University of Southern California Dissertations and Theses

Private Foreign Investment As A Possible Aid For The Economic Growth Of Iraq

(USC Thesis Other)

Private Foreign Investment As A Possible Aid For The Economic Growth Of Iraq

PDF

Download a page range

Download transcript

Copy asset link

Request this asset

Transcript (if available)

Content PR IV A TE FO R EIG N IN V E S T M E N T A S A POSSIBLE AID FO R T H E E C O N O M IC G R O W T H O F IR A Q b y - Fuad H. Tellew A Dissertation Presented to the FA C U L T Y O F T H E G R A D U A T E S C H O O L U NIVERSITY O F S O U T H E R N CA LIFO RN IA In Partial Fulfillment of the Requirements for the Degree D O C T O R O F PH IL O SO PH Y (Economics) August 1959 UNIVERSITY O F S O U T H E R N CALIFORNIA G R A D U A T E S C H O O L U N I V E R S I T Y P A R K L O S A N G E L E S 7 . C A L I F O R N I A This dissertation, written by ..............................FLTAD.H... T E L L p r ................................ under the direction of h.X$...Dissertation Com mittee, and approved by all its members, has been presented to and accepted by the Graduate School, in partial fulfillment of requirements for the degree of D O C T O R O F P H I L O S O P H Y Dean Date.........August ,...1959 DISSERTATIQ^T COMMITTEE ........... T A B L E O F C O N T E N T S C H A PT E R P A G E PA R T I T H E R O L E O F D IR EC T FO R E IG N IN V E S T M E N T IN T H E E C O N O M IC D E V E L O P M E N T IN U N D E R D E V E L O P E D C O U N T R IE S I. IN TR O D U C TIO N ...................................................................................... 1 The Problem................................................................................ 3 Statement of the P roblem ................................... 3 Importance of the Study......................................... 7 Limitations of the S tu d y ................................... 12 Sources of D ata ............................................................... 1^ Organization of the Dissertation .... 15 II. A N A P P R O A C H F O R T H E E C O N O M IC D E V E L O P M E N T O F U N D E R D E V E L O P E D C O U N T R IE S ................................... 20 The Meaning of Economic Development . . . 20 Definition of economic development . 21 Determinants of Economic Development . . Zh Components of Economic Development . . 25 Immediate d eterm inants................................... 26 Background determinants ................................... 27 Interaction of the Determinants of Economic Growth......................................................... 29 W here to Start Development . . . . . . . 31 iii CHAPTER PAGE A note of caution about the measures for the economic development of underdeveloped c o u n tr ie s ....................... 36 III. M E A S U R E S T G IN C R E A SE PER CA PITA IN C O M E F R O M L A N D A N D N A T U R A L RESOURCES....................... 39 Meaning and Characteristics of Land and Resources................................................................................. 39 W hat is Meant by Land and Its Resources 39 Characteristics of the Supply of Land and Natural Resources........................................ 39 The Implications of the Scarcity of Land Area to Economic Development....................... *+ 0 Measures to Increase Output W hen Culti vable Land is Scarce—The Need for Foreign A id ..................................................................... 42 Implications of Scarcity of Natural Resources Other Than Land Area .... 46 Underdeveloped Areas With Rich Mineral Resources More Attractive to Foreign Entrepreneurs ............................................................... 47 IV. M E A S U R E S T O IM P R O V E PR O D U C TIV ITY O F T H E L A B O R FORCE................................................................................ 49 The Quantity and Quality of the Labor Force as a Factor Determining Economic G ro w th ...................................................................................... 49 lv CHAPTER PAG-E Determinants o f* the Productivity of the Labor F o r c e .......................................................... ^9 W hat factors influence the size of the labor f o r c e .......................................... 50 What factors affect the quality of the labor f o r c e .......................................... 53 Characteristics of Labor in Underdeveloped Countries and the Measures Needed for Improvement................................................................. 56 Characteristics of L abor.............................. 56 Relative deficiency of adults .... 56 Causes of the deficiency of adult labor in underdeveloped countries • 58 A qualification .......................................................... 63 Poor h e a l t h ........................................................... 6b Lack of sk ills, aptitudes and incen tives ........................................; . . . . 65 Internal Measures for the Creation of an Adequate Labor Force ............................................... 66 External Measures for Developing an Adequate Skilled Labor Force ........................ 69 V. CA PITA L A N D CA PITA L FORM ATION......................... 73 Capital Shortage a Characteristic Phenomenon in Underdeveloped Countries 7b V C H A P T E R P A G E Obstacles to Sufficient Capital Forma tion in Underdeveloped Countries . . . 75 Measures for Capital Formation in Underdeveloped Countries ....................................... 79 Domestic Measures ....................................................... 79 Development capital from domestic voluntary savings ............................................. 81 Development capital from compulsory s a v in g s ......................................................... 83 Development capital by use of dis guised unemployment or seasonal idleness......................................................... 8U Foreign Measures ............................................................. 87 International l o a n s ............................. 88 International grants ............................................ 92 Direct business or private investment. 92 VI. T H E E N T R E P R E N E U R A N D E N T R E P R E N E U R S H IP . . . 95 The Hole of Entrepreneurs in Economic Development......................................................... 95 Scarcity of Entrepreneurs in Under developed C o u n tries................................... 96 Reasons for Shortage of Entrepreneurs in Underdeveloped C o u n tries........ 98 The historical, social and cultural re a s o n s ......................................................... 98 vl C H A P T E R P A G E Reasons due to the underdeveloped state of the economy.................................. 101 Measures for Promoting and Creating an Entrepreneurial Class in Underdeveloped Countries.............................................................................. 10^ Establishment of Social Institutions for the Stimulation of Entrepreneur ship .................................................................................... 105 Provision of Basic Facilities and Services for the Elimination or Reduction of Certain Peculiar Business Risks ........................................................ 10? Improvement of the Standard of Education............................................ 110 Making the Best Use of Available Domestic Entrepreneurial Talent . . . I ll Government Enterprise ............................................. 112 Foreign Entrepreneurs ............................................. 113 Immigration as a measure alleviating the shortage of entrepreneurs . . . 113 Direct private foreign investment as a means of overcoming the problem of the shortage of entrepreneurial ability in underdeveloped coun tries . ............................................................. . 1 1 7 vii CHAPTER PAGE VII. T H E M ER ITS O F D IR E C T PR IV A TE FO R E IG N IN V E ST M E N T S T O U N D E R D E V E L O P E D C O U N T R IE S: CONCLUSION....................................................................... 119 Advantages of Direct Private Investment . 119 Obstacles to Direct Private Investment . 121 Providing an Attractive Investment Clim ate.............................................................. 122 PA R T II A N A LY SIS O F T H E G E N E R A L C O N D IT IO N S O F T H E IRAQI E C O N O M Y VIII. T H E PH Y SIC A L SETTIN G A N D N A T U R A L R E S O U R C E S O F IRAQ.................................................................................. 127 Geographic Character and Climate .... 127 The Mesopotamian plain . ....................... 128 The Uplands n o r th ........................................... 131 The mountain b e l t ........................................... 133 The Clim ate.................................................................. 133 The Soil and W a te r ........................................... 13^ Mineral Resources ............................................................... 135 IX. P O PU L A T IO N D ISTRIBU TIO N A N D G R O W T H .... 137 Population Statistics and Geographical D istrib u tio n .................................. 137 Age and Sex Distribution of the Popula tion ........................................................................................... 139 Age D is trib u tio n ................................................. 139 Distribution of the Population by Sex . 1^3 vili C H A PT E R P A C E Population Growth....................................................... 1^7 Trends in M o rtality .......................................................... 1^8 Trends in F e r t i l i t y ......................................... . 1^9 The Implications of High Rate of Population Growth.......................................................... 150 X. C A PITA L R E Q U IR E M E N T S FO R E C O N O M IC D E V E L O P M E N T O F IRAQ................................................................................. 152 Difficulties of Assessing Capital Requirements ............................................................................ 152 Estimates of Capital Requirements . . . 153 Financing Economic Development in Iraq . 155 The Implications of the Dependence on o n R evenues...................................................................... 157 XI. P R O D U C T IO N A N D D E V E L O P M E N T IN A G R IC U L T U R E A N D INDUSTRY........................................................................... 166 A griculture....................................................................................... 166 Major Obstacles to Higher Agricultural Productivity in I r a q ......................................... 171 Land tenure s y s te m ..................................................... 172 Inequitable distribution of land . . 173 I n d u s tr y ............................................................................................. 173 The oil i n d u s t r y .......................................................... 173 Other i n d u s t r i e s .......................................................... 1 7 5 Investment in in d u s t r y ......................................... 176 CHAPTER i XII. lx P A G -E Type, size and distribution of In d u s try ................................................................... 177 Basic Reasons for Slow Industrial Growth In I r a q ................................. 18^ Lack of private Investm ent...................... 1 8 * + Deficient technical skill ............................. 18? Limited internal markets ............................ 189 Lack of entrepreneurial and manage rial s k i l l ............................................................. 190 FO R E IG N T R A D E A N D IN T E R N A T IO N A L B A L A N C E O F PAYMENTS................................................................................... 192 Foreign Trade ........................................................................ 192 Exports ................................................................... 192 O n ........................................................................................ 192 Other exports............................................................. 195 Destination of exports other than o i l ................................................................................... 197 Imports................................................................................... 199 Capital goods........................................................... 199 Consumer goods ..... ............................ 202 Sources of Im p o rts............................................ 20^ Balance of Payments....................................................... 206 The Importance of Oil to the Balance of Payments.................................................................. 206 CHAPTER XIII. XIV. X V . XVI. x PAGE i Iraq.' s Foreign Exchange Reserve and Its Composition.............................................. 208 PU B LIC FINANCE............................................................... 213 Public Revenues .................................................................... 215 Structure of the Tax System.................. 216 i Public Expenditures ........................................................ 224 Breakdown of Expenditures....................... 224 Public D ebt.................................................................... 226 Internal D ebt......................................................... 226 External D ebt......................................................... 2 2? H E A L T H A N D E D U C A T IO N IN IRAQ,....................... 230 Health in I r a q ......................................................... 230 Education......................................................................... 231 The Need for Educational Reform .... 231 D E V E L O P M E N T PR O G R A M ................................................... 235 Development Expenditures and Projects . . 235 Actual and Estimated Expenditures Compared............................................................... 236 Major P r o j e c t s ................................................... 241 Evaluation of the Development Policy . . 242 Shortcomings of the Development Policy. 243 C O N C L U S IO N S A N D G U ID ELIN ES FO R E C O N O M IC D E V E L O P M E N T O F IRAQ,............................................. 248 Guidelines for Planning Economic Development of I r a q ........................................ 250 Xl CHAPTER PAGE PA R T III A JOINT FO R EIG N -LO C A L PRIV A TE EN TERPRIZE A P P R O A C H FO R IR A Q XVII. T H E P R O B L E M O F S H O R T A G E O F EN TR EPR EN EU R IA L, M A N A G E R IA L A N D T E C H N IC A L T A L E N T : A N A P P R O A C H FO R SO L V IN G T H E P R O B L E M .... 257 Scarcity of Special H um an Ability In Iraq and Its Implications . . . '. . . . 257 The Implications of Shortage of Entre preneurial , Managerial and Technical Talent to Economic Development of I r a q ..................................................................................... 259 A n Approach for Solving the Shortage Problem of Entrepreneurial, Managerial and Technical Talent in I r a q ....................... 262 Objections to Government Enterprise . . 263 Joint Foreign-Local Private Enterprise A Better Approach ................................................... 270 Advantages of the Joint private enterprise approach to Iraq .... 270 The Investment Climate in I r a q ....................... 2 7 * 1 - The Risk of Nationalization and Confis cation in I r a q ......................................................... 275 Exchange Restrictions and Capital Transfer Difficulties in Iraq .... 280 CHAPTER I I XVIII. Lack of Social Overhead Facilities and Limited Domestic Markets in Under developed Countries as an Obstacle for Foreign Investment .................................. Can Iraq, provide adequate power energy end transportation system A general, solution for the enlarge ment of the size of the market in underdeveloped countries ....................... Probable fields of investment in I r a q ................................................................................ The extension and Improvement of existing industries ........................................ The establishment of new industries . Industrial possibilities that appear to need further consideration at present .......................................................................... IN FLA TIO N A S A M A JO R A R G U M E N T A G A IN ST T H E JOINT FO R EIG N -LO C A L PR IV A TE EN TERPRISE A P P R O A C H ..................................................................................... The Disadvantage of Inflation ...... Kind of Inflation Expected in Iraq Not Menacing . . . .............................................................. The Demand-Pull Kind of Inflation . . . xii P A G E 283 285 290 29^ 294 295 297 299 299 302 302 xiii C H A PTER *A G E The Cost-Push Type of Inflation .... 3 0^ The Expansion-Pressure Type of I n f la tio n ......................................................... 305 A Proper Policy for Combating Inflation . 307 Price control policy undesirable: provides no re m ed y ......................................... 307 A more liberal import policy provides a better solution ............................................... 3 0 8 Liberal Import policy and economic expansion.............................................. 311 XIX. S U M M A R Y A N D CONCLUSIONS..................................................... 315 The State and the Future of the Iraqi Economy.................................................................................. 316 Lack of Entrepreneurial, Managerial and Technical Talent: A Bottleneck in the W ay of Rapid Economic Growth .... 317 The Joint Enterprise Approach Best W ay for Solving the Problem.................................... 318 N o Major Obstacles Against Application of This Approach in I r a q .............................. 319 With Proper Policies Maintained Inflation Can Be C o n tain ed ........................ 319 Recommendations and Conclusions .... 3 2 0 Emphasize agriculture ......................................... 3 2 0 xiv C H A P T E R P A G E Emphasize industry ................................... 320 Emphasize education and health . . . 321 Attract foreign entrepreneurial, managerial and technical talent . . 321 Allow free repatriation of capital and p r o f its .............................................................. 3 2 2 Maintain a liberal import policy to reduce inflation ............................................. 3 2 2 BIBLIOGRAPHY..................................................................................................... 325 LIST O F T A B L E S T A B L E P A G -E I. Age Distribution, 1947, Presented in Per C en ts.................................................................................................. 140 II. Iraq’s National Income Estimates for 1956 Presented in Per C e n t s .............................................. 158 III. Iraq’s Budgetary Revenue and Expenditures . 159 IV. Balance of Payments Summary........................................ 161 V. Development Board Actual Revenue and Expenditures ........................................................................... 162 VI. Agricultural Area and Production of Principal Crops ...................................................................... 1 6 8 VII. Type and Number of Industrial Establish ments and Number of Workers Employed in Each In dustry........................................................................... 178 VIII. Size Distribution of Establishments In Terms of Number of Persons Employed . . . 180 IX. Summary of Industrial Census of Iraq by Liwae (Province) ................................................................ 181 X. Composition of E x p o r ts ................................................... 193 XI. Destination of Iraqi E x p o r ts .................................. 198 XII. Composition of Imports (Including Oil Companies Imports) .......................................................... 200 XIII. Composition of Imports (Including Oil Companies)....................................................................................... 201 xv i T A B L E P A G E XIV. Iraq's Sources of Imports (Including Oil Companies Im p o rts)............................................ 205 X V . Balance of Payments 19^7 to 1956 207 XVI. Iraq's Foreign A ssets............................. 209 XVII. Total Government Expenditures and Revenues. 214- XVIII. Iraq's Budgetary Revenue and Expenditures . 217 XIX. Iraq's Internal Public Debt ......................................... 228 X X . Proposed Expenditure of the Development Board 1951/52 to 1956/57 237 XXI. Allocation of Development Funds for the Plan Adopted in 1956 238 XXII. Estimated and Actual Development Expendi tures Compared................................................................... 239 PART I T H E R O L E O F D IR E C T FO R E IG N IN V E S T M E N T IN T H E E C O N O M IC D E V E L O P M E N T O F U N D E R D E V E L O P E D C O U N T R IE S CHAPTER I IN T R O D U C T IO N The subject of economic development of under developed countries has, in recent years, become the main concern of many economists, statesmen and thinkers in most parts of the world and, in particular, In the United States. Especially within the last decade the development of economically underdeveloped countries has become an important aim of American foreign policy. It Is now widely believed that the political, economic and security interests of the United States, as well as of the under developed countries themselves, will be served If living standards in economically underdeveloped countries are raised. For these, as well as for humanitarian reasons, American leaders have often expressed a desire for the development of the underdeveloped areas. Announcing the Point Four Program In his January 2 0 , 19^9, inaugural address, President Truman proclaimed a plan for the improvement and growth of underdeveloped areas. His prospectus based itse lf on the status of the more than half the people of the world, who, the President said, "are living In conditions approaching misery."^ 1Inaugural address, President Harry S. Truman, January 2 0 , 19^9. Pointing to American pre-eminence in science and Industry In material resources and ever-increasing techni cal knowledge, he spoke of a “cooperative enterprise, a world wide effort for the achievement of peace, plenty and freedom." 2 Industrial development and raised living standards in other countries, he said, could be brought about with the cooperation of American business, private capital, agriculture and labor, and he asserted that new economic developments must be worked out and controlled for the benefit of the peoples of the areas concerned. Assuring the ever cautious underdeveloped world of today against the fears from foreign political and econ omic domination, and cautioning it not to fall a victim into the hands of dlctatorian-authorltarian rule, President Truman noted: The old imperialism, exploitation for foreign profit, has no place In our program. . . . Only by helping the least fortunate of Its members to help themselves can the human family achieve the decent, satisfying life that Is the right of all peoples. Democracy alone can supply the vitalizing force to s tir the peoples of the world Into triumphant action, not only against their human oppressors, but also against their ancient enemies—hunger, misery and despair.3 More recently President Elsenhower, in a major speech before the American Society of Newspaper Editors, 2Lqc. clt. 3 pointed out the necessity for economic and social progress in underdeveloped areas. The President remarked: For the welfare of ourselves and others . . . w e must help the rest of the free world achieve its aspirations. For our mutual benefit, w e must Join in building for greater future prosperity for more human liberty and for lasting peace. . . . In the less developed nations, the urgent need is for economic and social progress for their peoples.^ President Eisenhower also emphasized the necessity of private foreign Investment for the development of these areas, and said it should be utilized as much as feasible. I. T H E P R O B L E M Statement of the Problem International investment, particularly through private investors, seems to be the favorable Western approach for the economic development of underdeveloped countries as indicated in the quotations from both Presi dents Truman and Elsenhower. Recently, however, many well-known American and United Nations economists have dismissed the important role which private foreign invest ment can play In the development of underdeveloped areas. A good number of these economists place negligible emphasis on such developmental possibilities, pointing to a variety of difficulties. Los Angeles Times. Sunday, April 2 2 , 1956, Parti. Som e point to the risk of nationalization and confiscation, and to the restrictive laws and exchange controls as discouraging factors. It has been said that the risk of nationalization and confiscation is great, due to the fear from continuous imperialism and economic exploitation which in the past accompanied many of the French, Dutch, British and other foreign investments in underdeveloped areas. Other economists expressed little hope in the possibility of successful development through the aid of direct foreign investment for different reasons. They point to some basic economic difficulties such as the absence of a domestic market large enough to permit foreign Investors to produce for the domestic market instead of exporting to foreign markets.5 They also point to the lack or absence of public overhead capital (social overhead) as one of the obstacles, since foreign investors may have to build these projects before they start their business.6 This writer believes that in the case of Iraq, ^Ragnar Nurkse, Problems of Capital Formation in Underdeveloped Countries (Oxford: A. T. Broome and Son, 1955), Chapters I and V . ^Paul A. Baran, "National Economic Planning," A Survey of Contemporarv Economics. Vol. II, Bernard F. Haley (ed.), (Illinois: Richard D . Irwin, Inc., 1952), p. 379. 5 ! which Is the subject matter of this dissertation, these objections are not serious enough to warrant a total dismissal, of a developmental approach via the aid of direct foreign Investment. Iraq, which does not have a shortage of labor, and which has abundant untapped natural resources, and which also has, relatively speaking, sufficient capital funds— mainly from oil royalties—Is today finding it difficult to develop at a rapid pace, le t alone reach the goal set by the five and la te r six years development plans. The major obstacle to carrying on a more rapid development program, It appears to this writer, Is the scarcity of some kind of human ability or, to be more specific, the lack of entrepreneurial, managerial and technical talent. This writer believes that this shortage could be overcome and a more rapid rate of development could be achieved if Iraq would focus Its attention on private foreign Investment by making room for It to operate within a favorable investment climate. Fortunately, Iraq Is in a position to benefit from this kind of approach for the simple reason that the obstacles against foreign invests ments, of the kind mentioned above, are much less preva lent in Iraq. However, there is probably one obstacle usually feared when countries undertake to achieve a rapid economic development through a larger volume of expenditures, namely inflation. There is now some Infla tion in Iraq caused by the expenditures Induced by the development program which was Initiated In 1951 when the Government began to receive large revenues from o il. Obviously, then, there would be some fear that additional large investment from outside sources would Induce a dangerous inflation which could distort the general economy, and delay and obstruct real development work. If there Is a high, galloping inflation It Is possible that labor, enterprise and capital would be attracted Into Investments where profit prospects would seem to be high and therefore draw resources away from investments that were required most by the country for development purposes. Consequently, development would be delayed and made expensive due to a shortage of labor, material and higher costs. Social unrest may result if Inflation Is permitted to go very far, uncorrected, perhaps leading to serious interruption of the progress of Iraq. This w riter maintains, however, that with proper policies maintained additional foreign Investments would not cause a dangerous kind of inflation. H e further main tains that the kind of inflation which would result would be manageable without the use of radical measures such as price controls, exchange controls or devaluation. 7 Im portance of the Study In Iraq, and in other areas of the underdeveloped world, there Is In a sense a revolt among the people aris ing from their aspiration for better living. As they see more the benefits achieved through the spread of material well-being elsewhere, the people of underdeveloped countries become more inslstant In their demand for speedy economic development. N o one could reasonably quarrel about the desirability of Improving the lot of the people In underdeveloped countries. But the approach and schemes adopted for the fulfillment of this goal can differ sub stantially. Since the end of World W ar II, the big Western powers have been interested for many reasons in developing the economically more backward countries chiefly through creating a favorable atmosphere for private foreign Investors in these countries. Although the consensus of opinion among many writers point to a considerable number of difficulties Involved in this kind of approach, there Is no reason why a foreign investment approach should be deliberately kept away from aiding the develop ment of particular economies where conditions are favorable to foreign Investors and when the Investee countries stand to gain considerably. Iraq today is an outstanding example of such an economy. Here, therefore, the author introduces the foreign investment approach for 8 aiding the economic development of Iraq. Although much has been written on the subject of economic development and economic conditions of Iraq— including agriculture, industry, - commerce, labor, foreign trade, the banking and monetary system, and other aspects of the economy, no work on Iraq has yet appeared of the seme endeavor attempted by this dissertation. T o be sure, some important works on the subject of the economic development of Iraq written by specialists have already appeared, namely, The Economic Development of Iraq by the International Bank for Reconstruction and Development (now World Bank), 1952; Monetary Policy in Iraq by Carl Iverson, 195^; Development of Iraq: A Plan of Action by Lord Salter, published in 1955; and A Plan for Industrial Development in Iraq by Arthur D . Little, Inc., published in 1956. Only a few scattered remarks and opinions are made by these books in regard to foreign investment in Iraq.? Perhaps it would be illuminating to say in the way 7 There is one more work—a dissertation by M oham ed A . Katabi— which has to be mentioned, not so much for Its significance but because its title bears som e resemblance to the title of this author's dissertation. The title of Katabi1s work is: Som e Economic Aspects of Oil Investment in Iraq , written in 1955* It has treated a completely different subject matter. Its main emphasis is oil and its revenues. T o be more specific, Katabi's dissertation 9 i of a review a few sentences about the content or thesis of each. The first is more or less a discussion of the general economic conditions in Iraq—including land and natural resources, agriculture, Industry, trade, popula tion, labor, public finance, government economic policy and other aspects of the economy—with expert recommenda tions as to what should be done to improve each and to develop the economy within the framework of free enterprise economy. It was the first extensive effort of Its kind. The second study was prepared by Iverson at the request of the Central Bank of Iraq to find and discuss the possibilities regarding the future monetary policy of the country. It is an important piece of work on monetary policy and also on certain aspects of fiscal policy. The essence of the report Is that there should be "close cooperation and concerted action along parallel lines on covered two major topics: (l) the historical and economic highlights of Iraqi oil development which is more or less a political history of oil In Iraq since Its discovery until the conclusion of the present day oil agreement which entitles Iraq to share in profits on the 50/50 basis; and (2 ) "the part . . . which is relegated principally to the confines of economic theory" (Ibid., p. 8 ), which deals with the multiplier effects. T o be more specific, Katabi*s dissertation attempts to estimate the Increase in the size of Iraq's national Income as a result of Initial expenditures from oil revenues. A quick look at Katabi1s dissertation will convince the critique that the two dissertations are occupying two different domains. 1 0 I the part of the three strategic instruments of economic policy in Iraq: the central bank, the treasury and the development board.1 '® The book has an especially good discussion on the Central. Bank of Iraq, speaking in detail about its background, structure, functions and the role it should play to assist economic development of Iraq. The oil Industry and the multiplier effects of investing oil revenues are given a good treatment. The question of inflation Is also discussed In many aspects. Occasional comments and recommendations regarding othei* sides of Iraq's economy are also made, but very l i t t l e attention, Indeed, is given to foreign Investments In Iraq. The third work., Development of Iraq: A Plan of Action. presents as its title implies a plan of action for economic development. It prescribes the course which development planning should take with regard to the many sectors of the economy. The basic thesis of the book as evidenced by the emphasis In each successive chapter Is the need for efficient administration and for coordination of development plans. The purpose is to avoid shortages of material and human services and to create a balance between long and short term projects. Again little or no g Carl Iverson, A Report on Monetary Policy in Iraq (Baghdad: The National Bank of Iraq, 195^)» P» Ii» 11 attention ie paid to the significance of foreign invest- jments in Iraq. | The fourth, A Flan for Industrial Development in i ;Iraq, is a report of the Industrial Survey of Iraq which was prepared by Arthur D . L ittle, Inc., under the joint |sponsorship of the Development Board of Iraq and the United States Operation Mission to Iraq. It Indicates to the I Development Board the Industrial opportunities that are I suitable for immediate and future establishment and it offers a plan for expanding and improving existing indus t r i e s and for establishing new ones.9 However, only a few scattered remarks about the importance of foreign enter- IpriserB and the part they can play in raising the output i ; of Iraqi industry appear in this report. Consequently, this writer can now repeat the :statement that no work Introducing a developmental approach for Iraq of the kind attempted by him has yet appeared. This study, therefore, attempts to cover an area which— ; though not completely Ignored—has been unduly neglected and | less commonly treated. The significance of this approach does not lie only in its attempt to f i l l the gap left by economic literatu re j on Iraq but also in its importance to Iraq and to the o Arthur D . L ittle, In c., A Plan for Industrial Development in Iraq (Massachusetts: 1956), p. 3* Western World as well. The benefits to Iraq would be the speeding up of the pace of development and other benefits resulting from direct and indirect contributions of foreign Investments to the basic economy; to living stan dards; to culture; and to institutions. O ne particular advantage of foreign investments in Iraq is that It would help in integrating into the nation the foundations of a more mature economy by means more suitable to a private enterprise system and democracy. The benefits to the W est can be expressed in one sentence. It would gain a friend in its ideological struggle against communism. A stronger private enterprise economy, of course, provides a powerful Insulation against communism. Limitations of the Study This study is concerned only with the question of private foreign Investment as a possible aid for economic growth of Iraq. Its purpose is more or less limited within this area. It will attempt mainly to provide answers to the following questions a,nd other matters related to them: (l) H o w can private foreign Investors contribute to the development of Iraq13 economy? Are there serious barriers to private foreign investments in this country? A nd (3 ) what policies should be devised to eliminate the major difficulties and to ensure the success of development of Iraq through the aid of foreign 13 I investment? It is beyond the scope of this study to provide the i answers to all the questions that could be asked—under i ! the general topic o f* economic development or under the general topic of international investment for economic ;development of underdeveloped countries—most of which ! have been asked and given convincing answers by well known i ! scholars. While this author will draxv on the wisdom of jthese scholars and quote them or repeat some of their | jideas, he will not attempt to duplicate or compete with j jtheir works except when it is necessary for a satisfactory ! | development of his dissertation. For example, while this author will attempt to des- | |cribe and analyze the kind of Inflation to be expected at ;the in itial stages of development by means of additional I |foreign investments in Iraq, he m ay not trace the process ;of inflation under a number of alternative assumptions as to the way in which expansion will proceed. Such matters I may require a separate study in order to provide a convinc- i jing and well-rounded discussion. Nor is it his purpose to i tackle the various theories of international Investments— except when they have a direct bearing on the study—for his purpose is not to devise a theory of international investment. Rather, his study provides a way or an approach—it may even be called a program--for aiding the economic development of Iraq per se through the media of foreign investment. 1A i Sources of Data Information upon which this study was based is derived from a variety of both primary end secondary . sources. With regard to information on Iraq—Including facts and figures and other literature— »it has been assembled from almost a ll the available materials and pub lications put out by many well known institutions Interested In the development of underdeveloped countries such as: The United Nations; The International Bank for Reconstruction and Development; The International Monetary Fund; The Middle East Institute; The Royal Institute of International Affairs, and others. M any references published in Iraq have also been consulted. For the theoretical aspect of the dissertation this w riter has studied thoroughly many books on the economic development of underdeveloped c o u n tr ie s .A r tic le s in ^The following books proved more useful: N. S. Buchanan and H. S. Ellis, A pproaches to Economic Develop ment (New York: The Twentieth Oentury Fund, 1955); Ragnar Nurkse, Problems of Capital Formation in Underdeveloped Countries (Oxford: A. T. Broome and Son, 1955); B. E. Haley, Ted.) A Survey- of Contemporary Economics, Vol. II (Illinois: Richard D . Irwin, Inc., 1952); H. F. Williamson ahd J. A. Buttrick (eds.), Economic Development: Princi ples and Patterns (New York: Prentice-Hall, Inc., 195 United Nations, Processes and Problems of Industriallza- tlon la Underdeveloped C oqntr.l aa (N ew York, 1955); United Nations, The Determinants and Consequences of Population Trends (hew York: 1953);and many text books. 15 | many learned journals have also been consulted. . II. O R G A N IZ A T IO N O F T H E D ISSER TA TIO N This dissertation Is divided into three major parts. Part 1 covers Chapters I-VII Inclusive. Chapter I is the introduction. Chapters II-VII are assigned for a theoretical discussion of underdeveloped countries in general. These chapters, therefore, deal with the topic of economic development, Its meaning, determinants and pattern. Attention is focused upon the lack of adequate productive resources in underdeveloped countries, particu larly skilled labor force, capital, and entrepreneurial ability. The emphasis is upon the merits of direct foreign investment in meeting these shortages and in speeding up the process of economic development in under developed countries. Chapter II, entitled "A n Approach for Economic Development of Underdeveloped Countries," deals with the meaning of economic development, its determinants and components; also the important question of where to start development and the basic measures needed for the develop ment of underdeveloped countries. A s a starting point, the author favors taking measures for augmenting the supply of the productive factors—land, labor, capital and entrepreneurs—and for the improvement In their quality and use. 16 Chapter III, “ Measures to Increase Per Capita ! Income from Land and Natural Resources," is a discussion I i of the characteristics of land and its resources and the implication of the scarcity of land, and the natural resources essential to productivity and economic develop- i ment. i | Chapter IV, "Measures to Improve Productivity of i | the Labor Force," deals with the effect of labor on the j i j productivity of underdeveloped countries. The discussion centers on the general determinants of productivity of the labor force, labor characteristics which are inhibiting productivity and economic development in underdeveloped countries, and the line of action needed for overcoming I the d ifficulties. This chapter points out that direct | | foreign investment can be of much help In raising produc- | tiv ity of labor and can contribute effectively to the creation and promotion of a sufficient skilled and semi- i skilled labor force which is needed for rapid economic : development. i | The fifth chapter, which covers "Capital and Capital Formation," reveals that in underdeveloped countries the shortage of capital is great, that the capital required for development is of great magnitude and that efforts to provide sufficient capital from indigenous resources alone would not be successful. 