Present-day division of Iraq into, more or less, three seemingly separate parts (Kurdistan
plus Kirkuk, Baghdad-to-Basra, and the ‘Upper Middle’; Nenawa, Salahuldin, Diala,
and Anbar) hides long-enduring economic/financial interdependence. The financial
interdependence shows in the fact that oil-producing governorates have been
increasingly ‘financing’ (through the central budget) the deficit between spending and
locally generated income of all other governorates. Accordingly, regional spending
(consumption and investment) is hardly related to locally generated income.
Furthermore, observed regional distribution of per capita consumption, a major
component of spending, is quite unequal. In particular, Kurdistan enjoys the highest
level; well above the national average. At the other end, most southern (including oil
producing) and some Upper Middle governorates are below the average.
A confluence of factors has contributed to these outcomes. The following three
are of importance; one of a long-term nature and another two that assumed added
importance since 2003. First, decades-long near-total dependence on oil revenues in
financing the central budget (and balance of payments) had fed into, and at the same
time reinforced by, a declining share of agriculture and manufacturing in GDP.
Secondly, institutional/political arrangements and worsening security situation after
2003 had resulted in two skewed regional distributions: (ii.1) development of oil/gas
resources has concentrated in the ‘south’ and ‘north’ of the country to the virtual
exclusion of the Upper Middle, thus contributing further to its financial and political
dependence on the central budget and, hence, sense of marginalization, (ii.2) there are
indications that present central budgeting of regional allocations is responsible for part
of the disparities in regional distribution of per capita consumption.
Disparities in regional oil development and standards of livings, lack of coherent
economic policies, and current political differences are interacting to feed into the
ongoing social, political, and armed conflicts. The situation deteriorated further after
the terrorist attack of DAISH (ISIS), in June 2014, and its control of parts of the Upper
Middle. Furthermore, since the beginning of August 2015, repeated popular protests in
Baghdad, the south, and middle Euphrates, against inadequate public services, electricpower cuts, widespread corruption, unemployment, and the sectarian/religious base of
politics and public administration, have complicated and deepened the crisis. Resolution
of these conflicts/crises depends on reaching a universal political and social ‘contract’
between the main adversaries, in the ongoing conflict, and is, therefore, beyond the
scope of this paper. However, looking into schemes of decentralization and better oil
revenue-sharing (through federal budgetary allocation), attempted in this paper, may be
useful on the way to facilitate a social/political compromise and hopefully a kind of
social contract. They could also rectify some regional spending disparities.