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Technocracy Redux? Sadr, the Communists and Oil

A number of recent articles have suggested the "victory" of Sairoon, a coalition led by Moqtada al-Sadr and including the Iraqi Communist Party, will herald a new era for Iraq. If the recent past is anything to go by, reform will continue to be an uphill struggle.

It would be easy to misinterpret the Sadr-Communist alliance as one of convenience. In many ways the two movements have a shared history, not least one of suffering brutal oppression at the hands of the Baathists (the ICP was active in the Iraqi opposition until 2003, and have seen their leadership ruthlessly targeted by the Baath regime). Both movements have long sought to mobilize grassroots support among the poor, while railing against the accumulation of wealth. The doctrine their leaders carry, Mohammad Baqir al-Sadr’s Our Economics and Karl Marx’s Das Kapital, both condemn the injustice of unfettered capitalism.

Statements from key figures in the movements echo economic populism, fighting a “trinity” or “triangle” (as the Sadrists recently called it) of “disease, poverty and illiteracy.” A key difference is that the Communists were one of the only groups to voluntarily disband their small armed wing in the summer of 2004 while many others clung on to militias.

The Sadrists today have neither disbanded their armed wing, and are unlikely to fully disband it if the partial “freeze” of their armed wing in 2008 is any guide. The Jaish al-Mahdi was superseded by the Promised Day Brigades, who continued attacking coalition forces and, after their withdrawal, periodically clashed with rival groups in Baghdad. Today, Moqtada’s Saraya al Salaam have displayed significant progress and even won accolades from Sunnis across Iraq, particularly in Samarra. But the road to security reform is long and will involve efforts from all sides.

In any case, most actors inside and outside of Iraq will likely give the newly empowered Sadrists a chance to go ahead with government formation and this includes the U.S., who have many times attempted to communicate with Sadr in the past through back-channel negotiations. Furthermore, any concerns in Tehran and Washington will likely be soothed by the growing realisation that Iraq’s status quo politics will continue for the foreseeable future--perhaps even with PM Abadi still at the helm.

Washington can take some comfort that moderates such as Ammar al-Hakim and Abadi will remain key players and Tehran will know that their allies will secure at least some ministries. Indeed, even the Badr Organization has long accommodated many U.S. goals in Iraq and appears unlikely to deviate from this path.

A sense of cooperation in a nation at crisis underpins the Sadr-ICP alliance. Party Secretary Jassim al-Hilfi was present at some of the early political gatherings in Baghdad in 2003, haphazardly organized by the Coalition. He remarked at the time, "When you have a guy with an Islamist head-cap sitting next to a communist, well, it's an experiment.There's a lot at stake and not much time to lose.”

Fifteen years later, same sense of urgency pervades the union, a determination to write the wrongs of corruption levels that place Iraq close to the bottom of international rankings. In sum, there is a sense that Iraq does not have much time, as Sadr remarked in 2013, Iraq had a “dark” future.

What then, will this alliance do for Iraq and how can anti-corruption or “technocratic” initiatives counter the embedded systemic problems in Iraq? If Abadi goes, can they find a better replacement?

The PM has overseen a remarkable surge in national unity and an international rallying around Iraq, although other significant Iraqi leaders, namely Ammar al-Hakim and Sadr himself have played a role in regional rapprochement. Abadi has also presided over Iraq’s relatively stable relationship with the IMF and World Bank (which has wobbled since the Federal Government announced the KRI budget reduction to 12.6%.)

Patchy attempts to comply with lending conditions helped to stabilise Iraq’s finances, allowing for continued IOC operations during the twin threats of Daesh and (at one point) $27 oil. Abadi has overseen, with his advisers, modest but modern economic reforms, rolling out some electricity distribution privatisation despite stiff opposition and seeing Iraq sign two of the key international commercial arbitration treaties, ICSID and the “gold standard” New York Convention. It is hard to overstate how important electricity privatisation is for Iraq's future (see our article "Beyond Oil: Restoring Iraq's Economic Sovereignty.")

Abadi has, with Oil Minister Jabbar al-Luaibi, modestly improved the terms of Iraq’s new oil contracts, although Luaibi failed to stop the dramatic and potentially costly exit of Shell at the end of 2017. Lastly, Abadi has partially consolidated the problematic State Owned Enterprise (SOE) sector in Iraq, allowing some of the weaker enterprises to die off, pensioning off workers and keeping its salary bill under control as PMF wages took precedence. The vast sector is widely described as a collection of loss making assets, an employment scheme that sucks investment from education and health and crowds out private investment. Abadi restrained the sector in the face of ongoing protests across Iraq, but there was little choice; in 2015, the salaries were simply not there. These are small economic changes, against the odds.

All of this has been achieved in the face of intense opposition but ultimately helped by a steady drumbeat of victories against Daesh (initially, Abadi’s support of the conventional army in major operations and deference to the international coalition drew fierce criticism.)

But much of what Abadi has achieved has been done with the erratic support of Sadr, meaning there may be more of the same to come. Will the Sadrists reverse Iraq’s gradual progress on the economic front? Are we, in sum, about to see the Venezuela-isation of Iraq?

Ultimately no, and partly because it already exists outside of the oil sector and partly because the jumble of coalitions in parliament mean no leader, party or coalition can push through much new policy. Perhaps the key difference with Abadi’s Iraq and Maduro’s Venezuela (outside of Venezuela’s energy sector disaster) is that Iraq wants private investment but needs capacity assistance while Chavez and Maduro set out to “destroy capitalism.”

Given widespread discontent and stubborn poverty after 15 years, as evidenced by the relatively low election turnout, we might presume economic populism would be the order of the day.

The question is, how would this differ from Maliki’s economic populism, which involved burning through the entire Development Fund for Iraq in 2013 and crashing Iraq’s finances, even after cutting the Kurdish budget in January 2014?

Sadr and the Communists will focus on development, but actual policy depends on whether the seats of their coalition can ever mobilise enough support in parliament (a simple majority in the Council of Representatives is needed to pass legislation.) Despite articles about the Sadrists ranging from hysterical to rose tinted, it is unclear how much political clout Sadrists will carry through to parliament. The result could be messy, at least in the political sense.

One direction policy could take, and one which may win enough support to pass legislation, might involve a Direct Distribution Mechanism (DDM) of resource revenues. In March 2016, Sadr called for a citizens dividend from oil wealth. This idea, long advocated for Iraq by development experts could potentially stimulate areas of the Iraqi economy from the bottom up. But in the absence of massive top down reform, a DDM could simply result in a badly managed basic income scheme that would suck revenues away from schools and hospitals.

Currently, it is hard to imagine a more economically statist Iraq. The Sadr-ICP alliance long argued that oil revenues are not helping the poor, despite the fact that “government take” (the total amount Iraq receives from production) has been high enough to see the departure of Shell from the 38 billion barrel Majnoon field and that oil has consistently comprised over 90% of government revenue.

The Fiefdom of Oil

IOCs were initially attracted to Iraq despite extremely low per barrel remuneration for oil extraction, partially offset by having access to supergiant fields over a long contract duration with a low per barrel extraction cost. But IOCs have complained time and again about the government’s participation in the sector and Iraq’s oil development has never been characterised as led by the private sector. Instead, bureaucracy has stifled investment, according to many IOCs.

In fact, the Iraqi government in April 2012 took in over $8 billion in oil revenues when Brent crude was trading at over $120 per barrel and IOCs were taking small per barrel fees. Shell’s fee for Majnoon was initially $1.39, although investment costs of the IOC were (in theory) rapidly repaid (with long delays in reality.) Like Shell, smaller oil companies such as PetroVietnam have also departed Iraq because contract terms crushed profits and executives lost patience with the Ministry of Oil.

But this was far from a state-led disaster. Iraq still managed to dramatically raise production during the war against Daesh. Clearly, the public-private partnership that Iraq created avoided a Venezuela- style decline, where the state crippled private participation and production collapsed. Without that progress, it’s likely Iraq would have collapsed long before the liberation of Mosul. But it is revenue management that has always been the problem, compounded by the political system.

Extreme power sharing?

Iraq’s Open List Proportional Representation voting system has created such a jumbled array of parties and coalitions, combined with the muhasasa quota system (agreed by Iraqi opposition in the 90s and cemented by the Coalition) that strategic planning in the economy has been lacking and characterised by damaging competition between many actors and the political hiring of the workforce. Yes, Iran-backed parties did not fare well in the election-- but neither did anyone else, meaning the leading coalition in parliament must be formed around concrete issues.

