Will oil wealth trickle down?

Iraq stands to draw equal with Saudi Arabia in oil production but its people are sceptical that the industry will improve their lives.

BAGHDAD // Iraq is about to tap into considerable wealth. Sitting on at least a third of the world's remaining oil reserves, it signed deals in December with international companies to extract its oil and gas. From Lukoil in Russia to BP in Britain to an array of Chinese firms, foreign investors are desperate to develop Iraq's hydrocarbons and have agreed to rates extremely favourable to Iraq's oil ministry.

The companies will receive less than US$2 (Dh7.2) for every barrel of oil extracted, with the rest going to the Iraqi government, which now exports more than two million barrels per day, and could within two or three years easily be exporting three times that, putting it on a par with Saudi Arabia. But economists and ordinary Iraqis now fear that the money may have little benefit for the majority of the population, and that with a shattered infrastructure unable to cope with a huge influx of money and one of the world's most corrupt governments, the black gold lurking beneath Iraq may make the rich richer and the poor even poorer.

Even now, 90 per cent of government revenues are generated by oil exports, but those who hoped that the increased industry would bring increased employment have been disappointed. According to US statistics, the hydrocarbons industry currently employs only two per cent of the Iraqi workforce. Without intervention, this is unlikely to change. Although oil is hugely lucrative, it is not employment-intensive, bad news for Iraq's unemployed, which may be 20 per cent of the workforce. Development of this one sector also costs job in other areas.

Iraq is a fertile country, and agriculture used to employ millions of people farming the land between the Tigris and Euphrates rivers. But, explained the economist Franco Scotti, when a huge influx of wealth comes into a country, it makes it cheaper for people to buy products grown and manufactured elsewhere. When a country exports a commodity, he said, the value of the currency increases against foreign currencies.

"Unless the government specifically intervenes," he said, "it becomes cheaper to buy everything outside the country. In Iraq we already see, for example horticulture, fruit and vegetables, 80 per cent is imported." For Sheikh Ali Mijbil, a farmer just north of Baghdad, the lack of government support for agriculture is infuriating. "The agriculture sector is complementary to the oil sector. It is another resource and unfortunately this is not receiving support from the government at all.

"You have no Iraqi crops in the market; Iraqi farmers started leaving their line of work." He called for the government to supply fertiliser and seeds to farmers, and to work on continuous electricity supplies so that water pumps would work. "You know," he said, "we are getting a lot of money from oil, and instead of refurbishing a garden in Baghdad - we should restore the electricity, because if we have electricity we will be able to store many things."

As all the revenue generation in Iraq moves ever further from private agriculture or business, to state-controlled hydrocarbons, money is concentrated in the hands of the central government. There are some signs that Iraqi officials are using the money to alleviate the problems of Iraq's people, for example the Public Distribution System provides baskets of (mostly imported) food to nearly every Iraqi household, which guarantees every family 2,000 daily calories.

But besides the problems such state-issued supplies cause for Iraq's food industry, economic power resting in the hands of a government classified by Transparency International as the world's fifth most corrupt can be dangerous. One way, say analysts, that oil-rich economies cope with unemployment is to create unnecessary government jobs. This is happening in Basra, an area rich in oil, said one resident, but the jobs are allotted on sectarian and political grounds.

"To get a job in the oil sector," said Abu Sami, 30, "you have to be recommended by someone directly related to you, like your own father - Even going to the oil industry institute you cannot be accepted for study unless you have a relative working in the sector." Abu Sami, a computer shop manager who asked that his real name not be used, said the oil ministry offices in the city were overcrowded. "They give more jobs than they need," he said, adding that even jobs such as guarding oilfields were given according to political affiliation.

Some have suggested solutions to the problem, such as non-governmental or USAID support of agriculture, and optimists have said that other sectors in Iraq, for instance housing and IT, have attracted the interest of investors. But Mr Scotti, the economist, remains pessimistic about the prospect of a diverse private sector in Iraq providing employment and creating a culture of meritocracy. "Ninety-nine per cent of foreign investment in Iraq is in hydrocarbons," he said, adding that there was almost nothing in manufacturing.

Looking to possible futures for Iraq, he said that creating a culture of food handouts and subsidised government jobs was not ideal but it was better than the kleptocracy of oil-rich but vastly corrupt countries like Angola, where people see almost none of the money from oil. The paradoxical situation where a country has generated a lot of money from one sector, to the detriment of other sectors and people, is known as the resource curse, said Ben Lando, bureau chief of the Iraq Oil Report. "Typically," he said, "we have seen it in countries that are still developing, that have a weak or new governance or a very fractured government." However, he said, it is not inevitable.

A government must have transparency - and the recent oil deals were negotiated publicly and openly - to be accountable to the communities around an oilfield. He pointed to the UAE as a place where oil was developed strategically, although the population in Iraq is fast growing and is far higher than that of the Emirates. "I think," said Mr Lando, "Iraq is at a transition point where it could go either way."

On the one hand, he said, the government was making some moves toward transparency, and had required oil companies signing contracts to provide services for local communities, but corruption's hold was still strong. And even as oil wealth throws up economic quandaries for a new, post-war Iraq, there have been sharp reminders that the worst impact Iraq's oil wealth can have on its people is an increased chance of conflict.

Shots were fired last week over a disputed well in the Fakka oilfield on the Iran-Iraq border. Disputes over oil-rich territory in Kirkuk will hang over this month's election. "The war zone atmosphere remains in Iraq," said Mr Lando. "Political and security instability could move in a way that is not favourable for Iraqis, and if oil is involved then there is even more reason for groups and individuals to fight and not compromise."

* The National