Transitioning toward economic and institutional resilience is no longer a luxury to be debated at meetings, gatherings and seminars; it means directing Iraq's oil resources toward building a real economy.
Iraq possesses enormous reserves of oil, natural gas and other natural resources. This wealth holds considerable strategic importance as the principal—and virtually the sole—source of government revenue. Since the significance of these natural resources became evident, oil rents have remained among the most prominent issues occupying political and social circles, business leaders and economists.
Economic literature indicates that every discovery or development of oil fields tends to generate excitement among government officials and citizens alike over the prosperity such investments might bring. Yet this optimism is frequently misplaced. Many countries have been disappointed by their failure to achieve sustained growth following oil discoveries, subsequently confronting serious economic difficulties. It has long been recognized that countries endowed with abundant oil revenues and other natural resources often experience lower levels of economic growth and more severe social problems than countries with fewer resources, a phenomenon known as the resource curse (1).
Historically, oil exploration in Iraq began in the late nineteenth century, while commercially significant quantities were discovered in 1927, ushering the country into a new phase of its economic history. Oil gradually evolved from a natural resource into the fundamental pillar of the Iraqi economy. The history of Iraq's oil discoveries is therefore not merely a history of oil fields, but also one of the relationship between natural wealth and economic sovereignty.
From a political economy perspective, the foundations of Iraq's rentier state began taking shape in the 1950s, initially through profit-sharing agreements with operating oil companies, followed by the recovery of extensive areas covered by oil concessions under Law No. 80 of 1961 and the subsequent nationalization measures of 1972. These developments marked a defining period in the history of Iraq's oil-dependent rentier state, whose characteristics remain deeply embedded in the country's economic and institutional structures.
Following the collapse of the colonial system after World War II, Iraq occupied a distinctive position among developing countries because of its substantial human and natural resources. It entered the postwar period with considerable human potential and natural wealth. Its enormous oil resources enabled policymakers not only to overcome challenges associated with taxation, foreign borrowing and external investment, but also to escape pressures arising from balance-of-payments deficits and other economic difficulties. Governments at the time decided to allocate oil revenues to development, placing Iraq ahead of other oil-producing and developing countries in this regard (2).
During the 1980s and 1990s, however, Iraq entered a new phase in the evolution of its rentier state. The economy shifted from a relatively strong financial position to one marked by an acute fiscal crisis, struggling to meet society's basic needs. The principal failure of that period lay in the authoritarian conduct of the former regime, particularly its poor allocation of oil resources among competing investment and consumption priorities. The dominance of oil-rent-based power also gave rise to other phenomena that survived by exploiting the economy's aggregate surplus through mechanisms and practices created by the authoritarian rentier system.
After 2003, Iraq did not merely remain trapped within the rentier economy; it entered an intensified phase of rentier dependence in which oil became the sole direct driver of the country's economic, social and political life. The principal characteristics of Iraq's post-2003 rentier economy can be summarized as follows:
Fiscal expansion amid declining productive and service sectors: Oil revenues increased to unprecedented levels as a result of higher oil prices and growing exports. However, this financial abundance contributed to the phenomenon known as Dutch disease, as inexpensive imported goods flooded domestic markets, causing productive and service sectors to contract.
Expansion of the public sector and the emergence of an employment-based state: The number of government employees, pensioners and social welfare beneficiaries increased dramatically. Public employment shifted from being an instrument of state administration to a mechanism for absorbing public discontent and distributing patronage networks. Consequently, recurrent budget expenditures, particularly salaries and wages, came to consume more than 70–80% of total public spending at the expense of the investment budget.
Institutional failure and widespread corruption: The absence of digital governance and rigorous oversight systems created channels through which public funds were drained, including customs smuggling, fictitious projects and other practices. Corruption evolved from individual misconduct into an institutional environment that obstructed reform efforts.
Complete exposure to external shocks: The Iraqi economy became highly vulnerable to fluctuations in global oil prices. This fragility was particularly evident in two major crises over the past decade. The first occurred in 2014, when oil prices fell as Iraq was fighting criminal and terrorist groups. The second emerged during the COVID-19 pandemic in 2020, when the government faced immediate difficulties in securing public-sector salaries and subsequently resorted to devaluing the Iraqi dinar against the U.S. dollar (*) to finance recurrent expenditures.
The following figure illustrates the characteristics of Iraq's rentier economy using data and statistics for 2025.
Figure 1: Oil's Contribution to Exports, Government Revenue and Real Gross Domestic Product in 2025
Figure prepared by the researcher based on World Bank data.
