The Iran Iraq War: Economic Opportunities Lost

By John Haldane

The Iran-Iraq war, per capita one of the bloodiest and longest of this century, is now in its sixth year, with no end in sight. Financial and manpower losses are running high on both sides. Several European Mideast experts have estimated total casualties at close to one million. A more conservative estimate by a U.S. Government analyst last September indicated that the number of deaths in the war had reached 350,000, with Iranian losses 250,000 of that total. Given the small Iraqi population of only 15 million and the Iranian population of 42 million, these losses represent a significant percentage of the youth of both nations, who normally would be entering the workforce or undertaking higher education.

The two nations' bountiful oil income traditionally allocated to industrial and agricultural development, medical facilities and to the raising of educational and living standards goes now to pay for aircraft, artillery, ammunition, and other necessities of war. While the leaders of both nations claim they have the full support of their citizens and that morale is high, foreign experts question how long the populations of these two countries will tolerate the squandering of non renewable oil resources on a costly war that does not involve any serious national interest on either side.

A Reversal of Fortunes in the 'Oil War'

Iran and Iraq have long had one product economies based upon oil. The petroleum sector accounts for more than 99 percent of Iraqi and 95 percent of Iranian revenue. Therefore, after some early pushing back and forth across borders, both antagonists' war strategy called for a sustained attempt to restrict oil exports from the opposing power to the outside world by bombing oil production facilities and oil export terminals, and harassing foreign oil tankers.

Until last September, this so called "oil war" had taken its heaviest toll on Iraq. As a result of Syria's closing of the pipeline from the Kirkuk oil field to the Mediterranean, and Iranian raids on its Gulf oil terminals, Iraq's export capacity had shrunk from a pre-war level of about 3 million barrels per day (b/d) to only 800,000 b/d. However, the recently completed pipelines through Saudi Arabia and Turkey now have increased Iraq's export capacity to about 1.5 million b/d. Additional pipelines through the same countries should boost Iraqi export potential to over 3 million b/d by late 1988.

Iran concedes officially that it earned only $14.7 billion in oil revenue the last fiscal year, well under its projected $21.1 billion. When the Iranian government responded to this loss of income by slashing domestic spending 40 percent, industrial production fell 17 percent at a time when the war's cost in foreign exchange alone was an estimated $3 billion annually.

The Iranians export between 80 and 90 percent of their oil from the huge Kharg Island terminal. By concentrating on this one facility, Iraqi air attacks have seriously affected the entire Iranian economy. This explains Iran's recent decision to rush the construction of a new 200 mile twin pipeline from Gurreh, the underground pumping station for Kharg Island, to Asaluyeh on the Gulf coast. This new offloading facility would be well out of the range of Iraqi bombers.

Iraq has expended some $35 billion in foreign currency reserves and piled up foreign debts in the range of $40 to $50 billion during the five years of hostilities. Comparable figures are not available for Iran, but a report by the Organization of European Cooperation and Development (OECD) indicates that Iran's total foreign reserves now amount to only $5 billion, barely enough to cover annual foreign military purchases.

Since the Iranian airforce seems unable to prevent the continual Iraqi air strikes against Kharg Island, the Iranian government has initiated a number of programs to ease its foreign exchange crisis. Aggressive oil marketing has been undertaken to insure the rapid purchase of exportable oil. Bilateral counter trade (oil for goods) agreements are being concluded with a number of foreign countries and barter deals are encouraged with the larger Western and Eastern countries. However, given the soft world market for crude oil and foreign fears of Iraqi air strikes against tankers and cargo vessels, it is doubtful that Iran will achieve its goals.

Key Iranian oil installations are in urgent need of repairs, aside from damage caused by Iraqi air raids. Iran also needs foreign technical assistance to complete long delayed and vitally needed industrial projects, as well as to help overhaul the country's decaying infrastructure. Since Iran lost many of its best qualified engineers, managers and technicians after the revolution, she also needs expert foreign assistance just to maintain production in such vital industries as oil, iron and steel, chemicals and textiles.

Mortgaging the Future Through an Endless War

How long the war will drag on is anybody's guess. So long as Khomeini is in charge, Iran is unlikely to respond to Iraqi conditions for ending the war. And Iraq, now that its new oil pipelines are operative, feels no need to meet Iranian demands for concessions.

Past efforts by outsiders to negotiate a peace agreement have failed. The most recent attempt, during the December visit by Iran's foreign minister to King Fahd of Saudi Arabia, produced no tangible results, although the Saudis worked hard to arrange a pact agreeable to both sides. A cessation of hostilities certainly would ease the apprehension felt by Saudi Arabia and other Gulf Cooperation Council members that the war will destabilize or spread to other parts of the Gulf.

Mideast experts agree that Iran and Iraq could prolong hostilities for years by continuing at their present austerity levels. However, the real loss to both countries is the opportunity to make their economies more self supporting by weaning themselves from a purely petroleum based economy. Oil prices are dropping from their historic highs, making it increasingly difficult for both nations to invest surplus oil revenues and build the kind of economies they need multi faceted ones capable of generating needed foreign exchange through the export of a judicious mix of industrial and agricultural goods.

John Haldane is a specialist in Middle East affairs who has served as a foreign service officer in Baghdad, Beirut and Cairo, and as an international economist in the Departments of Commerce and Treasury.