17 Therefore, arguments are given in favor of foreign capital to supplement that accumulated domestically. Distinction is made between the various types of capital imports, and the case for direct private investment is favored as a more effective contribution to capital formation and the development of the local foundations of a durable economy. The sixth chapter, entitled “The Entrepreneur and Entrepreneurship," em phasizes the importance of entre preneurial ability to the development process, and the shortage of entrepreneurs in underdeveloped countries as a major factor inhibiting economic development. The basic reasons for this shortage are discussed and various approaches to remedy the situation are suggested. The arguments favor direct private foreign Investment in the form of "joint foreign-local private enterprise" for overcoming the dearth of entrepreneurial ability in under developed countries. At the end of this part of the study a brief conclusion on the merits of this approach is given, and the obstacles deterring its application in underdeveloped countries are also mentioned. The conclusion reached is that underdeveloped countries with rich mineral resources of potential value, and which can offer a reasonably attractive investment climate possess a favorable position for obtaining the advantages of direct foreign invest ments. Iraq, this writer believes, is one of these 1 8 countries which can meet both the requirements and benefit from the operation of direct private enterprises on its land. Parts II and III confine themselves to Iraq. They deal with private foreign investment as a possible aid for the economic development of Iraq. Since the success or failure of foreign Investments in assisting economic development abroad Is determined to a great extent by the economic and other conditions of the country in which foreign Investments will operate, a review and analysis of these conditions in Iraq is called for. Part II does this in nine chapters (VIII through XVI). The review centers around: land and physical resources, size of population and labor force, capital and financial facilities needed to channel capital, entrepreneurs and managerial talent, agricultural and industrial conditions, the balance of payments, foreign trade, public finance, health and educa tion and the Iraqi development program. Chapter XVII, Part III, emphasizes that lack of entrepreneurs, managers and skilled people is alt present a major problem facing Iraq In Its attempt to carry on a more rapid rate of development. It also suggests the approach of Joint foreign-local private enterprise to overcome this shortage and to aid economic development In Iraq. Because of the popular contention that the risks Involved and the obstacles and restrictions against 19 i private foreign Investment are too great In relation to their return, Chapter XVII also takes up these risks and obstacles (namely, confiscation end nationalization, exchange controls and transferring of profits, absence of social overhead and markets, etc.), and argues that In the case of Iraq per se they are at the minimum and should not constitute serious obstacles to the flow and operation of private foreign Investment there. Furthermore, this chapter puts the finger on some of the available profitable investment opportunities in Iraq that are suitable for immediate and future exploita tion . Chapter XVIII concerns Itse lf with disadvantages of foreign Investment in Iraq. The major disadvantage of increased foreign investment in Iraq at the present would be the inflationary pressure it may create. This chapter, therefore, discusses the problem of Inflation: Its causes, kinds, consequences and Impact on economic development. It also suggests the line of action which should be followed in order to avoid a dangerous Inflation while obtaining at the same time the advantages of the Joint enterprise approach. The final chapter contains the conclusions of the study. A view of the highlights of the dissertation Is given and other problems that bear attention are exposed. CHAPTER I I A N A P P R O A C H FO R T H E E C O N O M IC D E V E L O P M E N T O F U N D E R D E V E L O P E D C O U N T R IE S I. T H E M E A N IN G O F E C O N O M IC D E V E L O P M E N T Economic development la concerned with the pace o f* sustained change in output of the economy measured In the aggregate or per capita of the population, or per member of the labor force.It is concerned with Improving our material economic position, and therefore It is a desirable objective since i t is one of the important elements of progress, “getting ahead," which we a ll empha size . In explaining the meaning of economic development, distinction must be drawn between It and the slow changes in productive resources and acceleration of knowledge that even the most nearly static societies experience. Economic development means; A rate of expansion that can move an underdeveloped country from a near subsistence mode of living to substantially higher levels In a comparatively short period of time, i.e . decades rather than centuries. For nations already advanced economically it means a hi oses Abramovitz, "Economics of Growth," A Survey of Contemporary Economics, Vol. 2, B. F. Haley (edTTT Tlllinols: Richard D. Irwin, Inc., 1952), p* 13^. 21 ! continuation or acceleration of existing rates of growth.2 Definition of economic development. The most popular definition of economic development is phrased as follows: "a sustained rise in per capita real I n c o m e . "3 Questions regarding the structure of a society, the size and composition of its population, its institutions and culture, the resource patterns, and even distribution of output am ong the society's members, are relevant only insofar as they bear on this main consideration.**' A crucial aspect of this definition is its reference to sustained or long-run change, to real income or output, and to per capita income or income per person. 'W h y sus tained? Because a rise over a few years m ay be too short to better the material well-being of the people. A temporary upsurge in material well-being followed by a recession to the Initial levels could scarcely be called development. W hy real Income and not money income? 2 Harold F. Williamson, "Introduction," Economic Development: Principles end Patterns. H . F. Williamson and J. A . Buttrick (e&s.T^ (N ew York: Prentice-Hall, Inc., 195*0 > p. 3. 30. Lowell Harris, The American Economy (Illinois: Richard D . Irwin, Inc., 1956) , p. 73^* See also, W . W . Rostow, The Process of Economic Growth (N ew York: John Wiley and Sons, Inc., 1952) , pp. 55» 70, 80 and 102. ^Williamson, op. c lt. . p. 7. 22 I Because the monetary unit changes in value and therefore w e may obtain a false picture of a country's economic performance, and also because there are many things which may be valuable to us but cannot be purchased with money. The answer to the question why per capita. Income and not a rise in income “rests on the belief that concern is usually with the welfare of hum an beings as Individuals or families."^ The choice of per capita income seems to some writers to be less clearly Justified. Buchanan and Ellis, for example, raise the following question: “ W hat of the case where, despite important changes and sizable Investments of a developmental character, real income per person does not increase over time, but Instead a larger population gets an unchanged average income? Can one s till say there has been development? Probably so. For it must be conceded that if the economy over time is able to support larger and larger numbers at the same level of material welfare, then welfare had Improved: had developmental changes not been instituted, some persons now alive would not have survived, or if they had, they would have been less well off than they now are.6 In view of the above remark, one might agree that the choice of per capita income leaves some difficulties, let, because it is most significant to center attention on what Is available per person and because concern Is parti cularly with underdeveloped countries, this writer prefers ^Harris, loc. c lt. ^N. S. Buchanan, and H. S. Ellis, Approaches to Economic Development (N ew York: The Twentieth Century Fund, 1955) , p. 22. 23 I to stay with the popular definition given earlier. As was mentioned, the choice of M per capita income1 1 rests on the belief that we are usually concerned with the welfare of human beings as individuals or femilies. This concept may be especially important in underdeveloped countries where per capita income is very low and the need for improvement is very urgent. Without an increase in per capita income it would be hard to convince the people of underdeveloped areas that there had been economic groT-rth.? True, it seems reasonable to assume that there had been development when per capita income, because of a population increase, remained the same. But this kind of development is of l i t t l e significance to the people of underdeveloped countries in view of the extreme level of poverty and low standard of living prevalent in these countries. To say that there had been development in an underdeveloped country there must be a sustained rise in per capita income of that country. Such a concept of economic development is more compatible with the urgent need for raising living standards in underdeveloped areas.8 ^Needless to say, it would be even harder to main tain that there had been economic development or growth when national income had risen but per capita income had fallen because of a population increase. ®In view of the prevalence of a great mass of crushing poverty in underdeveloped countries some II. D E T E R M IN A N T S O F E C O N O M IC D E V E L O P M E N T Economic development implies raising real income per person. The task of prescribing how to achieve a higher Income per capita would be much simpler if there were a generally accepted theory of economic growth. ’ ’Despite the considerable amount of attention that was given to the subject over the years by social scientists, no such theory has e m e r g e d . "9 This is mainly due to the fact that economic growth is a complex process. Because of the complexities of the subject one finds that the thinking about economic growth Is s t i l l unsettled. Econ omists, today, are far from certain about the relative Importance of forces aiding and obstructing economic dev elopm ent.10 economists have even suggested that reduction of mass poverty be made a crucial te st of the realization of economic development. See, for example, Jacob Viner, International Trade and Economic Development (111lnoIs: Free Press, 1952) , pp. 126-127. ^Williamson, op., pit.., p. 1^. ^H arris, pp. o lt. . p. 733- This contention is expertly revealed In the following quotation: ’ ’The factors which govern the levels and trends of the per capita output of national economies ere only imperfectly known. Data needed for measuring the effects of various factors are largely missing, and social and economic theory Is not sufficiently developed to exploit fully the available data. In particular, the extent to which apparent effects of certain factors may really be due to other prior determinants shaping these factors has not been adequately explored. As a result, considerable 25 ! Despite the absence of a satisfactory theory and the absence of agreement as to which of the forces are more Important or relevant to the study, economists are confident that continued research and an increase in knowledge will greatly contribute to the development of a generally accepted theory. With this in mind the follow ing analysis is based on the existing body of literature created by a number of competent scholars w ho devoted their attention to the questions Involved. Components of Economic Development For purposes of analysis, the components or deter minants of economic development m ay be grouped in a variety of ways, provided any such listing is comprehen sive in its coverage, and is made up of elements that are analytically and operationally distinguishable.-1 - 1 In this dissertation it is preferred to classify the determinants of economic development into two major groups, namely, the immediate determinants and the background determinants. Each of the two major groups of determinants is made up of 1? m any components as shown in the following analysis. ~ differences of opinion exist am ong scholars in this field." United Nations, Department of Social Affairs, The Determinants and Consequences of Population Trends T N ew York: United Nations, 1953)* p» 220. ^Williamson, op. c lt. , p. 17. -L^Thls lis t of factors Is based on the following works but considerably rearranged: The Determinants and 26 Material Resources H um an Resources determinant s Quantity and quality of productive resources available in a country. This includes: (a) Land and natural resources (e.g. land area, coal, oil, iron ore, etc.). (b) Capital resources (e.g. machinery, facto ries, roads and other forms of capital). (c) Labor resources (e.g. the size, the skill and efficiency of the labor force). (d) Entrepreneurs: The dynamic factor in economic development. This refers to people with entrepreneurial ability who function as technical Innovators or adapters, business promotors, capital providers and risk takers and, finally, as business managers. (The human resources reflects immediately the industrial arts and, in the long run, the educational and scientific Consequences of Population Trends. op. c it. , pp. 221— 222; J. J. Spengler, "Economic Factors in the Development of Densely Populated Ares," Proceedings of the American Philosophical Society, Vol. 95 > No. 1, February, 1951> pp. 20-53; Also Spengler, "Theories of Socio-Economic Growth," Problems In the Study of Economic Growth (N ew York: National Bureau of Economic Research, 19^9), pp. ^6-115; Buchanan and E llis, op. c it. . Chapter 2; Williamson, op.. c it. . pp. 1-21; Abramovitz, o lt.. pp. 132-182. attainments). II. Efficiency (in economic organization and technology). This Includes: (a) The effectiveness with which economic activities are organized, which depend upon: 1. The degree of specialization and divi sion of labor in effect; 2. The extent to which economies of scale, as distinguished from economies Included under 1, are attained; 3. The manner in which the activities of fliros composing given industries are adjusted to those of firms composing other Industries. (b) The efficiency of the techniques by which material resources are utilized. (c) The degree to which the productive resources (human and material) are employed. Background determinants I. The Physical environment: Refers to climatic complements surrounding the use of land and other productive resources (e.g. the winds, the rainfall, temperatures, geology of the earth). II. Institutional environment : Refers to the social and political institutions (e.g. the family and caste system; the kind of politi cal system and government and the degree of direction and regulation exercised by the state; the legal institutions, etc. Such institutions in the political and social environment may manifest themselves in the economic structure the society has: for example, they effect the system of allocating resources, the system of property relations, the system of incentives, the conditions surrounding the activities of persons per forming entrepreneurial functions and making innovations, etc. III. Cultural environment: It refers to the customary mode of thought and behavior, the philosophical attitude or values of the people—all of which tend to manifest the kind of institutions a country has. This classification is based on the popular belief that output or average real incomes In any society depend upon the available resources of production (land, labor, capital and entrepreneurs) and the efficiency with which they are used; and the cultural, social and political framework within which all economic activity in the 29 particular society is carried on.^3 These factors broadly determine the level of total output and thus income per person at any point in time. Interaction of the Dgtermlnants of Economic G -row th The above determinants or components of economic development have numerous cross relationships. They Interact with each other for they are more or less inter dependent . For example, physical environment can affect economic activity in a country. The territory, the weather and the kind of resources in an area certainly affect the quantity and quality of productive resources. Nations cannot exploit resources far beyond those which they have within their ow n borders or over which they are able to assert economic control. Therefore, the physical environment sets limits to the productive resources available to a . country. Conversely the quantity and quality of productive resources could affect the physical environment but in a relatively smaller degree. For example, by using labor and capital, a nation can control som e of Nature's changes, like erosion, and therefore preserve the supply of land. It can use Its productive resources for exploiting the deserts through irrigation, ■^Buchanan and Ellis, op. c it. . p. 23; Williamson, oo. c i t . . pp. 17-18; Abramovitz, op. c it. . pp. 1 3 ^ 1 — 1 ^ . for draining marshes, and so fo rth .^ The interdependence and interactions of the Im m e diate determinants with the instltutlons--political, economic, legal, and so forth—are considered more obvious. Certainly institutions such as private property, free enterprise, freedom of contract, freedom of choice, labor unions, monopoly, oligopoly, democracy and a host of similar Institutions have direct Impact upcn the quantity and quality of productive resources and the efficiency with which they are used. While this is true, It is also true that these institutions are affected by the components of immediate determinants. Greater and better productive resources and improved efficiency undoubtedly could bring about changes in the institutions. For example, building of roads and Improvement of other ways of transportation, Introduction of more and better equipment and plants, Increased quantity and Improved quality of labor, efficient utilization of available natural resources and discovery of new ones, a greater and better supply of trained X II It should be admitted, however, that the effect of productive resources and efficiency upon physical environment are very limited. Som e characteristics of particular areas w e know are virtually unchangeable. For example, "m an and other resources cannot change the winds of Patagonia, the heavy rains in ps.rts of the tropics or the monsoons in India." Buchanan and E llis, op> c i t . , p. 32. 31 managers, promotors, innovators, capital suppliers, and a host of other changes in the immediate determinants would eventually create a demand for new or different in stitu tions more compatible with the needs of the time. Finally, not less obvious are the interactions and Interdependence of cultural environment and the immediate determinants of economic development. Customary modes of thought and behavior, the philosophical attitude or the values of the people all tend to manifest themselves in the established Institutions of the society. Their effect, therefore, on the quantity and quality of resources and on the efficiency with which they are used is very clear and need no further illustration. O n the other hand, changes in the quantity and quality of productive resources and in the efficiency will create different conditions in the society and therefore would force new value relations and new modes of thought and attitudes. Thus the determinants of economic development are intermingled. They are interrelated and affect each other. This being the fact, the question of where to start development in the underdeveloped countries should be answered next. III. W H E R E T O ST A R T D E V E L O P M E N T General economic analysis probably cannot provide an answer as to where to sta.rt development. Since different conditions prevail in each country the most effective way to bring about development, or raise real incomes, will not be the same everywhere. The most promising approach for some areas may be vie. a more efficient use of the productive resources already In hand., for example the labor force or land as a factor of production; for others, the important obstacles to higher real Incomes may be a dearth of entrepreneurial abilities and productive capital equipment or socio-cultural factors.15 In spite of these differences economists are s till attempting to find a . general answer for the question of where to start development which would be applicable at least to the majority of the underdeveloped countries of the world. Som e consider the changing of social, p o liti cal, cultural, lega.l and other similar Institutions— within which the existing productive resources are used— as the first step toward development. They maintain that the mere presence of productive resources, such as natural resources or labor, or the presence of the possibility of increasing them or applying different productive technique will not by itself bring about economic development. Unless the Institutions inhibiting development are changed first in favor of aggressive exploitation of these resources there would be little or no economic development. But to begin development by first changing the institutions—political, social, and so forth—is easier 15Ibld. . p. 21. 33 I said than done. For one may ask: how is this change to com e about? Perhaps revolution is one way—revolution to throw away the existing institutions which are inhibiting development. If this violent and costly method is undesirable then, perhaps, political and social controls are another way. But in a democratic society this to ta li tarian approach Is also undesirable because of the restrictions it imposes upon the people and the disturban ces It brings to the society. Even if we disregard these difficulties, starting development by firs t changing the institutions does not provide enough assurances that economic development will occur. These changes, for example, may not energize and push toward Increased material productivity or per capita income. This is particularly true in most underdeveloped countries where "economic achievements have traditionally been assigned a relatively low rank in the cultural value scale. Perhaps, in order to break up the barriers set by the institutions, it would be necessary to change the quantity and quality of productive resources first. But in order to bring about changes in the quantity and quality of resources, Institutions and the cultural environment have to be changed—in order to make effective Ibid., p. 78. 3^ I the system of free enterprise and private property, and so forth—which in turn depend upon the Immediate determi nants . Thus w e have a dilemma—a vicious circle. W hat to do then and where ,to start development? Under these circumstances it is preferred to focus attention on the quantity and quality of productive resources; to do what is possible to augment them, improve their quality and use them efficiently within the framework of the institutions end cultural environment in which they exist. This preference is based on the fact that som e of the factors affecting output can be changed more easily than others and therefore development can be produced more readily by acting on the more mutable factors. Since interdependence characterizes the components or determinants of economic development, induced changes in the more mutable determi nants will in time produce changes in others, eventually affecting even those which are quite inaccessible to direct manipulation. For this reason, it is believed that development can be served better by focusing attention on the produc tive factors which can be changed more easily. It is believed that by augmenting, Improving and utilizing efficiently the land and natural resources, capital, labor and entrepreneurs not only real incomes will be raised but also the cultural ties and institutions 35 | inhibiting development will be loosened and their roots will eventually be cut off and therefore they will lose their inhibiting Influence and wither away.1? This would com e about through inducing new wants competitive with the old and also by introducing new possibilities of using productive resources which compete with the old. By doing so the static pattern of demand and resource utilization would be disrupted and replaced by new ones, and the personalized economic relationships prevalent in underdeveloped countries would be deperson alized.1® All this would immediately or eventually weaken the old cultural bonds and beliefs and ultimately bring about new values and philosophy which in turn would create a demand for new or different institutions more favorable to economic development. The above analysis, therefore, reveals that meas ures to be taken for economic development should perhaps start with focusing attention on the immediate determi nants—quantity and quality of productive resources and the efficiency with which they are used. The majority of economists are in agreement about this starting point. While they recognize the difficulties involved—arising •^Ibld. . p. 89. Also, The Determinants and Consequences of PopH lfL fclon op. c lt., p. 222. 18 Buchanan and E llis, loc. c lt. 36 I from the Interaction and interdependence of the components of economic development—they at the same time realize that the journey toward development must start somewhere. Focusing attention on the Immediate determinants seems to them a modest and more realistic approach. This trend of thinking m ay be easily observed from the "particular a.t tent ion given (by economic literature) to the question of how each of the major factors of production may be enlarged or utilized more effectively. A note of caution about the measures for the economic development of underdeveloped countries. The decision of what steps should be taken in the field of immediate determinants in order to make any economy grow is not an easy task. Varied conditions in different countries certainly make it difficult to prepare a general prescription for all the underdeveloped countries. This is so because of the differences of symptoms in each country such as overpopulation or underpopulation, ■^Williamson, op, c lt. . pp. 16-17. However, this writer would like to inject a note of caution. While focusing attention on immediate determinants is considered a better starting point, it should not be inferred that nothing should be done to modify at the same time the institutions and the cultural environment. B y all means, alongside the measures taken in the field of Immediate determinants, efforts should be made to modify the institu tions and cultural environment whenever possible or i reasonable in favor of increased material productivity. 37 ! scarcity of land and natural resources or abundance, absence of capital and entrepreneurs or their availability. With this note of caution or qualification in mind, this writer will now proceed to discuss the steps to be taken for the achievement of economic growth of under developed countries. H e will attempt to emphasize those steps or measures considered as modest and more realistic. The discussion will be confined to the four strategic factors—lend and natural resources, labor, capital and entrepreneures. Although only a part of the determinants of economic development, these factors are the most impor tant elements in development, for a shortage or inadequacy of any one of them m ay retard the whole development process.20 Having stated this, the ground is now prepared for the discussion of action to be taken with regard to the four productive factors. This is done in the following four chapters. In each chapter the discussion centers around the role played by each factor in economic develop ment and its implication to the development of under developed countries; It reveals the shortages of these 20 For this reason and also because discussion of other elements involved in the wide process of economic development may require a separate study, and Is also less basic to the line of analysis pursued In this disserta tion, attention is focussed on the four factors of production. factors In underdeveloped countries; and the measures required to remedy the situation. Emphasis in each chapter Is on the merits of direct foreign investment. CHAPTER I I I M E A SU R E S T O IN CREA SE PER CA PITA IN C O M E P R O M L A N D A N D N A T U R A L R E SO U R C E S Before one can prepare the prescription or suggest the measures to be taken concerning land and natural resources some questions relating to meaning and supply characteristics of land and its resources have to be answered. I. M E A N IN G - A N D CH A RA CTERISTICS O F L A N D A N D R E SO U R C E S What is Meant by Land and Its Resources? Land, regarded as an economic resource, Implies not mere area alone but Its f e r tility , and mineral contents— such as coal, o il, Iron ore, and so forth— , topography, vegetation cover, water ways, location of the natural resources, and so forth. It also refers to the climatic complements—such as the weather, the winds, the rain and geology—surrounding the land. 1 Characteristics of the Supply of Land and Natural Resources Within any given country the quantity or supply of ■^United Nations, Department of Social Affairs, The Determinants and Consequences of Population Trends (New York: United Nations, 1953), p- 26U; also see: Norman S. Buchanan and Howard S. E llis, Approaches to Economic Development (New York: The Twentieth Century Fund, 1955), • P• 36. 40 I land and all the natural resources above it or under it cannot, in a strict sense, be augmented. The area of lend is fixed by the boundaries surrounding the country and likewise the supply of natural resources over and above the lend area. However, in an economically meaningful sense the supply of neither the land area nor its resources is limited. For example, by using labor and capital a nation can control erosion to preserve the supply of land. It can exploit deserts through irrigation works, or drain the marshes or undertake other similar projects to make the usable supply of land greater. Similarly, through research, application of tech nology and large investments a nation can enlarge the supply of natural resources by opening up new sources or resources or by finding new uses for it. II. T H E IM PLIC A TIO N S O F T H E SC A R C IT Y O F L A N D A R E A T O E C O N O M IC D E V E L O P M E N T Does the scarcity of cultivable land area account for the low per capita incomes in underdeveloped areas? M any writers believe that overpopulation (i.e. the ratio of land to labor) is a handicap to the development of underdeveloped areas. T o use the words of some of these writers: The economic difficulties /caused by shortage of land/ are most easily seen in places like the Nil© Valley, the river deltas of southern and eastern Aala, and such densely populated Islands a.s Java, Jamaica, and Haiti, where a large farming population is trying to make a living on a limited area of cultivable land.2 W here acute overcrowding on the land exists the prospects for higher output or real incomes are not very encouraging. Whlle measures to increase the supply of usable land—by extending irrigation into the deserts or by draining marshes, and so forth—are technically possi ble they would be extremely difficult to undertake. This is so because they Involve enormous capital investment which most underdeveloped countries cannot afford, and because such measures require the existence in the country of sufficient number of people equipped with a kind of technical, knowledge and aptitude generally lacking in underdeveloped areas. Overpopulation, however, is not necessarily associ ated with underdevelopment or low per capita incomes. Switzerland, Belgium and Netherlands, which are over- populated and have a low ratio of land area to labor force in agriculture, are all developed countries. However, this should not be construed to imply that scarcity of land has absolutely no effect on the development of under developed areas. "W hen the ratio drops below one hectare ^United Nations, Department of Social Affairs, Popul ation Growth and the Standard of Living in Under developed Countries (N ew York: United Nations, 195^)> P- * » * • 1 * 2 I (one hectare = 2.1*7 acres) of arable land . . . the proba b ilitie s are that per capita income will also be at a very low figure, say less than #100.“3 Thus one can note In the way of conclusion that, to a limited extent, a shortage of cultivable land accounts for the low Incomes of the underdeveloped areas. Measures to Increase Output W hen Cultivable Land Is Scarce—The Need for Foreign Aid W hen supply of cultivable land cannot be Increased what measures can the underdeveloped countries take to augment output or per capita income? Som e writers Insist on large-scale industrialization and enlargement of the commercial sector of the economy in order to balance production. The idea is to concentrate on the production of manufactured products in order to make it possible for the country to exchange these products for agricultural products through foreign trade. The experience of Japan is usually cited as a striking example for the success of this approach. It Is said that "without a great expansion of manufactures and foreign trade, Japan could hardly have managed to feed her growing population on her slender agricultural resources."^ ^Buchanan and E llis, op. c it. , p. 37. ^Population Growth and the Standard of Living in Underdeveloped Countries. op. c l t .. p. 5- See also: The 4-3 N o one can reasonably quarrel with the concept that there are advantages gained from Industrialization of underdeveloped areas. But one has every reason to believe that under the prevailing conditions in most of these areas, development of large-scale industry without the aid of foreign sources would be a formidable task. Most underdeveloped countries do not have sufficient capital required to develop the natural resources and to build the factories, railroads and other facilities of an industrial economy. Generally, underdeveloped countries also suffer from a shortage of workers equipped with skills and abilities necessary for efficient operation and mainte nance of machinery and for technical and clerical occupations. There is also in underdeveloped countries a dearth of managerial and entrepreneurial talent. The deficiency in education that is typical of most under developed areas hampers efforts to overcome these difficulties. Under such unfavorable circumstances, an attempt to enlarge the industrial and. commercial sectors of the economy, unless supported by sizable aid from foreign sources, is indeed a tremendous project. Another more moderate way of Increasing per capita Determinants and Consequences of Population Trends. op. Pit. , p. 275* 2|4 | income in underdeveloped countries in which cultivable land is scarce is to use the existing cultivable land more effectively—by malting improvements in agriculture and by making efforts to use fully the potential productivity of their best land or to modify or overcome the deficiencies of their poorer land.- 5 In certain underdeveloped areas this approach does not seem impracticable while in others it would be much more difficult.^ In either case, how ever, some kind of foreign aid is needed in order to make technological improvements, capital investments, and so The division of large estates is considered by many writers to be still another way of Improving produc tivity or per capita income. It is pointed out that many social, as well as economic, advantages would be gained from such division. In regard to the social advantages of such division and the necessity for putting an end to the greatest inequalltles, there seems to be little argument. The hypothesis that economic, as well as social, advan tages result from the division of the land depends partly on the fact that some large estates are badly managed, particularly where absenteeism is the rule. It is also pointed out that division should lead to more intensive utilization of the soil. Other writers are doubtful about the economic advantages. They say that great Inequalities are needed to provide incentive and capital accumulation needed In underdeveloped countries; and that redistribution can relieve the pressure only within limits. W here available cultivable land Is insufficient no change In the distribu tion system alone will make it sufficient. Furthermore, the division of land into too small holdings may result in highly inefficient production. The Determinants and Consequences of Population Trends, op. c lt. , p. 273. However, where large estates are badly managed, where absenteeism prevails, and where capital is hoarded or unproductively spent distribution and division of land into not too small holdings would be advantageous. ^Loc. c lt. U r S forth, possible. W e have, so far, discussed the measures to be taken to increase per capita income in those underdeveloped countries in which there is a shortage of cultivable land. W e pointed out that, whichever approach Is followed, there is need for some kind of help from foreign sources. This need for foreign aid is by no means to be dismissed in the case of those underdeveloped, countries in which there is no scarcity of cultivable land. There are many countries in South America, Africa, and Asia where much potentially productive land is unused, sparsely settled or totally uninhabited. Naturally, in these countries, the extension of area, under cultivation and more efficient use of the land would help Increase per capita Incomes. But conditions in those underdeveloped areas with abundant cultivable land are no better than those in countries with scarce land. They, too, lack the produc tive elements—capital, skill, technical and entrepreneur ial know-how—which when combined with land and its resources would increase output. In conclusion, whether there is a scarcity of land or not, whatever the measures taken to increase output and per capita income rapidly, underdeveloped countries require help from foreign sources. k 6 III. IM PLICATIONS O F SCA RCITY O F N A T U R A L R ESO U R C ES O TH ER T H A N L A N D A R EA ? The dearth of natural resources such as coal, oil, iron ore, and other sources of energy and Industrial raw material in any country is certainly an obstacle to the industrial and rapid economic growth of that country. Few nations have yet achieved substantial economic development without access to, or control over, relatively large and cheap supplies of such resources.^ While a scarcity of natural resources could inhibit the development of a country, the abundant availability of resources on the other hand does not necessarily or automatically make a country developed. Many countries which possess large deposits of natural resources are underdeveloped. This is because their resources are untapped, s till largely in the potential stage, awaiting capital, skilled management and labor for their develop ment. Availability of abundant natural resources 7 Implications of unfavorable climate will not be discussed because they are beyond the reach of economic policy. Certainly, at least at the present, nothing could be done to change such climatic phenomenon such as the winds of Patagonia, the heavy rains in parts of the tropics or the monsoons in India. ^Joseph L. Fisher, 1 1 The Role of Natural Resources," Economic Development : Principles and Patterns. Williamson and Buttrlck Teds.), (New York: Prentice— Hall, Inc., 195^)» p. 22. h7 therefore would have no significance if they are simply stocks or flow of materials which remain unused. /.They/ have significance only in conjunction with enterprise which sees their economic value—, capital equipment—which transforms and transports them—, and labor—which is trained in the necessary tech niques of mining, farming, forestry, fishing, and manufacturing.9 With the aid of these productive elements the economy can make use of the resources available to it. It can also expect to discover things now unknown and to learn more about how to use what nature has given and therefore help provide for the future development. Since these productive elements (capital, skilled labor, entre preneurs, etc.) are lacking In underdeveloped countries, the prospects of achieving a more rapid rate of development by properly and efficiently utilizing the available resources is much less promising unless aid can be obtained from foreign sources. Underdeveloped Areas With Rich Mineral Resources More Attractive T o Foreign Entrepreneurs Underdeveloped countries with rich mineral resources of clear potential value have a better opportunity to speed up their economic development through the aid of foreign sources. International investors, given a sufficient degree of freedom and security, usually have a strong ^Ibld. , p. 2 7 . 4-8 Incentive for exploitation of these resources because of the profitable opportunities they present. "Exploitation of mineral resources In these underdeveloped areas can be the engine for driving forward rapidly a whole program of desirable economic growth."^-0 Therefore, foreign Invest ments can contribute a great deal toward rapid development of those underdeveloped areas with resources of clear potential value such as mineral resources. However, a reminding note is necessary here. W hen foreign investments exploit or develop these mineral resources, there is no guarantee that they will automati cally push the nation toward substantial or rapid economic development. For this to happen, a host of accompanying policies have to be carried on mainly by the under developed countries themselves. With proper policies regarding such things as± the employment and training of local people, capital accumulation, conservation standards, avoidance of waste, and the wide distribution of the gains from such development, mineral exploitation by foreign Investors can be the driving force toward rapid economic development. Without these and other proper accompanying policies at home, the development may become impossible to sustain, particularly when foreign investment is with drawn . 10Ibid. , p. 33- CHAPTER IV M E A SU R E S T O IM PR O V E PRODUCTIVITY O F TH E LA B O R FO R C E I. TH E Q U A N TITY A N D Q U A LITY O F T H E L A B O R FO R C E A S A FA C T O R D ETER M IN IN G E C O N O M IC G R O W T H The labor force in any country caji significantly retard or aid the process of economic development. In order to prescribe the measures to be taken regarding the labor force as a factor of production and to Indicate the role played by foreign enterprises, one should know what factors are inhibiting the productivity of labor in under developed areas. However, before discussing this it is helpful to review the general determinants of productivity of the labor force in any given country. Determinants of the Productivity of the Labor Force-* - Broadly speaking, the productivity of the labor "Labor force refers to that part of population which is economically active or gainfully employed." Joseph J. Spengler, "Demographic Patterns," Economic Development: Principles end Patterns, Williamson and Buttrick (eds.), \New York: Prentice-Hall, Inc., 195^)* 65. However, the statistical definition varies some what from country to country. In the United States, for example, It Includes all individuals who are currently in the labor market, whether employed or unemployed. Ibid., p. 66. Note: Discussion related to the entrepreneurial class of the labor force will be separately covered for Its Importance. 