Reviving Iraq's middle class
US plan to rebuild may restore economy to pre-1990 vibrance
By Stephen J. Glain, Globe Staff, 03/23/2003
In a country known for ancient relics, Captain Akram Hasan is a living reminder of one of the Arab world's most important modern achievements -- the Iraqi middle class -- and a possible beneficiary of the Bush administration's postwar reconstruction plans.
Hasan is a pilot for Iraqi Airways, once the most highly rated airline from Istanbul to Singapore. He is certified on every aircraft Boeing makes and once earned the equivalent of $1,500 a month, which is more than what most Middle Eastern people today earn in a year. After Iraq's 1990 invasion of Kuwait and the sanctions on Iraq that followed, Hasan's wages plummeted in value along with the country's currency, the dinar, and are now worth about $2.50 a month. Iraqi Airways, blocked from international travel by US-imposed restrictions on Iraqi airspace, was reduced to plying the occasional charter flight to local destinations like Basra and Mosul, arranging bus transport, and catering embassy receptions.
Until the US-led assault on Iraq last week, Hasan supplemented his income by selling used appliances from a dimly lit stall in the center of Baghdad. His beard is immaculately groomed and he wears a crisp buttoned-down shirt. "Wherever we went we were top citizens," he says of the presanctions era. "I could get into countries with just my identification card, no passport needed. We were the pride of Iraq."
For the last few decades the fortunes of the Arab world have been interlaced with those of the Iraqi middle class. Both have suffered since Iraq's 1990 invasion of Kuwait and the international sanctions that followed. The first and most diversified modern Arab economy was an engine of growth for the region and extinguishing it with sanctions brought the rest of the region to a halt.
"We believed Iraq was where the Arab dream was," said Said Aburish, a Palestinian writer and one of many non-Iraqi Arabs who was drawn to Iraq in the 1970s before leaving the country to escape the regime's growing tyranny. "Iraq had wealth, population, and first-class technocrats. There is a reason why they call that country the Fertile Crescent, and sanctions really did it in."
Now the White House, working through the Treasury Department and the United States Agency for International Development, is preparing to spend billions of dollars to rebuild Iraq. It is well into negotiations with major US contractors to rebuild the country's infrastructure, from roads to primary schools and power grids. Eventually, according to USAID and Treasury department officials, Baghdad's banking and financial systems will also be reinvigorated in a region that for more than a generation has known only primitive capital markets and chronically low investment.
The Bush reconstruction plan has been percolating since late last year and has already drawn criticism. Exactly how the administration will retool Iraq's banks and financial sector has yet to be spelled out. Nongovernmental organizations, not-for-profit groups known as NGOs that coordinate relief work, say they have been sidelined, and non-US contractors complain they have been squeezed out of the largest deals.
But if the plan succeeds, it would complete what has been the slow but methodical rehabilitation of the country's once-formidable white-collar class -- educated, professional and hungry for the region's goods and services. Despite a generation of sanctions, Iraq has already managed in recent years some of the highest economic growth levels in the Middle East. A stable war aftermath and the reintegration of Iraq to the global economy could help reverse more than a decade of Arab economic malaise.
"Unlike Afghanistan, Iraq had a vibrant middle class, and there are still remnants of it," said an administration official familiar with the rebuilding plan. "If you can rebuild it, you can go a long way toward reviving the region."
With a market of 25 million people, a deep-water port, ample water and oil reserves, rich topsoil, and perched at the gateway between the markets of Asia and the Mediterranean, Iraq has extensive natural assets. Long before the petroleum era, Iraq was coveted by emperors, caliphs, warlords, sultans, and monarchs. Britain occupied Iraq for much of the early part of the last century, first because it was a land-bridge to India and later because it was a source of oil for the Royal navy. Throughout the Cold War, Baghdad was assiduously courted by Washington and Moscow.
Despite a series of coups and countercoups beginning in 1958, the growth of Iraq's per-capita income from 1960 to 1987 easily outpaced its neighbors.
Before the invasion of Kuwait -- and even after the Iran-Iraq war forced Baghdad to assume huge debts -- Iraqis enjoyed living standards that were among the highest in the Middle East. Unlike other oil-producing states in the Middle East, where petrol-dollars were swapped for palaces and fleets of limousines, Baghdad invested much of its oil revenue into hospitals, schools, and roads patronized by a growing cadre of white-collar workers. By the late 1970s, nearly all Iraqi children attended primary school and about 60 percent went to secondary school. The number of physicians per 1,000 people tripled, and Iraqi women were encouraged to educate themselves and enter the work force. The state dispatched engineers, doctors, and civil servants to the United States and Europe for study and training.
Ali Shakri, a confidant of Jordan's late King Hussein, remembers how well-represented Iraqis were at Wales's Cardiff University when he was earning a degree there. "Every one of my classes had Iraqis," he said. "Most were doing postgraduate work in engineering and radiology."
