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North Korea: Witness to Transformation

Sanctions and the Ghosts of Iraq, Part 1

by | April 16th, 2013 | 06:06 am

North Korea is already under multilateral economic sanctions and tightened sanctions in response to continued activity in the missile and nuclear spheres can be anticipated. Yet already one is hearing rumblings critical of sanctions, blaming them the suffering of innocent civilians.  The issue was essentially framed in these terms in an Australian radio talk show in which I recently participated. Iraq looms large in this narrative, and indeed, one of the other participants in that radio discussion, Ben Saul of the University of Sydney, claimed that sanctions had led to the deaths of 500,000 infants there.

So as the North Korea issue heats up, it is worth reviewing the Iraq case, especially insofar as the conventional wisdom articulated by Saul and others appears to be based on outdated evidence.  In the first part of this analysis, I review the evidence on Iraq.  In the second part, I examine what it may mean for North Korea.

During the 1970s, Iraq established itself as a middle-income country, with a per capita income of roughly $2,500 putting it in the same league as contemporaneous Portugal, Argentina, and Yugoslavia, though with the typically unequal distribution of income within oil exporters, estimated rates of illiteracy and infant mortality were considerably higher in Iraq than in those comparators. The turning point came in 1979-1980 with the deposal of Baathist regime leader General Hasan al-Bakr by one of his enforcers, Saddam Hussein, who consolidated power and assumed the presidency in July 1979.

Saddam’s ascendancy was followed by Iraq’s invasion of Iran in September 1980, initiating a period of political and economic decline lasting nearly a quarter-century. The Iranians retaliated by striking Iraqi oil assets, virtually halting oil production in October, and destroying the port facilities on the Gulf in November. The war, which dragged on for eight years, would claim the lives of perhaps 200,000 Iraqis out of a pre-war population of 13 million—equivalent in terms of today’s US population to 4.5 million Americans killed. Iraqi oil production, which peaked in 1979, never recovered, averaging roughly 1 million bpd for the duration of the war, and then increasing to 3 mbpd after hostilities ended.  A Kurdish rebellion in the north was put down with extreme brutality: poison gas, first deployed against the Iranians, was used on Kurdish civilians, an estimated 100,000 of whom were killed in this campaign.

Two years later, in August 1990, Iraq invaded Kuwait.  Within hours the UN demanded an unconditional withdrawal, within a week imposed a trade embargo, and on 29 November passed a resolution authorizing the use of any method to secure Iraqi compliance by 15 January 1991.  The US-led multinational coalition mustered troops in the Gulf and on 16 January launched a counter-attack that liberated Kuwait. Combat ended with an Iraqi acceptance of terms in March. Estimates of Iraqis killed in combat vary enormously; the Pentagon initially estimated 100,000 but most subsequent analyses reached lower figures, perhaps half as many or less.

In the absence of foreign intervention, popular insurrections against Saddam’s rule in the Kurdish areas in the north and the Shia areas of the south, which had been encouraged by the US, were ruthlessly suppressed. Irreversible ecological damage was wreaked on the delta of southeastern Iraq in an attempt to destroy marsh Arab society.

Much of Iraq’s electrical generating capacity and national power grid had been destroyed by aerial bombardment. Estimates vary considerably, but peak capacity was reduced from perhaps 9,300MW to 2,300MW. Much of the remaining industrial plant was either destroyed in the bombardment or withered under the subsequent sanctions regime. Oil production was temporarily halted during the fighting, but in the war’s aftermath recovered to 0.5 mbpd, enough to cover domestic needs.

Possibly encouraged by the unwillingness of foreign powers to intervene in the repression of these revolts and/or fearing reprisal attacks from its neighbors, Iraq subsequently violated the terms of the ceasefire agreement that required it to identify and destroy its missiles and weapons of mass destruction. In October 1991, the International Atomic Energy Agency (IAEA) reported to the Security Council that at the beginning of the war, Iraq had been within 18 months of having a nuclear weapon, enough material had survived the war to permit Iraq to resume weapons fabrication and the country was within five years of successfully completing the task. The Security Council tightened the embargo that had remained in place after the rebellions by the Shia and Kurds were crushed, and in 1992 “no-fly” zones were established in southern and northern Iraq to deter a second attack on Kuwait and the use of Iraqi airpower against civilian populations. Under US and British air protection, the three Kurdish-majority northern governates effectively seceded, declaring autonomy within the context of the Iraqi state.