50 force working with a given set of techniques, resources, and capital equipment depends upon two major sets of p determinants, namely, the size of the labor force and its quality. W hat factors Influence the size of thq labor force? The size of the labor force in any country is determined, of course, by the size of the population as a whole which in turn is determined by the relation between births and deaths, Immigration and emigration. But within any given size of population there are many other important factors of distinct Influence upon the size of the labor force and the amount of work done by it. O ne of these factors is the age structure of the population. There is a great deal of difference in the size of the labor force when, for example, its members, are mainly under fourteen or over seventy years of age, or mainly adults between these ages. For those under fourteen or over seventy years of age are usually not available for work and therefore are not counted in the labor force, while the adults between these ages are generally so considered. Thus, age composition can increase or decrease the productivity of the labor force by augmenting or The term size of the labor force as used here refers not only to number of workers but also to number of working hours. reducing its size. Another factor is society's attitude toward work by women, children end minority groups. Matters such as whether w om en should work, when young ladies should marry, whether wives should work after marriage, whether children should work and the existence or absence of social prejudices against minority groups—all these Influence the size and ultimately the productivity of the labor force and the nation. Still another important factor is the educational requirements set or desired by the society. The more years individuals customarily spend in school, the smaller the fraction of the total population that will be holding full-»time Jobs. If, for example, the standards of educa tion require students to spend a long time at schools, boys and girls do not enter the labor force until they are seventeen years and sometimes more. Therefore, size and productivity of the labor force are, at least temporarily, reduced by such high standards. A fourth factor is the retirement practice. The age at which older people customarily retire can increase or reduce the size and the productivity of the labor force. Retirement at an earlier age causes a reduction, while retirement at a later date causes an increase in the size and, therefore, productivity of the labor force. Of course, the social security laws and retirement plans— all affect the retirement practices of society. A fifth factor influencing the size and productiv ity of the labor force is the financial position of people. If people are rich they tend to affect the size of the labor force negatively and vice versa when they are poor. For example, if people are rich they may send their children to college instead of to work, or they may send them for vacations during the summer. O n the contrary, when families are poor they may have to put their children to work at an earlier age. Also, when a poor m an retires with no comfortable pension waiting for him he may have to seek part time or full time work. The rich do not have to. The sixth important factor affecting the size of the labor force is the length of working hours established by society or by government and the desire of people for leisure. H ow many hours people work a week, how long their vacations are and how much leisure time they take— for sports events, trips, fishing, and so forth—Influence the productivity of the labor force. Fewer working hours per year may have the same affect on output as a smaller labor force while a greater number of working hours may have an opposite effect. Last, but not least, is the level of wages. Higher wages, it is said, will induce a greater number of people to offer their services and therefore there will be a 53 greater labor force and greater productivity.3 These have been the main factors affecting the size of the labor force and consequently Its productivity. But productivity of the labor force depends not only upon its size but also upon its quality—that is, the skill, energy and efficiency of the labor force. W hat factors affect the Quality of the labor force? Health of the working people is one important factor affecting the productivity of the labor force. For example, better health can expand the average working life of workers and postpone the retirement date, can reduce time and effort lost for sickness, can make people ener getic, more active and lively on the Job with the result that productivity is greater. O n the other hand, low level of health due to diseases will have adverse effects on productivity of the labor force. Morale and attitude of the working people toward work, business and life are other important factors 3 The question of whether higher wages will increase the size of the labor force or not is still a subject of argument. Som e writers say that higher wages will cause unemployment, the result of which is a smaller labor force and lower productivity. Still others maintain that after a given level is reached higher wages may cause supply to slope backward (that is, supply of labor will decline as higher wages are offered). This may be especially true in many underdeveloped countries. After a given income is secured people will withdraw their services and prefer leisure instead of work even at higher wages. S U r affecting the quality and productivity of the labor force. If members of the working force are happy with their work, convinced of its worth to them, they accomplish more than when they are discontented and frustrated. Other important factors which are closely related to the above are the social customs, traditions and a tti tudes as they affect the mobility and distribution of the labor force. Certainly the geographical and occupational distributions of the labor force, and the degree to which these distributions correspond to the requirements of demand and production can increase or decrease efficiency and productivity of the labor force. W hen distribution of the labor force is based upon class, custom and tradi tions rather than on market considerations (that I s , the relation between cost and returns), and when mobility of labor is based on social customs and traditions rather than on personal preferences and abilities, many good talents may go unutilized and obvious ineptness may go uncorrected and consequently efficiency and productivity will suffer.1 4 ' One of the important factors affecting quality end productivity of the labor force is education. Education is very important in advancing and spreading technological Borman S. Buchanan, and H. S. Ellis, A pproaches to Economic Development (N ew York: The Twentieth Century Fund, 1955), P. 32. 55 know-how end scientific knowledge—all of which signifi cantly determine the skill and efficiency of the labor force. Literacy and higher education can tremendously improve efficiency and ultimately the productivity of the people. While, on the other hand, illiteracy end deficient education can hamper efficiency and productivity by making it difficult to train workers and to demonstrate to them the most efficient methods of doing the Job, whether it be agricultural, commercial or industrial. Finally,^ the existence or non-existence of free labor unions also has its effect on the efficiency, energy and skill of the labor force. Availability of free and mature unions may improve the quality of the labor force through Improvement of working conditions, obtaining higher wages, conducting special training programs in different centers of the country, cooperating with manage ment—all of which could have a positive effect on the energy, skill and efficiency of the labor force. So much for the general determinants of productivity ^Of course, many other factors, including the kind of diet end quality of the machines, equipment, training facilities, and so forth, affect the energy and efficiency of the labor force. But the influence of diet on quality and productivity is not yet confirmed to be a very impor tant factor in productivity. For this reason, it has not been discussed above separately. Also, the effect of machines, equipment, techniques is not discussed separately because it was assumed earlier that they were taken as given. 56 of the labor force. Let us now turn to the discussion of those factors which are especially effective in inhibiting the productivity of ls.bor in underdeveloped areas, in an effort to prescribe a remedy. II. CHARACTERISTICS O F L A B O R IN U N D E R D E V E L O PE D C O U N TRIES A N D TH E M E A SU R E S N E E D E D FO R IM PR O V E M E N T Characteristics of Labor Almost all the factors mentioned above affect the productivity of labor in the negative sense. However, the factors which are well emphasized as characteristic of labor in underdeveloped countries and as major causes for lower productivity are the following: Relative deficiency of adults. Contrary to what would normally be expected, but perhaps really true, one of the chief obstacles to economic development is the manpower shortage which exists even in the so-called over-populated countries. A n in itial difficulty is that owing to the age structure of the population, there are not enough adults.6 In underdeveloped countries there are relatively fewer adults and more children compared to the situation in the economically advanced countries. To quote one ^United Nations, Department of Social Affairs, The Determinants and Consequences of Population Trends (New York: United Nations, 1953)» P» 265. 57 United Nations report: Proportions of children under 15 years of age approximating * K ) per cent or more of the total popula tion are typical of the underdeveloped countries, while in economically advanced countries these proportions are commonly in the range of 22 to 30 per cent. . . . Persons between 15 and 65 years of age, w ho supply the bulk of the manpower of economic activities, make up about 65 per cent or more of the population in most of the economically advanced countries, but substantially less than 60 per cent in most of the underdeveloped countries.7 In order to make up for the deficiency of the adult labor force and at the same time to lighten the burden of childhood dependency, underdeveloped countries make it a com m on practice to send the children to work at an early age. This practice is especially noticeable within the agricultural, population where children are frequently employed to a considerable extent, if not full time, before their tenth year.® But the contribution of working children to the Incomes of their families is far less than that of the adult workers. Consequently one can conclude that the existence of a high rate of children in the population is a factor tending to lower per capita output.9 it permits 7 Loc. o it. O Loc. c lt. Perhaps this economic advantage obtained by parents from their children explains, to some extent, why people in underdeveloped countries have large families. ^Loc. c lt. 58 the exploitation of the oncoming generation of workers w&stefully through the practice of putting children to work, especially full-time work. Full-time employment of children is incompatible with a satisfactory standard of living, particularly since such employment is possible only at the expense of a neglect of education. Causes of the deficiency of adult labor in under developed countries. The unfavorable deficiency of adult labor in underdeveloped countries is due primarily to a high birth rate, a high mortality rate and the low proportion of wom en engaged in economic activity. High birth rates and mortality rates are in fact two of the most com m on characteristics of underdeveloped countries. The first increases rapidly the number of children in the population while the other does not permit them to live long enough so that the country will benefit by their more productive efforts as adults. The solution of the problem of a high birth rate is much more difficult than that of a high mortality rate because "measures to lessen mortality can be imposed by government action, while the lessening of fertility depends upon the volun tary action of individuals."1° ^Doris G -, Adams, "Current Population Trends in Iraq," The Middle East Journal. 10:162, Spring, 1956. Another difficulty is that a decline in mortality Is generally agreed to be beneficial, while there is less 59 Broadly speaking, the solution to the problem of a high birth ra.te can be brought about by the practice of family limitation (birth control and avoidance of early marriage); by creating an environment conducive to family limitation. The attainment of such an environment depends upon many interrelated economic and social factors such as, . . . the shift of the population from country to city, the desire to Improve one's own social and economic position or that of one's children, the changes in the status and role of women in the society, the improvement of the level of living, the increasing expenses of rearing children, a decline in religious interest and a decline in mortality.H Certainly the near future does not permit changes of this sort to occur rapidly in underdeveloped countries. In the long run, however, when those countries become advanced, the hopes are brighter. Meanwhile, in these countries where the problem of a high birth rate is urgent the government can Increase its activities in order to bring about those social and economic changes conducive to family limitation at an earlier time. A high mortality rate, which is another problem agreement about the value of lower fertility. Many econ omists argue that by reducing the birth rate the country will also be reducing the future size of its labor force which is needed for economic development. ^ The Determinants and Consequences of Pooulation Trends, on. c it. . p. 96. 60 facing underdeveloped countries, is presumably an easier problem to cope with. In the first place, unlike the case in birth rates, a decline in mortality is generally agreed to be beneficial.^-2 Moreover, measures to reduce mortal ity can be imposed by government action. A high mortality rate must be reduced because it represents waste at least in terms of cost. For example, the government or the parents may invest a considerable amount of capital and effort in rearing a child with the expectation that the advantages obtained--both in terms of revenue for himself and his family, and services for the country—will be remunerative. But when this well brought up child dies early, before he reaches the productive age, neither the country nor the parents are sufficiently rewarded as a return on their investment. This represents waste, and consequently governments must act to reduce the mortality rate. Broadly speaking, high mortality rates are causally related to the low levels of living and to the lack of education and medical and health fa c ilitie s .^ Therefore, measures and efforts for reducing mortality Bhould concen trate on making improvement in these fields. But every 12 Adams, op. c lt., p. 1 6 2 . ~^The Determinants and Consequences of Population Trends. on. c lt.. p. ^9* 61 action to reduce mortality rates reduces the standards of living, which are already low in underdeveloped countries, in the sense that there will be more mouths to be fed. For this reason it is the opinion of many writers that in order to achieve the goal of a long time decline in mortality rates there should be a substantial improvement in economic conditions.1^ But many underdeveloped countries cannot, without assistance from foreign sources, bring about a rapid, substantial improvement in economic conditions due to scarcity of capital, skilled labor, entrepreneurs, and so forth, in those countries. Does this mean that efforts to reduce mortality be discontinued? Certainly not. For, so far as can be learned, people in all societies, in all times and places, have seemed to prefer life, regardless of the standards of living, to death. This answer takes into consideration only the humanitarian aspects. It disregards completely the ques tion of economic development, namely, a sustained rise in per capita income. A decline in mortality rates without a substantial increase in the national output would certainly retard development instead of advancing it. Therefore, underdeveloped countries are faced with a dilemma. High mortality is a waste and inhuman while reducing mortality li* Ibid. , p. 70. 62 will reduce further the low level of living, ceteris paribua. It goes without saying that International invest ments can help these underdeveloped countries out of their dilemma. They can provide the capital, skill, entrepre neurs, knowledge, and material; introduce health measures and equipment, and so forth, which would both reduce mortality and help in the achievement of substantial improvements in the level of living. So much for the problem of a high mortality rate. The next important problem to be discussed, which is causing a deficiency of adult labor in underdeveloped countries is the status of women. In most underdeveloped countries w om en are made to accept their traditional role as home-maker and the bearer of children. Consequently the proportion of w om en engaged In economic activity is very low in many underdeveloped countriesThis means that a large potential source of labor, perhaps half of it, is excluded from the labor force. Underdeveloped countries, especially those in which the shortage of adult labor is acute, could turn this potential source of labor into reality by granting the female population the economic and educational opportunities ^ Ibld. . p. 265- 63 as well as political rights.-^ Factors such as Increased education; equality for wom en in many spheres of public and private life—regarding employment, pay, education, security, political representation, and so forth—the emphasis upon the woman’s role as a companion with equality in marriage and consequently the abolition of certain customs, ancient laws and practices which violate the human dignity of women; and the opportunity for personal development and independence of wom en would effectively divorce w om en from their traditional role of being only housewives and bearers of children. Conse quently, the country could count on their contribution to the size and productivity of the labor force. A qualification. In our discussion so far about the characteristics of labor in underdeveloped countries w e have Indicated that the ratio of the labor force to population is small, and consequently we briefly prescribed the measures to be taken in order to increase the size of the labor force. However, a reminder is necessary. The small size of the labor force is not necessarily an immediate handicap in all cases, for some United Nations, Economic and Social Council, Commlsalon on the Status of W om en (N ew York: 1955)* pp. 3— 14'. See also: United Nations, Advances in the W om en1 a Bight a (N ew York: Department of Public Information, 1955)* pp. 1— 10. 6^ of the underdeveloped countries in which the density of agricultural population is extremely high may not have sufficient opportunity for the employment of the existing labor force even at the seasons of peak labor require ments. In such Instances, deficiencies in the size of the labor force caused by the structure of the population must then be considered as an eventual handicap which would become real if successful measures to deal with underemployment and unemployment were taken. Poor health. Poor health is a major cause of low productivity of the labor force in underdeveloped countries. It is estimated that malaria affects 300 million persons annually in the world, causing a loss of twenty to forty working days per year for each person affected. Other debilitating diseases which afflict hundreds of millions of persons in the underdeveloped countries each year are schistosomiasis, filariases, yaws, hookworm and other Intestinal parasites, syphilis and gonorrhea, trachoma, and leishmaniasis.18 Fortunately for the underdeveloped countries medical and technical science can provide them with the necessary means for coping with the problem of health. All of these diseases could be virtually eliminated by modem methods 17 The Determinants and Consequences of Population Trends. loc. c lt. 18Ibid. , p. 266. 65 of inoculation, treatment, insect control and sanita tion .3-9 Improvement in health, accompanied by other measures which will prevent population growth over the increase of food and other necessities, can contribute greatly to economic development through increased physical capacities of workers. For this reason underdeveloped countries should Invest considerably in public health work. Such investments should never be questioned for they pay great dividends in the future. Lack of sk ills. aptitudes and Incentives. The lack of vocational skills and aptitudes is well emphasized by many writers as a major cause of low productivity in underdeveloped countries. To quote oneUnited Nations report in this regard: In all the underdeveloped countries, there is a scarcity of workers who possess the skills and abilities required for efficient operation and main tenance of machinery and for technical, clerical, managerial occupations.20 The importance of a skilled labor force does not only lie 19 In some countries malnutrition is one of the principal reasons for the low resistance to illness and disease and, consequently, for the Insufficiency and low productivity of manpower. In such countries attention should mainly be focused on improvement of diet and consumption of more nutritious food. Loo. c lt. 20 Population Growth and the Standard of Living In veloped Countries. op. c lt. . p. 5» 66 In the efficient operation and maintenance of complex equipment but also in its contribution to efficiency in production. For exam ple** Certain types of expensive equipment are economical only if continuously utilized, meaning that raw and auxiliary materials must be fed at a steady rate and finished products must be disposed of without delay. Efficiency at one stage of production thus depends on the efficiency of labor and the competence of /personnel/ at every other stage.21 N o country willing to achieve economic development can reach its goal rapidly without developing adequate skilled labor and trained technical personnel for all branches of economic activity. In order to recruit needed manpower and develop an adequate labor force two sets of measures can be used, namely, internal and external measures. Internal Measures for the Creation of an Adequate Labor Force The Internal measures center around the elimination of those causes which are impeding the development of a qualified labor force such as lack of incentive among people, unfavorable social organizatIon, and an inadequate educational system. The willingness to work hard in order to increase The Determinants and Consequences of Population Trends. o p . o lt. . p . 267* 67 the material standard far above the minimum needs is generally lacking among the peoples of many underdeveloped areas. For this reason they lack the Incentive to work hard in order to improve their skills and efficiency for greater earning capa.clty. "Many authors have observed that the productivity of the average worker in certain countries is reduced by the fact that he stops working when he has earned enough to provide for his needs."^2 in such instances it becomes very difficult to induce workers to accept opportunities to be trained and taught skills by merely offering higher wages, since higher wages will only 21 result in a reduction of time worked. - The lack of incentive to learn the skills, to produce more and to earn more is at least in part attrib utable to the depressing physical surroundings of the worker and to his meager range of traditional needs. The creation of additional wants resulting, for example, from better understanding of health requirements and from the enlargement of economic and other needs which will be caused by general economic expansion and other activities, may conceivably counteract or eliminate this lack of incentive to improve one's earning capacity through better 22 Loc. c lt. 2 3 L q£. a i t . skill and efficiency. Development of an adequate and qualified labor force may also be Impeded through the organization of society. W hen economic and industrial development is first being undertaken within a country, workers must be recruited, trained and taught the skills that are suitable for industrial employment and other mechanized Jobs. But where workers must m ove away to fill these Jobs many social impediments such as customs, traditions, family or tribal pressure may operate to limit recruitment and the learning of skills even within the home community. As was mentioned earlier, in Chapter II, it is expected that economic development and commercialization of economic activities will create new needs and therefore new values and new habits of thought and behavior, all of which will help eliminate this social barrier. Lack of education or illiteracy is considered to be the chief obstacle to the development of an adequate skilled labor force. ^ Adequate education or literacy is a prerequisite for development of skilled labor. The function of literacy is to make communication of ideas oh. The lack of an adequate educational system is, in fact, one of the chief obstacles to economic development and social advancement in the underdeveloped countries. Statistically, there Is a definite correlation between a high level of literacy and Industrial development. 69 easier between the workers and their teachers or super visors. But more generally speaking, a more important function of adequate education is to use it as an instru ment for social and political change. People are more receptive to changing their customs, traditions and philosophy of thought when they are educated. Consequently, underdeveloped countries should provide for a certain minimum of fundamental education for the mass of the population, as well as for institutions of higher education and scientific research. W here capital funds required for such an educational program are very meager, as is the case in many underdeveloped countries, attention should be focused on those educational measures which will help develop a skilled labor force with a minimum capital investment. For example, the country can build elementary schools and focus attention on teachers who will be trained and taught the skills. Those teachers in turn will carry on to their students what they have learned. The country can establish specialized training centers to teach the members of the community the special ized skills needed in particular industries. Such measures should not require too much capital investment. External Measures for Developing an Adequate Skilled Labor Force Besides the internal measures, underdeveloped 70 countries, particularly those in which industrial develop ment is first being started, can take other external measures. For one thing, they can import the needed manpower from abroad until such a time when a sufficient number of native workers are ready to take their place. This approach, however, is very costly since workers from industrialized countries usually demand higher salaries than they can obtain in their own countries. Underdeveloped countries can also rely partly upon immigration by opening their doors for immigration of those people who are gifted with skill and technical know how. But history tells us that in the absence of catas trophic events—such as wars, political coercion, and natural calamities—the movements of people from one area to another are primarily the direct result of inadequate economic and social opportunities in the area of emigra tion and superior opportunities in the area of immigration. Since these conditions are now superior in the areas of emigration (Europe, North America, etc.) from which skilled people are expected to come, it will take a great deal of effort and attraction to Induce people to migrate into the underdeveloped countries. However, it is always possible nowadays with special arrangement with foreign governments and with special attractive measures to induce some skilled people to migrate to underdeveloped countries. 71 Another measure is to import experts from abroad to teach the local people the skill required for different industrial, commercial and other occupations. Many under developed countries are making use of such expert services—supplied by Point Four programs, United Nations technical aid programs or by direct hiring of foreign experts. Another more effective and more helpful external measure for developing a skilled labor force and the economy as well, in the opinion of this writer, is through direct foreign investments in underdeveloped countries. Foreign enterprises established in underdeveloped coun tries would effectively contribute to the creation of a skilled labor class. Workers can learn considerably by training on the Job under the supervision of experts and of the foreign enterprises. Foreign enterprises would provide not only experience and expert trainers but also working places and training centers necessary for training a large number of workers. The contribution of direct foreign investment to the development of an adequate skilled labor force may come another way, namely, through its social effects. W hen foreign investors establish their modem enterprises— Industrial, commercial, or agricultural—they immediately create employment opportunities. Consequently many tribal natives may leave their tribal homes to go into centers of 72 industrial activity. As a result, the process of "detrlbalization1 1 begins to take place and eventually the Impeding social forces of development will break down. H ow this detrlbalization and breakdown of social barriers will com e about is expertly explained in the following quota tion: A worker who may be employed for a few years in a mining undertaking far from his hom e passes with little or no intermediary transition from tribal life to a life altogether new and different, involving radical changes in his surroundings, diet, language, and often climate. Within the labor centres, he learns a freedom impossible in traditional village life, grows accus tomed to pleasures not obtainable in the village, and begins to take on new material values, including the appreciation of private property. His religious faith may be shaken and his old unquestioned loyalty to the chief of his tribe may be attenuated by knowledge that his leader is much less experienced in the ways of modern world.^5 The elimination of the impeding customs, traditions, tribal and family pressures; the liberation of the person and development of his personality; and the acquisition of new material values would undoubtedly provide the incentive for people and permit them to improve their capacities, skill and knowledge in an effort to raise their living standards. Consequently, wherever and whenever possible it would be wise to take those necessary measures which would attract direct foreign investments into underdeveloped areas. 25 I b id . , p . 3 1 1 . CHAPTER V CAPITAL^ and c a p it a l formation Capital is a factor of major importance to the process of economic growth. So much so that economic development is looked upon, from one point of view, as the creation of real capital—of roads and railroads, facto ries and farm houses, towns and cities.2 Accordingly, "the rate at which economic development proceeds is seen to depend upon how rapidly the country's stock of real capital can be i n c r e a s e d " 3 or accumulated.^ •^Generally defined capital is the amount of wealth owned by an individual or enterprise at a specific time. However, most economists restrict the meaning of the term to that portion of wealth which is used for further production of goods. By and large they apply capital to producers' goods which a.re not used for the direct satis faction of wants. In short, capital is regarded as one of the factors of production. 2 „ 0 . Committee^for Economic Development, .The Research and Policy committee, Economic Development Abroad and the Role of American Foreign Investment (New York: 1956$” ~p. 9- Hereafter referred to as Economic Development Abroad. 3 Loc. c lt. ^Capital accumulation or capital formation means that society does not apply the whole of its current productive activity to the needs and desires or immediate consumption, but directs a part of it to the making of capital goods: tools and instruments, machines and trans port facilities, plant and equipment—all the various forms of real capital that can so greatly increase the efficiency of productive effort. Ragnar Nurkse, Problems of Capital Formation in Underdeveloped Countries (Oxford: A. T. Broome and Son, 1957)» p. 2. More specifically, capital accumulation means that the "flow of total output from year to year is so constituted that at each year's 7b I. CA PITA L SH O R T A G E A CH A RA CTERISTIC P H E N O M E N O N IN U N D E R D E V E L O PE D C O U N TR IES One of the primary reasons for the persistent poverty of underdeveloped countries is the fact that there is little or no accumulation of productive real capital resources in these countries. All underdeveloped countries lack an adequate supply of equipment and other forms of productive capital of good quality. This Inadequacy represents a basic obstacle to the development of Industry and agriculture and to economic growth in general, in the sense that labor end land could be made more productive or be more effectively employed If additional capital were available. Estimates of capital needed by underdeveloped countries for programs of economic development vary, but they all reveal the magnitude of the shortage of capital there. It is assessed that in the continent of Asia alone-^-in order to raise capital per worker to a range from one thousand to two thousand dollars—total capital needs range from b2 5»000 to 850,000 million dollars, an amount from one and a half to two and a half times the national end the kinds and quantities of useful capital equipment In existence are superior to those of the year before." Buchanan and Ellis, Annroaches to Economic Development (New York: The Twentieth Century Fund, 1955)> P* 5b. 75 Income of the United States of America.5 This estimate Is without any allowance for the possible Increase In popula tion. A study based upon the eixperience of Japan Indicated that a figure of the same order of magnitude as that suggested for Asia was needed. It was found that, In the course of four decades 270,000 million dollars would be required to raise the standard of living in the major part of Asia to the level reached In Japan In the late 1930's, with annual Investment rising from 2,657 million dollars In the first decade to 10,^65 million In the fourth decade. Since these estimates are in terms of dollars of 1936 purchasing power, they must be increased about 100 per cent to allow for the rise In prices since 1936.° In other parts of the world where a pronounced shortage of capital now exists, large amounts of capital will be required also. Obstacles to Sufficient Capital Formation In Under developed Countries In general terms, capital accumulation depends upon the rate of saving In the economy. Saving Is connected with power to save income since, by definition, saving Is that part of income which is not consumed. But in most underdeveloped countries the great majority of the popula tion Is poor and have a level of Income too low to permit ■^United Nations, Department of Social Affairs, The Determinants and Consequences of Population Trends (New York: 1953)7 p. 277. 6 I b i d . . p . 2 7 8 . 76 the accumulation of surplus income with which to create new real capital. In most underdeveloped countries the mass of the population have little or no margin between receipts from wages or the sale of produce and expenditure on necessary consumption goods . . . only a small number are regularly in receipt of an income which permit savings, and . . . in those underdeveloped countries which have high birth and death rates, the age group in the population which Is likely in any event to have disposable savings constitutes only a small proportion of the total.7 Moreover, the difficulty 1b aggravated by the fact that only a part of the Income that could be saved is actually channeled into productive investment, for . . . it is frequently the custom to spend surplus income in non-productive ways—for various kinds of conspicuous consumption, for traditional entertain ments, or for expenditure abroad. Part of the private Investment that actually does occur takes place In short-term speculative commercial ventures or disappears Into hoards of Jewelry, foreign currency or gold coins.8 The major reason for the failure of private savings to flow into productive investment Is the Inadequacy or ineffectiveness of the available banking and other finan cial institutions in underdeveloped countries to carry on this mission.^ Furthermore, the use that is made of 7 United Nations, Department of Economic and Social Affairs, Pro cesses and Problems of Industrialization in Underdeveloped Countries (New York: 1955)» p. 3^- ^Economic Development Abroad. loc. c lt. 9Another reason suggested by a group of United Nations1 experts for shortage of capital and failure to channel the available savings into productive investment 77 savings depends also upon the attitude of the people and availability of Investment opportunities, which are strongly Influenced by the economic and social structure, considered unfavorable in most underdeveloped countries. In many underdeveloped countries rapid population growth is also an obstacle to accumulation of capital, since these countries m ay use up the available capital In order to maintain a constant living standard for a growing population. For example, to provide the capital necessary for a 1 per cent population Increase, it has been estimated centers around certain aspects of income distribution prevalent In many of the underdeveloped countries. T o quote these experts: "The higher Income groups, from which the bulk of private capital formation must come, consists predominantly of traders and landowners. In the case of most traders, savings tend to accrue In comparatively small sums, which may not be realized in money terms but are more likely to flow directly into business expansion by way of Increasing inventories. In the case of landlords and plantation owners, savings also tend to flow back Into the same or cognate economic fields and to become Invested—at least in part—In additional land. In the first instance, the funds leak out of the economy fairly rapidly in payment for imports, predominantly of consumer goods. In the second Instance . . . they may circulate in the real estate market for som e time; part may be used for clearing, drain ing, levelling or otherwise Improving the land, but a large proportion tends to lose its capital potential, leaking out of the economy as sellers of land use the proceeds for consumption Involving Imports. In Latin America, one of the commonest uses to which such funds are put Is the construction of luxury residences, which, though from one point of vi&w a form of Investment, add little to the country's industrial output and in many cases have a fairly high import content." Processes and Problems of Industrlal1zatlon in Underdeveloped Countries, loc. c it. 78 that 2 to 5 per cent of the national income must be saved. If the annual grox'Tth in population is 2.5 per cent the country would find that 5 to 12.5 per cent of its national Income is absorbed by demographic investments with no rise In i t s l i v i n g s t a n d a r d s . ^0 It has been pointed out that in a densely populated country with a low level of per capita Income, growth in population not only increases the quantity of capital needed to provide the growing labor force with a given per capita amount of equipment but also adds to the difficulty of forming capital at a given rate. The possibility of capital formation, it is said, diminishes as population grows, unless Improvement in Industry and agriculture can keep pace. If the heavily populated underdeveloped country falls to keep pace through industrial and agricul tural improvement, the expanding needs for food and other necessities required by the growing population can be met only at the expense of those slim resources, which, with a stationary population, might have been used for the formation of fresh capital ~^The Determinants and Consequences qf Population Trends. loc.. c l t . Demographic Investments are those which are necessary for a growing population to maintain a constant living standard. ^Joseph J. Spengler, ''Economic Factors in the Development of Densely Populated Areas," Proceedings of the American Philoapp.hlcal Society, 95;30-31# February, 79 II. M EA SU R ES FO R CAPITAL FO R M A T IO N IN U N D E R D E V E L O PE D C O U N TR IES There are two major sets of measures which under developed countries may use in order to accelerate the rate of capital formation, namely, domestic and foreign measures. Domestic Measures Broadly speaking, there are three basic domestic means for capital formation in underdeveloped countries. The first is to reduce consumption in order to release factors of production for the production of capital goods; the second is to transfer labor and other productive resources from non-productive capital formation and cere monial activities to productive capital formation; and, thirdly, is to make use of the disguised unemployment or seasonal idleness in agriculture whenever this condition exists for increasing the production of real capital. The second and third are really means of capital formation via an increase in total output in such a fashion that the increase consists mainly or entirely of 1951* However, some writers disagree with Spengler on the theory that if technolgies are developed which emphasize the use of manpower for the production of capital equip ment, capital formation may be increased. See, for example, Nurkse, op. clt., pp. 32-56. 12Buchanan and Ellis, o p. clt., p. 59. 80 capital equipment. The Increase in capital goods via the first means would come through shifting some of the resources engaged in producing consumption goods into the production of capital goods. In other words, capital forma,tion via the first means would be at the expense of consumption for it involves a reduction of consumption goods and consequently a fall in consumption levels; while capital formation via the other two means would come without a decline in consumption goods output. Theoretically, any underdeveloped country can Increase the stock of its capital goods if It is willing to diminish consumption. But in many underdeveloped countries consumption Is already so low that further reduction in consumption would be very Injurious to the people and would bring with It a host of undesirable social and political disturbances. Even In those coun tries where consumption could be lowered without seriously injuring the people, the government would not dare to go In this direction, for it would almost certainly be driven out of office. Consequently, little can be said in favor of this approach unless the country has a totalitarian and dictatorian government which may be able to accumulate some considerable amount of capital by deliberately cutting consumption. The present writer earnestly believes that capital formation should not require that levels of consumption be 81 reduced; rather, a part of the rise in output should be saved and devoted to capital formation. But even this milder requirement is not easy to attain since under developed countries would have to prevent the dissipation of the whole of Increased output by population increases or advances of consumption. The crucial problem of capital formation via domestic means, then, would be to devise effective means for beginning and maintaining the cumulative process of saving and investment. In the following analysis, som e of these means are discussed. Development capital from domestic voluntary savings. Frugality, thrift, good economic management, security of persons and property, prevention of inflation^ and establishment of saving and financial institutions—euch as private credit institutions, saving and loan associations, commercial banks, and so forth, needed to encourage and provide outlet for savings—stand high in the list of requirements for augmenting savings and channeling them into capital producing investments. N o one could deny that If such requirements are made available a certain amount of 13 Som e writers advocate inflation as a means of bringing about forced savings In the economy. But forced savings must occur at the expense of voluntary saving, and the fruit of savings are wasted by distortion in the use of real resources. 82 i i ] capital could be saved and, in fact, also be made avail- ; able for investment for capital formation. | O n the other hand, no one could reasonably quarrel ■w ith the contention, held by many writers, that in view of a low level of Income and a high rate of population i growth, voluntary savings in underdeveloped countries j | ; I would be insufficient to form capital at a rate needed for : { economic development. This is the conclusion, with refer- ' ence to the underdeveloped countries and perhaps also with reference to other countries. Spengler, for example, pointed out the fact that the rate of domestic savings in India was only 2 to 3 per cent of national income, whereas the country needed an amount of approximately 11 per cent of income in order to be able to achieve a 3 per cent ! annual increase in per capita income with population | | increasing at the rate of 1 per cent per year.