and southern Iraq, where religion is deeply rooted, the support of clerics is crucial for major policy undertakings to succeed. Muslim clerics have more power in Iraq today than appointed political office-holders. Nearly all Middle Eastern countries’ constitutions are based on Islamic principles. Thus, a clear understanding of the religious view on nationalization and privatization is crucial.
Islam respects property rights and forbids nationalization. Scholars from all Muslim sects and rites agree that the government cannot nationalize privately owned assets. However, a majority of scholars agrees that in very rare circumstances, and only if necessary, officials can nationalize private property on the condition that owners receive proper compensation. Despite this prohibition, top Muslim scholars supported oil nationalization and issued timeless religious decrees clarifying the basis for it.
Muslim jurors and secular political leaders gave the same reasons for nationalization. They identified a link between occupation, foreign power and multinational companies. They listed foreign control, human rights abuses, loss of national wealth, poverty and low income as reasons for nationalization. Islamic jurors viewed nationalization as a “just” scheme to return property to its rightful owners. Would they see it any differently during the US/British occupation?
The current situation shows that Iraqi nationalization drivers have not changed over the last 30 years. Indeed, the US/UK-led occupation has enflamed these sentiments. Present-day religious and legal scholars will consider any privatization contracts, concessions and trade deals as “invalid.” In their view, such contracts will have been extracted “under duress” during an occupation. It is impossible to extinguish two generations of religious beliefs and passionate nationalism overnight.
A distinction between “oil reserves” and “oil companies.” Religious decrees from the 1950s and 1960s allowed nationalization of oil reserves. Jurors argued that oil concessions were given under duress; foreign firms did not hold legal titles to the reserves. Therefore, nationalization did not violate Islamic principles.
The majority of Muslim scholars believe that oil reserves are owned by the Islamic nation, including future generations. The state is entrusted with this wealth, which cannot be privatized. Muslim scholars allowed deals with foreign operators, as long as they could not use oil to dominate political and social life. This distinction between oil reserves and operating companies indicates that a future Iraqi regime is unlikely to privatize reserves, but it might privatize the companies.
In recent years, many countries have privatized their oil companies, including Argentina, Brazil and Russia. However, not one of the top producing countries has entirely privatized its reserves. Russia’s privatization was partial – Putin’s regime still holds shares in previously state-owned companies. In the UK, the birthplace of capitalism and free markets, the government still owns oil reserves. And the US government still owns reserves on federal lands and offshore.
Privatization supporters argue that it would bring sustained economic growth, prosperity, political stability and democracy to Iraq. Several case studies show that privatization increased efficiency and profitability in Eastern Europe, Latin America, Asia and Africa. However, most privatization studies show that it results in massive layoffs. In the general economy, Iraq will benefit from privatizing public companies. However, privatizing oil companies does not create jobs.
Recent riots in Baghdad indicate that high unemployment and poverty are the main impediments to political stability and democracy. Some people fear that privatizing state companies will make the situation worse by increasing unemployment, reducing workers’ incomes, and increasing the income gap between the haves and have-nots.
Several case studies demonstrate that privatization creates jobs and decreases unemployment only in industries that suffered from under-investment under government control. Significantly, all Iraqi sectors have suffered from under-investment and funding backlogs.
Privatization in Iraq would create jobs, reduce unemployment and increase wages in most industries. Therefore, the government should make job creation the main criterion for privatization. The sectors that have suffered the most from under-investment have the greatest potential for job creation.
Such privatization will enhance political stability by creating jobs and increasing workers’ incomes. The top four candidates for Iraqi privatization are telecommunications, retail, airlines and tourism. Officials should not give priority to privatizing the oil sector, which is capital-intensive, offers fewer jobs than other industries and is already overstaffed. Iraq needs political stability and a strong central government first. 
Dr. A. F. Alhajji is an assistant professor of economics in the College of Business Administration at Ohio Northern University in Ada, Ohio, specializing in international and energy economics. Previously, he was an award-winning, visiting professor of economics at Colorado School of Mines. He is a regular contributor to this column.
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