Reeling from two recent wars, subject to economic sanctions, and preyed upon by the Saddam clique, Iraqi society began to crumble. Deprived of inputs and cut off from the rest of the world, the industrial economy collapsed—yet fearing social unrest, the state continued to pay 500,000 SOE workers—even at facilities that had been destroyed in the wars.  Similarly the prices of food and fuel products were kept heavily subsidized to buy social peace. Yet historically the state had relied almost exclusively on oil revenues for funding.  Now, with oil exports cut off, the government lacked means to finance its massive expenditures and resorted to the printing press.  Inflation surged.

Among the casualties of the fiscal squeeze were expenditures on education and health.  For males, literacy peaked among the cohort born in the 1960s (in excess of 80 percent) and then fell thereafter.  This decline accelerated after 1980: with the state’s failure to rebuild schools destroyed in the wars, or build new schools to reflect population growth and shifts, public schools were forced to operate tripled shifts to accommodate excess demand.  By 2003, when Saddam was removed from power, Iraq, which had once been the most literate of Arab societies, had the highest rate of illiteracy among the 15-24 age group of any Arab country.  Educational attainment was actually higher among middle-aged Iraqis who had completed their schooling before the 1979-1980 turning point than it was in the cohort entering the labor force.

A similar story of decline could be told for health status, though the data are less reliable, and particularly in the case of the politically sensitive infant mortality figures, subject to enormous revisions.  According to the UNDP 2004 Iraq Living Conditions Survey, the rate of infant mortality rose steadily from approximately 22 per thousand in 1988 (the first year that they could construct direct, as opposed to indirect, estimates), to 33 in 2003—well below speculative pre-Second Gulf War estimates in excess of 100. The infant mortality figure was highly politically sensitive, since a high figure, ascribed to the economic sanctions regime that was imposed after the first Gulf War, could be used as an argument for sanctions removal (i.e. sanctions had “killed one million Iraqi babies” as was frequently claimed in the Middle East at the time, or 500,000 as Ben Saul asserted in the ABC discussion).  Indeed, in addition to doing secondary checks to reaffirm the accuracy of the survey estimate, the survey’s authors express surprise that the infant mortality rate did not spike after the imposition of sanctions but instead continued its steady climb which had begun at least as early as 1988. The UNDP survey both debunks the estimates of extraordinarily high levels of infant mortality in sanctions era Iraq, and by demonstrating that the trend was rising prior to the first Gulf War, also provides support for the notion that the Iraqi decline began with the Iran war, if not earlier.

Under sanctions, corruption exploded. Virtually all forms of private economic activity required permits and these represented an opportunity to extract pay-offs by predatory apparatchiks. Following the tightening of sanctions in 1992, inflation hit 500 percent, and Saddam responded by executing 42 merchants.  Although the public explanation was that the merchants were engaged in profiteering, privately many believed that in reality most of them had been attempting to form trade syndicates without involving Saddam or his family. The trade regime had a dualistic character—a formal control regime reminiscent of orthodox central planning and an illegal regime operating in parallel, in the words of one World Bank analyst “both under direct Baathist control.” These distortions were further amplified by disequilibrium in the foreign exchange market: prior to the imposition of sanctions, foreign exchange premium of 1,000 percent had prevailed on the black-market; after the tightening of sanctions this black-market premium soared, with a dollar on the black market worth more than 10,000 times its official value.  Much of this corruption centered on oil:  with domestic subsidies keeping the price to consumers a fraction of the prevailing world prices, there was an enormous incentive to divert supplies away from the domestic market and to neighboring countries where Iraqi crude and refined products could fetch huge margins relative to domestic sales. Summing up the grotesque nature of the environment one entrepreneur observed, “When you don’t know what will happen the next day, you can’t organize and plan. One morning you wake up and everything has changed; the dinar collapsed, Saddam invaded Kuwait, your uncle was thrown in jail.”

