Economic Consequences of Conflict: The Rise of Iraq’s Informal Economy

Iraq’s economy has undergone a number of profound changes over the last several decades, many of which have had significant implications for the manner in which the country’s informal economy has evolved. The statist, heavy-handed economic policies of the Ba'athist government concentrated much of Iraq’s productive capacity in nationalized factors, which degraded under the sanctions regime of the 1990s, when both industrial and agricultural production faltered for lack of inputs. When coalition officials arrived in Iraq after the war, they planned on turning Iraq into a free market economy – a model for capitalism in the Middle East (Looney 2003). As part of this plan, they expected private companies, both foreign and domestic, to play a leading role in jump-starting the economy. Free market incentives driven by pentup demand and a massive aid-financed reconstruction program were thought to be sufficient to induce a massive wave of investment and hiring of Iraqi workers (Cha 2004). But violence, crime and uncertainty over the future have undermined investor confidence, preventing market-driven mechanisms from playing their anticipated role. As a result, nominal Gross Domestic Product (GDP) contracted by about 35 percent in 2003. It has recovered little since then, despite the U.S.-led reconstruction efforts. The only part of the economy to have survived both Saddam Hussein and the post-2003 period of instability and insurgency is the country’s informal economy. In fact, there is ample evidence that the country’s informal economy has expanded considerably since Saddam’s overthrow. In this regard, Iraq’s informal economy is following a pattern seen in other parts of the world – the informal economy tends to grow during periods of economic crisis. This phenomenon has occurred on each of the main continents: