The Historic Resource Shift: Redefining A Country's Key Resources Or Inevitable Collapse, 10 FEB

 The Historic Resource Shift: Redefining A Country's Key Resources Or Inevitable Collapse

Abbas Karim Saddam  

First: Loss Of The Economic Value Of The Single Resource

Iraq is a rentier country that relies on a single source of income, and oil will begin to lose its economic value before 2050, i.e. after 25 years. 

Not to mention its depletion, which represents the greatest danger, although it is remote and depends on many factors, but in the best forecasts it will not exceed 100 years, and this is not important at the current stage, as the debate now is about the loss of its economic value, not its depletion. Over the past century, oil has played its role as one of the most important drivers of the global economy and a major source of energy. 

However, this role has begun to witness a clear decline due to the rapid changes in the global economic and technological landscape.

The International Energy Agency forecasts that by 2030 demand will decline significantly, while OPEC reports indicate that it will remain a major energy source until 2045. In any case, it will not be the only and major source of energy as it is now, and therefore demand will decline significantly.

In any case, it will certainly lose its economic value before these periods of time, whether optimistic or pessimistic. The bottom line is that the abundant returns currently achieved cannot be achieved in the very near future, and the loss of its dominant economic position has become a dangerous reality for several reasons supported by facts and indicators:

1. The rapid growth of renewable energy sources:

According to the International Energy Agency (IEA) 2023 report, renewable energy sources such as solar and wind are expected to account for 35% of total global energy production by 2030. This shift is driven by a more than 70% drop in the cost of renewable energy production over the past decade, making it more competitive than oil.

2. Global policies to reduce carbon emissions:

More than 130 countries have committed to achieving carbon neutrality by mid-century, putting oil in the crosshairs of anti-fossil fuel policies. For example, several major economies such as the European Union and China are phasing out fossil-fuel vehicles over the next two decades.

3. Oil price volatility and slow demand:

OPEC data suggests that oil prices are becoming more volatile as a result of declining global demand and changing economic priorities. Slowing population growth in many developed and emerging countries is reducing the need for traditional fuels.

4. Directing investments towards clean technologies:

Global investments in clean energy are set to reach around $1.7 trillion in 2023, surpassing investments in the oil and gas sector for the first time.

5. Energy storage innovations:

Energy storage technologies such as batteries have made a huge leap, with their cost falling by more than 80% since 2010, making renewable energy more viable.

The figure below shows the decline in reliance on crude oil as the sole energy source and the rise of other competing alternatives, and the gap is still growing.

While oil still retains some economic importance today, its future looks uncertain in light of the ongoing transformations. The world is moving steadily towards a carbon-free economy based on sustainable sources, which means that oil may no longer be the primary driver of the global economy it once was. Companies and countries that invest now in clean energy and future technologies will be the winners of this historic transformation.

Second: Increase In Public Spending In The General Budget

In light of these increasing risks that threaten the only source of income, Iraq is still a country that consumes everything and produces nothing, and the consumption bill is increasing annually, in addition to the change in the consumption pattern that necessarily imposes an increase in consumption as well, meaning that the size of spending in the general budget is constantly increasing with or without our desires, in addition to the steady increase in population. 

The chart below shows two facts: the first is the extent of the increase in spending over the years, and the second is the degree of its association with fluctuations in crude oil prices, as Iraq witnessed two severe crises due to the decline in prices, in 2014 and what followed, when Iraq was forced to implement austerity policies that reflected a severe recession in local markets in addition to popular anger due to the increasing pressures, and the other in 2019 and what followed due to the Corona crisis. 

In both crises, the savior to restore economic activity to normal was the rise in oil prices again, meaning that the crisis had extended for a longer period, the situation would have been very difficult, and unfortunately we did not seize the risks imposed by the fluctuations to carry out real reforms, and the figure below shows The amount of spending increases annually.

Although Iraq mainly focuses on exporting crude oil, there are some other commodities that it also exports, although the volume of their exports does not reach the level of oil exports. The following are the most prominent commodities that Iraq exports:

2.Agricultural products:

Dates: Iraq is one of the largest producers of dates in the world and exports large quantities to the Gulf countries and Europe.

Fruits and vegetables: Exports include watermelons, tomatoes, grapes and cucumbers, and are mainly exported to neighbouring countries.

3. Animal products:

Meat: Iraq exports meat and some animal products to the markets of neighboring countries, such as Saudi Arabia and Jordan.

Eggs and dairy products: Limited exports compared to other countries, but contribute to the diversity of Iraq's non-oil exports.

4. Manufacturing industries:

Chemical products: This includes fertilizers, pesticides and some chemicals that Iraq produces locally.

Plastic Products: Iraq exports some locally manufactured plastic products, such as plastic bags and other supplies.

Metal products: such as iron wires and other metals used in construction and heavy industries.

5. Textiles and clothing:

Iraq has a relatively small textile industry, but some fabrics and clothing are exported to countries in the region.

6.Wood products:

It includes the export of furniture and manufactured wood products in Iraq, but its volume is still limited compared to other exports.

The figure below shows the Iraqi economy's dependence on crude oil and the differences between it and other exported commodities.

Third: Non-Oil Trade Deficit

Despite the export of these products, they do not represent an influential value in the general budget or the local economy, as the non-oil trade balance is witnessing a long and continuously widening deficit. Despite the increase in exports in recent years, the gap is still increasing due to the increase in imports as well, which constitutes pressure. 

The trade balance deficit is due to many well-known reasons, including the heavy reliance on imports, weak economic diversification, weak local infrastructure, trade policies, the impact of political and security crises, the difficulty of attracting foreign investments to develop non-oil sectors, the weakness of the agricultural and industrial sector, and the decline in the competitiveness of non-oil exports. The trade deficit leads to several results that negatively affect the economy, the most important of which are:

1. Increasing dependence on oil revenues: The non-oil trade deficit leads to a deepening dependence on oil as a primary source of hard currency, which exposes the economy to the risks of global oil price fluctuations. In the absence of economic diversification, the Iraqi general budget is sensitive to any decline in oil prices.

2. Pressure on foreign exchange reserves: To finance imports and cover the deficit, Iraq relies on its foreign exchange reserves, which leads to the depletion of these reserves, which then leads to a weakening of confidence in the economy and increases the risks of exchange rate volatility.

3. Increase in external debt: Assuming the absence of income generated from the sale of crude oil or the loss of part of it, the trade deficit pushes the government to borrow externally to finance imports and bridge the gap between exports and imports. As a result, the accumulation of debt weakens Iraq’s ability to invest in productive sectors and increases the burden of debt service in the future.

4. Effects on the private sector: The influx of imported goods at low prices leads to unfair competition with local products, which weakens local industry and agriculture, closes local factories and increases unemployment as a result of the decline in competitiveness.

5. Deterioration of the exchange rate: The continued deficit weakens the Iraqi dinar against foreign currencies as a result of the increasing demand for the dollar to pay the import bill, and then the process of defending the stability of the exchange rate leads to the erosion of foreign reserves.

6. Weak economic growth: The trade balance deficit reflects an imbalance in local production, which reduces the contribution of non-oil sectors to economic growth. As a result, reliance on imports limits the development of local productive sectors.

8. Economic instability: The persistent deficit undermines financial and economic stability, making the country more vulnerable to economic and political shocks, and lowers confidence in the economy, leading to a reduction in the flow of foreign and domestic investment.

9. Loss of job opportunities: The weakness of local productive sectors due to reliance on imports leads to a reduction in job opportunities in the industrial and agricultural sectors, and the increase in unemployment increases social and economic challenges. The figure below shows the non-oil trade balance and the widening deficit gap.

Fourth: Available Opportunities
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Despite this pessimistic outlook, we still have a chance to change the future if we start working now, as we are in a race against time to save our future generations, which requires first understanding the risks facing the country’s future and taking them seriously. 

The process of diversifying the economy to create sectors capable of generating income sufficient for consumption with the advent of an era in which oil loses its economic value, i.e. sectors capable of achieving the same level of income that meets the natural needs of the population, is not an easy task, as these sectors must achieve the same returns that suffice the operational needs of the population and the investment needs of the state. 

To start creating these sectors, we need time, at a time when we have not yet provided the basics. In order to ensure that these sectors are capable of achieving this level of income, we need years to test, modify, develop and enhance them to ensure their ability to generate this income. The reader can imagine the time that this requires.

Below is a set of solutions that depend on changing the state’s philosophy in view of its main resources, capable of creating economic diversity through a combination of state resource intervention and support for the business sector, relying on the country’s available human resources:

Redefining resources at the level of the Iraqi state, instead of relying on oil as a primary resource, to focus on the human resources that Iraq is distinguished by, as the population structure is concentrated in the youth category as a primary resource for the country.

A revolution in legislation that serves the business sector to build a strong local business sector that contributes to achieving diversity and is able to absorb the country’s young capabilities.

Exploiting the enormous young human energy and transforming them into businessmen capable of contributing to creating diversity instead of employees whose wages are added to the total spending bill.

Modifying labor market inputs to match the jobs required in the market, and adopting global markets as a criterion for modifying inputs. This requires modifying university specializations or intensive systematic training of current capabilities to make them suitable for the next stage.

Encouraging leading companies in the local economy to establish effective business incubators to discover opportunities for added value.

Establishing state-owned business incubators with high financial capabilities managed in a private sector manner to finance projects that private incubators are unable to finance.

Establishing sovereign funds that focus on investing in vital local sectors and carrying out projects described as Mega Projects to give a strong boost to the economy and create diversity and job opportunities.

Identifying the economic sectors that are appropriate for the Iraqi economy and focusing on them, and asking important questions such as which goods to meet local consumption and which to export? Which goods do we import? Which are the target markets? To build a plan based on our comparative advantages in view of other markets.

Implementing the concept of "development from within", which refers to the use of local financial resources to achieve economic and social development and exploit financial abundance by focusing on mobilizing national resources and benefiting from local capabilities to finance development projects. 

By mobilizing local resources and utilizing them efficiently. These resources include crude oil revenues, taxes, national savings, and private sector investments. 

The most important objectives of financing development from within are to achieve financial independence, as it reduces dependence on external loans, which gives countries the ability to control their economic policies, stimulate sustainable growth, contribute to building a strong and sustainable economic base based on local resources, increase employment, enhance local industries, as well as harness the financial abundance available to a country to serve development.

Sources of financing development from within are represented by oil revenues, which are the most important source of financing development, as financial abundance provides an exceptional advantage to achieve a high level of development, and the tax system: Improving the tax system to achieve revenues from individuals, companies and the private sector: 

Stimulating private investments in development projects by improving the business environment and reducing bureaucratic obstacles, and this is done through a package of legal legislation that helps businesses grow.

Restructuring the public sector and privatizing public companies with the aim of transforming them into profitable companies that create added value, in addition to getting rid of their spending bills.

Promoting the country abroad in a systematic and focused manner and rebuilding a new impression of security stability and the availability of important investment opportunities and major opportunities to achieve exceptional profits, which will encourage companies to come to Iraq and rethink establishing large projects. This requires serious work from the Ministry of Foreign Affairs.

Developing the banking sector to make it effective and capable of creating cash flow within the economy by attracting local or foreign deposits and re-employing them through effective lending policies.

These are dangers that threaten us and our future generations, and we must be alert to them. If we do not start seriously today, understanding the dangers surrounding the country, its future will not be better than the worst African country, and this is certain. 

The challenges are serious and dangerous at the same time, and they require serious and real work. Starting now in a random manner is better than starting tomorrow in an organized manner, and we do not know when this “tomorrow” will come!   https://economy-news.net/content.php?id=52611