With inflation roaring and bank interest rates fixed in single digits, keeping money in the bank was a losing proposition. The result was a decline in deposits, financial disintermediation, and a fall in saving and investment.  The process of financial disintermediation was so advanced that in a paper published in the American Economics Association’s Journal of Economic Perspectives, former monetary specialists with the Coalition Provisional Authority observed that “One top [Coalition Provisional Authority] official surmised that most Iraqis had never seen the inside of a bank when the 2003 war started.”

In 1996 under UN auspices an ‘Oil-for-Food’ program commenced through which Iraq would be permitted to sell a limited amount of oil in order to finance essential food and medical imports which were then rationed in-kind to households through a public distribution system (PDS).  (Sound familiar?) Ironically, this program intended to benefit the Iraqi masses contributed to even further corruption, by providing a sanctioned channel for international trade—which could then be suborned.  Local farmers who could not compete against subsidized grain imports were adversely affected, as were retailers displaced by the PDS. Indeed, the program reinforced the centrality of the state, by directly tying consumers to a state-operated system for essentials, and at the time of the 2003 war, it is estimated that 60 percent of the population was dependent on rations through the PDS. The fall in rural incomes contributed to migration to the urban areas—and increasing the share of the population reliant on the state.

The old Eastern European joke about life under communism was “we pretend to work, and they pretend to pay us.” During the last years of Saddam’s rule, for many Iraqis the corollary might be put “we pretend to work and they pretend to pay us, but to make ends meet we sell cigarettes or our bodies on the street.” The banality of destitution in the final years of the Baathist regime is illustrated by the following anecdote:  before the 2003 war, only two denominations of the Iraqi paper money circulated widely—the 250 and 10,000 dinar notes. However, the 10,000 dinar bill was so large as to be illiquid and actually traded at a 10-30 percent discount to the 250 dinar note.  Hence the lower value 250 note was used even to settle large bills, and as a consequence, Iraqis dispensed with actually counting money and simply weighed it—bills were settled by weighing plastic bags filled with cash. At the time of the conversion to the “new dinar” in 2003 one pound of paper notes bearing the likeness of Saddam Hussein were turned in for every Iraqi man, woman, and child.

It is often alleged that in terms of public investment Saddam favored politically important constituencies in Baghdad and central Iraq, especially after the uprisings in the north and south following the first Gulf War.  If one looks at indicators of public investment in the 2004 UNDP survey which are unlikely to have changed dramatically within one year of Saddam’s removal (such as the existence of schools, hospitals, and sewer systems—as distinct from more variable indicators such as the supply of electricity) there is modest evidence of regional disparity.  With respect to schools, despite having lower educational attainment among its adult population, educational access within the Kurdish autonomous region was better than central or southern Iraq, comparable to Baghdad. Southern Iraq generally is lower on all indicators of public investment than central Iraq, and there is a tendency for southern Iraq to score worse on indicators of child nutritional status as well.  The impoverishment of Shia-dominated southern Iraq was so profound that families were reduced to the ghastly practice of sending pre-pubescent girls into minefields to scavenge for valuable mushrooms. (Pre-pubescent girls were the optimal scavengers because they combined sufficient cognitive ability with low weight, and, if injured or killed, represented a smaller economic loss to the family than an equivalent boy.)

Hammurabi may have given the world its first written legal code nearly 4,000 years ago, but at the dawn of the second millennium Mesopotamia was governed by a homicidal despot.  Over two decades an estimated 250,000-290,000 Iraqis had been killed or had disappeared. Per capita income had fallen by half, and a society that had been comparable to Portugal or Argentina when Saddam took power had been reduced to something more akin to Bolivia or Honduras. And with educational attainment falling and infant mortality rising, the future was even bleaker.

Sound familiar? In part 2, the relevance of this experience for contemporary North Korea.