^ Nurkse seriously questions the degree to which i i I reliance can be placed on voluntary savings in view of the I "demonstration effect" of advanced consumption standards. In the poorer countries of the world today, he maintains, there is a growing awareness of advanced living standards, and consequently the propensity to consume is continually stimulated by the attraction of consumption patterns prevailing in advanced countries. This, he says, tends to limit the capacity for voluntary saving in the poorer Spengler, op. clt., p. 45. j 83 countriesTo offset this handicap it is suggested that measures for fostering voluntary saving be supplemented by measures for compulsory savings. Develooment capital from compulsory savings. It Is maintained that considerable sources of Income exist In many underdeveloped countries, which would be appreciable sources of capital, if they were diverted from their traditional non-capital producing uses—such as Investment In real estate and the building of temples, shrines, palaces, and so forth, hoarding; conspicuous consumption; and waste of labor in elaborate ceremonial activities. It has been estimated, for example, that In Brazil In 19^7 net domestic savings amounted to thirteen dollars per capita, but only six dollars of this amount was used for genuinely productive Investment .-* ■ ? Appropriate fiscal, customs and financial policies (which include the use of taxation, forced saving through Inflation, import controls and accompanying rationing and licensing policies, and so forth) might both encourage savings and lead to conversion of a larger portion of expenditures into capital producing investments. ■^Nurkse, op. c lt.. Chapter IV, also pp. 1^2— 1^3* •^Buchanan and E m a, op. c lt. . p. 58. •* ~ ^ The Determinants and Consequences of Population Trends, op. c lt. , p. 281. 84 Regardless of the many objections raised against the soundness, end practicality of using such compulsory means,fact remains that underdeveloped countries cannot attain a level of savings high enough to provide the sufficient amount of capita.! required for economic development.^9 Development capital by use of disguised unemploy ment or seasonal idleness. In recent years attention has been called to the possibility of drawing upon disguised unemployment which exists among agricultural workers of the underdeveloped countries to produce needed capital equipment.20 Since a considerable proportion of agricul tural labor in many underdeveloped countries is under employed and sometimes totally unemployed during a large part of the year, this existing supply of manpower could be used for the production of capital equipment at a very low co s t. utfany writers have questioned the soundness, effectiveness and practicability of such methods of compulsory savings and Investment. See, for example, Buchanan and Ellis, op. cl,t. . pp. 308-322; also Nurkse, op. c lt. , pp. 109-115 ®nd pp. 142— 152. ^ The Petermlnants and Consequences of Population Trends . on. c lt. , pp. 277-280. ^^Some of the champions of this idea are Nurkse, o n . c lt. . Chapter I I ; and W. E. Moore, Economic Demography Q .f Eastern and Southern Europe (G-eneva: League of Nations, 19^5 ) . 85 In agriculture, for example, supplying unemployed, or underemployed workers with rudimentary tools and a few new Ideas might provide sufficient stimulation for accomplishing much-needed projects. . . . And were It found that fewer workers In agriculture could produce nearly as much, the transfer of agricultural workers to the production of capital goods would not In principle put any added strain on the food supply.21 A considerable labor reserve also exists outside of agriculture which is underemployed or unemployed. It is possible that a large number of such workers could be utilized in activities which would contribute to the formation of new capital. Employment of people in com m u nity development programs which are mainly self-help local work projects can engage a considerable number of those unemployed and underemployed in capital building projects such as irrigation, road building, flood control, water supply and sewer projects, given small Incentive payments and some help by the government. In this respect the International Bank has recommended for Iraq a system by which the Sarafia dwellers would build their ow n mud houses with some help from the government which would supply sewer and water systems and a few essential 0 9 structural materials. The Determinants and Consequences of Population Trends. on. c lt., p. 281. 02 International Bank for Reconstruction and Development, The Economic Development of Iraq (Baltimore: The Johns Hopkins Press, 1952), pp. 55> 59-60. 86 N o one could reasonably deny that by using the methods mentioned above capital formation could be increased appreciably in all underdeveloped countries. But, to use the words of United Nations experts, The question remains . . . whether the rates of savings and investment can be raised high enough by these means to provide a sufficient amount of capital for the economic development of those countries where the needs are greatest, and particularly where population is growing rapidly.23 Therefore, the possibility of importing foreign capital to supplement the Inadequate domestic savings have to be considered next. It Is generally believed that, in view of the low level of saving and the rapid rate of population growth in many underdeveloped countries, there would be no capital accumulation, no rise in standards of living, and no economic development unless foreign capital were imported in large amounts. One writer had estimated ths/t during the 1950's the countries short of savings (chiefly countries in Latin America, Asia and Africa) would absorb about 12,700 million "international units.A somewhat less optimis tic evaluation of the possibilities of importing capital 23 The Petermlnants and Consequence s of Population Trepds, log, git,. oik , Colin Clark, "The World Will Save M oney in the 1950's," Fortune. 42:88-91 and 117-128, July, 1950. Clark's "International unit" has a purchasing power equivalent to approximately that of one and a half dollars in the United States in 1950. 87 indicates that, . . . if careful preparations were made for effec tive use of foreign capital, the underdeveloped countries of Asia, Latin America, and southern Europe would be ready by 1952-1953 to absorb ^,000 to 6,000 million dollars per annum from abroad.25 A more recent study with conservative estimates suggests that, . . . the Independent underdeveloped countries of the free world as a group might be able to use effectively as much as & 500 to £?1,500 million of new foreign capital each year during the next few years over and above what they are now r e c e i v i n g . 26 These estimates show that the amount of foreign capital required by underdeveloped countries is large and that if this capital were effectively used, it could increase considerably the rate of capital formation and economic development in underdeveloped areas. Foreign Measures The contribution of capital from abroad may come in three major forms, namely, international loans (public and private); international grants; and direct business investments. While all these forms could contribute to capital formation and development of underdeveloped countries in general, the significance and effectiveness 25 The Determinants and Consequences of Population T u sn d s, lo j£ . c ^ t . 26 Economic Development Abroad, op. clt., p. 11. 88 of each form may differ with different countries and with different conditions. In the following the three forms are compared. International loans. In those underdeveloped countries where direct business Investments—due to lack or absence of social overhead capital end deficient market— are reluctant to go, international loans would be useful. Under such circumstances International loans to finance governmental Investment for building social overhead capital and for enlarging the market can be a suitable way of laying the foundations of a country's economic develop ment . It Is often said, on the basis of past e:xperience of certain countries such as Japan and Australia, that international loans are a prerequisite to direct business Investment. Nurkse, for example, said: First in the country's /Japan/ development came government investment financed In part by foreign loans; much later . . . came direct foreign invest ments. By that time the market had grown, the public overhead facilities were established, and so the inducement for private entrepreneurial Investments had become substantial. . . . The same sequence can be observed In certain other countries that have attained a substantial degree of development /such as Australia/.2? It is further pointed out, In favor of inter national loans, that they can be used by public 27 Nurkse, on. c lt. . p. 91* 89 authorities more easily than other types of foreign investment, for domestic economic development in accord ance with a coherent over-all program.^® While international loans have few advantages over direct private investments they, unlike direct private investment, may not bring about a net increase in the amount of real capital within the underdeveloped country. The major obstacle in the way of capital formation via international, loans Is the high propensity of the poor people in underdeveloped countries to consume. W hen people find superior goods, or pattern of consumption, they want to use them, and they become dissatisfied with the old. Their Imagination is stimulated and their desires increase. Thus their propensity to consume Increases, and no Increase in saving or capital formation occurs. In these da.ys, knowledge of superior goods and consumption patterns has been tremendously facilitated through contacts, communication mediums and improved transportation. The knowledge of, or contact with, better living and better things has opened the eyes of the people In underdeveloped countries to previously unrecognized possibilities; it has extended their imaginations and their desires. All this tends to raise the propensity to 28Ibid., p. 89* consume in the poorer countries, with the result that savings and capital formation is significantly affected.^ Now, foreign lenders may leave the borrowing country free to use the international loans any way the country desires. The pressure of higher propensity to consume and the desire of people to improve their living standards make it politically expedient for the government not to resist demands for governmental spending for consumption. Under such circumstances the international loan may be spent mainly on consumption purposes, and therefore little or no addition is made to the rate of capital formation. Such can be the case even if each foreign loan is earmarked for a specific productive project.30 if inflow of capital, because of strong and persistent pressures for high consumption, was accompanied by a relaxation of domestic saving efforts, there may be no change in the total rate of capital formation The earmarking of particular international loans to specific investment projects in order to Insure productive 2^Ibld. , Chapter III. In this chapter, Nurkse uses J. S. Duesenberry1s new theory of consumption and saving— which emphasizes the Interdependence of individual consumers' preferences—and applies it on an international level. 30Ibid. , p. 9 2 . 91 use of funds may not be fully effective and may not by any means provide a basic remedy to capital formation. The following story serves to illustrate the futility of the method of earmarking International loans for specific productive projects $ The Austrian government, so the story goes, asked for the release of counterpart funds to reconstruct the Vienna opera. The E. C. A . /.European Cooperation Administration/ is said to have replied that this would not be a productive investment and that the release could not be granted for this purpose. Then the Austrian government remembered that it was Itself financing the construction of an electric power plant in the mountains. It went back to the E. C. A . and asked for a release of counterpart funds to pay for this piece of construction, to which the E. C. A. agreed. So all that happened was a switch: the wily Austrians, having got the E. C. A . to take over the financing of the power plant, now financed the construction of the opera from their own r e s o u r c e s . In short, the use of international loans for capital formation may be subject to the difficulty of a high and rising propensity to consume in the poor under developed countries. Without deliberate efforts by the people and governments of underdeveloped countries to prevent it from happening, International loans would some how spill over into consumption. Consequently It may fail to contribute to capital formation and to lay the local foundations of dure.ble economic development. The effectiveness of International loans depends essentially on complementary domestic action in the receiving country. 32 Ibid., p. 97. 92 International grants. International grants can, of course, be used for capital formation in the same way as loans. The obstacle facing international loans applies to International grants with greater force. To again quote Nurkse: In the case of losns, there is generally some pressure to use them at least for specific productive purposes so that interest and amortization require ments can be met later on. In the case of grants, even this pressure does not exist. Grants can be used directly or indirectly for consumption without any subsequent inconvenience.33 Again, without deliberate action at home International grants may fail to contribute to capital formation and to laying permanent ground for economic development.^ Direct business or private investment. While international loans and grants may fall to Increase the rate of capital accumulation in underdeveloped countries, direct business Investment may not. It "has at least a solid merit In that it almost Inevitably results in a net Increase in the amount of real capital within the Investee 33 Ibid. , p. 92. - International grants suffer from other drawbacks. It is not difficult to see that such an institution might engender unattractive benefactor or mendicant attitudes, and hence possibly embltterment in International relations. Jacob Viner in his International Economics (Illinois: 1951)* pp* 371-372, provides severe criticisms against Inter-governmental grants as a pennanent institution. 93 c o u n t r y . n35 in -the case of International loans and grants there is nothing inevitable about it. Undoubtedly direct private investments have some special advantages over the other two types of foreign capital. Being subject to private motives and business calculations, it is likely to be productively employed. If direct private investment shies away from some of the basic fields for development, it nevertheless exploits the Immediately productive lines of Investment and it would be difficult to dispense with these contributions to output and productivity of underdeveloped countries.36 Direct private investments help to promote the spread of modern technology37 and efficient management methods. Such Investments bring with them managerial and technical talents not adhering to governmental loans and grants. Furthermore, it Is free from the rigid Interest and amortization requirements that affect international loans. It also takes some of the burden from the taxpayer's shoulders. 3 5 ‘ Nurkse, qp. c lt. , p« 92. 3°Buchanan and Ellis, Qp. clt., p. 351* -^SpreaxL of technology is In a sense a foiro of capital accumulation. It refers to the technological side of capital formation. "W hen the stock of capital Increases, naturally the technical form of it changes. Instead of working with shovels for building roads, it would be possible to work with tractors, trucks, and so forth. See Nurkse, op. c lt.. p. 2. Most Important of all, direct private Investment, . . . moves on a sound business basis of mutus.1 profit without involving the moral problems concerning the duty of a creditor country to supply capital. It therefore provides a firmer foundation for long-run economic relations than does public capital.38 In short, direct business investment is indispens able for aiding underdeveloped countries’ economic development. Consequently it would be advantageous for underdeveloped countries to make every effort to provide an attractive investment climate. This requires, for example, elimination of restrictive laws and regulations and various other obstacles due to exchange control, double taxation, or risk of nationalization. In those underdeveloped countries where direct business investment shies away because of an absence of social overhead capital and sufficient markets, efforts must be made to provide this overhead capital and to enlarge the market.^9 Buchanan and Ellis, loc. c lt. 3?But in those poorer countries which lack invest ment funds to provid.e the needed social overhead capital, international loans and grants may be helpful if effectively used for productive purposes. Under such circumstances loans and grants become a prerequisite for direct business investment. CHAPTER VI T H E E N T R E PR E N E U R A N D EN TR EPR EN EU R SH IP I. T H E R O L E O F E N T R E PR E N E U R S IN E C O N O M IC D E V E L O PM E N T The term entrepreneur commonly refers to those w ho Initiate new enterprises, bearing the risk and Innovating through the process. Their economic activities "may involve the creation of a new product, a new method of production, development of a new market, the utilization of new sources of productive factors, or a new form of organization. Entrepreneurs play a dynamic role which is of peculiar importance for economic progress. They are people who seem to possess a marked degree of Ingenuity and aspiration, and a high order of organizational and administrative ability. They seem to have a special ability or trick for seeing how the resources—people, tools, equipment and land—may be organized and used in unfamiliar ways to produce better results. In their restless search for better ways of doing things and their almost severe dissatisfaction with the gap between what is ^"Yale Brozen, "Entrepreneurship and Technological Change," Economic Development: Principles and Patterns, Williamson and Buttrick (eds.), (N ew York: Prentice-Hall, Inc., 195^), p. 199- 96 realized and what could be realized they are continuously contributing to the advancement of the economy.2 Entrepreneurs play a dynamic role in economic development in the sense that they are almost continuously bringing changes in resources, changes in their use through time and changes in the level of real i n c o m e .3 N o wonder they are regarded as being among the most effec tive instrumentalities for material progress. In fact, it is no wonder, either, to hear that economic development is very intimately tied to them.^ II. SC A R C ITY O F EN TR EPR EN EU R S IN U N D E R D E V E L O PE D C O U N TR IES In underdeveloped countries entrepreneurial talent is scarce. This scarcity is one of the major obstacles delaying the economic development of these countries. Even if there were no shortage of capital, labor and natural resources, scarcity of entrepreneurs able to institute and manage industrial enterprises would s till be a major bottleneck.5 it is an important reason why 2 Norman S. Buchanan and Howard S. Ellis, Approaches to Economic Development (New York: The Twentieth Century Fund, 1955)» p» ^9• 3r hoc. c lt. b Brozen, loc. c lt. ^Economic Development Abroad, loc. cit. 97 productive resources available in underdeveloped countries fail to find their way into productive investments. M any economists and other thinkers insist that the shortage of entrepreneurs is primarily responsible for backwardness of underdeveloped countries. To quote one of them: . . . perhaps the primary reason why productive resources /natural resources, labor and capital/ in underdeveloped areas are often unutilized or inefficiently employed is the great dearth of persons with organizational and administrative skills in nearly all branches of private and public life. Entrepreneurs and entrepreneurial abilities are in short supply. The qualities of leadership combined with organizational and administrative skills are said to be all too rare in the underdeveloped areas. T ,fere these skills more plentiful and more widely diffused and applied, the other resources would yield a better product end the present environment would be seen to contain far more resources than are now believed to exist. The inefficiency with which some resources— land and labor, for example—are currently used is attributable in part to the fact that a particular kind of productive factor, entrepreneurial and organi zational ability is in short supply.° The importance of entrepreneurs to the development of underdeveloped countries is also indicated in the following: At their 1952 meeting, the governors of the Inter national Bank for Reconstruction and Development and of the International Monetary Fund studied the contention that they were playing Macbeth without Macbeth. The International Bank, the Technical Assistance Adminis tration of the United Nations, the United States Buchanan and Ellis, op> clt. , p. 2k, A similar view was also held by J. B. Condllffe, The C ommerce of Nations (N ew York: W . ¥. Norton and Company, Inc., 1950), pp. 677-695- 98 Technical Cooperation Adjninistration, and other agencies were making efforts to raise income levels in sections of the world dissatisfied with their economic status. Capital was being supplied to these areas; training programs for the development of special skills were under way; technicians versed in devising ways of improving methods were available. But a vital spark necessary to catalyze technological advance and economic growth was missing. The entrepreneur had been neglected.7 True, most underdeveloped countries have a small class of entrepreneurs, "but it is typically a class of merchants and traders engaged in distribution, foreign trade, real estate speculation and money-lending," rather than the promotion and management of modern industrial enterprises. Reasons for Shortage of Entrepreneurs in Underdeveloped Countries Many reasons account for the dearth of entrepre neurial ability in underdeveloped countries. Som e are historical, primarily entailed by the^social and culturad factors, and the others stem primarily from the under developed state of the economy of these countries. The historical, social and cultural reasons. In underdeveloped countries the peasants form the majority of the population. These peasants are bound by traditions and ancient philosophies and social institutions which Brozen, o jd . c lt. . p. 196. 99 provide a very poor ground for business leadership. These traditions include,® for example, lack of interest in material things or contempt of work and economic pursuits. They m a,y also include the denial to actual and potential enterprisers the resources they need for running or establishing new enterprises by the many restrictions they Impose—occupa.tional or otherwise. In this respect the experts from the United Nations wrote the following: . . . it may not be possible to recruit labor, because it is tied to the soil by law, or because caste restrictions prevent labor from moving to new occupations. Or land may be concentrated in the hands of a small number of persons who are unwilling, often for reasons of political prestige, to sell it to persons outside their group. Or the banking system may discriminate against borrowers of a particular race or creed.9 Traditions and social institutions of underdeveloped areas often force or permit the available small upper class, which Is the main potential source of entrepreneu rial talent, to go to waste. This may come about when the tradition bound upper class look down on economic pursuits, or when they live in the power of a feudal, Q For a detailed discussion of the traditions and social institutions causing dearth of entrepreneurs in underdeveloped countries see Buchanan and Ellis, o jd. s_it_. , Chapter IV; Economic Development Abroad. op. clt.. , pp. 11-12; and United Nations, Department of Economic Affairs, Measures for the Economic Development of Underdeveloped Countries (New York: 1951)> PP» 13-16. ^Ibid. , p . 1 5 . 100 aristocratic system which discourages business enter prise. 10 . . . people may be unwilling to make the effort to produce wealth if the social prestige which they desire is more easily acquired in other ways. Thus, in feudal or aristocratic societies where power is inherited rather than earned, and where little respect is accorded to wealth which has been created in the first or second generation, the energies of ambitious men are not attracted so much to the production of wealth as to the acquisition of skills which may secure entry into the strongholds of power—to the acquisition of military skill, or the skill of the hunt, or the skill of the lawyer or priest. In such societies, the production of wealth is frequently held in contempt as a profession for well-bred young men.-H By contrast, if successful entrepreneurs are held in high esteem and looked upon as highly prized members of the community the available upper class, as well as other people, would be induced to engage in entrepreneurial activities. In most underdeveloped countries, defects of the laws and their application are also responsible for a shortage of entrepreneurs. For example, laws to secure the fruits of one's efforts, to protect property, to organize relations between landlord and tenant, to induce innovation, and so forth, are generally too weak to induce Investors to establish manufacturing and agricultural 10Economic Development Abroad, op. c lt., pp. 12— 13* ^ Measures for the Economic Development of Under- developed Countries, op. c lt. , pp. 13— 1^* 101 enterprises. Reasons due to the underdevelooed state of the economy.12 Scarcity of entrepreneurs is also caused by the underdeveloped state of the economy, which makes the functions of entrepreneurs more complicated and burdened with a greater number of responsibilities and risks. In underdeveloped countries the entrepreneur is likely to have to perform by himself all the entrepreneurial func tions of business promotion, capital provision and risk bearing, technical innovation or adaptation and finally business management. The absence or inadequacy of institutions and other mediums to facilitate the perform ance of each of these functions makes the job of the entrepreneur in the underdeveloped country more difficult than his counterpart in a more advanced country, and thereby discourages the emergence of industrial entrepre neurship . As a promoter, for example, he suffers from a lack of appropriate specialized instltutions--such as issuing houses, commodity markets, labor exchanges, and so forth— -I o All the reasons for scarcity of entrepreneurs given in this section, and most of the measures, suggested In the next section, unless otherwise mentioned are based on the discussion in: United Nations, Department of Economic and Social Affairs, Processes and Problems of Industrialization in Underdeveloped Countries (N ew York: 19555”, pp. 30-33. 102 which would take over or facilitate specific functions of the entrepreneur. Consequently he is likely to be involved much more, directly, in the process of bringing together the various factors of production at the site of production than the promoters in advanced countries. As a capital provider and risk taker his position compared to that of the entrepreneur in advanced countries is also unfavorable. For the underdeveloped countries in general lack capital funds, lack a more highly organized capital market, and consequently the entrepreneur himself is often the chief provider of capital. And in the absence of a well-developed security market, the entre preneur finds It more or less difficult to change his position and therefore he m a.y remain tied to the enterprise indefinitely. This certainly magnifies the risk of carrying on an entrepreneurial activity in the under developed country. Because it is not easy to find suitable managerial skill in underdeveloped countries to substitute the entrepreneur for a manager, and because he is personally more involved in the project (as a promoter* and capital provider) the entrepreneur is unlikely to be able to withdraw to the extent that his counterpart in advanced countries probably would. H e has too much at stake and finds it necessary for success to stay close to the enter prise as manager, thereby burdening himself with greater responsibility. In underdeveloped countries the entrepreneur is also likely to encounter shortages of transportation, communications and electric power.-* -3 The unknown elements facing him are also more numerous than they are in advanced nations. Because statistical services and specialized financial, technical and marketing Institutions are Inadequate or absent, the entrepreneur is often compelled to make decisions without ,any accurate knowledge of some of the key factors which would affect the operation and future of his enterprise. Thus entrepreneurs in underdeveloped countries, unlike those of the advanced countries, are often required to make such difficult decisions with regard to production technique, scale of operation, location of factories, means of distributing the product, and so forth, on the basis of his ow n knowledge. Indeed, all these reasons magnify the risks and responsibilities which entrepreneurs have to face in underdeveloped countries. Both groups of reasons given above, undoubtedly, account considerably for the shortage of entrepreneurs in underdeveloped countries. For neither the social nor the economic environment is at all favorable or conducive to 13 Economic Development Abroad, op. clt., 104 the emergence and training of the type of persons likely to prove successful in initiating productive enterprises. III. M E A SU R E S FO R PR O M O T IN G A N D C R EA TIN G A N EN TR E PR EN EU R IA L C L A SS IN U N D E R D E V E L O PE D C O U N TR IES Generally speaking, entrepreneurial ability is the result of natural or innate capacity promoted by experi ence, observation, practice and training. Therefore, an entrepreneurial class is likely to become more plentiful as the economy develops. The supply of entreprenurial ability is likely to feed on itself, becoming relatively less and less scarce as industrial, agricultural, financial and other enterprises are established. But the process of economic growth itself depends partly on the effective operation of entrepreneurs as promoters, managers, innova tors or adaptors of better techniques and methods. Consequently the main problem is the breaking of the circle in the early stages of economic development. Several measures may be suggested. But before indulging in the discussion of the measures it is useful at the outset to make this general statement: In those private enterprise economies which rely greatly on private initiative, the key measure for mobilization of scarce entrepreneurial ability should provide incentive by the elimination or reduction of some special riske which are beyond the limits customarily facing entrepreneurs in io5 advanced countries, and by making the marginal efficiency of entrepreneurial activity, if the expression permits, an attractive prospect. Anything that tends to magnify the prospective net return or reduce the uncertainties—whether it be change in government fiscal or commercial policy, an increase in the efficiency of the other factors of production—will tend to stimulate the flow of entrepreneurial skill into /productive economic activities/, both from other domestic fields of activity and from abroad.1^ The flow of entrepreneurial talent into productive economic activities is also likely to be increased by anything that tends to enlarge the total supply of entre preneurs, whether it be education, a change in the social structure, immigration or attraction of foreign entrepreneurs to invest directly in the underdeveloped country. Having made this general statement the discussion will be focused now upon those specific measures required to solve the problem of a shortage of entrepreneurs in underdeveloped countries. Establishment of Social Institutions for the Stimulation of Entrepreneurship The creation of a climate favorable for entrepre neurship depends on establishing social institutions ^ Processes .end Problems of Industrialization in Underdeveloped Countries, op., c lt. , p. 32. 106 which would make possible the exercise of independent individual enterprises and allow the maturation and development of personalities whose predominant orientation is in the direction of productivity, working, and creative integration. The realization of these conditions depends upon a series of political acts. If rigidities of caste and class structure are mitigated, if government is able to protect property rights efficiently regardless of claims of privilege, and if the administration of laws is assured in an Impersonal end reasonably equitable manner, the main objective conditions for the development of creative Industrial entrepreneurship are present. Measures to eliminate or reduce social rigidities and to permit social and occupational mobility; to make arrangements for property transfers, contracts and the like easier, less costly, more flexible and better adapted to nurturing, promoting and giving free play to the economic interest of persons as individuals or in associations would be important elements in a line of action toward the encouragement and development of enterprise and entre preneurs. Improvement in the rules governing the inheritance of land, land tenancy and land ownership would ■^Bert F. Hoselitz, “Entrepreneurship and Economic G-rowth, 1 1 The American Journal of Economics and Sociology, 12:108, October, 1952. 107 have similar effects. For Instance, Inheritance laws which permit subdivision of land far beyond the limits of effective cultivation should be changed, and land tenancy laws should provide more Incentive to the tenant by giving him security and the right to reap the fruits of his activity and Initiative. In the field of public administration, maintenance of public order, competence and honesty in administration — all are helpful for the creation of a favora,ble climate for entrepreneurship. For example, an adequate police force and the maintenance of minimum standards of speed, efficiency and justice in the courts can provide more security and confidence to entrepreneurs. Competence and honesty of public administration would exert an Important effect upon Initiative and economic activity, while uncertainty and risk—caused by an Inefficient administra tion or Ill-advised government action—would have an Inhibiting effect on economic initiative. Provision of Basic Facilities and Services for the Elimination or Reduction of Certain Peculiar Business Risks Business risks cannot be eliminated completely. Nor would it be desirable to reduce them--by government guarantees for example—beyond the limits customarily facing entrepreneurs in advanced countries, If resources 108 are not to be inefficiently used, or diverted into less productive uses. But since there exist in underdeveloped countries som e risks which are usually higher than those in the advanced countries, efforts should be made to reduce or to equalize the degree of risk, at least in those fields in which special uncertainties exist. One such line of action is the Improvement in the flow of reliable economic data by providing, for example, adequate informative and statistical services concerning techniques, markets, prices and costs. Such services could supply the entrepreneur some knowledge a.bout the key factors which would affect his investment in the future. With statistical information he would be able to make a more accurate analysis of the market and, therefore, more likely to make better decisions. Another is the lessening of the various deficien cies in social overhead facilities, and improvement of the economic environment in general. Lack or absence of social overhead facilities constitute special obstacles to industrial growth. For example, in underdeveloped countries there are still resources, mineral deposits, grazing land, and so forth, undeveloped for want of transportation facilities—railroad, highways or others. A construction of a dam in many parts of the under developed world, for example, can draw forth entrepre neurial activity to make barren land green. And the 109 establishment of power plants would Improve the prospects of profits and Induce or facilitate establishment of productive industrial ventures. The above measures and other improvements in the economic environment are likely soon to be followed by an increased flow of entrepreneurial talent into various sectors of the economy. Another line of action for reducing risks is to take measures for lessening the likelihood of arbitrary changes in the administration of laws and regulations, especially those which can immediately and directly affect business and entrepreneurial activities, by the government or its agents. Arbitrary changes of this kind, as shown in the following quotation, increase business risk and therefore inhibit investments. The risks associated with investment . . . are enhanced wherever there is the possibility of arbitrary action on the part of the government. Sudden and frequent changes in tax rates or taxation policy, in foreign exchange rates or the administra tion of foreign trade controls, or in customs or excise duties, are all disruptive of business and hence tend to magnify the reluctance of investors to commit their savings to industrial enterprises which are thus exposed to unpredictable forces.^ Every effort should be made to avoid any economic atmosphere which unnecessarily inhibits entrepreneurial activity. l b Processes and Problems of Industrialization in Underdeveloped Countries. on . clt ., p. 2^. 110 Improvement of the Standard of Education A rise in the standard of education, fundamental and formaJ., general and technical, is a prerequisite to any increase in the flow of entrepreneurial ability. Any enlargement of the pool of general talent from which the specla.1 entrepreneurial skill is drawn is equivalent to an increase in the potential supply of entrepreneurs. Hence, as high a proportion of the national income as is possible should be devoted to investment in education which would eventually improve the future flow of the country's productive resources—human or otherwise. In this regard, the experts caution underdeveloped countries not to attempt to achieve universal literacy for fear of waste of efforts and funds in pursuit of a goal which would be unfavorable and probably hostile to the creation and promotion of entrepreneurs. Instead, attention should be focused on real Improvement In the general level of education. Furthermore, these experts contend that, . . . a premature attempt to achieve universal literacy might so dilute and spread the teaching force that the outcome would be merely wider semi- literacy, which would probably be Inimical to the growth of enti*epreneurlal ability. A genuine raising of the general educational level, on the other hand, even if it took a little longer, would also Increase the potential supply of managerial talent, which would in turn tend to release for more purely promotional activities the entrepreneurs who might otherwise become tied down indefinitely to factory management. This would result in a more Ill economical use of scarce entrepreneurial talent.3-7 Improvement in the standard of education for the creation of an adequate class of entrepreneurs, however, is a long term process and therefore cannot provide the entrepreneurs needed for rapid development in a short span of time from domestic sources. Making the Best Use of Available Domestic Entrepreneurial Talent The effect of shortages of entrepreneurs can be partly overcome by effectively utilizing the supply of domestic entrepreneurial ability by the establishment of industrial development corporations. Such corporations tend to concentrate the function of starting manufacturing undertakings, thereby enabling a few groups of skilled personnel to become specialists in the field of Industrial promotion, which Is regarded as one of the most Important phases of the entrepreneurial tasks. While establishment of such corporations on the private level Is theoretically commended, the possibility of their emergence and profitable engagement in business would depend upon the stage of economic and industrial development the country had reached. W hen an under developed country has reached a certain degree of economic 1?Ibid., p. 32. 112 end industrial growth, the possibility of emergence of private development corporations is brighter than when it is at a primitive level. If the private sector did not respond—after the incentive provided to it by government, or if there is no incentive whatsoever as is the case in the less developed countries—establishment of industrial development corporations by government, it is said, would be advan tageous. This brings us to the controversial subject of government acting as entrepreneur. Government Enterprise The shortage of entrepreneurs in underdeveloped countries has, in many cases, Induced the governments to act as entrepreneurs in an effort to industrialize and develop their countries rapidly on their ow n initiative. Government action of this kind, in the opinion of this writer, is not the best alternative for attacking the problem of scarcity of entrepreneurial ability for many reasons, including waste and inefficiency in the use of resources, the danger of an expanding political and economic bureaucracy in government, and the weakness of public responsibility and lack of competence and honesty in public administration. Objection to Government Enter prise approach is discussed in detail in Chapter XVII of this dissertation. Foreign Entrepreneurs A better approach for overcoming the shortage problem of entrepreneurial ability, the present writer believes, is through the aid of foreign entrepreneurs. If foreign entrepreneurs are encouraged to take part in the industrialization and development programs, the direct responsibility of the government for assuming the entrepreneurial role—Initiating and organizing new enterprises—is thereby reduced. N o, foreign entrepre neurial talent may flow Into underdeveloped countries in two ways: through immigration, and direct private (or business) Investment. Each of these will be discussed Immediately. Immlgration as a measure alleviating the shortage of entrepreneurs. The argument that Immlgra.tion can help to overcome the shortage of entrepreneurs is cited principally with reference to those countries which are believed to have large reserves of unused natural resources which could be put into production if more people with entrepreneurial talent and other skills were to immigrate there. Undoubtedly Immigration would be of great help In the development of such countries, for it Is evident that immigrants can bring to the receiving country the needed entrepreneurial ability and enterprise, as well e,s scientific knowledge, Inventiveness and certain skills 11 and occupational aptitudes which the native labor force lacks. Evidently, immigrants with such valuable charac teristics could make valuable contributions even to such highly developed countries as the United States of America.3-8 History provides us with a great many examples of how immigrants have had considerable direct significance in achieving industrial and economic development in many countries—such as the contribution of the Chinese In Siberia early in the thirteenth century; of the Cerman, Flemish and Italians in France in the fifteenth end sixteenth centuries; of Europeans in general to North and South America, Australia, and N ew Zealand in the seven teenth century; of the Irish immigrants to Canada in the mid— nineteeth century; end of Immigrants from the United Kingdom and others again to Canada In the twentieth century. In the post-World W ar II period, Australian industry has absorbed a considerable number of Immigrants from Europe. In Lebanon returning immigrants, from North and South America, have been an Important source of entrepreneurial skill. In Egypt a good deal of the country's Industrial development in recent decades 18 The Determinants and Consequences of Population Trends , ojd. c lt . , p . 