This situation became so bad that a fiscally top heavy state in 2015 was unable to pay salaries, from police in Anbar to teachers Basra, while the KRI was beset by the same problems. In almost every province through 2015, citizens complained that Baghdad was intentionally marginalising them based on sect or ethnicity. The reality was that the profligate former government had spent Iraq’s revenues and produced little to show. This was the situation Abadi has fought to rectify during the war with Daesh, and Sadr has finally been given the task he always promised he could achieve: economic justice for all.

Aside from fighting corruption, what then, will the Sadr-ICP alliance do to rectify the systemic economic problems in Iraq?

In the energy sector, it is hard to see much change. In 2010, Sadr issued a decree saying Iraqis were not permitted to work for Western oil firms until their “intent” had been assessed, meaning that oil contracts would have to be reviewed. This was hardly a controversial sentiment in Iraqi parliament at the time. In 2011, Sadrist Labour Minister Nasser al-Rubaie pushed legislation forcing investors to hire more Iraqis: businesses would not be allowed to bid on government projects unless they could prove their workforce was 50% Iraqi. But previous laws such as National Investment Regulation No. 2 of 2009 already stipulated that 50% of workers should be Iraqi, while Crude Refining Investment Law No. 64 of 2007 pushed this percentage to 75%.

By the end of 2012, Shell’s workforce comprised 2,500 Iraqis and 500 foreigners, while the percentage of Iraqi workers at the Basra Gas Company in 2017 was 17%. While commendable, this matters little in the wider picture of Iraq’s unemployment crisis as the oil sector employs just 1% of the workforce. Even the colossal revenues of spring 2012 could not solve unemployment.

Oil for Development

This takes us to the desire of many Iraqis to return to the Iraq of the 1950s when the government ring fenced a set percentage of the budget, including oil revenues, for economic development. To many Iraqis, this was a halcyon era. Recalling this time, Hanna Batatu writes that Mohammed Baqir al-Sadr would have kept one fifth of oil revenues aside for development, in keeping with his opposition to the concentration of wealth. Arguably, the economic theories of Mohammad Baqir al-Sadr represent an Islamic counterpoint to Marxism, arguing for moral and religious constraints on surplus wealth or resources, rather than a description of the problems of capitalism and its inevitable journey into decline.

The idea of ring fencing a part of oil revenues for development is again gaining traction. Fore example, Venezuela’s social development Misiónes are separate from the budget, but not of course insulated from the wider catastrophic institutional failure in the country. DDMs have been suggested as a way of keeping a portion of oil revenue out of the hands of the political elites. Iran has adopted cash transfers, albeit not from a ring fenced portion of oil revenue, on the basis that a direct transfer can be more efficient than subsidies designed to artificially reduce electricity, fuel and basic goods costs.

Subsidies are famously distorting of economic growth, overlapping not only with the poorest citizens but also those who may not need the help of subsidies and are encouraged to rampantly consume cheap goods and services, especially as oil prices rise. One study on energy subsidies in Indonesia noted how,

“Forty percent of subsidy benefits go to the richest 10 percent of households, and less than 1 percent goes to the poorest 10 percent. Fuel subsidies are, in fact, generous transfers of taxpayer money to the rich.”

Therefore, a transfer of some oil revenues to the poor could eliminate some of this waste and there is evidence that sending funds directly to the poorest citizens can help people escape the trap of poverty, rather than discourage work. The Manifesto Group suggest Iraq must, “Review all the subsidies and social welfare programmes and explore the possibility and desirability of replacing them with a universal income plan.” This could make sense as the IMF note how Iraq’s Public Distribution System, intended to alleviate poverty,

“suffers from large inefficiencies in procurement, distribution, and management, and implies significant macro-economic distortions because of its heavy reliance on food imports...due to its large scale, it distorts the market for food and discourages local production.”

Iraq's PDS is already the biggest of its kind, but cheap goods still do not reach the population in some areas. Just as with ring-fencing oil revenue in Venezuela or the cash transfer program in Iran, a DDM in Iraq cannot be a substitute for institutional improvement across the board, to tackle the rot in the system.

Furthermore, the IMF note how a mismanaged DDM, for example, one that did not consider oil revenue volatility, could pose a serious threat to other services, as they report,

“Even modest revenue losses could have a significant impact on the provision of basic services. A loss of 10 percent of natural resource revenues would be equivalent to public health spending in more than 40 percent of the countries in our sample. It would also be equivalent to half of the public spending on education.”