By 1980, with Baghdad generating some $25 billion a year in oil sales, Iraq was the region's most important trading partner and among the largest consumers of American grain. The country attracted both skilled and unskilled laborers from around the region who fertilized their own economies by sending home a share of their wages. The Iraqi dinar was highly liquid and traded at 1.50 per US dollar. Iraq had established itself as the Arab world's first modern economy, and it did so largely under the administration of then-emerging strongman Saddam Hussein, who imposed sweeping land reform, improved health care, and increased minimum wage laws.
"Baghdad was a city of light," said Hikmat Mahoud Al Hilli, an 80-year-old barber who for decades has cut hair from his dilapidated shop on Al Rashid Street, once the heart of fashionable Baghdad. "Seventy-five thousand people visited here every year. We had a higher quality of people then, before all these peasants from the village came."
Sanctions neutralized Iraq's middle class. The currency has wallowed over the last 12 years at a black-market rate of between 1,500 to 2,600 per US dollar. The regime has fueled inflation by circulating postsanction dinars with Saddam's face on the notes of large denominations; they are poorly minted and are referred to as "photocopy money." The old dinars are of high quality and feature renderings of Iraqi antiquities and a statue of King Faisal I, the Iraqi monarch installed by the British in the 1920s. Most Iraqis have squirreled away their presanction currency as they await the end of sanctions and the dinar's recovery.
The dinar's devaluation has deprived the region of an important source of income. Iraqis buy far less of their neighbors' products and can no longer afford to hire so many guest workers. No other Arab country has filled the void. Over the last decade, the growth of overall gross domestic product in the region -- excluding Israel -- has averaged less than 1 percent.
Despite this, Iraqi consumption has been slowly recovering. On the eve of last week's assault, the country in many ways had one of the most dynamic economies in the region, thanks to an enormous smuggling trade and a UN humanitarian program that allowed Baghdad to sell oil for humanitarian supplies and public works projects. Since 1998, Iraq earned between $7 billion and $12 billion dealing in contraband goods, according to the Washington-based Institute for International Economics. The oil for food program, set up by the United Nations to avert a humanitarian crisis, has authorized some $34 billion worth of projects and the purchase of food and medical supplies in the last five years.
Long before the Bush administration unveiled its plan to re-build Iraq, a troop of European, Russian, and Asian merchants lined up for a slice of the oil for food business. One of the most important dates on the Iraqi calendar, alongside holy feasts and fasts, is the annual Baghdad trade exposition, where some of the world's top multinationals -- US-based companies are conspicuously absent -- show their wares. Many of the goods on display, from luxury cars to DVD players, do not appear on the UN's list of humanitarian items.
Much of the revenue from the smuggling trade ended up in the hands of Saddam's clan in the form of huge villas that have mushroomed in Baghdad's fashionable suburban neighborhoods, representing one of the hottest real estate markets in the Middle East. But the revenue has also trickled down beyond the ruling circle. Until last week, business was brisk for merchants like 32-year-old Ahmed Fadl, who sold bootleg DVDs in Baghdad's old market. Ahmed has a degree in petroleum engineering and in peacetime gives night classes in Arab literature. He once dealt only in the possessions auctioned off by Iraqis to raise money for food but now his stock includes smuggled electronics goods and the latest rock videos.
"We are less isolated," Fadl said, "You can even buy a satellite dish."
Receipts from the smuggling trade and UN programs have animated the otherwise moribund economies of some of Iraq's neighbors. Before the US-led assault, the Jordanian port of Aqaba and the Syrian port at Latakia owed much of its volume to oil for food and smuggling activity. Trucks lined up on both sides of the Turkish-Iraqi border checkpoint at Zakho in northern Iraq. Turkish vehicles were loaded with everything from construction materials and luxury watches bound for Iraq, and Iraqi tankers were filled with crude oil heading for Turkey. Iraq's major cities are embroidered with the logos of the world's top brands -- from Samsung to Mercedes and Nintendo. Share prices on The Baghdad Stock Exchange, though diminished in value by the dinar's collapse, traded as furiously as they do in the trading pits of Cairo or Beirut.
So potent has been the combination of illegal and legal commerce in Iraq that its gross domestic product actually grew by an average rate of 19 percent in the three years ending 2000, according to the Economist Intelligence Unit, a sister company of the London-based weekly magazine/newspaper. Though the economy contracted in 2001-2002 because of reduced oil output and war fears, EIU forecasts growth of 15 percent in 2004, assuming a short conflict and a stable aftermath.
"The middle class used to be dominant," said Mohammad Sa'eed Sahaf, Iraq's minister of information. "Now it's a minority. But they are still doing what they did before the war. They used to have the highest income in the region. When sanctions are lifted, they can easily readjust."
Stephen J. Glain can be reached at email@example.com.