3 0 7 . 115 was the result of the leadership of resident foreigners such as the British, French, Greeks end Italians. More recently the Belgium and Dutch immigrants have established the diamond cutting industry in Israel and in the Union of South Africa. Wherever there was immigration to an under developed area it was the immigrants who pioneered to become Industrial entrepreneurs. They were, more or less, the vital spark which Induced industrial and economic d ev el opm en t . 9 Consequently, policies by governments of under developed countries to facilitate immigration of persons with entrepreneurial ability as well as other skilled people from areas, In which they are relatively plentiful, to their countries would certainly help In solving the problem of the shortage of entrepreneurs and would be a step forward in the interest of Industrial and economic development. But certain practical difficulties of major Importance are expected to make it very difficult for underdeveloped countries to encourage immigration to their countries at the desired level and of the desired kind. The following quotation sums up these difficulties: Large quantities of capital are usually necessary to prepare the way for the immigrants, to Install them and equip them with the facilities which they ^ Processes and Problems of Industrialization in Underdeveloped Countries. op. c lt., pp. 80-81. 1 1 6 need to make a useful contribution to the economic development of the country. Whereas the immigrants most desired are those who possess skills and abili ties that are lacking in the receiving country, there are few places in the world where the supply of such persons is excessive. Many of the countries of potential immigration are not attractive to potential migrants from other parts of the world because their climate is undesirable, because they are subjected to serious health hazards, or because social, political and cultural conditions are not conducive to the quick assimilation of immigrants. The land tenure condi tions in certain underdeveloped countries discourage immigration for settlement. The very fact that they are underdeveloped puts these countries at a disad vantage in efforts to attract immigrants from countries where the stands.rd of living is higher, social services are superior, educational facilities are better . . .20 If history is any Indicator, the prospect of solving the problem of shortages of entrepreneurs through immigration seems very slim. For history shows tha,t in the absence of catastrophic events—such as wars, political coercion, famine and other natural calamities— the movement of people from one area to another is primarily the direct result of inadequate economic and social opportunities in the area of emigration and superior opportunities in the area of immigration. The backward conditions in underdeveloped countries, indeed, leave little hope for the possibility of seriously depending upon immigration as an approach for solving the problem. 2o The Determinants and Consequences of Populat ion Trends. loc. c it. 117 Direct private foreign investment as a means of overcoming the problem of the shortage of entrepreneurial ability in underdeveloped countries. The most promising and rapid approach for overcoming the dearth of entre preneurial ability in underdeveloped countries, this writer believes, is through direct foreign investment. This approach Involves the transfer of expert entrepre neurs—managers, promoters, financiers, Innovators or adaptors—directly from foreign lands w ho immediately fill the gaps left open in the process of economic development. Such an approach can provide a supply of expert entrepreneurs sufficient to maintain a rapid economic growth. It can also help create and promote a class of efficient entrepreneurs from indigenous sources. Through the educative role of expert foreign personnel and of the efficient and successful operation of a new enterprise, direct foreign investment is an object lesson to local actual and potential entrepreneurs. The foreign expert w ho is in direct charge of his Investment is capable of achieving a productive combination and employment of resources and in this way he could convey to local entrepreneurs the art and techniques of doing business efficiently and productively. By establishing industrial and other enterprises a training ground is provided for entrepreneurial and other skills. M any natives will be given opportunity to acquire ! 118 practical experience by axitual employment in the foreign enterprise. Experience gained this way is the most Important educational instrument for the creation of an entrepreneurial class in any country. For, as one economist put it, "the only adequate training ground for entrepreneurial and other skills Is by actual employment in the enterprise."21 By establishing new enterprises, direct foreign Investments also stimula/te the development of corollary enterprises. By so doing and by purchasing some local supplies needed for Its operation the foreign enterprise helps in the creation and promotion of domestic enter prises. Hence direct foreign investment not only directly supplies the needed entrepreneurs from abroad but also generates a. supply of indigenous entrepreneurs for the future. 21 Condllffe, op. clt.. p. 680. CHAPTER V II T H E M ERITS O F D IRECT PRIVATE FO REIG N IN V ESTM EN TS T O U N D E R D E V E L O PE D CO U N TRIES: C O N C LU SIO N I. A D V A N T A G E S O F DIRECT PRIVATE IN V ESTM EN T The preceding chapters point out the great need in underdeveloped countries for capital, skilled labor and entrepreneurial ability. If these countries are to develop their resources and raise their per capita income rapidly, and without resorting to the familiar totalitar ian approach, It is necessary as well as deslra/ble for them to seek assistance from foreign sources. It has been maintained that from the standpoint of meeting the shortages of skilled labor, capital and entrepreneurs, and in terms of economic contribution to underdeveloped countries, direct private foreign investment Is a more favorable and promising approach than the other types of foreign Investment. As far as training and development of a skilled labor force, the contribution of foreign enterprises to the host country would be considerable, particularly through on-the-job training and the provision of efficient supervisors and working places necessary for the training of a large number of workers. With reference to capital, it should be preferable to both foreign investors and 120 Investee countries to have the Investment fund accompanied with the management and enterprise rather than being transferred in the form of a loan. Capital that goes abroad without management—as much of it did in the early twenties— -often constitutes a poor risk. That which goes abroad under foreign management—through establishing new enterprises or branches and subsidiarles--usually shows better results both from a profit standpoint and in terms of economic and social contributions to the host coun tries. ^ Finally, insofar as entrepreneurs and qualified personnel are concerned, there would be little or no trouble in supplying them if the direct Investment,, approach, is adopted. For this approach not only directly supplies the needed entrepreneurs from abroad but also—through the provision of a training ground for entrepreneurs end the stimulation of corollary enterprises—generates a supply of indigenous entrepreneurs for the future. The advantages of direct foreign Investment are not confined to the ability to aid in overcoming the shortages of capital, skilled labor and entrepreneurs in under developed countries. From the standpoint of economic 1 W ayne C. Taylor, end John Linderaan, United States Business Performance Abroad: The Case Study of the Creole Petroleum Corporation fn Venezuela' "(Washington: 1955) V p. 100. Herafter referred to as The Creole Petroleum Corporation in Venezuela. 121 contributIon, direct foreign Investment can also assist In raising the productivity and per capita income of the host country. By directly initiating productive enterprises; by fostering, subsidizing or creating by virtue of its operations some of the basic economic facilities such as transportation, energy and communications; by aiding or stimulating the development of related industries; by providing employment for local people and through a host of other contributions, direct private foreign investment is expected to speed economic development of the investee countries and therefore raise per capita income and standards of living in these countries. II. O B ST A C L E S T O D IRECT PRIV A TE IN V E ST M E N T \ But in these days we frequently hear that there exists little or no basis for private investments in foreign underdeveloped countries, due to the rise of nationalism and the fear from nationalization or confisca tion, and the many restrictive laws and regulations, exchange controls, transfer difficulties, double taxation, lack of domestic markets and social overhead capital, and so forth. This may be true In certain underdeveloped countries, but an increasing number of foreign govern mental and private leaders are deliberately trying to create and maintain an investment climate favorable to 122 foreign entrepreneurs.2 Venezuela, Mexico, Lebanon, Turkey, Pakistan, and even India are some of the many countries which are attempting consciously to encourage foreign investments In an effort to speed, up economic development. III. PROVIDING A N A TTR A C TIV E IN V E ST M E N T C L IM A T E If foreign enterprises are to be helpful in advanc ing the economic development of a nation It would be wise for that nation to endeavor to make the investment climate more attractive. Foreign entrepreneurs would not go abroad and establish enterprises unless they believed they could return a satisfactory profit on their Investment. The prospect of msklng profit would be appealing if obstacles to private foreign investments In underdeveloped countries were removed or reduced within reasonable and practical limits. Therefore, every effort to provide som e guarantee against nationalization and confiscation; measures to remove or reduce the effectiveness of the restrictive laws and regulations and the obstacles of exchange controls and double taxation; and all other steps taken to make the prospect of investment in underdeveloped countries profitable should be applauded. 2_ Loc. clt. 123 The degree to which the investment climate could he made attractive to foreign entrepreneurs, however, differs with different countries. With reference to confiscation and nationalization, in those countries where the presence of foreign— owned enterprises are viewed with extreme suspicion and fear of interference with domestic and foreign policies, there is a tendency to overlook the advantages of foreign enterprises and their contribution to the development process. Under such instances, the risk of nationalization and confiscation is greater and therefore foreign enterprises are reluctant to invest in these countries. Fortunately, in order to offset the dangers of direct foreign investment—real and imagined—new forms of organization have been evolved in recent years. The new kind of organization takes the form of "joint ventures" in which foreign investors, local investors and the government of the underdeveloped country (sometimes without government participation) in varying degrees participate. Such joint ventures may reduce the risk of nationalization and confiscation that an entirely foreign firm might face.3 q A different solution to the problem of nationaliza tion and confiscation is being practiced in Burma and India. These countries have ena.cted laws guaranteeing that specific industries will not be nationalized or that in the event of expropriation just and equitable compensa tion will be paid. Burm a, and India, for example, have 124 Joint ventures (or Joint enterprise) of various types are becoming more widely adopted both In Latin America and in the Far E&st.^ Consequently, this partner ship principle can—except where there is extreme fanaticism and dislike of foreign enterprise—do away with the fear from nationalization and confiscation which is considered the major obstacle to the flow of foreign enterprises into underdeveloped countries. The degree to which the investment climate can be made attractive also differs with the ability of a country to provide sufficient overhead capital. For example, those underdeveloped countries which can provide basic facilities and essential public works and services—such as roads and railways, telegraph and telephone systems, power plants, waterworks, schools and hospitals—provide a good profit prospect and therefore have a better chance of attracting foreign businesses than those countries which cannot provide such facilities.^ written such a principle into their constitutions. Such a provision has also been proposed in the Gold Coast. United Nations, Processes and Problems of Industrialization lift Underdeveloped Countries (N ew York: 1955)> p. 88. ^Processes and Problems of Industrialization in Underdeveloped Countries. op. sit., p. 85. ^It may be said that foreign enterprisers them selves would introduce such basic facilities. True, while a large foreign enterprise might construct some of these fa.cilities and services itself in order to carry on its 125 Underdeveloped countries with rich mineral resources of potential value—such as oil, Iron and coal— provide more profitable opportunities than those countries without these resources. Therefore, mineral rich coun tries provide a stronger incentive and a more favorable investment climate for foreign investors. Finally, those countries in which there are no exchange controls and currency inconvertibility or those which permit the transferring of a reasonable amount of profits and repatriating capital provide a more attractive investment clima.te than those countries which do not recognize the deterent effect of exchange restrictions on foreign investments. Therefore, if an underdeveloped country expects to obtain the advantages of direct private foreign invest ment, it is necessary for it to offer a res.sona.bly attractive investment climate. One of these countries which is capable of providing such a climate and which also stands to gain greatly by encouraging direct private investment is Iraq. This will be analyzed in Parts II and III of this dissertation. business, small-scale individual enterprises cannot be expected.to do so. PART I I A N A LY SIS O F T H E G E N E R A L CO N D ITIO N S O F TH E IRAQI E C O N O M Y Since the success or failure of direct foreign investments in assisting economic growth of Iraq will be determined to a great extent by the economic conditions in the country, a review and analysis of the general conditions of the Iraqi economy is necessary. Part II is assigned for this purpose. This part is not designed to give a complete and all encompassing account of Iraq's economic structure, for that would go far beyond the limits of the present dissertation. Rather, the purpose is merely to call attention to certain strategic factors in Iraq's general economic structure which will tend to shape the process of developments. Therefore, the limited scope of this part should be borne in mind. CHAPTER V III TH E PH Y SICA L SETTIN G A N D N A T U R A L R ESO U R C ES O F IR A Q , I. G E O G R A PH IC C H A R A C T E R A N D C L IM A T E Looking at the map of the world one finds that Iraq is one of the small countries of the world. Its area of 168,0*1-0 square miles is roughly equal, to that of the State of California or less than half the size of Texas.The area is bounded on the east by Iran, on the north by Turkey, on the west by Syria, and Jordan, and on the south by Saudi Arabia, Kuwait and the Persian Gulf. Reputed seat of the Garden of Eden, Iraq has been known as Mesopotamia—the land between the rivers, which in ancient times was known to be one of the most fertile regions in the world. Situated almost at the meeting place of three continents, Asia, Africa and Europe, Iraq has enjoyed an Important strategic position. The Importance of Iraq's geographical situation has been obvious since Alexander'a armies linked Europe with India twenty-two centuries ago. Through it ran not only the shortest but the easiest routes from southern Europe to the Persian Gulf and to India until the discovery of the Cape route. From the time of Babylonian empire the trade of the Far East tended to Informat ion Please Almanac 1958, planned and supervised by D an Golenpaul Associates (N ew York: The Macmillan Company, 1958), pp. 267 and 661. 128 pass through Iraq to the Levant ports on the Mediter ranean. In the nineteenth century the desire to control or to prevent others controlling this route Involved G-reat Britain, Russia, and Germany In attempts to dominate Iraq. The discovery of oil and the growth of air communications In the twentieth century have given the country a positive place in the political framework of the world. . . .2 From the standpoint of geographical character and climate Iraq cs.n be divided into various distinct regions: the Mesopotamian plain, the upland north, and the Folded Mountain Belt.3 The Mesopotamian pialn . The Mesopotamian plain begins from the sea (the Persian G-ulf) and goes up toward the northeast, following the foothills of the Persian mountains, then turns southwest across the old river estuaries at Samarra and Hit and returns parallel to and west of the Euphrates. Thus it covers most of the southern and middle areas of Iraq Including Baghdad, Diyala, Hllla, Kut, Diwaniyah, A m are., Muntaflq and Basrah Liwas.^ Within these limits the soil is stoneless alluvium. This area is liable to be flooded during the flood 2 Royal Institute of International Affairs, The Middle East (London: Oxford University Press, 1955)» p. 255- ^Ibld. , p. 25^. ^A liwa is one of fourteen governing units consti tuting Iraq. 129 season in the spring because the two rivers (Tigris and Euphrates) flow in channels which e.re somewhat above the rest of the plain. The Tigris rises in late March or early April, the rise at Baghdad being sometimes as much as twenty— three feet; the other river rises two or three weeks later than the Tigris, the maximum rise at Faluja being about fourteen feet. In September and October both rivers are at their lowest. The highest point of the plain region is one hundred and fifty feet above sea level. The two rivers unite at Q,urna—about one hundred and twenty miles from the head of the Persian G-ulf, or about sixty miles above the city of Basrah, forming a . single great channel known as the Shat al-Arab, which flows into the Persian G-ulf. However, before the two rivers join they flow through a region of lakes and marshes in Muntafiq and Am ara. liwas. In the marshland of these two liwas a distinctive group of Arabs--the marsh Arabs-- live in dwellings made of reeds and brushwood, in contrast to the rest of the country where mud huts, and in the mountains of the north, stone houses predominate. The Marsh Arabs live on rice—grown in the naturally inundated marshland—varied by fish and the produce of their mud- banks and swampy islands. Their prevailing type of livestocks are the water buffaloes which they tend from shallow-draft canoes. 130 The annual rainfall in the plain regions averages about six inches. The rainy season in the plain regions occurs usually between mid-November and mid-March, the rainiest month being February; but it is impossible to generalize, as a complete season's rainfall m e.y occur in a. period of only three weeks, the remainder of the winter being dry. Consequently, because of insufficiency of rain, agriculture in the plain regions depends almost entirely on irrigation. For this reason it is here where most irrigation projects have been carried out in the past. W here land is high and water is easily accessible pum p irrigation pre dominates; otherwise for the remote areas flow irrigation is provided by canals dependent on the Hindiya barrage on the Euphrates, the Kut barrage on the Tigris and the Diyala weir on the Diyala river. Here flow irrigation between the two main rivers is facilitated by the fact that in the Baghdad region the Euphrates is higher than the Tigris, while below Baghdad the Tigris is above Euphrates.5 In the Mesopotamian plain, the principal winter crops are barley and wheat. Sum m er crops are limited due to lack of water, but among them cotton has become, in recent years, by far the most prominent, leaving sorghum, ^International Bank for Reconstruction and Develop ment, The Economic Development of Iraq (Baltimore: The Johns Hopkins Press, 1952;, p. 125; hereafter referred to as The Economic Development of Iraq. 131 sesame, green grain, corn and millet far behind. Rice is an Important crop between Nejlf and Diwaniya on the Euphrates and around Rumaitha farther down the river. Fruit culture is important. The Diyala Valley in partic ular produces excellent citrus fruit. Dates are widely grown, both for domestic consumption and export. In the Basrah, Nasirlya, Araara triangle lie the largest date palm area in the world. Basrah, which is the second largest city in the plain area, Baghdad being first, is the only port in Iraq and handles most of the country1s foreign trade. Iraq's second largest oil field is near it.^ The Uplands north. This area is undulating gravel steppe and rich plough-land, with some stone. The string of mountains in the extreme north and northeast have a direct bearing on the climate of the uplands and the north as a whole. These mountains rise to fourteen thousand feet in height and, consequently, the rainfall is heavy from October to M ay, amounting to from twelve to thirteen inches a year.? Because this area has a comparatively long winter this amount of rain is sufficient to yield a winter crop without Irrigation. In some districts such as Kirkuk and Erbll the rainfall Is supplemented by the ^Loc. c lt. ?F. Dsmluji, Som e Aspects of Modern Iraq (London: The Diplomatic Press and Publishing Co., 1952), p. 7« 132 Kahrlz (underground water channels) system of water production. In the summer the rainfall is so low as to prevent planting. As there is no adequately organized irrigation system to meet this summer lack of rain, the farmers confine themselves mainly to the winter products®—such as wheat and barley which are the principal crops of the area. However, water from streams and springs also permit cultivation of rice and cotton in the summer. Between the two rivers in this area and the south of latitude J6° N. there is a wedge called Jezireh (Island) which is hardly susceptible to irrigation because of the elevation and structural arrangement of the land. The Jezireh is an upland plateau relieved by low ranges and depressed areas of which the major one is the W adi (valley) Tharthar. For this reason it is sparsely inhab ited by pastoral nomads although some settled farming, made speculative by irregular rainfall, is carried on.9 The liwas of Mosul, Erbil, and Kirkuk are in the uplands area. They are respectively 703. 1,250, and 1,087 feet above sea level. Kirkuk is the center of most of Iraq1s oil production and one of the largest and Q Iraqi Ministry of Interior, Iraq Today (Baghdad: Government Press, 1953). p* 77- ^The Economic Development of Iraq . loc. cit_« 133 richest oil fields in the world. Mogul, which is the second largest city in Iraq., is also an important producer of oil, hut it is principally a commercial center and an outlet for exports to Syria and Lebanon. The mountain belt. The crescent of mountain country included in the northeast frontier comprises the basins of the rivers Liyala, Lesser Zab, Greater Zab, and Khabur.-*-^ Here the people, Kurdish nomads, live an entirely different life from the Arabs of the plain and uplands. Villages are stone— built and shelved into the sides of the hills. In the valleys and on the hillsides tobacco, grain, timber, vineyards and other fruits are grown. Toba.eco Is an Important cash crop. The mountains provide a natural pasture for animals. Raising of cattle, sheep and goats by Kurdish noma.ds is one of the principal occupations. Between the Euphrates valley and the western side of Iraq is a semi-desert land populated only by nomad tribes of bedouin Arabs with their flocks and camels. The Climate Iraq1s climate generally runs to great extremes— long hot summers and short cold winters. The climate differs noticeably in the north from that In the center ^ The Middle East, op . clt. , p. 255* 134 and that in the south of Iraq. The northeastern area is mountainous, with a comparatively long winter and winter rainfall. The central area of Iraq is characterized by a moderate winter and a long, dry summer, while in the south the weather is hot and moist with a long summer and shorter seasons. That area of the south which is on the Persian Gulf is one of the hottest places in the world. Average temperatures at Mosul in the north, Baghdad in the center, Basrah in the south are respectively 43° > 49°, end 54° in January end 92°, 94°, and 92° in July and August The So11 and Water Except for the extreme western and northwestern districts and the northern pe.rt of the Jezlreh the soil in Iraq is one of the most fertile in the world. The two dominant rivers—Euphrates and Tigris—plus many other tributaries have, during the flood seasons, contributed immensely to the richness of the soil. Hence the arable and cultivable lands constitute over two-fifths (or forty-eight million acres) of the country's total area. However, in 1958 about twenty-three ^Compiled and calculated from the following: Government of Iraq, Principal Bureau of Statistics, Statistical Abstract, 1950 (Baghdad: The Government Press, 1952), pp. 7-8; and Statistical Abstract. 19 51 (Baghdad: The Government Press, 1954), p. 11. 135 million acres or approximately one-half of the cultivable area, was exploited.-1 -2 The remainder, equal by itself to more than the area of cultivated land in Egypt, is still virgin and is extremely fertile. There is in Iraq plenty of flowing water which when adequately utilized—by storage and regulation of the river waters for example— would allow for the irrigation of the whole of the cultivable area in winter and summer. II. MINERAL RESOURCES Iraq possesses considerable mineral resources of which oil is the chief asset. At present there are two major oil fields; one near Kirkuk in the north, the other near Basrah in the south. There are other minor oil fields in Khansqin on the Iranian border and in Mosul of which the latter is increasing in importance. The Kirkuk field is generally reported to have reserves of over 1,000 1 2 Office of the Cultural Attache, The Embassy of the Republic of Iraq, Agrarian Reform Law of the Republic of Iraq (Washington, D.C.: Colortone Press, 1950), p* 2. Other official figures vary. For Example, The Economic Development of Iraq, p. 8, Indicates that the amount of cultivable land is almost three times that under cultiva tion. Another source, Iraq Today. p. 88, gives the total cultivable area as being only one-fifth of the country's tota.1 area and the total area exploited In 1953 in the neighborhood of one-fifth. The differences in figures are probably due to wide variations in time and the criteria used in determining the cultlvability of land. Regardless of the differences of the figures the fact remains that a considerable area of cultivable land is unutilized. 136 million tons, while that near Basrah, which is less well explored, seems to be almost equally promising. As regards other minerals, recent surveys have indicated that Iraq may contain appreciable quantities of iron ore, copper, sulphur and sulphur compounds, gypsum, bitumen, dolmite, calcite and different varieties of marble such as crystal quartz, sandstone, and so forth. There are also surface indications of the existence of chrome, zinc and other ores in still undetermined quanti ties.- There is also coal, which previous to the large- scale production of oil was mined on a small scale, but actual reserves have yet to be confirmed. A large and potentially valuable salt deposit exists near Basrah.13 Undoubtedly, therefore, Iraq has a fairly broad range of minerals which may be worthy of exploitation. U p to the present, little use has been made of these minerals. These minerals could, apparently, form the basis of light and possibly some heavy industry in Iraq. 13 United Nations, Department of Economic and Social Affairs, Economic Development in the Mid East. 19^5 to 1 9 5 ^ (New York: 1 9 5 5 ), P- 9 9 . See also The Economic Development of Iraq, op. c lt. , pp. Ikk- and 2?8; and The Middle East, qp. pit., p. 2?^+. CHAPTER IX i PO PU LA TIO N DISTRIBUTION A N D G R O W T H U p to the present only two official census of the population in Iraq have been taken. The first, taken in 1 9^ + 7 , represents the only source now available which offers sufficient population statistics. The other, taken ten years later (1 9 5 7)» has not yet published sufficient statistical data to serve as a guide for economic analysis. Therefore, in the absence of 1957 population statistics, analysis is based mainly on that of 19^7* X . PO PU LA TIO N STATISTICS A N D G EO G R A PH IC A L DISTRIBUTION Iraq has a population of 6,538,000 (comparable to New Jersey), according to the last official census taken ! in 1957-1 This figure was raised to about seven million 2 i in a recent government publication, perhaps allowing for i the nomadic bedouins and other people which may have been | I omitted In the count or excluded from the census due to i the fact that enumeration of such people who are always on the move pose great problems. About nine hundred thousand ■ ^T he Arab Information Center, "Iraq,” The Arab W o rid , hiB, February-March-Aprll, 1958. Hereafter referred to as The Arab World. ^Office of the Cultural Attache, The Embassy of the Republic of Iraq, Agrarian Reform Law of the Republic of Iraq (Washington, D.C.: Colortone Press, 1950), p. 33» 138 people live in the municipality of Baghdad, the capital, six hundred thousand In Mosul, four hundred thousand In Basrah and three hundred and fifty thousand in Kirkuk.^ A n estimated conservative figure of three hundred and fifty thousand people (taken on the basis of the 19^? census) live in the towns of Sulalmaniya, Diwaniyah, Karbala and other towns having a population of over fifteen thousand.** Thus about 2.6 million people or over one— third of the population live in sizable urban communities. In addition, another half million people are estimated to be living in small towns, many of which are little more than large villages; in many respects they form a semirural class intermediate between the larger towns and the villages. During the past decade or two—particularly during the last World W ar— -there has been a substantial movement from the rural areas toxfard the large cities. Consequently the rural population has been dwindling. Between 19^7 and 1957 the rural population dropped from 66.2 per cent to about 50 per cent, while that of urban areas increased from 25 to about 50 per cent. Rural areas like Amara province and 3 The Arab World. loo. P it. b International Bank for Reconstruction and Develop ment, The Economic Dev el o t> m en t of Iraq (Baltimore! The Johns Hopkins Press, 1952), p. 127. ^Loc. c lt. These towns are usually the administra tive and market centers of the minor political subdivisions such as "Q.adhasH and nNahlya." 139 others where extreme adverse living conditions prevail are the principal sources of migration to the large cities. The shift and concentration of population in a few major cities reflects the fact that the standard of living in the major cities is generally higher than in the rural areas. The cities, particularly the big four (Baghdad, Mosul, Basrah end Kirkuk), have higher standards of education, health and better social services. They also provide greater and more varied employment opportunities, and recreational and entertainment facilities. II. A G E A N D SEX D ISTRIBU TIO N O F T H E PO PU LA TIO N Age Distribution Because of a relatively low life expectancy and a high birth rate, Iraq—like all underdeveloped countries at a similar stage of development—has a very young population. Table I shows that in 1955 about half of the popu lation was under the age of twenty. It also shows that a remarkable percentage of the population consists of children. For example, 18 per cent of the population was below five, and 3^ per cent below ten years of age as compared with 1^ and 26 per cent respectively for Egypt in 19^7# 11 and 20 per cent for the United States in 1950, TABLE I A G E DISTRIBUTION, 19*+7, PR ESEN TED IN PER C EN TS (Nomadic Tribes of About 250,000 are Excluded) Age Male Number Percent age Female Number Percent age Total Number Percent age 0-*+ **09,039 9.0 * + 3 0 ,0 1 0 9.** 839,l*+0 18.377 5-9 337»**33 7.*+ 399,231 8.7 736,66/+ 16.133 10-19 317,967 7.0 *+15, * + * + 8 9.1 733, * + 1 5 16.061 20-29 201,22*+ A . A 285, * + 6 8 6.3 *+86,692 10.658 30-39 250,6 5 0 5*5 301.695 6.6 552,3*1-5 12.096 /+0-/+9 2 5 2,22* + 5.5 232,262 5.1 Z + 8 Z + , * + 8 6 10.610 50-59 1*1-8,176 3.2 l*+*+,576 3.2 292,752 6. * + 1 1 60 and over 209,561 * 1 -. 6 228,980 5.0 *+38, 5*1- 1 9.60*+ Unknown l 1,071 0.0 1,079 0.0 2,150 0.0*+7 Total 2, 127,3*^5 *+6.6 2, *+38, 8 * + 0 53.*1- * * -, 566,155 99-997 or 100 SO U R C E: Compiled and Calculated from Government of Iraq, Principal Bureau of Statistics, Statistical Abstract, 1955 (Baghdad: Zahra Press, 1956), p. 16, and Doris G . Adams, "Current Population Trends in Iraq," The Middle East Journal, 10:15*1-, Spring, 1955* i* a and 8 and 16 per cent for England and. Wales In 1950-51.^ In the rural areas—because of substantial migra tion to the cities, consisting principally of young adults or adolescents—the proportion of children (under 10) and the old (over 50) is much higher than its counterpart In the cities.? One result of age distribution of this kind Is to increase the burden of dependency In the country. To lighten the burden of dependency it is not surprising to find, particularly within the agricultural population, that children are put to work at an early age, and that old people ordinarily continue to work to the full extent of their physical capacity Instead of retiring before the loss of this capacity, as is the case in the developed countries. Employment of children is Incompatible with a satisfactory standard of living, especially since It occurs only at the expense of education. Employment of high proportions of children is also regarded as a factor tending to lower per capita output since a child*s produc tivity and contribution to the Income of the family is much less than that of an adult worker. The undesirable effect of age distribution in Iraq £ L Doris G -. Adams, "Current Population Trends In Iraq," The Middle East Journal, 10!15^* Spring, 1955. ^The Economic Development of Iraq, loC. cl/t. li+2 on output and standard of living is not a serious obstacle which cannot be surpassed. Improved health, sanitary and educational conditions are expected to reduce the mortality rate and—at least In the long run—birth rate. The average rate of life expectancy Is also expected to rise. All this, plus Increased capital Investment in the different sectors of the economy, is expected to raise output per person in Iraq. In the rural or agricultural sections, where the effects of age distribution are more adverse, the pros pects appear to be very good. O n September 30, 1958, the Government of Iraq announced the birth of the Agrarian Reform Law ending feudalism in Iraq, and promising the distribution of land among small landholders w ho will receive help and assistance from the government. The Law requires that agricultural cooperative societies be established by farmers w ho have taken over seized land in each area. The Law further grants the agricultural workers the right to organize and form unions.® Such arrangements are expected to brighten the prospect of the future among the farm population, and to reduce effectively migration of adult workers from rural areas to the cities, thereby improving the prospect of The Agrarian Reform Law, op. cit., pp. 5-31* productivity In agriculture. In addition, the new Irriga tion schemes—many of which are already completed—and the possibility of introducing machinery and more modern and efficient methods of agricultural production—all indicate that age distribution of the population in Iraq should not be a significant problem. Distribution of the Population by Sex According to the census of 19^7* 5 3 pen cent of the total population were women. The deficiency of males, who represented only A6.6 per cent, has no adequate explanation other than their omission for fear of conscrip tion. The people's memory of the Ottoman period, when the government counted population only for the purposes of taxation and conscription had, apparently, showed Its affect on the census taken In 19^7* A representative of the central government is s till regarded with fear or suspicion in many parts of the country; and when he asks the names and ages of young men, there Is no doubt in the minds of those being questioned as to his motives.9 Sex composition of the population is particularly significant to Iraq since the proportion of wom en engaged in economic activity is very small and considerably below that for men. In 19^7 only A per cent of the females of 9 Adams, op., c lt. , p. 1 5 2. Perhaps, therefore, if an accurate census is taken and the bedouin are counted, the proportion of male and female population may be even. 1*j4 Iraq reported employment, while 58 per cent of the male population were employed. It is apparent, therefore, that Iraq*s labor force could be substantially increased once the traditional role of wom en as housewives, mothers and non— working daughters is changed and the status of wom en is Improved. The opinion Is often voiced that the Moslem religion, which clearly makes the Moslem countries a man*s world, is the main cause of the low proportion of women employed. For example, M ohammed, the prophet, clearly said In the Koran: "M en are In charge of women, because Allah hath made the one of them to excel the other."^ * 0 Throughout Islam, it Is said, wom en are s till treated as inferior beings. For example, wom en should, wear veils, for no decent woman is seen In public. M an alone makes the decisions in the house; he does not talk things over with his wife or daughter; he rules his wife, mother, daughters, and sisters. Marriage, it is further said, is a partnership. The m an expects the wom en to do all the work around the house. Anybody who maintains that the low proportion of wom en engaged in economic activity in Iraq Is the product of Islam religion is, In the opinion of this writer, in ^Nancy Edison Dabbagh> "I Married a Moslem," Good Housekeeping. November, 1958, p. IMk Ui-5 effect Baying the aame thing about other religions— including Christian, Hindu, Buddhism, and so forth—since economic activity of wom en is also proportionately low in Latin America, India, China and other non-Moslem under developed countries. Islam is not the only religion which declares the superiority of men over women. The Christian Bible (in ! the New Testament, mostly from St. Paul) says: Wives, submit yourself unto your ow n husbands, as unto the Lord. For the husband is the head of the wife, even as Christ is the head of the church. . . . Neither was the man created for the women; but the women for the man. . . . I would have you know that . . . the head of the woman Is the man. . . . Like wise, ye wives, be in subjection to your ow n husbands.11 This is very similar to what M ohammed said. In practice, however, and especially in America, few people take the Bible that seriously. In Islam and other non- Moslem oriental countries the teaching of M oham m ed and St. Paul are s till largely practiced. However, In many Moslem countries the position of women is definitely changing. In Ira.q the veill^ is | rapidly vanishing and the Idea that no decent woman Is i I seen in public is fading fast. The harem is gone. This I 11 Ibid. , p* 1 * 4 -5 - | Incidentally, veiling was not a Moslem invention, and M oham m ed never dreamed of i t . It was introduced from the Byzantine Empire or from Persia. Ibid. , p. 139- 11*6 reporter does not think there is a single harem left any where in Iraq.-1 ^ Polygamy has practically disappeared although the Koran permits a m an to have up to four wives at a given time. It is rare, in Iraq, for a m an to have more than one wife. In recent times great strides have been made toward greater female economic activity. In the sphere of education, for example, higher studies on a co-educational basis are made available to girl students. W om en are also assuming a more progressive part in public and private ; services as well. They are becoming, in great numbers, | doctors, lawyers, teachers, engineers, accountants, ! clerks, sales clerks, nurses, and the like. Several women's organizations are now active in public and intel lectual life, as well as in social services. Thus one can conclude that the seeds of emancipation of w om en from old-fashioned restraints have now been planted and it will not be too long before w om en in Iraq can assume an equally active role in the economic life. ; Consequently one can safely conclude that once the tradi tional role of wom en and the restraints are completely removed the Iraqi labor force will substantially be i increased. j | _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ j 13 Except for a very few feudal princes, mostly in i Saudi Ara.bia and Y em en and Kuwait, the harem 1 b practically! gone from the Moslem countries. III. PO PU LA TIO N G R O W T H Until 19k7 there -were no reliable statistics to [ indicate the historical trend of population growth. The few periodical estimates made before that year show that population Increased from 2,82k,000 in 1930 to 3,560,000 In 1935 and to 3 >995*000 In 19k3 The rate of population |growth for the thirteen years (from 1930 to 19k3) Is, i |according to these figures about 3 per cent per annum. ■ Although this rate of growth Is based upon estimated I figures which may be regarded as inaccurate and unreliable, |the rapid increase of population shown in the two official } |census ta&en In 19^7 and 1957 indicates that the rate of jgrowth is amazingly higher than 3 per cent. In the last Idecade the population Increased from approximately |k,800,000 In 19k7 to 7,000,000 in 1957. This represents an annual Increase of over A per cent. Even if it is assumed that the rapid Increase In the last decade Is exaggerated due to the fact that part of the Increase represents those Iw ho were omitted or not Included in the first official census of 19^7 due to the many difficulties and inexper ience encountered then, it is obvious that the rate of population growth is very high. I k Royal Institute of International Affaire, The Middle East (London: Oxford University Press, 1955), p. 256. 