Of course, a DDM in Iraq is a long way off, not least due to the technical challenge of rolling out millions of bank accounts across the population and the complex task of working out a distribution mechanism. This is before we consider the risk of powerful opposition from parties defending their patronage networks.

Return of the technocratic cabinet

What might other Sadr-ICP policies resemble? Jassim al-Halwai, an Iraqi Communist intellectual (see Benedict Robin’s blog Iraq: After Occupation) suggests party policy may be closer to Vietnam style state capitalism than traditional Communism. He remarked how,

“we believe in the role of the private sector, and we believe in the importance of national investment, and also foreign investment in order to build Iraq and its development.” But he also explained how it was necessary to restore some 2000 state owned factories in Iraq, which would be very likely to rebuild much of the economic inefficiency that Abadi has tried to strip away. This would go far beyond the 157-212 projects identified in the Iraqi Government-World Bank Reconstruction and Development Strategy for 2018. The development of those projects alone requires tens of billions in investment and oil revenue.

The Communists do however, understand the need to diversity oil revenue. But they have released statements in the past disregarding IMF conditions on loans. Furthermore, diversification based on industrial development is not a strategy. In a Central Committee meeting in November 2014, the party noted the need for,

“a serious re-consideration of the State's economic policy and strategy, to ensure building an active, dynamic and multi-resourced national economy and expanding its productive base.”

The idea of a highly planned economy fits well with the statist ideal that the government can achieve great leaps of development. This goal would be served by technocratic ministers appointed on the basis of experience, not party connections. Until the 2016 protest movement, the Sadrist’s record on this was patchy at best. The continued presence of Hakim al-Zamilli, a self described technocrat who runs the Parliamentary Security and Defence Committee, and who stands accused of running death squads when he was Minister of Health in 2006, will force many to question the commitment of Sadr to reform.

Robert Ford has pointed out that technocrats without a political support base could struggle to achieve much. Indeed, it is precisely the most difficult decisions--that only a good technocrat would make, which challenge the status quo. For example, Electricity Minister and Abadi ally Qasim al-Fahadawi’s push for electricity privatisation, while a difficult strategy to get right, is the best chance for Iraq to unburden itself of power sector expenditure and keep the lights on into the 2020s. But it faces massive opposition, including from the Sadrists.

In the end, the Sadr-ICP-Abadi technocratic cabinet initiative led to chaos, dragging on from February 2016 until the summer, leading to cabinet positions unfilled, battles over portfolios (at one point with two ministries simultaneously claimed by different ministers.) But the old guard of the post 2003 order successfully held onto the status quo. In the process, Iraq’s parliament had been ransacked and protesters lay dead in the street--at least 10 in February 2016. Remarkably, security forces and later, Sadr himself, showed incredible restraint that prevented a serious escalation.

Arguably there had been a modicum of progress following the alignment of Abadi and Sadr against corruption at the end of 2014. This was at best a pyrrhic victory given the ensuing weaponization of corruption allegations that almost paralysed Abadi’s government. Ironically, the most high profile anti-corruption cases predated the height of the protest movement: leading Sadrist and former Deputy Minister for Energy Affairs Baha al-Araji was investigated for multiple offences in August 2015 (previously he had been a mobile phone salesman in London.) Minister for Trade Mlas Mohammed Al-Kasanzan was removed from office in December 2015 (rumors abounded about his corruption and his brother had been charged).

Although not connected to the “technocratic cabinet” initiative, Abadi later oversaw some very high profile but ultimately historic case arrests. In mid-May, the Abadi appointed head of the Commission of Integrity, who had long complained of a general lack of will in parliament to fight corruption, resigned from his post. The playing field is now open for the next stage of the battle against graft.

What has happened in the days after the election is indicative of what may come. Ammar al-Hakim, who appears to have re-kindled his alliance with Sadr, remarked in 2016 on the “technocratic cabinet” plan, “The bypassing of the political blocs will weaken them and keep them away from the political process, and could undermine the democratic system and the structures of state ...that we have built since 2003.”

It is difficult therefore, to forsee the major initiatives of the Sadrists and Communists passing easily into legislation, whatever the shape of the next government. Supporters of Iraq can hope that creeping progress can be accelerated by a stronger mandate for the anti-corruption movement, but if the past is any guide, it will be a long and difficult battle ahead. Ultimately, Iraq’s political system may need to be re-designed.

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