According to the International Monetary Fund (IMF), despite improvements in security and the end of armed conflicts, economic growth rates have not shown a significant recovery. Since 2018, growth has remained virtually stagnant, averaging 0.3%, substantially lagging behind regional and international peers, including other oil exporters in the Middle East and North Africa (MENA). Weak growth momentum is partly attributable to oil price volatility arising from the economic conditions experienced by the global economy, both in the past and at present, and partly to sluggish non-oil growth. Non-oil gross domestic product grew by an average of just 1.3% between 2018 and 2023, compared with 1.8% for the MENA region and 1.6% for the region excluding Gulf Cooperation Council (GCC) countries.
Iraq's non-oil GDP per capita, which stood at approximately $2,700 in 2022, also remained the lowest in the region, far below the regional average of $9,500. Sluggish growth and limited job creation have intensified social pressures amid an expanding working-age population. According to the latest labor force survey, conducted in 2021, the unemployment rate stood at 16.6%, while approximately 74% of young people were not in employment, education or training (NEET), a proportion substantially higher than the average for the MENA region excluding Gulf countries (31%) and the rest of the world (less than 20%). Demographic pressures are mounting, with more than 780,000 new entrants expected to enter the labor market annually, bringing the figure to nine million young people by 2030 if prospects for economic growth and job creation do not improve (3).
Overall, nothing has influenced Iraq's circumstances as profoundly as oil. Since its discovery, the country has undergone successive social, economic and political transformations affecting its structures, values and institutions, while becoming an arena of competition among various forces and movements seeking dominance and control (4).
Against this background, and in light of the country's deeply troubled and disorderly management of oil wealth, a fundamental question arises: Why have Iraq's natural resources not yet fulfilled their developmental potential by effectively generating progress, growth and prosperity, and eliminating poverty and underdevelopment? How can these resources be used to perform that role more effectively?
Answering this question requires first breaking the grip of rentier dependence and its damaging consequences, which have obstructed the establishment of a strong and resilient economy. This transformation demands the development of an economic model rooted in a development-oriented investment mindset to replace the existing rent-based model. Such a transition is not merely an economic choice; it is an existential prerequisite for rebuilding a resilient state and economy capable of withstanding shocks.
This requires moving away from an economy characterized by structural weakness, fragility, deteriorating living standards and widespread corruption toward a diversified and resilient economy capable of absorbing shocks and driven by knowledge, innovation and technological advancement. The following diagram compares the fragile economy with the resilient economy.
Diagram 1: Comparison Between a Fragile Economy and a Resilient Economy
A resilient economy represents a benchmark of economic strength in a world increasingly shaped by crises, tensions, disruptions, geopolitical shifts and rapid technological development. Countries are now working to reassess their overall economic conditions and secure their economic futures by moving toward models built on economic resilience.
More broadly, experiences in political economy demonstrate that countries dependent on a single resource, such as oil, lack the capacity to withstand rapid transformations over the long term. Whenever global oil markets experience turbulence, these countries confront difficult challenges involving fragile economic structures, institutions that respond extremely slowly to crises, and the risk of falling into debt traps, among other problems. Consequently, countries, particularly oil-dependent rentier states, have sought to adopt the model of the resilient state, characterized by institutional structures capable of absorbing shocks, diversifying sources of income, and using technology and governance to serve society.
For Iraq, escaping the trap of the fragile economy, breaking the dominance and harsh grip of rentier dependence, and transitioning toward a resilient economy is not merely a development option; it is a matter of national and economic security. Resilience in this context does not mean neglecting the oil sector. Rather, it means investing oil wealth in building productive sectors, developing manufacturing and petrochemical industries, strengthening digital infrastructure, and empowering the private sector to become the primary engine of employment and innovation.
Transitioning toward economic and institutional resilience is no longer a luxury to be debated at meetings, gatherings and seminars; it means directing Iraq's oil resources toward building a real economy. Such an economy must be based on industry, services, innovation and progress. Iraq must either summon the political, institutional and economic will to drive change and restructure its economy on the foundations of resilience and efficiency, or remain at the mercy of fluctuations in global oil markets, awaiting the next shock from which it may no longer possess the tools to recover.
Al-Furat Center for Development and Strategic Studies / 2004–©2026
Notes and References
(1) James Cust and David Mihalyi, “The Presource Curse,” Finance & Development, International Monetary Fund, Washington, Vol. 45, No. 4, 2017, p. 36.
(2) Abbas Alnasrawi, The Iraqi Economy: Between the Destruction of Development and Future Prospects, 1950–2010, translated by Mohammed Saeed Abdulaziz, Dar Al-Kunooz Al-Adabiya, 1995, p. 11.
(*) The Iraqi dinar has been devalued against the U.S. dollar on more than one occasion to meet financial obligations and finance consumption expenditures, most recently in October 2012.
(3) International Monetary Fund, Selected Issues: Iraq 2025.
(4) Hassan Latif Kazem Al-Zubaidi, “Oil and Oil Policy in Iraq,” Book Series, Iraq Center for Studies, Iraqi Oil and Oil Policy in Iraq and the Region Under the U.S. Occupation: A Future Perspective, 2007, p. 9.
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