1^8 Allowing for the margin of error in talcing the census, this writer assumes that population growth in Iraq has been in the area of 3 per cent per annum—indeed a very high rate of growth. That this trend is expected to continue for at least several generations to come may be deduced from the expected falling mortality of Iraq's population when combined with its steadily high fertility . Trends in Mortality Under the present poor health conditions, mortality in Iraq stands at a relatively high level as compared with the more developed countries. The crude death rate is believed by medical authorities to be about thirty per thousand population, while that in European and North American countries ranges from eight to twelve per thousand. Infant mortality in Iraq is even higher. It Is believed that infant death rate ranges from three hundred to three hundred and fifty per thousand. In the advanced countries this rate is currently under fifty per thousand.^5 This high rate of mortality in Iraq is really underestimated, due to the fact that a large number of deaths talce place without the presence of a medical authority who can be depended upon to report the death. Voluntary reporting of deaths by individuals is also on a 15 Adams, o p . £ i £ . , p . 159* 1^9 i I small scale. j It Is very obvious that Infant mortality at a high rate Is the factor responsible for maintaining the rate of general mortality at a high level. But infant mortality can be immediately reduced by measures such as education, sanitary Improvements, and Increasing availability of medical facilities. Thus if full advantage is taken of i ; the ample opportunity to improve health and educational I conditions in the future, and when incomes and standards j i of living rise as economic development proceeds the general mortality rate could be expected to fall far below | the thirty per thousand population. ! Trends In. Fertil i t y Ail evidence points toward the conclusion that : fertility in Iraq is very high—close to the biological maximum. The reproduction rate in Iraq Is even higher than other countries of relatively high fertility such as Egypt, Japan and Formosa. In Egypt, for example, the | crude birth rate in 19^7 was forty-four while its counter part In Iraq ranged from fifty to fifty-five per thousand population.-^ Although education for women, material desires and rationalism are spreading and helping to create an ^ Ibld. . pp. 161-162. 150 | environment conducive to family limitation (or lower fertility) In Iraq, this trend Is limited to the larger cities and its influences are confined to the educated upper middle and upper classes In these cities. To the majority of the people having a large family is a source of prestige as well as a major form of social security for i parents' old age. Thus girls marry at an early age (soon I after puberty) and social custom allows men of any age to take a young wife and encourage high fertility. | Until the factors which have, caused the fertility rate to fall in the Western world—themselves causally related to economic development—begin to operate in Iraq, j it can be said with certainty that the birth rate will j j remain at or near its present high level during the coming several generations.17 i : The Implications of High Rate of Population G-rowth If the crude death rate is assumed to be less than : thirty per thousand (or twenty to twenty-five) and the I crude birth rate fifty to fifty-five per thousand, the f i crude rate of natural increase would be 3 per cent per annum or somewhere near this figure. This demographic growth is of special importance to Iraq for the future of economic development of the country will be greatly 17Ibid.. pp. 162-163- 151 influenced by the relation between the rates of growth of I productivity and population. If the rate of population groxvfch outruns the increase in productivity, a shrinking per capita income, lower standard of living and a type of contracting economy | will be the inevitable result. If productivity increases ; by a rate just enough to keep pace and provide for i population growth, per capita income will tend to remain ! at about a constant level and the standards of living will | not improve. Since it is believed that for several generations to come it would be difficult if not impossible to halt j | the rapid rate of population growth in Iraq, the only way ; in which living standard and per capita income can be raised for the expanding population is to increase produc tion at a faster rate than population. At a 3 per cent increase per annum Iraq will have, within twenty years, approximately five million additional people to feed, shelter, clothe, educate, and so forth. This means that I | Iraq is faced with an overwhelming need to accelerate its | economic development. This will require heavy new capital Investment—not only of the demographic type which is neceseary for a growing population to maintain a constant living standard, but also the economic type of investment which tends to raise this living standard. The amount of capital investment Iraq needs is discussed next. CHAPTER X CAPITAL REQUIREMENTS FOR ECONOMIC DEVELOPMENT OF IRAQ I. DIFFICULTIES OF ASSESSING CAPITAL REQUIREMENTS It Is difficult to assess even approximately the | amount of capital required by Iraq— or by any under developed country— for programs of economic development. One arbitrary method is to calculate existing j capital per capita or per worker in more highly developed | ! countries and to apply this ratio to the populations of j ! underdeveloped countries, considering their present i I 1 | capital to be almost negllglble.A ! But, due to uncertainty and inadequacy of the rele- i vant statistics and because of differences: In definition, i I estimates of existing capital per worker In underdeveloped as well as In advanced countries vary widely. For example, The value of a road or a tunnel on which amortiza tion charges have been paid is not Included in such calculations of capital as are obtained from conventional balance sheets. Yet an estimate of capital needed for Investment in under-developed country without these permanent installations must Include the cost of providing them. Frequently also, the estimates given refer only to Industry or heavy Industry, where the equipment per worker is particu larly expensive. 2 ^United Nations, The Determinants and Consequences of Population Trends (N ew York: 1953)» p* 27 7. 2k>_c. qlt_- 153 It Is estimated that in order to raise the capital per worker in Asia to at least one thousand to two thousand dollars, present capital being negligible, the total needs will be In the range of 425»000 to 850,000 million dollars.^ But this calculation is without any : allowance for the possible Increase In population, and capital needs should not be calculated In static terms. I However, even if population is considered and forecasted the total amount of necessary investment [ ; required to attain, after a number of years, a particular stage of development with a certain amount of capital per i | head of population cannot be easily deduced. "Development | Itself will require certain capital which will be used for Intermediary operations; hence the calculation should be made yearly or at even shorter intervals of time. Accordingly, It is difficult to predict with certainty how much capital Investment Iraq needs in order to raise per capita income to a certain level after a long period in the future. ; | Estimates of Capital Requirements Various studies have been made which are concerned with capital Investment needs for the development of 3 Loc. c lt. ! ^Ibld., p. 278. 1 5 ^ I underdeveloped countries and their magnitude in relation i to the rate of population growth. Singer, for example, in i | a study of the mechanics of economic development, has illustrated that in underdeveloped countries in which 70 ; per cent of the population is engaged in agriculture and ! in which the rate of population growth is assumed to be | 1.25 per cent annually the total cost of the development program required—to rad.se the national income by *K 3 per | cent and increase the per capita income by 3 per cent—is 22 per cent of the national income.5 Spengler has, in turn, found tha.t in order to raise ! per capita Income 3*2 per cent annually, so that it would r I rise from one hundred dollars to two hundred and twenty I ; dollars by the end of twenty-five years, the total invest- | ment needed for Implementing the plan of economic I | development will absorb about 13*8 per cent of the annual national income if the population increases 1 per cent annually, and 19-5 per cent investment rate if population / • iIncreases 2 per cent annually.0 H . W . Singer, “The Mechanics of Economic Develop ment: A Quantitative Model Approach," The Indian Economic Review (India.), 1:1— 18, August, 1952, cited by The Pet erminants ajid Consequences of Population Trends . loc. ^Joseph J. Spengler, "Economic Factors in the Development of Densely Populated Areas," Proceedlngs of. the American Philosoohical Society, 95:30-31, February, 1951. 155 Still another study concerned with the economic ! development of the Arab countries of the Middle East estimates that new capital investment must reach about 20 per cent of the total national income on an annual basis. The assumption here is that the rate of population growth : is 2 per cent per year.? Naturally, in the case of Iraq for which the rate of population growth was estimated to be about 3 per cent, | the rate of capital investment should be of a greater | magnitude. Can Iraq finance a rate of investment of over ! ! 20 per cent of its national Income on an annual basis? i I j ! II. FINANCING ECONOMIC DEVELOPMENT IN IRAQ I j j The financial resources required for implementing I the plans for economic development of Iraq are expected to : come partly from private local savings, partly from foreign investors, but largely from oil revenues. The oil revenues accruing to Iraq, under the existing profit- : sharing agreement, and on the basis of a thirty million ! ! ton production will amount to a little over I.D. 70 (or $196) millions a year.® ^Norman Burns, "Planning Economic Development in the Arab World," Lands East: The Near and Middle East Magazine. 3:9-10, November, 1958. ®Lord Salter, The Development on f Iraq: A Plan of J Action (Baghdad: The Development Board, 1955), p* 13- The j thirty million ton production is derived from the figures ! 156 In the absence of any major interruption and with prospects of increased oil production and export through additional pipelines commencing in 1957» oil revenues are more likely to increase than diminish. This increase in revenue was foreseen by the development Board which has raised its estimated oil income (70 per cent of total oil ■revenues) for the six year plan ending in March, 1961, from il.D. 385 to I.D. 5 0 0 .9 Knowing that its proved oil reserves were estimated in 1952 at over 10 per cent of the iworld reserves, Irad need not fear the exhaustion of |supplies at least in the present century.-*-® | It is with these facts in mind that it is concluded i j ithat Iraq would not suffer from a serious shortage of development capital .- * • - * • for crude petroleum output for recent years which was as follows: 28.2 millions in 1953, 29-8 in 195^, 31.7 in 1955 and 29-3 in 1956. These figures are take n from: Inter national Monetary Fund, Background Material on Iraq for 1957 Consultation (Washington, D.C.: 1957), p. 3 2. Also International Bank for Reconstruction and Development, The Economic Development of Iraq (Baltimore: The Johns Hopkins Press, 1952), p. 75, reported that the oil companies have jassured the government an Increase in the annual rate of production to thirty million tons by the end of 1955. 9 Background Material on Iraq for 1957 Consultation. op. c lt. . pp. 8-9. ■*-® Stephen H. Longrigg, Oil in the Middle East. cited by Salter, op., c lt. . p. 1A. op. clt. , p. 11; also, The United Nations, Economic Development in the Mid-dle East. 1956-7. However, It will not be right to conclude that additional private The Implications of the Dependence on Oil Revenues The oil revenue occupies a key position in the national economy. Its importance to Iraq stands out clearly when related to national income and other economic indicators of the status of the national economy. Tahle II shows that the contrihutIon of the oil sector to the national product has, in 1956, accounted for 27 per cent as compared to Zh per cent for agriculture. Tables III, IV and V indicate respectively that it was the revenues from oil which enabled the budget to be balanced, the | balance of payments to be positive, and the development | program to be Initiated. i The dependence of Iraq*s national economy on Income I from oil is therefore great. Consequently, any adverse change In the output or profitability of oil would spell disaster. It would bring general impoverishment and unem ployment, social distress and discontent and political instability. It is essential therefore—in formulating programs for economic development—not to ignore this dangerous possibility. After all, oil is an exhaustible j asset. The exhaustion of the reserves may be remote but capital would not be helpful to Iraq, since oil revenues would be, at least for some time to come, tied up In providing more and better social overhead facilities, hospitals, public schools, Banitary and housing projects, irrigation and drainage schemes, and many other public services. 158 TABLE II IR A Q * S N A TIO N A L IN C O M E ESTIM A TES FO R 1956 PR ESEN TED IN PER C EN TS I.D. Millions Per cent National Income Salaries and wages 65.2 22 Earnings in kind, non monetized sectors 38.2 13 Rente 21.b 7 Profits and interest 98.8 3b Net oil revenue 68.8 2b Net national income 2 9 2. b 100 National Product (value added) Agriculture 7 0 .0 2b Manufacture 33.7 12 Oil industry 78.2 27 Housing and other buildings 18.9 7 Wholesale and retail trade 0 • H 11 Transport 1 1 .5 b Services L9.1 17 Total 292. L 100 SO U R C E: Background Material on Iraq for 1957 Consulta tion, p. b, citing K. G. Fenelon, statistical expert to the Government of Iraq. TABLE III IRAQ,1 S BUDGETARY REVENUE AND EXPENDITURES (In Millions of Iraqi Dinars) 1953/54 Actuals 195V55 1955/56 Estimate Revised Original 1956/57 1956/57 Expenditures DefBnse and police 19.66 20.14 20.03 27.19 23.62 Economic schemes and local administration 8.63 9.85 7.70 16.51 12.49 Ministry of Interior 1.85 2.06 2.79 2.84 2.72 Ministry of Finance 5.44 5.35 3.53 4.13 3.97 Ministry of Education 2.69 3.26 3.^3 5.96 5.46 Health and Social Welfare 3.71 4.69 4.72 6.35 5.98 Ministry of Commerce and works 3.02 2.48 2.35 3.13 2.97 Agriculture 1.53 2.14 1.73 2.68 2.57 Other expenditures 3.62 3.83 4.59 5.72 5.17 Total 50.15 53.80 50.87 74.51 66.03 159 TABLE III (CONTINUED) 1953/54 Actuals 1954/55 1955/56 Estimate Revised Original 1956/57 1956/57 Revenuq Oil revenue 15.04 17.16 25.32 22.84 22.84 Customs and excise 18.78 21.72 25.13 24.00 24.00 Income tax 2.20 2.25 2.18 2.00 2.00 Property tax and stamp duties 1.19 1.38 1.55 1.36 1.36 Agriculture 3.56 3.45 2.67 3.47 3.47 Government agencies income 8.40 3.17 3.53 4.66 4.66 Post 8nd Telegraph 1.68 1.85 2.02 2.03 2.03 Other 1.87 1.20 1.00 1.32 1.32 Total 47.72 52.18 63.40 61.68 61.68 Balance -2.43 -1.62 12.53 -12.83 -4.35 SOURCE: Background Material on Iraq for 1957 Consultation, op. cit., p. 26, based on information from the Iraqi Ministry of Finance. Note that the deficit of 12.83 in 1956/5? is due mainly to a decline in oil revenues from the year before and also due to increased defense, police and economic schemes expenditures. The decline in oil was caused by the Suez crisis in 1956. 091 161 T A B L E IV B A L A N C E O F P A Y M E N T S S U M M A R Y (In Millions of Iraqi Dinars) 1953 195^ 1955 1956 Oil revenue (net) 55-43 66.74 94.38 79.79 Exports 23-04 20.68 16.18 14.94 Import s -56.91 -68.70 -90.88 -104.70 Other (net) 0.23 4.63 0.83 20.44 Balance « increase in foreign assets and gold 21.79 23.35 20.51 10.47 SO U R C E: Ibid, . p. 19. 162 TABLE V DEVELOPMENT BOARD ACTUAL REVENUE AND EXPENDITURES (In Millions of Iraqi Dinars) 195V55 1955/56 1956/57 Revenue Oil 40.04 59.08 48.19 Other 0.69 1.6? 2.58 Total 40.73 60.75 50.77 Expenditures Direct 20.87 23.90 33.00 Indirect via Ministries ------- 9.52 12.00 Loans disbursed 0.85 5.56 5.30 Total 21.72 38.98 50.30 Balance (surplus) 19.01 21.77 0.47 SO U R C E: Ibid. , p. 25* based on Information from the Ministry of Finance and the Central Bank of Iraq. 1 6 3 with substantial and increasing production it is inevi table. And a serious depression through the prospect of exhaustion would precede actual exhaustion by a considerable period. There are, moreover, nearer dangers; e.g. a possible world surplus of oil (and therefore fall of prices and output) through the development of other sources of heat and power; or a political disturbance of the present system of production and distribution of which Iran has given an example and w a r n in g .12 And in case of war oil production and oil revenues are vulnerable. This problem was brought into focus in the last quarter of 1956 when, as a result of the Suez I incident, oil production and exports declined sharply and, | for a time, threatened the disruption of Iraq's develop ment program, the budgetary position and Import policy.^-3 With these considerations in mind, Iraq should assign most of the revenues from oil for development programs In order to raise the level of the economy and per capita incomes to a satisfactory level, and to estab lish a sound foundation for a growing economy within a relatively short period. This will require heavy capital investment, not only in the agricultural and industrial 12Salter, loc. c lt. 1^ ''Background Material on Irao for 1967 Consultation. o p . c lt., p. Jk Iraq was able to surmount these difficul ties because of their short-run nature and the availability of large foreign exchange reserves. 16^ sectors but also In social overhead capital and welfare projects, for example, schools, hospitals, housing, sanitary installations, roads, railways, bridges, irriga tion and flood control projects, drainage of swamps, public utilities, power facilities, and so forth. Since it is the responsibility of the state, particularly in underdeveloped countries, to undertake the I establishment of such overhead capital and welfare projects and services, most of the oil revenues would be absorbed i | by investments in this kind of projects. G-rowth in the I industrial sector and agricultural production and proces- i sing will have to depend upon private Investment—in line iwith the principles of a private enterprise economy. A i i j substantial amount of private capital is available. But ; the rapid growth of the population (3 per cent per annum) and the always present threat of decline or loss of the oil revenues necessitate an Investment rate which seems unlikely to be attained from the private sector short of foreign assistance. ; In conclusion, even with its oil income, Iraq can benefit from larger amounts of capital investments i provided by foreign investors who will assist Iraq to accelerate economic development more rapidly than the population increase. Foreign investment can also help to speed up the establishment of a sound foundation for ±65 economic development which will provide a basis for continued economic growth even when income from oil is completely lost. ! CHAPTER XI | PR O D U C T lU N A N D D E V E L O P M E N T IN A G R IC U L T U R E ! A N D IN D U ST R Y I. A G R IC U L T U R E j | Iraq Is primarily an agricultural country. Figures i ! on the national Income given In Table II, page 158.» show i I the Important role of agriculture In Iraq's economy. Next i | to oil, agricultural production Is the major component of i the national income. Agriculture accounts for 2k per cent i of the country's production and over 60 per cent of the population Is engaged in agriculture. Agricultural output has been on the Increase in ! recent years, particularly since World W ar II. During the | war allied troops stationed in Iraq spent large sums on i local purchases. Between 19^1 and 19kk these expenditures amounted to 3fr6k million. There was at the same time a similar increase in national Income, expressed in monetary terms, and prices rose considerably. The wholesale price index In 19^3 reached a peak of 590 (December 1938 to August 1939 * * 100) and stood at 503 in 19k5^- ■^Ministry of Economics, Statistical Abstract, 19S O (Baghdad: Government Press, 1952), p. 310, and United Nations, Department of Economics and Social Affairs, Economic Developments in the Middle East, 19k5-195k (N ew York: United Nations, 1955)7 P* 92. O ne writer reported 167 These expenditures by the troops and the addition ; to national Income and the rise In prices—ell stimulated agriculture. The area under cultivation was considerably extended by irrigation and greater use of farm machinery, and total output increased. Table VI shows that the increase in area and output achieved during World W ar II was generally maintained during the post-war period. In I recent years there seems to have been a further extension in acreage, owing to increased irrigation and greater : mechanization.^ The 1952— 53 agricultural and livestock census, the | first of its kind, puts the total agricultural holdings of j Iraq at 6,38^,000 hectares, of which 2 ,7 5 2 ,0 0 0 hectares are rain fed, 2,912,000 irrigated (of this total 1,685,000 hectares are Irrigated by flow, 1,120,000 hectares by pumps and 107,000 by water wheels and other means) and 6*14,000 hectares uncultivable. Of the total, the cropped area represented only hO per cent or 2,527,000 hectares while that which was left fallow represented 4 1 + per cent that the wholesale price index In 1943 reached as high as 690. See F. H. Gamble, Economic and Commercial Conditions j in Iraq (London: Hie Majesty's Stationary Office, 1949), i P. 1. ! i p ! ^The number of pumps used in irrigation rose from j 2,757 with a total horsepower of 91,332 in 1945 to 4,784 j with a horsepower of 183,326 in 1955; Ministry of j Economics, Statistical Abstract. 193*? (Baghdad: Government I Press, 1956J,p. 90; and Economic Development in the | ! Middle East. 1945 to 1954. on. c it.. p. 93. T A B L E VI A G R IC U L T U R A L A R E A A N D P R O D U C T IO N O F PR IN C IPA L C R O P S (1934-1938, 1945, 1948 end 1950 to 1956) Crop 1934-38 1945 1948 1950 1951 1952 1953 1954 1955 1956 Area (thousands of hectares) Wheat 661 777 963 950 863 882 1,046 — — — Barley 743 826 974 1,000 218 927 700 1,211 - — — Rice 152 194 295 189 210 129 — — - — Cotton 16 — — 32 44 40 24 — — — Production (thousands of tons) Wheat 478 400 301 545 487 480 762 1,160 4-53 776 Barley 575 650 570 851 839 800 1,111 163 1,239 757 1,016 Rice 205 245 350 242 190 250 180 83 111 Cotton 2 1 2 8 6 3 3 3 7 9 Dates 260 301 (1947) 305 350 370 371 365 421 300 SOURCE: Economic Developments In the Middle East, 1945 to 1954, Ibid.. p. 94; Inter national Monetary Fund, Background Material on Iraq for 1957 Consultation (Washington, D.C.: 1957)» P« 5; Government of Iraq, Principal Bureau of Statistics, Statistical Abstract. 1955 (Baghdad: Zahra Press, 1956), pp. 73 and 76. 168 169 or 2,795*000 hectares; 128,000 hectares, or 2 per cent was under fruit trees and vines; 231*000 hectares, or 4 per cent consisted of pastures; and *+2,000 hectares, or 1 per cent consisted of woodland.^ The major crops and the area planted to each was as follows: barley 1,211,000 hectares; wheat 1,0*4-6,000; rice 129,000; maize 54,000; cotton 2*+,000; millet 22,000; sesame 22,000; tobacco 10,000; vegetables 45,000; others 38,000; total 2,601,000 hectares. The census also showed that Iraq owns close to ten million livestock. The census put livestock on agricultural holdings as follows: sheep 6,000,000; goats 1,618,000; cattle 712,000; buffaloes 47,000; horses 137**400; camels 38,000; donkeys 399*000; and mules 57,000.^ Agricultural experiments have proved that Iraq is capable of producing cotton and grain of good quality. Iraqi bs.rley and dates are of superior quality. Economic Developments in thg. Middle East, op. clt. , p. 94; and The Arab Information Center, "Iraq," The Arab- World . 4:12, February-March-April, 1958. ^Statistical Abstract, 1955. op. clt., p. 75; also Economic Developments in the Middle East, 1945 to. 1954, loc. clt.: and The Arab World, loc. cit. The raising of livestock is an important primary industry in Iraq. Sheep and goats predominate because they thrive despite poor grazing and feeding. Livestock raising is an adjunct of agriculture rather than an integral part of it and most of it is done by nomads who are not considered farmers. Livestock and livestock products including wool, hides, and skins, and casings account for a sizeable percentage of the total value of Iraq’s exports, exclusive of oil. 170 As a result of varying clima.tic conditions, floods | and attacks by locusts and other Insect pests agricultural ; yields have fluctuated and total output has therefore varied considerably from year to year. The sharp drop in 1955* for example, was due to large-scale crop failures : due to climatic conditions, and output in 1952 and the years preceding it was hampered by damages caused by ; locust attacks. Floods have incurred considerable damage year after year. The experience of recent years, however, has shown ] j that with the cooperation of other Middle Eastern and ! | foreign governments, damages caused by locust attacks can i i be reduced. Similarly, with the completion of several ; flood control schemes in 1956, such as the W adi Tharthar and Habbaniyah projects, the danger of floods should be greatly reduced. The year 1956, which was a normal year (unaffected by flood, locust or weather damage), shows a decline in Iraq's main agricultural products, namely, barley, wheat, I rice and dates. In this year there was a rising internal demand, yet production not only did not show an increase i I over similar past years but also was well below that of j l 195^* The failure of agricultural production to increase i I in the face of rising internal demand can be attributed to ! i a migration of farm labor away from land to more lucrative j 1 occupations in the cities. The decline in labor was not 171 i compensated for by adequate mechanization and the adoption I of better methods. The following quotation supports the above reasoning: In the southern part of Iraq, with few exceptions, land holdings are very large and the supply of labor has until recently been relatively cheap, yielding the proprietors what they consider an adequate absolute | profit not conducive to the adoption of efficient I farming methods to increase production. Large labor migration out of this area to the more lucrative urban I occupations has adversely affected production. In the | north the land holdings are smaller, but some mechani zation has been introduced. Production in that area, I however, depends to a great extent on rainfall and is I unpredictable. In the central part of Iraq agricul- | tural production has remained stationary.- > j The loss of labor which is shifting away from agriculture to other occupations, however, should not be I viewed with alarm if necessary steps are taken to compen- i sate for the loss. There is noxf on the farm a considerable I disguised unemployment or underemployment. Should human j resources be utilized fully and effeciently a certain loss of farm labor should not effect agricultural development. Furthermore, the introduction of mechanization and better methods, the provision of adequate agricultural credit I Institutions end appropriate system of land tenure should provide a high and rising output In the future. Ma.lor Obstacles to Higher Agricultural Product ivity in ^International Monetary Fund, Background Material on Iraq for 1957 Consultatlon (Washington, D. C.; 1957), p. 5- Iraq Agricultural productivity and yields in Iraq are generally low. Several factors are responsible for this low productivity. Chief among the factors which are directly affecting productivity are the poor drainage in the irrigation zone, the failure to maintain soil fertil ity, lack of mechanization and the use of primitive methods and tools of production and lack of agricultural finance to meet large-scale credit needs. Observers readily note that the major obstacles to agricultural development have been those deep-rooted institutional factors which have been affecting the country's agricultural capacity indirectly. A m ong these are the land tenure system end the unequal distribution of land. Land tenure system. The ownership of cultivated land has been in the hands of a few proprietors w ho entrust the actual cultivation to sharecroppers. These sharecroppers barely eke out an existence since the portion I of land allotted to them is small and their share at best i ; I i is no better than one-fifth of the produce of the land j they cultivate. Furthermore, under this sharecropper system the land which a sharecropper cultivates may change j from year to year. Consequently the sharecropper virtually has no 173 Incentive to improve production. The sharecropping system ,also discourages the cultivation of animal fodder crop since the apportionment of shares between landlords and tenants does not lend Itself readily to such crops. For their part, the land proprietors themselves show I little interest in Improving agriculture since they enjoy a : relatively large share of the produce without the adoption ; of efficient farming methods and with the expenditure of little or no capital. | Inequitable distribution of land. Another major i obstacle to agricultural development is the inequitable I I | distribution of land. The agricultural census shows that: ; There were only 125*00 0 holdings, with an average area of 51 hectares per holding. Of these, 2^,000 holdings were under 1 hectare, 26,000 between 1 s.nd 5 hectares, 16,000 between 5 and 10 hectares and 19,000 between 10 and 20 hectares. Thus, 85*000 holders, or 68 per cent of the total, owned about 8 per cent of the total area. At the other extreme, some 33,000 holders, with over 100 hectares each, owned some 85 per cent of the total area.6 These census data show that the majority of the agricul tural population are landless and that landholdings are largely in the hands of few proprietors. II. INDUSTRY The oil industry. The petroleum Industry is by far Economic Development in the Middle East. 19A5 to 195 k > op.* s i t - » D- 95- the largest in the country. it is managed by foreign companies which operate as concessionaires. The oil industry has witnessed considerable develpment in the past fifteen years. As a result of exploration activities new oil fields have been discovered and developed. Several additional pipelines as well as other installation and oil handling facilities have been constructed, thereby Increasing substantially the crude petroleum export capacity of Iraq. As a result of the foregoing developments during the last decade and a half, as well as increasing world demand for petroleum, production of crude oil—which had declined from A.7 million tons in 19A6 and 19^7 to 3.4 million tons in 19A8 because of the Palestine conflict and the shutdown of the Haifa—started to rise sharply to 6.5 million tons in 1950, 18.9 million in 1952,? 2 9 .8 million in 195A, 31.7 million tons in 1955» and had been expected to reach 3A million tons in 1956.® However, actual output in 1956 was 31.5 million tons,9 the decrease resulting from the interruption of oil flow via pipelines to the E Mediterranean In November 1956, caused by the Suez crises. i j 7Ibid. . p. 96. ^Background Material on Iraq for 1957 Consultation. on- gJJtL . » P* 7 • ! ! 9 i I The Arab World, loc. clt. In 1955 a new oil refinery was constructed near Baghdad with a refining capacity of one million tons of oil a year. This refinery is designed to meet internal requirements for oil and its by-products. Other industries. Apart from the oil operations, industry plays a minor role in Iraq1s economy, and is mainly directed to processing agricultural products and manufa.cturlng building materials and consumer goods for the local market. Modern industry Is of recent introduc tion and Is so far little developed. Many Industries are ) still close to the handicraft stage and still use methods which are obsolete in more developed countries. The traditional crafts employ less than half of the manpower and s till account for a sizable part of total output. The most important industries are cotton ginning, cotton and wool spinning and weaving, rayon weaving, dyeing, milling, vegetable oil extraction and soap manufacture, brewing and distilling, date packing, tanning, and the manufacture of date syrup, cigarettes, footwear, cement, and bricks, for all of which there are modern as well as more primitive plants. There are also works for manufacturing light steel products and aluminum ware. There are also small enterprises which include bakeries, confectionerles, and establishments for food- { processing, ice manufacture, carpentry, processing local 176 marble, battery-charging and repairs to electrical apparatus, motor vehicles, and agricultural equipment.10 lnvestment in industry. W o comprehensive figures on the amount of actual capital investment and output from industry are available. However, available statistics do show that some progress is being made toward industriali zation. Figures show that after 19^2 industrial i I investment began to increase, the total amount from 19^+ 3 5 to 19^8 being I.D. 3,089,00c.11 Between 19^+8-49 and 1951-52, the capital invested | in the principal industries, other than petroleum, Increased from s.bout I.D. 3.12 million to I.D. i million, the value of production from l.L million to I.D. 3.6 million, and the number employed from 1,6^9 to 3,837.12 Since then, there has been a relatively substantial development. The first and only industrial census which was completed in 1955 (Table VII) shows that—aside fhom the oil industry which employed some thirteen thousand ^°Royal Institute of International Affairs, The j Middle East (London: Oxford University Press, 1955)> p. 283- I | 11 Industrial Bank, First Annual Report (Baghdad.: ! Government Press, 19^-8), p. 3^- ! 12Economlc Development in the Middle East, 19^5 to I sua* a lt-» p. 99. 177 persons— -there were In Iraq. 90,291 persons employed In 22,**60 Industrial establishments. Of these over fifteen thousand were employed in the textile and leather indus tries; about fifteen thousand in the building materials and construction Industry, © nd about four thousand in the i tobacco industry. These figures tend, however, to ! exaggerate the size of manufacturing industry proper in ! Iraq. Apart from the oil industry production Is generally j carried out by small firms where the capital and labor j | employed is scanty and the productivity correspondingly i very low. i I I i Type. size and distribution of industry. Som e Idea ! |of the type, size and distribution of Industry is given in I Tables V I I , V I I I , and IX. The Industrial census (Table i V I I ) does not show the significant fact that less then half i of the manpower employed is engaged In handicraft proper, and that only a few thousands can, in fact, be said to work in plants of modern type. Furthermore, as shown in Table VIII, 22,166 out of 22»**60 industrial establishments In Iraq employed less than I twenty or more persons each, and only 2 9 * 1 ' employed twenty j i or more persons each. The average size of establishment was four persons. ; j But there was a considerable difference in size between the j j two groups of establishments as the average for the larger j 178 TABLE VII TY PE A N D N U M B E R O F IN D U STRIA L ESTA B LISH M EN TS A N D N U M B E R O F W O R K E R S E M P L O Y E D IN E A C H INDUSTRY'1) Type of Industry Number of Establishments Total Number of Persons Employed Stone qus.rrying 60 388 Slaughter houses 7 21 Dairies 130 476 Fruit preserving, date packing, et c. 98 8,217 Grain milling 954 3,783 Bakeries 1,563 5,199 Sweet-making 176 809 Other food vsyrup, starch, etc.) 127 451 Spirits (Arek) and brewing 7 304 Soft drinks and soda water 56 '567 Cigarettes and tobacco 1,057 9,988 Spinning, weaving, etc. 2,248 9,058 Rope-making 44 135 Other textiles 599 2,770 Shoe making 1,239 3,186 Shoe repair 739 1,028 Tailoring 4,236 7,385 Making-up textiles 611 1,087 Carpentry 1,914 3,337 Furniture-making 184 698 Paper and cardboard articles 5 14 Printing, etc. 132 959 Tanneries 96 646 Leather goods 121 215 Rubber products 3 4 Soap and miscellaneous chemicals 53 1,100 Tar-making 16 104 Brick-making 203 6,840 Glass-making 9 19 Pottery and tile-making 140 730 Cement, Juss, gypsum, etc. 266 2,558 Iron and steel ([casting, forging, etc.) 68 339 179 TABLE VII (CONTINUED) Tot al Type of Industry Number of Number of Establishments Persons Employed Metal products 2,34-6 5,375 Electrical appliances 157 300 Small boats building and repairing 5 4-42 Railways workshops 8 2,506 Motor vehicles repair 1,239 4,0 4 -6 Watch repair 210 275 J ewelry 862 1,604- Musical instruments 11 15 Grain milling and ice-making 3 19 Other manufactures 311 954- Construction 39 4-, 679 Electricity generating ^9 1,359 Water supply 34- 815 Electricity and water 22 1,384- I Unclassified 3 103 | Total 22,4-60 90,291 SO U R C E: St at lstl cal Abstract 195*5 (Baghdad: Zahra Press, 1956), pp. 101-102; Carl Iverson, A Report on Monetary Policy in Iraq (Baghdad: National Bank of Iraq., 1954-) > p. 72; and Economic Development of the Middle East. 194-5 to 1954 -. loc. c lt. i(l) The criterion adopted for determining what establish ments should be included in the census was that it should be engaged on production for sale in manufacturing industry or in maintenance or repair work and should have a fixed place of business. Size was not a criterion and even the smallest workshops were Included. I 180 TABLE VIII SIZE DISTRIBUTION OF ESTABLISHMENTS IN TERMS OF NUMBER OF PERSONS EMPLOYED Size Number of workers In Number of Total each establishment Establishments workers 1 10,157 10,157 2 5,651 1 1 ,3 0 2 3 2,805 8,415 4 1,383 5,532 5 804 4,020 6 432 2,592 7 232 1,624 8 182 1,456 9 87 783 10 98 980 11 52 572 12 64 768 13 64 832 14 24 336 15 32 480 16 23 368 17 12 204 18 38 - 684 19 26 494 20-29 68 1,582 30-39 48 1,604 40~*f9 20 834 50-99 63 4,165 100-149 23 2,691 150-199 16 2,654 200-249 20 4,182 250-299 5 1,315 300-399 15 4,695 400-499 4 1,825 500-999 8 5,336 1000 and over 4 7,809 22,460 90,291 SO U R C E: Statistical Abstract 1955 (Baghdad: Zahra Press, 1956), p. 103. TABLE IX SUMMARY OF INDUSTRIAL CENSUS OF IRAQ, BY LIWAS (PROVINCE) FOR THE YEAR 1955 Liwa Establish ment Number Workers Number Annual Wage Bill (in Thousand Dinars) (1) Total Receipts (in Thousand Dinars) (2) Cost of Raw Materials (in Thousand Dinars) Cost of Oil and Electricity (in Thousand Dinars) Value of Machinery etc. (in Thousand Dinars) Baghdad 4,706 33,594 3,366 23,089 9,933 492 8,812 Mosul 2,470 8,032 ?44 2,217 1,196 45 876 Basrah 1,285 14,519 826 3,717 1,312 102 1,864 Hilla 2,129 6,211 145 1,510 338 40 388 Kerbela 2,090 5,127 212 1,381 434 23 714 Arbil 1,464 2,272 51 463 124 23 185 Amara 1,363 2,468 83 674 160 21 360 Kirkuk 1,328 3,527 173 2,086 609 77 213 Buiaim 1,069 4,158 263 2,333 306 70 695 Kut 1,024 1,889 47 250 67 30 555 Dial a 1,166 2,309 46 294 71 15 130 Muntefia 885 2,445 92 359 121 24 211 Sulaimanniya 804 1,774 47 362 145 9 99 Diwanlya 677 1,966 61 463 208 24 556 Total 22,460 90,291 5,756 39,198 15,021 995 15,658 SOURCE: Statistical Abstract 1955 (Baghdad: Zahra Press, 1956), p. 100. (1) Many of the workers In certain industries are self-employed or family workers who do not receive wages. (2) Includes receipts from sale of products, repairs and other sources. 181 182 establishments of twenty or more persons each was 131*6, whereas those with under twenty persons each had an average size of only 2=3 persons. Table IX shows that manufacturing Is concentrated around Baghdad. Somewhat more than 20 per cent of the total number of establishments are located in G-reater Baghdad and the workers in these establishments accounted for nearly 37 per cent of the total number of persons engaged in industry in the country. In 1 95 * 4 -, a check on | firms in Baghdad showed that of a total of some 33*600 I workers some seven thousand were In firms with over one jthousand employees; about four thousand in firms with five j : hundred to nine hundred and ninety-nine employees; some : three thousand were in the 250-*4-99 group; about four thousand five hundred were in the 100-2*4-9 group; three thousand were in the 20-99 group; one thousand five hundred were In the 10-19 group; and ten thousand worked in firms employing nine persons or less. Baghdad absorbed about 70 per cent of total factory employment—that is, those working in plants of modern type.-1 -^ Since the publication of the last industrial census in 1955* some more progress has been made and the indus trial production Increased. In 1956 it was estimated ^ The Iran Times Annual, Baghdad, December, 195*4-; also the Economic Development in the Middle East. 19k-5 to 13.5k, lo c . ai£. i 183 that Industry contributed about I.D. 3^ million to the national product, or 12 per cent.!**' In 1956 three privately owned and operated cement plants were producing about two thousand tons of cement per day. Four addi tional cement factories were operating in 1957 with an output of fourteen hundred tons per day. Production in the cotton textile industry increased. Recent estimates I show that Iraq produces annually about forty million square yards. Considerable progress has also been made in : the field of power production. In recent years, new j capacity of about 160,000 K w . has been added to a total I previously existing capacity of only 70,000 K w . And It is expected that In twenty years' time the total capacity of the country will reach 5 0 0 ,0 0 0 K w . Although industrial production has been increasing in recent years, the increase has been confined mainly to the field of textiles and construction materials. The fact remains that modern industry is little developed and that production Is still mainly carried on by small films with little capital and low productivity. Even the modern Industry (excluding oil) would be considered relatively small since at best it is made up of medium-sized plants which are not capitalized to an extent at all comparable 1 A Background Material on Iraq for 1957 Oonsultation. op. c lt., p. 6. This figure includes building and contracting. 18 IP with similar industries in western countries. O n the whole—despite the impetus and stimulus given to It, through tax exemption, tariff protection and financial assistance by g o v e r n m e n t 3- ^ — Industrial produc tion Is still very small and Industry, apart from the oil, Is as yet little developed and still plays a relatively minor role in Iraq's economy. The industrial growth in Iraq has been slow. Basic Reasons for Slow Industrial Growth in Iraq Som e of the basic causes that have retarded indus- i trial growth are lack of private investment, deficient i I technical skill, limited market and consumers' income, and, above all, lack of initiative and experienced entrepreneurial and managerial skill. (A) Lack of private Investment♦ In the pest, capital has often been hoarded or Invested in non- In an effort to promote industrialization the i government enacted In 1929 the Encouragement of the ! Industrial Act which was modified in 1950. This leglsla- j tion remitted customs duty on Imported machinery and materials and granted exemption from income and property tax and the use of rent-free state land to predominantly Iraqi owned Industrial establishments with machinery values at I.D. 5,000 or over which, used primarily raw materials available In Iraq or produced goods imported In considerable quantities. Furthermore, In 1935 the Agricultural and Industrial Bank was founded to extend loans to both agriculture and industry. In 19U6 a separate state Industrial Bank was founded to provide further stimulus by helping; to supply the capital needed for Investment. 185 industrial sectors. Investment was mostly in rural or urban property or in commerce, where the security or rate of return was believed to be higher than in industry. To some extent tax exemption, tariff protection and the financial assistance by the government, through the ' Industrial Bank, have encouraged Industrial endeavor. The ; extent of Industrial expansion, however, was limited and was confined mainly to the textile and building materials ! Industries. Even in these fields expansion is considered to be inadequate since the productive capacity of the I plants falls to meet the requirements of the market. At i ; best the plants are medium sized, in terms of capitallza- I j tion, and in this respect they fall short when compared to 1 their counterpart in advanced countries. The previous governments gave considerable amount of lip service to the necessity of industrial expansion, but they actually did very little to bring about this expansion. In the first five year plan, during the period ; from 1951-1955» the Development Board spent on industry | only 2,587,000 dinars out of a total revenue of 107**472,000 j dinars.^ This amounted to less than 3 per cent. In recent years the Board seems to have paid more attention ■^The Central Bank of Iraq, Statistical and Research Department, Quarterly Bulletin of the National Bank of Iraq. April-June, 1955 (Baghdad: Al Rabita Press, 1955), p. 35. to industrialization. The Development Board Budget for the six year program (1955-1961) shows that 10 per cent or some forty million dinars out of a total revenue of 390 million dinars were devoted to industrial purposes. Figures for actual outlays, up to date, are not available to this writer, but the International Monetary Fund reported on July 3 0 , 1957» that "in the industrial sector . . . actual outlays under the plan have fallen short of approved targets. "-^7 A report of the experts from the United Nations had recommended in 1952 that, for purposes of entrance of new industries into new fields and for expansion of existing industries, plans should be ms.de, as quickly as they can be formulated, to enable the Industrial Bank to provide loans to private investors. Since the absence of a capital market in Iraq makes it very difficult for Investors in Industry to marshall long term and equity capital, Iraq should heed this advice without further delay. For successful industrialization ;of Iraq will depend significantly on a broad participation by the private sector in such activities. 17 Background Material on Iraq for 19 57 Consultation, op. c lt♦ , p. 1. 18 International Bank for Reconstruction and Develop- j ment, The Economic Development of Iraq (Baltimore: The Johns Hopkins Press, 1952), p. 280. i (B) Deficient technical skill. The number of people with adequate technical talent in Iraq is rela tively small. Several foreign experts in economics have noted that there is in Iraq a general shortage of skilled and semi-skilled workers.^9 Although they all conveyed to the government the Importance of promoting and creating a class of skilled labor and technicians, the government did relatively little toward achieving this goal. In the last few years, however, the number of skilled workers have increased. The increase was largely aided by the foreign firms (which were engaged in the development projects initiated by the government), as they provided a training ground for a great many workers. Steps must still be taken, through special educational programs and training centers, to raise the number of skilled people to a satis factory level sufficient to meet the needs of a developing economy. This, however, should not be construed to mean that the shortage of skilled workers and technicians In Iraq is | very serious and it will, therefore, become a serious obstacle in the way of Industrial and economic expansion of the country. For although the problem exists it is not r , ! See for example, Lord Salter, The Development of Iraq: A Plan of Action (Baghdad: The Development Board, ! ^1955)» P« 33; Iverson, op. c it. . p. 1^8; and The Economic j Development of Iraq. op. c it., p. 8 3. j 188 as serious as It seems, and the prospect of solving It, as many experts believe, are bright because the Iraqi xrorkers are quick to learn and with proper training they are generally adept at learning industrial processes. To support this assertion three different reports may be quoted. First, the report of the IBRD's Mission to Iraq is quoted: The Mission feels that there is sufficient evidence to show that the potential quality of_Iraqi labor will not prove an obstacle /.to development/. O n a number of occasions the Mission members saw considerable mechanical ingenuity displayed by men with little training and inadequate tools; and these observations were confirmed by those with experience in Iraq. It would do less than Justice to the Iraqi worker if the development of his innate skills were not encouraged in the directions where they are likely to be most urgently needed?0 To quote now from Professor Iverson's report: The efficiency of labor in Iraq is low today partly because of insufficient nutrition, partly because of lack of education and training. Experience seems to show, however, that Iraqi workers are quick to learn and ...................................................................................................................................... it should not be too dlfficult_to train a sufficient number of persons to perform /the skilled work/ which is most needed in the immediate future.21 Finally, to quote from Lord Salter's report: A s regards the non— professional level, most of the required skills will com g from 'learning on the Job.' A ls,rge proportion of Iraqi unskilled workers are, by the general evidence of those who have employed them, capable of developing a high degree of skills as mechanics /.etc*/ . . . if employed under suitable 20The Economic Development of Iraq. loc. c it. ^Iverson, op. c it. . pp. 1U5 and 1^8. ; 189 ! pp j supervision. & It could be concluded then that a sufficient number i I I of skilled labor could be quickly trained in Iraq to meet the special requirements of industrial and economic expan sion of the country. N o serious shortages of skilled : labor, therefore, are expected in I r a q . 2 ^ j i 1 | (0) Limited internal markets. Until the initlationj j of a development program almost a decade ago, the domestic I market (due to inadequacies of basic facilities such as 1 transportation and power, low income and purchasing power, and lack of studies end research work to indicate the industrial opportunities available for profitable lnvest- | ments in Iraq) have been limited. This has had the effect i of restricting the number of industries, which m ay be I economically justified unless the product can be produced cheaply enough to find a foreign market. This condition, however, may be corrected in the long run through a rising 22 Salter, loc. c it. ^Even if acute shortages do develop, Iraq could In the last analysis import skilled labor from the Middle East at relatively moderate wages. “Thus among the large number of Arab refugees from Palestine there could be found many mechanics, carpenters, electricians, stone- workers, plumbers, foremen, as well as a large number of unskilled construction workers. Businessmen can also obtain foremen and som e specialized workers from other countries in the Middle East." The Economic Development of Iraq. o p . c it . , p. 8A. 190 ! standard of living, especially among the rural population. :Improved methods of farming, increased irrigation, expan- i ; sion of basic facilities, such as transportation and power, expansion of industry itself, and more intensive education should help to raise purchasing power to some j extent and thereby eliminate or reduce the problem of | ■limited market. i Furthermore, the expansion of local industry would i jbe facilitated by the reduction of trade barriers among j the Arab countries. The Arab states have already made considerable progress since 1953 in reducing intreregional trade barriers, especially in agricultural products, but less so in Industrial products. As measures to raise purchasing power are taken and intraregional trade barriers i are further reduced—perhaps creating in the not too long !future one large com m on market—industry can expect the demand for its products to increase rapidly. However, this I should not be construed to mean that in the short run a limited market presents a serious obstacle to greater industrial expansion in Iraq. A detailed analysis of the problem of limited market is undertaken in Chapter XVII, and the conclusion is reached that it ia not a serious obstacle in the way of larger industrial and economic expansion of Iraq. (D ) Lack of entrepreneurial and managerial sk ill. Entrepreneurial and managerial skill in Iraq is in short supply. This has so far been an important bottleneck to industrial and economic development in general, and -will remain so without the aid of international skill. It has been mainly this kind of problem which prompted this writer to suggest the direct foreign investment approach as a solution. This approach has been discussed in detail in Part I in connection with the underdeveloped world as a whole, and will be further discussed in Chapter XVII, with regard to its application to Iraq. CHAPTER XII I FOREIGN TRADE AND INTERNATIONAL BALANCE OF PAYMENTS Foreign trs.de in Iraq follows the normal pattern ' for underdeveloped countries in that imports consist mainly | of manufactured products while the exports consist almost i exclusively of primary products. The international j balance of payments situation of Iraq is satisfactory and | exchange availabilities have been more than adequate to I cover exchange requirements for the Import of consumer and | | capital goods. A striking feature of Iraq's balance of payments is Its heavy reliance on oil which is by far the largest export of the country. | I. FOREIGN TRADE ! Exports i Oil is the most valuable export of Iraq, followed by i barley and dates. Other exports are raw wool and cotton, i animals on the hoof, hide skins, Intestines, seeds for oil manufacture (linseed, cotton, sesame), and a few minor commodities such as gums, gall nuts, and liquorice root. Iraq, in addition, has an appreciable transit trade consisting largely of goods passing to or from Iran. Table X shows the composition of exports in recent years. Oil. Iraq's exports and receipts from oil have been 193 j TABLE X j C O M PO SIT IO N O F E X P O R T S (I, Value D. Millions) Percent 1954 19 55 1956 1954 1955 1956 Oil (net receipts) 66.7 94.4 79.8 76.3 85.3 84.3 Barley 00 • 00 6.0 5.3 10.1 5.4 5*6 Dates 3.5 . 00 2.2 4.0 2.5 2.3 Others Wheat 0.5 1.7 — — Other grains, pulses and flour 0.7 0.9 0.4 Raw cotton 0.3 0.6 0.5 Live animals 1.6 0.4 0.4 ) 9.6 6.8 7.8 Hides and skins 0.3 0.2 0.3 Seeds 0.3 0.5 0.3 Minor miscellaneous items 4.7 3.1 5.5 Total 87.4 110.6 94.7 100.0 100.0 100.0 SOURCE: Compiled from International Monetary Fund, Back- ground Material on Iraq for 1957 Consultation, op. cit., pp. 1? and 34; ©nd the Central Bank of Iraq, Department of Statistics and Research, The Quarterly Bulletin of the Central Bank of Iraq, January-March, 1956 (Baghdad: Thomas Printing Press, 1956), p. 23* ; 1 9 * + j increasing sharply during the 1950's, both as a result of | increased production (which was aided by the discovery of : new fields and construction of new pipelines) and a more favorable agreement with the operating oil companies who agreed to raise the previous minimum quantity to be | produced annually. j While the value of oil exported was 1 0 .8 million j pounds sterling in 19*+6 and about, *+ 0 million in 19*+9 > it i soared to about 79-6 in 1952, and to 121.*+, 159.6, 168.1 million pounds sterling in the years 1953, 195*+ and 1955, respectively. However, the Suez situation disrupted the flow of oil through the pipelines in Syria and conse quently oil exports declined in 1956 compared to 1955 > | amounting to 156.6 millions. In 1957 oil exports were | estimated at even lower level. I Iraq's receipts from oil, of course, followed the | same pattern. From *+.1 million pounds sterling in 19*+6 and 7.6 million in 19*+9 they Jumped to *+8.*+ in 1952 and to j j 55«*+i 66.7, 9*+.3 in the years 1953, 195*+ and 1955. They dwindled to 79*9 in 1956 and were estimated at 50 million i in 1 9 5 7 -1 The principal countries to which crude oil was i exported in 1955 were in the order of importance: France, International Monetary Fund, Background Material on Iraq for 1957 Consultation (Washington, D.C.: 1957), pp. 7, 17 and 3 2. 195 Italy, United Kingdom, Indonesia, G-ermany, Belgium. The United States has been quite unimportant as a market for Iraqi o11.2 It should be remembered, however, that these destinations of oil exports show only the distribution of j crude oil exports from Iraq and can not be taken as an i | indication of the geographical distribution of the final j consumption of Iraqi oil because many of the countries ; import the oil for refining and later exportation. Nor j ! does it allow any conclusions regarding the distribution on currencies of the sales proceeds of the company. uther exparts. Iraqi exports of commodities other j | than oil fluctuate considerably from year to year, with I changes in the size of crops. In the post-war period an I upward trend has been noticed. Merchandise exports, ! excluding petroleum, increased from an average of I.D. 3*9 million for the years 1936-1939 to an average of I.D. 12.6 million in 19^5-19^7» and to an average of I.D. 22.9 imillion in 1951-1953* Tbe increase reflected both a rise in quantity and price of the merchandise exported. In recent times, however, commodity exports have shown a continuous decline, averaging I.D. 17.2 million 2 Carl Iverson, A Report on Monetary Policy in Iraq (Baghdad: National Bank of Iraq, 195*0 » P» 81. 196 for the years 195^ through 1956. The decline In exports ; resulted mainly from larger consumption Internally and a j i decline in production of export commodities which was i ! partly affected by the flood of 195^- The leading exports, other than oil, are barley and | other grains, dates, followed by animal products, mainly: I ; sheep, wool, hides and skins. Barley is by far the most important export among them, averaging close to *K) per | cent for the years 195^ through 1956. Export of dates is i the next significant item. Iraq is the world's greatest producer and exporter of dates. Export of dates for the i years 1952 through 1956 averaged close to 20 per cent of total exports, other than oil. Live animals and their i I products averaged over 10 per cent for the seme period.3 | j Production of barley, mainly because of inefficient i ! irrigation, fluctuates greatly from year to year, giving wide fluctuations in export revenue obtained. For example, !the two successive crop failures in 19^7 and 19^8 resulted I in a fall in the exports in 19^8 to less than three | thousand tons, while the next two years (l9*+9 and 1950) gave a better than average output, and consequently exports increased to 325*000 and ij-50,000 tons respectively. Before 3 The Central Bank of Iraq, Statistics and Research Department, Quarterly Bulletin of the Central Bank of Iraq. January-March, 1956CBaghdad: Thomas Printing Press, 1956), p. 23* and Background Material on Iraq for 1967 Consulta- klo.n > OP- * P- 17. 197 | 19^9 exports had never exceeded 300,000 tons. Dates ; production also varies substantially from year to year, i but It ranges between 150,000 and 350,000 tons. These great variations cause wide fluctuations in the price, and in years with large crops marketing difficulties have been j experienced. Even the exports of animal products— which are the most important source of dollar income for Iraq— experi ence very great fluctuations. The exports of animal ! products are in the main based on sheep. Wool, hides and j | skins together with some casings are exported. The sheep are vulnerable to diseases during the cold winter and the summer drought. The fluctuations thus usually follow those of vegetable products although with considerable j dampening. i j | Destination of exports other than oil. If exports ; of petroleum are excluded, the United Kingdom is by far I the most important market for Iraqi goods; in 1951-1953 it | received 32 per cent of exports.** However, as shown in Table XI, Germany, Holland and Denmark have assumed a significant place in recent years. In fact, in 195^ Holland was the leading destination of Iraqi goods, t \ , United Nations, Department of Economic and Social Affairs, Economic Development in the Middle East, 19*45 to 195*4 (New York: 1955), p. 100. 198 TABLE X I DESTINATION OF IRAQI EXPORTS1 (Milllons of Iraqi Dinara) I.D. 1954 Percent I.D. 1955 Percent Jan I.D. .-.Oct. 1956 Percent United Kingdom 2.0 11.1 2.2 1 3 .8 2.0 18.5 Genu any 2-5 13-9 2.0 12.6 1.3 12.0 Denmark 1.8 10.0 1.8 C ~ \ • H H 1.0 9.2 Holland 3.1 17.2 1.5 9.4 0.7 6.8 Kuwait 1.1 6.1 0.7 4.4 0.7 6.9 Lebanon 0.5 2.8 0.9 5.7 0.6 5.8 Syria l . l 6.1 0.6 3.8 0.5 4.6 India l . l 6.1 0.9 5.7 0 .5 4.6 Belgium 1.0 5.6 0.6 3.8 0 .5 4.6 United States 0.7 3.9 0.6 3.8 0 . 4 3.9 J apan 0.1 0.6 0.2 1.3 0 .1 0.1 Others 3.1 16.6 3-9 24.5 2 .5 23.0 Total 18.1 100.0 15.9 1 0 0 .0 1 0 .8 100.0 SO U R C E : Central Bank of Iraq, Department of Statistics and Research, Quarterly Bulletin of - frhe Central Bank of Iraq. January-March, 1956 (Baghdad: Thomas Printing Press, 1956) , p. 25; and Background Material on Iraq for 1957 Consultation. op. c it., p. 36. ^•Excluding oil and re-exports. 199 j : followed by Germany, then the United Kingdom. In 1955» ; the United Kingdom regained its first position and in 1956 j i it increased the lead to a greater margin. ! According to the latest available statistics (1956) the major countries of exports, other than oil, are the j following: The United Kingdom (18.5/0 » Germany (12%) and I Denmark (9.2%). The United States importing only 3*9 per |cent is not one of the major importing countries.^ If oil !exports are included, however, the picture changes and | I France becomes the principal market, followed by the United Kingdom, Germany and Denmark.^ Imports Most of Iraq's food Is produced locally. But apart jfrom tobacco, fuel and som e building materials, most of its other requirements are Imported. A general idea of the ^composition of imports m ay be obtained from Tables XII and XIII. Capital goods. It appears from these tables that consumer goods account for a greater share than capital goods. But In recent years imports of capital and durable 5 Background Material on Iraq for 1957 Consultation. on. c it., p. 36. ^In recent years, France has been taking nearly one half of Iraqi exports of petroleum, Germany one-ninth and the United Kingdom one-ninth. Iverson, loc. c it. 200 TABLE X II C O M PO SIT IO N O F IM P O R T S (IN C LU D IN G OIL C O M P A N IE S IM PO R T S) (Millions of Iraqi Dinars) 1954 Percent I.D. 1955 Percent Jan I.D. .-Oct. 1956 Percent Sugar 5 0 7.3 5.3 5.4 6.4 6.6 Tea 6.4 8.8 8.1 8.3 5.8 6.0 Cotton piece goods 3.7 5.1 3.2 3.3 2.1 2.2. A rtificial silk piece goods 4.8 6.6 5-5 5.7 4.3 4.5 Woolen piece goods 1.1 1.5 1.2 1.3 1.1 1.1 Soap 0.6 0.8 0.7 0.7 0.8 0.8 Iron and Steel 8.2 11.3 13.0 13.4 12.6 13.0 Boilers and Machinery 10.1 13.9 12.5 12.8 15.6 16.2 Vehicles and Part s 6.2 8.5 9.7 10.0 7.8 8.1 Electrical Machinery 3.5 4.8 4.8 4.9 6.9 7.2 Chemicals and Pharmaceuticals 2.1 2.8 2.9 2.9 2.4 2.5 Paper and card board 1.2 1.6 1.3 1.4 1.8 1.9 Timber 1.5 2.1 2.4 2.5 2.1 2.2 Other 18.1 24.9 26.6 27.4 26.7 27.7 Total 7 2 .8 100.0 97.2 100.0 96.4 100.0 S O U R C E : Central Bank of Iraq, Department of Statistics and Researoh, Quarterly Bulletin of the Central Bank of Iraq. January-March, 1956(Baghdad: Thomas Printing Press, 1956) , p. 20; and Background Material on Iraq for 19 57 Canaulta.tlon, op. p it., p. 35. T A B L E XIII COMPOSITION OF IMPORTS (INCLUDING OIL COMPANIES) 1951 Per I.D. cent 1952 Per I.D. cent 1953 Per I.D. cent 1954 Per I.D. cent 1955 Per I.D. cent (1) 1956 Per I.D. cent Capital goods ------- 26.9 ------- 35.0 ------- 43.5 29.5 40.6 4 2.4 43.6 45.0 46.7 Consumer goods ------- 73.1 ------- 65.0 ------- 56.5 43.3 59.4 54.8 56.4 51.4 53.3 ------- 100.0 ------- 100.0 ------- 100.0 72.8 100.0 97.2 100.0 96.4 100.0 jSOURCE: International Monetary Fund, Background Material on Iraq for 1957 Consulta tion, o p , . cit., p. 18. ^ Ten months data only. 201 202 i i goods (including those of the oil companies) have assumed j I a greater significance. Capital goods increased from 26.9 | per cent in 1951 to 46.7 per cent in 1956. The increase in 1952 and 1953 was due mainly to large imports by the oil companies, particularly for equipment for the pipe lines. In 1954- and the following years the imports of j . ; | capital goods by oil companies have declined, but capital I goods imports associated with the development progran have !risen sharply. The increase has been particularly great in iron, steel, machinery, boilers and vehicles. Consumer goods. Despite the proportionate decline of consumer goods in relation to total imports, consumer goods have increased in absolute terms, rising from I.D. j 4 -3 • 3 million in 1954- to I.D. 54-.8 million in 1955 > and on j the basis of ten months data were running at an annual rate of about I.D. 60 million in 1956.? In 1956 tea and I sugar accounted for about 13 per cent of total Imports, I textlies (mainly rayon and nylon) for about 8 per cent end i |chemicals and pharmaceuticals for 2.5 per cent. | It is to be observed that Imports of the above consumer products are—with the exception of woolen and cotten textiles—continuously Increasing and that they are several fold above the level before the Second World War. 7 Background Material on Iraq for 1957 Consultation. on. c i t .. p. 18. 203 For example, Imports of tea increased from 3 #200 metric |tons in 1938 to about 16,500 in 1955» and on the basis of I three months1 data they were running at an annual rate of about twenty thousand tons in 1956. Similarly, Imports of sugar increased from forty-four thousand tons in 1938 to lone hundred twenty-three thousand tons in 1955# and in 1956 , on the basis of the firs t quarter data, they were running |considerably above their level in 1955*® This explains the | I great desire of Iraq*s governments to have a sugar factory i established in Iraq to satisfy some or a ll of the local consumers* demand. Imports of woolen and cotten tex tiles are on the decline both in relative and In absolute teiras, owing mainly to Increased domestic production. The decline Is I also partly due to a shift In the pattern of consumption j Ifrom cotton and wool textiles to rayon and nylon and the Increase in the imports of second hand clothing from the United States. S tatistics show that imports of rayon are I increasing. In 1953 they were double their level of 1938. | jIn 1955 they were trip le that level, and were expected to be higher in 1956.^ Because of the great demand for rayon, 8 The Central Bank of Iraq, S tatistical and Research Department, The Quarterly Bulletin of the Central. Bg,nk ojf Iraq. April-June, 1956, p. 21. ^The Quarterly Bulletin of the Central Bank of Iraq, April-June, 1956, loc. c i t . , and The Economic Development 20 k nylon and other synthetic silk products, end the availa b ility of favorable possibilities the United States Operations Mission to Iraq jointly with the Development Board of Iraq have recommended the establishment of rayon textile mills and a rayon plant in Iraq. 10 Imports of chemicals end pharmaceuticals also | increased several fold. 11 This Increase coincides with !the ever Increasing endeavor to improve the health standard j of the masses. | Sources of imports. O n the basis of available published statistics (and as shown in Table X IV) the United Kingdom has been the most Important source of Iraq's imports. During 1956 it was the largest supplier with 29 per cent, followed by the United States with 1A per cent, i I Germany 9 per cent, and Japan and Ceylon 6 per cent each. j ! It is to be observed that imports in absolute terms j i showed an Increase from almost all sources. It is worth jmentioning that Japan, which was the second largest Iraq. op. c it.. p. 157* Imports were as follows: 17.3 million square meters In 1938 and 38.1 and 6 6 .A million square meters In 1953 and 1955 respectively. 10Arthur D . Little, Inc. , A Plan for Industrial Development in Iraq, A Report Jointly Sponsored by the Development Board of Iraq and the United States Operations Mission In Iraq (Massachusetts: Arthur D . Little, Inc., 1956), p. 2 8 2. 11Economic Development in the Middle East. 19A5 to 195L, l o g , c i t . 205 TABLE XIV IRAQ'S S O U R C E S O F IM P O R T S (IN C L U D IN G - O IL C O M P A N IE S IM PO R T S) (Millions of Iraqi Dinars) Jan.-Oct. 195^ 1955 1956 I.D. Percent I.D. Percent I.D. Percent United Kingdom 22.5 30.9 27. ^ 28.2 27.8 28.8 United States 10.3 1A.1 Ik.7 15-1 13.1 Ik. 3 Germany 6.0 8.2 7.6 7.8 8.9 9.2 Japan 5.9 8.1 8.2 8.^ 5.9 6.1 Ceylon 5-3 7.3 7.6 7.8 5.8 6.0 Belgium 2.k 3.3 3.2 3.2 5.0 5.2 Holland 2.3 3.2 3.1 3.2 2.8 2.9 Italy 2.1 2.9 2.2 2.3 2.1 2.2 India 2.3 3.2 2.5 2.6 1.5 1.6 Others 13.7 18.8 20.7 21.^ 22.8 23.7 Total 72.8 100.0 97.2 100 .0 96.^ 100.0 ! S O U R C E : International Monetary Fund, Background Material on Iraq for 1957 Consultation. op. c it., p. 37, based on information compiled from the Central Bank of Iraq. 206 ; supplier of imports to Iraq before the Second. W orld W ar, j had in 1956 dropped to fourth place. The United States I | has taken its place since the W ar. j II. B A L A N C E O F P A Y M E N T S The Importance of Oil to the Balance of Payments The balance of payments of Iraq generally shows a deficit on commercial accounts and a net credit from the operations of the oil industry. This is evident in Table i X V which shows the main items in the balance of payments of Iraq. Table X V illustrates the growing Importance of foreign ow ned oil companies1 transactions in the Iraqi balance of payments. During the period 19^7-19^+9 the country's foreign exchange receipts from the oil companies averaged only I.D. 8.9 million, while receipts from other | exports of goods and services averaged I.D. 15.79 million. ! Since the conclusion of the new oil agreement in February, i 1952 (which w a,s made retroactive'to January 1st, 1951) Iraq's foreign exchange receipts from oil increased appreciably, reaching a m axim um of I.D. 9^*38 million in 1955* This amount considerably exceeds the I.D. 16.18 million receipts recorded for all other goods and services. If oil receipts are excluded it will be seen that Iraq has always had an adverse balance of payments except i in 1950 w hen exports were high while imports were reduced T A B L E XV 3 A L A N C L O F P A Y M E N T S 1947 T O 19561- (M111Iona of Iraq i Dinara) A. B. C. D. E. F. G. transactio n s of Oil Sector Exports s e re-exports f .o .b . Imports c . l . f . Investment Income S alaries rem itted abroad C apital movements Government repayment of advane Accrued ro y a ltie s paya'ble (increase) Royalty adjustment uther c a p ita l movements Sub— to ta l Turkish share of o il ro y a ltie s L ia b ilitie s to Turkish Gov't Total (net amount of foreign exchange re c e ip ts from o il transactions retained, by Iraq Q t her Goods end Services Exports f.o .b . Imports Services Total Other P rivate Donations Capital Off j L o a n s . Donat ions Repayment of loans Drawing on loans Total Total fo r Non— Oil Sector (B— E) Monetary Movements'^ Purchased (— ) and sales of se c u ritie s National Bank Commercial Banks Short-term a sse ts (increase— ) Government accounts abroad National Bank Commercial Banks Monetary gold (increase— ) Total 19k. 7 194P 1999 1950 1951 1952 1953 1954 1955 1956 ea 14.04 -5.06 -6.35 5.06 11 .20 -9.55 -2.11 11.56 14.10 -10.29 -5-76 9.59 29.59 -9.79 -22.46 10 .12 79.61 -P. 77 -38.77 6.85 80.79 -19.42 -32.7’ -0.50 -0.90 120.87 -17.17 -51.74 -0.45 -1.60 156.09 -5.78 -68.49 -0 .41 169-18 -6.27 -77.74 — 0 . 4 © -0.51 156.92 -7.21 -68.84 -0.41 -0.82 7.50 0 . 52 -2.55 -1 0 .662 IO.662 - - - - - - 4.19 -4.01 -4.54 -0.67 7.69 11.10 7.69 7.42 19.72 48.44 - 0 . 52 0.52 55.95 - 0 . 52 66.74 94.78 79.79 7.69 11.10 7.69 7.42 19.72 48.44 55.43 66.74 94.78 79.79 17.77 -75.02 0.17 10.7 4 — 76.88 1. 87 14.82 -70.97 2.92 26.03 -28.94 7.86 75.01 -4-».24 -0.17 22.53 -48.61 -0.81 23.04 -56.91 0.07 20 .68 -68.70 -0 .27 16.18 14.94 -90.88 -104.70 -1.90 7.51 -17.56 -24. 71 -17.27 0.95 -8.40 -26.89 -37.80 -48.29 -76.60 -82.25 al 0 . 25 -0.27 — 0.75 0.87 -0.79 1.25 0.92 0.99 1.44 3 .60 - - - - - - ----- ----- ---- - - - - - - 0.17 - 0.75 1.70 0.62 -1.97 0.47 0.56 0.19 2.44 -2.29 0.04 2.51 -0.95 -0.52 -0.02 2.53 0.17 1.12 -0.92 0.70 0.19 2.51 2.18 1.20 4.22 . 97 - 10.26 --12.87 0.16 7.21 1.10 6.82 -16.08 -29.. 26 -9.78 0.78 - 18.88 -77.39 -77.64 -97.39 -•77.87 -69.72 8.79 17.16 1.74 -8.24 — 0.44 - - - - - - ------ - - - - - - - - - - - - - - - - - - 0.08 -7.12 1.00 -4.96 1.25 -2.98 -1.72 ::: - - - - - - - - - - - - ------ ------ -----------0.57 -5.70-14.74 - -5.47 -4.36 -3.91 -17.77 - -1.96 -15.88 - 1.75 -17.74 10.59 — - - - - - - - - - - - - ------ ------ - - - - - - ------ - - - - - - 7 .00 -2.00 8.39 13.16 1.74 -8.24 -0.J -11.05-21.79 -23.35 -20.51 -10.47 Source: Data fo r the years 1947 through 1951 based on In tern atio n al Monetary Fund, Balance of Payments Yearbook■ 1947-1953 (Washington; D.C. : 1954). Data fo r the years 1952 through 195<F are based upon In tern atio n al Monetary Fund, Seventh Belanoa of Payment a Yearbook. 1947— 1955 (Washington, D .C.). Figures for 1956 are prelim inary and were obtained from the C entral Bank of Iraq. ^Mlnus sign Indicates debit; no sign Indicates c re d it. 2The 1054 entry represents the Iraq i Government*e share of the p rice adjustment of o il exporta for 1954 established under an agreement between the Iraq i Government end the o il companies In March, 1955- Since th is amount was not paid u n til 1955, I t Is entered here fo r 1954 as an Increase In accrued ro y a ltie s. ^Minus slen Indicates purchase of s e c u ritie s or Increase In aseets. 208' | by rigid controls. Year after year the balance of payments ; carried In Its non-oil sector a large import surplus which ; was only partly covered by such items as expenditures m a.de by pilgrims and tourists in Iraq, receipts from transit trade and expenditures by foreign vessels In Iraqi ports. I If oil receipts are Included i t will be seen that since i ; 1952 the deficit in the non-oil sector has been more than 1 offset by the surplus in the oil sector. ! In 1947* through 1949> the surplus in the oil sector failed to offset the deficit in other sectors, and Iraq drew heavily on its sterling balances and other 1 foreign assets. Consequently, Iraq's sterling balances fe ll from &57.2 million at the end of 1947 to £43 million ! at the end of 1949.12 However, beginning with 1950, there ! has been an increase in foreign assets, owing to the j surplus on current accounts, and In recent years, particu- i larly during the years 1953 to 1955» this surplus has been ; very large. ; Iraq1 s Foreign Exchange Reserve and Its Composition I j As a result of the recent increase in Iraq's income from oil (which was made possible by the oil agreement of 1952), the foreign exchange reserve of the country rose considerably. This is evident In Table XVI. This table 12 Economic Developments in the Middle East. 1945 to 19 54, op. clt., p. 102. T A B L E X V I IR A Q ,1 S F O R E IG N A S S E T S (Millions of U . S. Dollars) Central Bank Holdings Commercial Bank Holdings1 Total Reserves Year Sterling Other Sterling Other Sterling other Grand Gold Exchange Foreign Total Exchange Foreign Total Exchange Foreign Total Exchange Exchange Assets and Gold 1949 98.4 —— 98.4 22.5 1.0 22.5 120.9 1.0 121.9 1950 — . 117.3 — - 117.3 21»1 2.0 23.1 138.4 2.0 140.4 195! — 111.8 1.9 113.7 24.8 2.8 27.6 136.6 4.7 141.3 1952 June _ _ 119.1 2.0 121.1 18.6 2.2 20.8 137.7 4.2 141.9 Dec. — 125.4 4.0 129.4 40.6 2.2 42.8 166.0 6.2 172.2 1951 June —— 149.0 5.4 154.4 53.3 0.4 53.7 202.3 5.8 208.1 Dec. — 175.4 5.4 180.8 49.0 3.2 52.2 224.4 8.6 233.0 1954 June — 196.1 4.7 200.8 49.3 2.8 52.1 245.4 7.5 252.9 Dec. — 229.4 3.9 233.3 50.6 3.6 54.2 280.0 7.5 287.5 1955 M arch — 235-5 2.3 237.8 44.7 2.5 47.2 280.2 4.8 285.0 June —- 260.6 2.9 263.5 37.4 3.6 41.0 298.0 6.5 304.5 Sept. — 278.0 3.7 281.7 54.7 4.1 58.8 332.7 7.8 340.5 Dec. 8.4 276.7 9.4 294.5 45.5 3.9 49.4 322.2 21.7 343.9 N > O vO TABLE XVI (CONTINUED) Central Bank Holdings Commercial Bank Holdings^ Total Reserves Year Sterling Other Sterling Other Sterling Other Grand Gold Exchange Foreign Total Exchange Foreign Total Exchange Foreign Total Exchange Exchange Assets and Gold 1956 March 8.4 288.5 9.3 306.2 47.2 3.2 50.4 335.7 20.9 356.6 June 8.4 315.1 7.9 331. f c 29.2 2.3 31.5 344.3 18.6 362.9 Sept. 8.4 325.8 7.2 3W.it 29.9 5.2 35.1 355.7 20.8 376.5 Dec. 14.0 324.8 14.6 353.it 17.6 3.6 21.2 342.4 32.2 374.6 1957 Jan. 14.0 328.3 11.1 353.it 31.9 6.7 38.6 360.2 31.8 392.0 Feb. 14.0 —— — 332.6 — — - —— — —— Mar. 14.0 — — 334.8 — — — — . — —__ -- April — — — - — 321.9 — — — — — — -— S O U R C E : International Monetary Fund, Background Material on Iraq for 1957 Consulta tion , 0£. clt., p. 41. ^■Includes sterling investments; does not include non-sterling investments which are negligible. 210 j 211 I | shows that the foreign assets reserve hegan to Increase ; noticeably since 1952 and at the end of 1953 and 1955 were E ! almost respectively double and trip le their level of 19^9* After that they continued to rise, standing at $392 million in January, 1957- | The increase in foreign exchange reserves was i t ; mainly caused by the rise in production and export of | crude o il, particularly during the years 1953 to 1956 when j Iraq's foreign exchange receipts from oil amounted to ! $155, $187, $265 and $25^ million in 1953, 195^, 1955 and j 1956 respectively. In 1956 and 1957 the rise in foreign exchange reserve faJLled to keep pace with the previous years as a result of the Suez situation which started in the last quarter of 1956 snd caused a decline in oil j j production and exports. i ! Iraq's foreign assets are composed largely of I sterling assets. U p to October, 1955, Ire.q had no gold reserves. As a . result of an agreement signed on October ' 20, 1955, between the Governments of Iraq and the United | Kingdom, the Central Bank of Iraq purchased the equivalent of $8.^ million in gold from the 3ank of England. Toward the end of 1956 an additional $5*6 million of gold was purchased, bringing the total close to $1^ million. ' Background Material on Iraq for 1957 Consultation. op. c l t . , p. 20. j Aside from this gold and som e dollars held for j working balances, practically all of Iraq's reserves are held in sterling securities and sterling exchanges. In January, 1957, out of a total reserve of $392 million held ! by Iraq, $360.2 million consisted of sterling assets. Iraq's hard currency requirements are drawn from I the sterling area dollar pool according to the 1952 sterling area agreement with the United Kingdom. This agreement requires that members should deliver their foreign exchange earnings to the com m on pool and in return they would be allowed to draw foreign currencies "accord ing to needs." But there Is an implicit precondition that members should place severe restrictions on imports from the dollar area, at least not much less severe than those j | applied by the United Kingdom.^ So far, however, the ! United Kingdom has given Iraq substantial freedom of j action in drawing on the dollar pool and in determining i her ow n requirements for other foreign currencies.3-5 ■^Iverson, op., c lt. , p. 258. 1- ^ Background Material on Irao for 1957 Consultation, loc. clt. C H A P T E R XIII | PU B LIC FIN A N C E i j i a The total expenditures and revenues for the govern- | raent of Iraq for the years immediately before and after the Second World W ar are set out in Table XVII. It will be noticed that Iraq's public finance experienced a great expansion since the post-war period, and an expansion of considerable magnitude since 1 9 5 3» owing, by a large measure, to increased receipts from oil companies. It will also be seen that expenditures of the recent years (1953/5*+ through 1957/58) have been in the range of I.D. 50 and I.D. 70 million (apart from the expenditures of'the Development Board). Compared to the ilatest available estimates of national income (I.D. 292.*+ i imillion in 1956)-1 - it appears that the relative importance ! of the public sector in the total economy is almost as i great as in the more advanced countries. Between 17 and j 2k per cent of the national income passes through the treasury and is spent by the government on the satisfaction of general needs of the country. This, however, does not mean that Iraq's public expenditures in absolute amount are ■^According to an International Monetary Fund Report, Background Material on Iraq for 1957 Consultation, op. c lt. ,p . U, this is the latest national income estimate for Iraq prepared by Dr. K . G -. Fenelon, statistical expert to the Government of Iraq. 21 4 TABLE XVII T O T A L G O V E R N M E N T E X PE N D IT U R E S A N D R E V E N U E S (In Millions of Iraqi Dinars) Fiscal Year^^ Expenditures Revenues Balance 1936/37 7.15 6.03 -1.12 1937/38 7.54 6.92 -O.o2 1938/39 8.13 7.84 - 0 .2 9 1946/47 25.52 25.10 C M -d . 0 1 19^7/^8 2 6 . 5 6 26.01 -0.55 19W^9 29.62 25.67 -3.95 19*9/50 28.*9 27.20 - 1 .2 9 1950/51 28.29 3 2 .2 2 +3-93 1951/52 28.24 36.75 +8 .5 1 1952/53 44.40 50.5^ +6.14 1953/5*' 50.15 *17.72 -2.43 1954/55 53.80 5 2 . 1 8 -1.62 1955/56 50.87 63. *0 +12.53 1956/57 7^.51^2) 6 1 .6 8 -12.83 1957/58 7 0 . 6 9 ( 3 ) 68.4l(3) -2.28 S O U R C E : The Annual Report of the National Bank of Iraq for 19^9-50 and 1951; Government of Iraq, General Directorate of the Budget, The Iraqi Government Budget. 1952-53 (Baghdad: The Government Press); and Ministry of Finance, cited by International Monetary Fund, Background Material on Iraq for 1957 Consultation (Washington, D.C.: ! 1957), p. 2 6 . (1) The financial year covers the period from April 1 to March 31. (2 ) Revised estimates. (3 ) Estimates. : very large, but rather that the national Income Is very ! small. And, in fact, until recently very lit t l e has been i : done to promote production and economic development I through the use of fiscal policy. Iraq had followed the traditional policy of balan cing the budget each year rather then the new trend of deficit spending for the promotion of economic activity. One could hardly criticize this attitude on the part of Iraqi governments since It Is very doubtful whether substantial deficit financing for development and promo tion of economic life could have been effected before the conclusion of the oil agreement of 1952, which made, the accumulation of foreign exchange reserve possible, without creating balance of payment difficulties. The public debt of Iraq is comparatively small and does not constitute a real burden on the economy of the I I country. Borrowing from abroad had been rarely U3ed, and j j as of December, 195b, Iraq had no external debt. I . PUBLIC REVENUES In Iraq, total revenues and expenditures are not Incorporated in a single budget because the country had several budgets. It has an ordinary budget, a development budget (beginning in 1951/52) and four autonomous budgets. The autonomous budgets are for quasi-governmental agencies, namely: the State Railway, Basrah Port, F.A.O. Dredging 216 I ; and Tobacco monopoly. If the autonomous budgets are | expected to be In deficit, cover is provided in the i i j ordinary budget. However, if there is a surplus in these I budgets it is not automatically turned over to the ; ordinary budget. In recent years revenues of these | budgets were estimated to be in approximate balance with 1 ; expenditures. | The ordinary budget derives its revenue mainly from customs and excise taxes and the 30 per cent of oil revenue allocated to the treasury. This is evident from the breakdown of revenues and expenditures presented in Table XVIII. Structure of the Tax System I Table XVIII also indicates the structure of the tax i system in Iraq. It will be seen that Indirect taxes are | overwhelmingly dominant, that agriculture is hardly taxed I despite the fact that over 60 per cent of the populatin i get their living from agriculture, and that income tax is of unappreciable Importance. This structure of taxes in any country reflects the prevailing ideas of social Justice in the politically dominant classes. Since the landlords and feudalists have been the dominant class in Iraq until the revolution of the Urth of July, 1956, it is no surprise to see that agriculture has been almost wholly exempted from taxation. TABLE XVIII IR A Q 'S 3 U D G E T A R Y R E V E N U E A N D E X P E N D IT U R E S (In Millions of Iraqi Dinars) Item 1953/54 Actuals 1954/55 1955/56 Revised Estimate 1956/57 Original Estimate 1956/57 1957/58 Revenue Oil Revenue 15.04 17.16 25.32 22.84 22.84 25.40 Customs & excise 18.78 21.72 25.13 24.00 24.00 27.40 Incom e tax 2.20 2.25 2.18 2.00 2.00 2.75 Property Tax & stamp duties 1.19 1.38 1.55 1.36 1.36 1.56 Agriculture 3.56 3.45 2.67 3.47 3.47 2.54 Government agencies income 3.40 3.17 3.53 4.66 4.66 3.35 Post & telegraph 1.68 1.85 2.02 2.03 2.03 1.03 Other 1.87 1.20 1.00 1.32 1.32 4.32 Total 47.72 52.18 63 • 40 61.68 61.68 68.41 21? TABLE XVIII (CONTINUED) Item 1953/54 Actuals 195V55 1955/56 Revised Estimate 1956/57 Original Estimate 1956/57 1957/58 Expenditures Defense & Police 19.66 20.14 20.03 27.19 23.62 27.47 Economic schemes and local administration 8.63 9.85 7.70 16.51 12.49 11.17 Ministry of Interior 1.85 2.06 2.79 2.84 2.72 1.72 Ministry of Finance 5.44 5.35 3.53 4.13 3.97 4.79 Ministry of Education 2.69 3.26 3.43 5.96 5*46 6.29 Health and Social Welfare 3-71 4.69 4.72 6.35 5.98 6.75 Ministry of Commerce & Works 3.02 2.48 2.35 3.13 2.97 3.37 Agriculture 1.53 2.14 1.73 2.68 2.57 2.53 Other expenditures 3.62 3.83 4.59 5.72 5.17 6.60 Total 50.15 53.80 50.87 74.51 66.03 70.69 Balance -2.43 -1.62 12.53 -12.83 ^ -4.35 -2.28 S O U R C E : Ministry of Finance, cited by International Monetary Fund, Background Material on Iraq for 1957 Consultation, op. clt. , p. 26. ^ I n the 1957/58 budget speech, the deficit was stated to have been I.D. 10 million. 218 219 It Is expected that with the decline of the Influence of the feudalists since the revolution that an attempt will be made to change the tax structure in Iraq. It lies outside the scope of this dissertation to enter upon a general discussion about the changes to be made In the tax structure. Nevertheless, a few remarks may not be out of place. (A) It was pointed out above that indirect taxes are dominating among the public revenues. In principle at least this should be regarded as an advantage from the point of view of using taxation as a means of regulating economic activity. The main reason Is that Indirect taxes are, on the whole, easier to vary at short notice than direct taxes. But this, of course, assumes that the government has the administrative authority to vary the rates at which these taxes are levied, at least within certain limits. If amendments to existing tax laws have to be passed by Parliament in each case the procedure is likely to be too cumbersome and time consuming. Therefore, If in the future indirect taxes are to be used as an Instrument for regulating economic activity the government should be authorized administratively, at lea.st within 2 For a scholarly discussion of how variations in indirect taxes are likely to effect economic activity in Iraq see Carl Iverson, A Report on Monetary Policy in Iraq (Baghdad: National Bank of Iraq, 195^)» PP- 225-232. 220 certain lim its, to vary the rates at which these taxes are ' i ; levied. I (B) It was also pointed out above that income tax is of unappreciable Importance. But I t is doubtful whether It would be practical now to change the tax struc- ; i ture radically and begin to rely more heavily on the i 1 income tax. This is because many of the conditions j necessary for successful use of Income taxation are ' O i iabsent.- 7 j One of the conditions which Is required for success ful use of income taxation is a high standard of literacy among taxpayers. But in Iraq the majority of the population are Illite ra te . Illiteracy is most character is tic of the peasants, but often wage earners, independent craftsmen, and small shopkeepers can not read and write well enough to f i l l out the simplest income tax return with the guidance of printed instructions. True, wage earners may be covered by withholding, but In any refined i |system they must be able to f ile claims for exemptions and refunds. j Another important condition for satisfactory income i 3 A n excellent exposition of the conditions necessary for successful use of income taxation in underdeveloped countries has been given by Dr. Richard Goode, a member of a United Nations Technical Assistance Mission to Bolivia. See Proceedings of the Forty-Fourth Annual Conference of the National Tax Association, 1951. PP* 212-222, cited by (Iverson, op. c l t . . pp. 62-63• i 221 I j | taxation is the prevalence of accounting- records honestly i j and reliably maintained. In Iraq, as in most under- | developed countries, many businessmen maintain two or more I sets of books; others keep none. Vigorous tax admlnistra- i tion combined with educational campaign can do much to i improve accounting standards, but more trained personnel i I " ! ! and office equipment are needed. | S till another necessary condition for successful j t income taxation is a large degree of voluntary compliance on the part of taxpayers. Large scale tax evasion and tax fraud have existed in the past in Iraq. Consequently, if this situation continues to prevail even the best adminis trative organization can not successfully collect income taxes. To correct such an undesirable situation requires a long period of time. As Dr. G -oode puts it: The roots of a tradition of voluntary compliance with tax laws are not easy to trace, but i t is fa irly clear that such a sp irit does not grow up over night. I Although something can be done in the short run, a long period of popular' education end efficient and equitable administration of those taxes that can actually be enforced seems necessary to establish firmly the habit of general voluntary acceptance of the fiscal responsibilities of citizenship. Adoption of elaborate measures that will not be uniformly, applied delays improvement in taxpayers’ morale.^ The la st, and perhaps most important, condition for successful use of Income taxation is the availability of honest and efficient tax administrative personnel. Tax evasion, tax fraud, and lack of voluntary compliance on | the part of the tasqpayers are, to a large degree, the ! result of dishonest and incompetent administrators and tax collectors in charge of the program. In Iraq, as in most underdeveloped countries, the morale of tax collect- | ors and administrators has been weak and their efficiency ! low. Difficult as the task of establishing a satisfactory ! ; tax administration m ay be, It is probably the condition j for successful income taxation that can be met most quickly in Iraq. For in Iraq the Republican Government has already started to clear the tax administration apparatus from corrupted personnel.5 However, until the administration of the tax i | collecting system becomes vastly Improved it would be j doubtful whether Iraq could successfully use Income taxa- ' tion on a m uch larger scale. j This brings to attention a point which is worth I mentioning with regard to the use of fiscal measures as Instruments In the general economic policy. If the use of income taxation on a larger scale has to await improvement in the tax collecting system, then for the same reason many fiscal measures m ay be difficult to apply. For a Revolution in Iraq, A Report prepared for the Society of Graduates of American Universities in Iraq by a Special Committee (Baghdad! Al-Rabita Press, 1958), p. 2 6 . 223 more efficient tax collecting system is a necessary pre- ; requisite for the successful application of fiscal I measures as instruments for the influencing of economic activity. Consequently, until the deficiencies in the tax collecting system are completely done away with, applica tion of fiscal measures with the object of regulating the | economy would be met with some disappointments. i I Although it lies outside the scope of this study to I prescribe a line of action which would help solve the problem, one point is worth mentioning here. In order to be able to attract a sufficient number of competent and i J honest people really capable of correcting the deficien cies in the tax system, a substantial, increase in the I ! salaries of tax collectors and other personnel in the tax administration, and perhaps of other government employees also, would seem to be an indispensable condition. For ! the fact is that government salary earners, whether in the tax administration or otherwise, have been Insufficiently compensated for the Increase in the cost of living caused | |by the inflationary movement during and immediately after the Second World War. Such debasement may have had detrimental effects both on the amount and quality of the work performed by civil servants and on their integrity and moral standard. Indeed, it is reasonable to expect that higher salaries and the bettement of the standard of living would improve the integrity and efficiency of tax i 22k I | collectors end others. | II. PU BLIC EX PEN D ITU R ES i ; Breakdown of Expenditures ^ From the breakdoxm presented In Table XVIII, pages i I 217 and. 218, It will be seen that the largest Item on the ! expenditure side Is defense and police. In the revised estimate of 1956/57 they accounted for 36 per cent, and In i the 1957/58 estimate they were even higher, standing close to 39 per cent. This large portion of military expendl- j ! tures is partly due, however, to the fact that 1 1 capital work" expenditures have been largely transferred from the ! jnormal budget of the government to that of the Development | j Board. This same reason explains why expenditures on I agriculture in the normal budget are at a low level. In ; fact, in the budget of the Development Board these I expenditures, as will be seen la/ter, a.re of large magnitude | and are given top priority over the others. i Expenditures on education and health, which are of critical importance to the economy, are very small. Although in recent years they rose slightly so that they accounted for an average of 18 per cent in the flscal years 1956/57-1957/58 they are still very inadequate. The Impact of Public Expenditures on the Monetary and Brice sltuation The impact of expenditures of the normal budget, on the monetary and price situation, can not be determined separately x v ’ithout reference to large expenditures incurred by the Development Bosrd. For Iraq, via this agency, has embanked on a large-scale development program Involving ; considerable expenditures particularly in recent years. I The relative importance of development expenditures of | I.D. 50 million during 1956/57 can be gauged by the fact that total money supply at the beginning of 1956 X iras I.D. 71 million, and by the fact that total national income in ;1956 was I.D. 292 million. Consequently, the impact of j i |these expenditures on the money supply and price level can not be Isolated from those of the general budget of the j government proper. ! It is only natural to assume that such large-scale ;expenditures by the Development Board together with those 'indicated in the normal budget of the government proper would have some impact on the monetary and price situation. IM oney supply, for example, rose by 9 per cent in 1955 end |by 16 per cent in 195-6. This monetary expansion has been accompanied by rising prices. Taking the year 1953 as a base year (that is, 1953 = 1 0 0) the wholesale price index moved from 96 in 1954 up to 97> 104 and 109 in 1955; 1956 and 1957 respec tively. Similarly the cost of living index moved from 98 in 1954 to 1 0 1, 108 and 115 in 1955, 1956 and 1957 | 226 ! respectively.^ This upward trend in the price level was largely the result of greater demand for domestic resources. i Unless appropriate steps are taken, additional : expenditures and further monetary expansion are likely to |be accompanied by further price Increase.? | j | III. PU BLIC D E B T Internal Debt The public debt of Iraq Is comparatively small. Since 19^ five domestic loans totaling I.D. 7 million were used to finance the railways and irrigation schemes. In this year a twenty-year lottery loan and an ordinary three-year bond loan of I.D. l million each were floated land easily absorbed. In 19^-7 another I.D. 1 million three- jyear bond loan was issued. The three-year loans were !redeemed. T w o more outstanding bond loans were Issued in [19^8, one for I.D. 1 million with three years' maturity and the other for I.D. 3 million with twenty years' maturity. The above mentioned total of I.D. 7 million does not ^Background Material on Iraq for 1957 Consultation. on. c it., pp. 13 and 16. ?Cf. noat. Chapter XVIII on inflation for the discussion of the steps deemed appropriate by the writer of this dissertation. i 227 I i I Include outstanding treasury bills and the loans and j advances made by the National Bank, commercial banks or ; other institutions. A n idea of the size of the present I public debt of Iraq is given in Table XIX. In 1955 the i debt amounted to I.D. 20.83 and it rose to I.D. 27.22 million in 1956. However, this public debt is compara tively small and doe3 not constitute a real burden on the economy of the country. In fact, the government now has ! I almost no difficulty as far as revenues are concerned in redeeming Its debts.® External Debt The story of the external debt of Iraq Is also satisfactory. Since 1938/39 the government has obtained | j several foreign loans. The first loan, amounting to I.D. ! 1 million was obtained at the outbreak of the Second World ; W ar from the United Kingdom for the financing of the Iraqi railways. It was fully redeemed, however, In I9A 2/A3 . The second, which was obtained in 1950, amounted to I.D. I | 3 million. The loan was never fully drawn, and has been repaid. Also, the government obtained several advances (free of interest) from the oil companies, totaling I.D. A.5 million which have been repaid. In the summer of 1950 a development loan amounting to I.D. A.57 million was ^Ibld., p. 12. 228 TABLE XIX IRAQ,1 S INTERNAL PUBLIC DEBT1 (In Millions of Iraqi Dinars) Held by Central GrOV ' t Sem i--G-ov11 Total 1955 1956 1955 1956 1955 1956 Central Bank 6.83 9.26 8.50 1 2 .6 0 15.33 2 1 .8 6 Commercial Banks and Sarrafs2 1.89 1.91 1.33 0 . 6 2 3.22 2.53 S em i - G -o v ernm en t Agencies 0 .8 8 0 .9 8 — — — 0 .8 8 0.98 Public 1.40 1.85 — — 1.40 1.85 Total 1 1 .0 0 14.00 9-83 1 3 .2 2 20.83 2 7 .2 2 SOURCE: Central Bank of Iraq, cited by International Monetary Fund, Background Material, on Iraq for 1957 Consultation, op. c lt., p. 2 8 . (1 ) End of year. (2 ) Part of these bonds are deposited with the Central Bank as a part of statutory reserves. 229 obtained from the International Bank for Reconstruction and Development for the purpose of meeting the foreign exchange requirements of the W adi Tharthar irrigation scheme. In January 1955> the government cancelled the unused balance of $6.5 million and the amounts drawn between 1952 and 195** were repaid in February 1955*^ Iraq, as of December 1956, had no external debt. The repayment of the United Kingdom loan, the cancellation of the $6.5 million unused balance and the repayment of the loan from the Internal Bank for Recon struction and Development are evidence of Iraq's ability to meet its needs for foreign exchange from its ow n resources—represented at the present in Its oil. ^Xbid., p. 11, and United Nations, Department of Economic and Social Affairs, The Economic Development of the Middle East. 195*^-1955 (New York: 1956), p. 107. CHAPTER XIV | HEALTH AND EDUCATION IN IRAQ Although the relationship of health and education to economic development may appear to be an Indirect one, ; health and education are certainly of critical Importance to the economy; for basically It is the productivity of | manpower which must be raised, and this can be achieved only if measures are taken to make people better educated end to free them from debilitating disease. | j ! I. HEALTH IN IRAQ I j j No reliable vital statistics on health are available ! as most of the eight thousand Iraqi villages have no doctors or anyone equipped to note the facts. Available statistics give dysentery as the main disease with acute ophthalmia (trachoma) second, followed by bilharzia, hookworm and malaria. Maxrasmus (wasting due to malnutrl- ;tion) is the leading cause of Infant deaths followed by |diarrhea and pneumonia. Although considerable progress In public health has been made in recent years by means of increasing the number of hospitals, dispensaries and doctors, there is still a very high incidence of the above mentioned diseases, and Infant mortality is still extremely high— averaging between three hundred to three hundred and. fifty per thousand 231 births. While the curative services have developed rapidly, I measures for the prevention of disease and promotion of good health have not kept pace. In the future, public health efforts must concentrate on the prevention of ; disease. The main attack will have to focus on those i 1 diseases which sap the vitality and undermine the produc- i tivlty of the people. | II. E D U C A T IO N Education In Iraq Is largely a state responsibility although one hundred and forty private and foreign schools also exist. The state controls the educational policy, | the appointment and promotion of teachers. In the last ; two decades the Importance of education has received j growing recognition and considerable progress has been made. All, the number of schools, teachers and students have noticeably Increased, and. since 1952 public education at all levels has been made completely free. Primary j education has been made, by law, universal and compulsory where facilities exist.-1 - The Need for Educational Reform Nevertheless, the nation is still 85-90 per cent 1Embassy of Iraq, Education in Iraq (Washington, D.C.), pp. h, 7, 12. 232 Illiterate and education has been limited by shortage of schools and trained teachers. Even In Baghdad parents queue up for months In an effort, often in vain, to get a seat for their child in school. Furthermore, the schools have a bookish curriculum. College students go In mostly for law and other prestige professions. There Is rela tively little work practice connected with technical training and engineering; white collar, city Jobs are preferred. Typical of this trend are the figures on doctors. In the entire country there are 980 physicians and surgeons (one to every 6,500 or 7,000 people); of these 620 practice In Baghdad; of these 3k0 have their offices on Rashid Street, the main street.2 The facilities and quality of technical or voca tional education are still deficient. The adult education is s till largely neglected. Despite emphasis on primary education the number of children in school declines sharply with each succeeding grade, so that only between half and two-thirds of the children starting in primary school actually finish their primary school education and the investment In their education accordingly bears little fruit. This Is particularly true of children In rural areas where the educational, program in the schools 2Harvey O'Connor, N ew Light on Iraq (London: The Union of Democratic Control, 1958), pp. 6— 7. has no real relevance or meaning to the village children. The schools in rural areas teach the same curriculum which Is designed for Baghdad. Education Is not adapted to the environment and the practical needs of the people in the rural areas and consequently a great number of children do not continue their education. The following lengthy but worthy quotation from an American expert who spent the period October, 1956, to ; June, 1958, in Iraq, carrying out anthropological field ! work In some forty Iraqi villages, brilliantly illustrates ■ the point: | The Iraqi Government established /the rural school j to serve Umm_al-Nahr and some * K ) other villages in ! the district/ and provided teachers, books and other equipment. Over 250 students attended the school, yet in 1957 not one student passed the baccalaureate examination for the primary school certificate. Of the approximately 250 students in the school's six grades, only 10 were in the sixth and. final grade. Even those who do reach this grade are unprepared for the final /.baccalaureate/ examination which is uniform throughout Iraq. Although rural school teachers are somewhat below the standard of town and city teachers, the poor showing of this school is not primarily dependent upon teaching standards or upon a lack of ihtelligence among the students, the reason so often cited in Iraq. This ; poor record is rather a function of the unsuitability of the school curriculum for the students and the consequent lack of village association with the school. The school teaches, in effect, an alien curriculum suitable for Baghdad, for which It was designed. I call the curriculum alien since It has no real relevance or meaning to the village children. Their world is limited to the Immediate neighborhood of the village, s till closer to the world of Ur and Babylon than It is to our modern world. Yet the school attempts to bridge this vast gap and to prepare the students for life in this other world, which does not 21k \ I as yet exist for them. The school by teaching the three R's, history, geography, civics, hygiene, physical education—and even English—attempts to I equip the students for a world which is meaningless. Hygiene classes, for instance, teach the village boy | that if he brushes his teeth, gets exercise, a balanced diet, and keeps clean, etc., he will be healthy. This sort of lesson makes a great deal of sense for a boy who lives in N ew York or Iow a.—or even Baghdad—but bears no relationship to life in U m m al-Nahr where animal dung is used for fuel, where barefoot peasants walk through fields infested with hookworm and where the only drinking x-rater available is almost certain to be contaminated.3 Obviously there is need for educational reform. Not only is it necessary to expand educational facilities jbut also it is vitally important to evolve a better and more suitable type of education, one which is adapted to | the environment and practical needs of the people-helping ! to improve their health and their methods of work—and. I which will help to provide trained and efficient personnel i for carrying out economic development. In conclusion, education in Iraq should be given a more practical, realistic, technological and rural bias. Malcolm N. Quint, “The Idea of Progress in A n Iraqi Village," The Middle East Journal, 12:37^* Autumn, 1958. CHAPTER XV D E V E L O P M E N T P R O G R A M l I. D E V E L O P M E N T EX PEN D ITU R ES A N D PR O JEC TS The rapid increase in revenue anticipated from the I | expansion of crude oil production and the revision of the j j terms of payments by the oil companies led the Iraqi | Government, in 1950, to set up a Development Board to | assess the possibilities of economic development and initiate an over-all plan to develop the resources of the 1 j All figures and facts mentioned in this section, | unless otherwise mentioned, are taken from: G-ovemment of I Iraq, Development Board, Annual Report on the Operations of I the Development Board for the Year 1951 tBaghdad: Al-Anl j Press, 1956); Government of Iraq, Development Board, I Annual Report for the Financial Year. 1952-1953 (Baghdad: Al-Anl Press, 1956); Development Board, Annual Report for the Financial Year l233rl9SJ±; 1.9.5^1255.; and 1955-125.6 ; (Baghdad: Tafaiyudh Press); Development Board, M a.lor I Irrigation Projects (Baghdad: Al-Anl Press, 1955); Develop ment Board, M a.lor Irrigation Pro.lects (Baghdad: Al-Anl Press, 1956); Development Board, Development of the Tlgrls- Euphrates Valiev (Baghdad: Al-Ani Press, 1955TT Development |Board, The Habbanlvah Scheme (Baghdad: Al-Ani Press, 1955); | Development Board, Dokan D am Pro.lect 1955 (Baghdad: Al-Ani I Press, 195*0; Development Board, Compilation of Laws Concerning the Development Board (Baghdad: Government Press) and many publications of The Quarterly Bulletin of the Development Board: Annual Reports gf the Industrial Bank for the years 19^7 through 1957: Annual Reports of. the General Directorate of Industry for the Years 19A9 through 1956: The Quarterly Bulletin of the Central Bank of Iraq for the Year 1951: Land East: The Near and Middle East. Magazine: and the Annual Reports of the Agricultural Bank i g aSL. ! 236 ; country. In 1951> with the assistance of foreign experts including those of the International Bank for Reconstruc- ! tion and Development, a comprehensive six-year development plan was adopted (covering the period April, 1951» to March, 1957) and calling for expenditure of I.D. 155 ; million (Table XX) . In 1955 an expanded five-year plan (1955-1960), i terminating operations under the previous plan and calling I for total expenditures of I.D. 303*3 million was a d o p t e d . ^ ! With the prospects of Improved revenue from the oil sector i . | this plan was revised snd expanded in the fall of 1956. The new plan called for total expenditures of I.D. 500 ! million and was supposed to cover the six-year period : beginning April, 1955 March, 1961. The main field of expenditures In the new plan are shown in Table XXI. Actual and Estimated E;xpendlturea Compared Actual expenditures on development plans, as can be seen in Table XXII, have fallen considerably short of 1 2 I The breakdown of expenditures for this five-year plan was as follows: flood control, irrigation and drain age I.D. 107.9 million; roads and railroads I.D. 59.2 million; public buildings, housing and institutes I.D. A8.7 million; Industry, mining snd electricity I.D. A3.6 million; others I.D. AA.9 million. See*. Development Board and the Ministry of Development, Law No. A 3 for the Year 195 5 for the Q-eneral Programme, of the Pro.lects of the Development Board and the Ministry of Development (Baghdad: The Government Press, 1955)", pp. 17— 23* TABLE XX P R O P O S E D E X P E N D IT U R E O F T H E D E V E L O P M E N T B O A R D 1951/52 T O 1956/57 (Thousands of Iraqi Dinars) 1951/52 1952/53 1953/54 1954/55 1955/56 1956/57 Total Irrigation Projects: Tharthar 1,250 3,600 3,140 1,450 185 675 10,300 Habbaniya 450 300 500 500 200 250 2,200 Diyala reservoir 200 450 1,800 2,100 1,700 1,000 7,250 Dokan reservoir 200 600 1,400 1,700 1,550 1,250 6,700 Bekhme reservoir 200 1,000 2,500 2,500 2,500 2,500 8,700 Udhaim barrage and construction of canals — 550 250 500 500 500 1,800 Other irrigation projects 7 24 1,500 2,000 2,450 2,700 2,950 12,324 Major drainage projects 200 400 750 750 1,000 1,000 4,100 Total irrigation projects 3,024 7,100 10,840 11,950 10,335 10,125 53,374 Roads and bridges 2,066 3,800 4,700 5,300 5,450 5,450 26,766 Buildings 2,368 2,650 3,100 3,300 3,300 3,300 18,018 Reclamation of land, etc. 1,686 3,450 4,150 4,400 4,600 4,700 22,986 Administrative and research expenses 170 460 600 650 650 650 3,180 Industries 050 3,000 5,000 6,000 8,000 9,000 31,050 Grand Total 9,364 20,460 28,390 31,600 32,335 33,225 155,374 SOURCE: Summarized from: Development Board, Compilation of Laws Concerning the Development Board (Revised) (Baghdad: Government Press, 1952), pp. 8-9. 237 TABLE XXI ALLOCATION O F DEVELOPMENT FUNDS F O R THE PLAN ADOPTED IN 1956 (In Millions of Iraqi Dinars) Item 1955/56 1956/57 1957/58 1958/59 1959/60 1960/61 Total Percent Flood control, irrig a tio n and drainage 13.11 2A.00 26.90 27.00 29.25 33.50 153.76 30.75 Communications 1A.07 17.75 26.80 32.15 20.10 13.50 12A.37 2A.87 Public buildings 8.92 15.78 23.02 20. A 3 19.18 19.02 106.35 21.2.7 Industry A.12 13.06 1 1 .2A 8.00 8.00 9.90 5A.32 10.87 Animal and plant development 1.0A 3.00 3.00 2.50 2.50 2.25 1A.29 2.86 E lectric power n il 3.81 A. 76 3.00 1.00 0.10 12.67 2.53 Health 0.58 0.95 2.2 5 2.50 2.70 1.00 9.98 2.00 Education 0.31 0.60 1.15 1.50 1.70 1.65 6.91 1.38 Administration and planning 2.95 0.80 0.85 0.90 0.90 0.95 7.35 1.A7 Other 1.53 2.20 1.58 1.58 1.57 1.57 10.03 2.01 Total A6.61 81.95 101.55 99.55 86.90 83. * J 5 500.01 100.00 SOURCE: Compiled and summarized from: Government of Iraq, Development-Board and the Ministry of Development, Law No. 5k for the Year 1956 Amending the Law of the General Programme of the Projects of the Development Board No. A3 for the Year 1955 (Baghdad: Al-Ani Press, 1956), pp. 15-22. 238 TABLE XXII E S T IM A T E D A N D A C T U A L D E V E L O P M E N T E X P E N D IT U R E S C O M P A R E D (in Millions of Iraqi Dinars) Item 1951/52 1952/53 1953/51* 195V55 1955/56 1956/57 Estimated expenditures Actual expenditures 9.36 -3 .1 3 20.1*6 -12.81* 28.39 - 12.26 31.60 -20.87 1*6.61 -33.1*2 81.95 -1*5.00 Difference 6.23 7.62 16.13 10.73 13.19 36.95 SOURCE: Based on Tables XX and XXI above and on International Monetary Fund, Back ground Material on Iraq for 1957 Consultation (Washington, D.C.: 1957)> p* 9* 239 2 * 4 -0 estimates. In the initial years (1951/52 to 1953/5*4-) i actual, expenditures totaled I.D. 28.2 million while the estimated expenditures were I.D. 58.2 million, thus leav ing an unspent balance of I.D. 30 million. In these initial years, particularly in the first two years, the short fall was due to the fact that the plans and specific projects were not yet ready for effective implementation. j i Som e of the reasons given were thedels.y in the approval of the program by Parliament; the inability of departments to j execute the projects entrusted to them by the Board; and the necessity for providing adequate time to study, survey and prepare the estimated cost and specifications for ! inviting tenders for the various project s.3 I The building program and reclamation of lands end i other projects ran nearest to schedule, while Irrigation and Industry lagged behind. Since 1953/5*4- expenditures have risen considerably, increasing from I.D. 21 million in 195*+/55 to I.D. * 4 - 5 million in 1956/57» the increase : being mainly in the agricultural field. However, actual j | expenditures are still considerably below estimates, i particularly in the industrial sector. In this sector ! outlays under the plan have fallen short of approved j I targets largely because of lank of certain human skill and J 3 1 Economic Developments in the Middle East, 19*4-5- 195*4-. op. olt. , p. 113* 2^1 ! know-how, namely: managerial, entrepreneurial and technl- j cal know how. i | Ma.lor Pro.1 ecta Although the Board has alioted considerable amounts for the development of transportation, power and other i projects, the greatest proportion of Iraq's financial resources have been channelled into vast flood control and irrigation projects. A n over-all program has been i prepared, at an estimated cost of I.D. 335 million, providing for the construction of flood and irrigation ! projects on both the Tigris and the Euphrates. The I j purpose of these projects is to protect the country from j damage to lives and property experienced often in the past, : and to increase the area of land under cultivation by 75 per cent so that net annual agrlcultura.1 income after the completion of the projects would reach a level four folds larger than that of 1952.^ The main project on the Tigris has been the gigantic ! W adi Tharthar dam, the purpose of which is to divert flood i waters from the Tigris at Samarra into a huge natural A Background Material on Iraq for 1957 Consultation, on. g it., pp. 1, 6 and 9. 1 ^Knapper, Tippets, Abbot, and McCarthy, Development of the Tigris and Euphrates River System, summarized by Development Board, Development of the Tlgrls-Euphrates Valiev (Baghdad: Al-Anl Press, 1955)» PP* 3-26. I 2* 4 -2 depression of 761 square miles. This project was com pleted in 1956 at a cost of I.D. 16 million. O n the Euphrates the Habbaniyah project, completed early in 1956 at a cost of I.D. *i-.5 million, was the main project. It enabled flood waters later that year to be controlled and utilized for irrlge-tion the following summer. Other projects under construction include the Dokan D am on the Lesser Zab, a tributary of the Tigris; the Derbendi-Khan D am on the Diyala; and the D u Jails-, Latifiyeh, Haweejea, and Greater Musseyeb projects. M any other new irrigation projects were being planned. The Minister of Development stated, in a speech, that the above mentioned projects for irrigation and flood control may take twenty to fifty years to complete.^ II. E V A L U A T IO N O F T H E D E V E L O P M E N T POLICY M any experts,7 some of w hom served as advisers, closely associated with the development work, observed that while Iraq has shown prudence and restraint in Development Board, Law No. * $ £ fojr the Year 1955 for the General Programme of fhs. graffi-fit^, of tfc.e. D evelop ment. Board end the Ministry of D evelopment (Baghdad: The Government Press, 1955)» P» 3- ^Se.e for example the opinions of Lord Salter, The Development of Iraq: A Plan of Action (Baghdad: The Development Board, 1955)» PP» 115-118; and International Monetary Fund, Background Material on Iraq for 1957 Consultation, o£. » pp. 102, and 9-10. providing by law 70 per cent of its annual oil revenue for capital development—particularly for the construction and improvement of irrigation and flood control schemes, the transportation system and power facilities—they questioned or considered mistaken many of the underlying ideas of policy. Shortcomings of the Development Policy In the first place, too great an emphasis has been laid on dams and water schemes, while other forms of developedment have not been promoted adequately.® Of course, as Lord Salter stated: It is right that water schemes should absorb a greater part of the resources of the Board than any other single form of development, and that so far as they are necessary to give a reasonable security against flood disasters they must have priority. Once that point is past, however, they need to be placed in a proper relation to the uses they serve and weighted fairly against other claims upon development funds.° The International Monetary Fund's experts reported that with the completion of the Tharthar and Habbaniya projects satisfactory results in the field of flood control have already been achieved.^ Enough water can be stored 0 Dams and water schemes account for 31 per cent of the outlays, followed by communications with 25 per cent, public buildings 21 per cent, and industry 10 per cent. I | ^Salter, op., c lt. , p. 115- i | 10Background Material on Iraq for 1957 Consultation, jqp. fii£. , p. 1. zbh in these two major projects to be used for Irrigation, but no action was taken for the actual use of the stored water when It Is available. Thinking and planning in terms of how to put Into use the stored water which can be made available by the already completed Flood projects : certainly merits priority in importance and in time over i the construction of further dams. Greater attention to | the industrial sector which has been relatively neglected | also merits priority. ; Furthermore, far too little effort and capital have i ! been devoted to development which will bring reasonably ! 11 jquick results. According to Salter: j The great water schemes (apart from the extra security which the first of them, at Wadi Tharthar, which was started before the Board existed, will give against flood disasters) will take many years before they have a substantial effect upon production and welfare. They take a number of years to build; and the water they store needs irrigation canals, and drainage as well, before it is useful. Housing the most obvious of the Board1s enterprises which can give quick results directly visible to the ordinary men has hitherto been on a negligible scale. Little, lament ably little has been done to increase and improve agriculture.I2 I The same observation was also made by the experts from the International Monetary Fund who stated that It is reported by one source that more than l\Q per cent of the Board's money was invested in a long-range plan. See: "Iraq: The Uses of On," Fortune. September, 1958, p. 120. 12 Salter, op. clt., p. 117. 2 h5 \ "altogether the development program" of Iraq "haa not bo ; far been accompanied by a corresponding expansion In the l . more directly productive f i e l d s . "A n appropriate balance" they pointed out "between long-term basic development and the short-term productive investments in : both industry and agriculture would seem desirable for the balanced growth of the Iraqi economy."1^ The Importance j ! of the balanced growth was sharply brought into focus during the Suez situation when the temporary stoppage of : oil exports threatened Iraq's budgetary and balance of ! payments positions. | There are other reasons why it is significant for i Iraq not to concentrate to so great an extent on what are i i : essentially long-term projects. In the first place, it ; will always be resented by the masses that so large an amount of public money accruing through oil revenues over so many years should bring so little visible benefit to those w ho are suffering from lack of housing, drinkable water, hospitals, clinics end other basic public services I in most parts of the country. M any observers believe that i it was this kind of resentment, among others, that was responsible for the lightning downfall of Nuri Al-Said 13 ' Background Material on Irao for 1967 Consultation, los.- fiii- ! 1 J+ I Ibid. . p. 2. 1 2 ^ 6 i regime which, despite feverish construction of dams and other buildings, did not fundamentally alter the living conditions of most of Iraq's citizens.1^ There is a further reason why Iraq should not concentrate to so great an extent on long-term projects, 5 namely, to counteract the danger of inflation. The long term projects (dams, and so forth) involve for many years | spending on a large scale without an immediate increase in | production. Consequently, if only a part of the invest- | ment expenditures is spent abroad, and if the Increased I purchasing power is not reduced through taxation or saving, investment in long-term projects may bring a real danger j of inflation. ! Hence, in order to obtain a balanced growth, to ; avoid social unrest and the danger of Inflation it seems necessary for the development program to attempt to strike a balance between the long-term and short-term projects, iInvestment expansion is urgent in the more directly !productive fields--those which will give quick results in |increased production and services. The neglect of Nuri's regime of this Important aspect of development aided considerably in his downfall. After Nuri's assassination, in the revolution of the l^th of July, the Board members were replaced by men of the 1 5 _ Fortune. loc. cit. 2^7 revolutionary government. This writer does not he.ve information about the new development policy and to the best of his knowledge no definite policy has yet been announced. Regardless of the policy adopted in the future, however, this writer will in the final snd concluding chapter of this part of the dissertation touch briefly on the general line of development policy which should be adopted. CHAPTER XVI CONCLUSIONS AND GUIDELINES FOR ECONOMIC DEVELOPMENT OF IRAQ, Iraq has an altogether exceptional opportunity for achieving a rapid economic development which would increase her economic resources and raise her general standard of living. Its river system, besides the rain fall, can supply it with large amounts of water for irrigation and power generation. The soil in Iraq is among the most fertile in the world and a large area of arable and cultivable land still exists untapped. There is an abundance of various untapped materials— minerals or otherwise— which could form the basis for light and some heavy industry. There exists, also, hugh quantities of energy-generating materials, such as petroleum and white coal. The supply of labor— quantitatively— is now plentiful and sufficient to meet the needs of economic development. Labor is cheap and generally capable of acquiring skills with a little training. Oil revenues furnish Iraq with a large source of capital which can be used for establishing social overhead and other basic and major facilities, and which can be used for importing capital goods and other materials necessary for economic development. Oil revenues also help Iraq to maintain a 2 h 9 balanced budget, free from burden of heavy debts, and favorable balance of payments. Furthermore, they enabled Iraq to embark on a development program which began in 1950. Despite the material potentialities for economic development and higher standard of living, the development program did not fundamentally alter the living conditions. The majority of the Iraqi people, therefore, remain hungry, diseased and ignorant. Today, more than ever before, the Iraqi state is confronted with a population insistent upon better living conditions. This population—though it does not consti tute a problem at present—is expanding rapidly at a pace close to 3 per cent per annum. Thus Iraq is faced with an overwhelming need to accelerate its economic develop ment. For it is the only way to raise the living standards of a poverty stricken, insistent and rapidly expanding society. H ow can the abundant untapped material resources as well as relatively underemployed human resources of Iraq be brought to bear more fully upon this problem? W hat are the planning guidelines that will encourage more rapid economic growth with the benefits spread throughout all the society? 250 II. GUIDELINES FOR PLANNING ECONOMIC DEVELOPMENT OF IRAQ, 1. The writer believes the first guideline should be to emphasize agricultural expansion. This would have two major economic effects. It would provide more food— 1 which is urgently required— for local people, many of j whom live on less than two thousand calories a day. It | ; would provide employment for a large segment of the ; population which is largely engaged in agriculture, and t ; which includes a considerable number of underemployed and I unemployed people. j Many economists also add that increased produc- I tivlty in agriculture is a necessary condition for i ■ industrialization, both to feed those engaged In the ' industrial sector and to provide a market for their products. Steps have already been taken to provide reasonable ■ security against crops and property damaging floods. Many | dams and Irrigation projects have already been constructed or are being constructed to provide irrigation for that which Is potentially cultivable. What Iraq needs now is not to further the expansion of cultivated land. Rather, its immediate objective policy should be to open up new land when it is actually needed for available settlers, to ensure that what is cultivated is used to the best 251 advantage, under most efficient methods and to provide whatever is needed for this purpose. It is more urgent to do this than to provide irrigation for all that is poten tially cultivable. A m ong the desirable steps are land tenure reform, so cultivators will have a greater stake in increasing output which will belong to them rather than to the j j ! landlords. Steps have already been taken under the new : Agrarian Reform Law of 1958 for this purpose. The Law | also aims at raising peasants' living standards and j agricultural production by emphasizing village aid ! programs, cooperative societies, health, educational, i j agricultural and vocational services, and so forth, for the fellahin. 2. A second guideline would be to expand industry. Successful development requires a balanced growth between industrialization and agricultural development. Although there is an urgent need in Iraq for a larger food consumption, agricultural development snd greater food consumption can not be relied upon to ra.ise standards of living. N o country specializing in agricultural produc tion, for hom e consumption, has attained a living standard which can be considered high by modern standards. The recordB show that except in a few countries—ouch as Australia, N ew Zealand, and Denmark—high levels of per j capita incomes have been achieved only in countries which 252 i have developed their industrial resources on a consider able scale. i Furthermore, industrialization is desirable to avoid, the violent shocks from outside. For if Iraq specializes in agriculture exporting, for example, dates i and some other crops, its balance of payment, its govern- ; ment budget and the general internal economy in the ’ future would be vulnerable to fluctuations caused by the 1 world, market upon which it would be too highly dependent. There is every reason to believe that an Increase I in the size of the Industrial sector of Iraq would be | desirable. This belief is also found in a report Jointly I sponsored by the Development Board of Iraq and the United [ States Operations Mission in Iraq. To quote from the i report: While it is impossible here to lay down the appropriate relationship between industry and agriculture, it is clear that high living standards cannot be achieved without a substantial increase in industrial activity in Iraq. The present very small size of her Industry and the availability of poten tially valuable Industrial materials indicate that one of the fastest and most certain routes to higher I living standards for the people of Iraq is an industrialization program. . . .1 Among local industries that might be encouraged are those based upon the processing of local raw materials (that is, food processing and textiles) and those where "^Arthur D. Little, Inc. , A Plan for Industr 1 allza- j ; tlon of Iraq (Massachusetts: 1956), p. 5- 253 transportation costs give local producers a competitive advantage (for example, cement, brick, concrete pipe, and : so forth). Local petroleum will provide a cheap source of power for industries. Several chemical induetrles--such as the production of chemical manures, and so forth— could be established. A long list of new industries to be profitably established as recommended by the Report | mentioned above is found in the next chapter under the | heading of “Probable fields of investment in Iraq.1 1 3- The third guideline would emphasize education ! and health. Education in general and vocational and ( l I agricultural training in particular should be given I | greater attention, since implementation of the industrial i ' end agricultural development programs depend upon the availability of skilled people, technicians, engineers, entrepreneurs and other business talent. Engineering Colleges and Vocational Trade Schools, Agricultural Colleges, and other Institutions are already graduating many trained experts, but the total number is still small i relative to the needs, particularly the entrepreneurial snd manageria.1 talent. One final point regarding both health and education needs to be stressed here. The Board of Development should in the future enlarge its conception of capital investment to include “human investment. “ U p until the Revolution of 1958 the Board had thought of its task 2 5 ^ almost exclusively In material terms. W hen It contrib- utes, for example, to heaJLth It does so only in the form of buildings—hospitals, clinics, and so forth. So, too, its contribution to education is in the form of schools. It should be recognized that investment in human beings to Improve their quality as well as capacity is perhaps more beneficial and suitable to the country than bricks and mortar investment. For example, bilharzla and malaria are some of the , endemic diseases which are reducing the productive capacity of those suffering from one or another of them, i and who, in som e regions, are perhaps a majority of the population. This writer thinks that, in this case, capital investment to reduce incidents of bilharzia. and malaria would be more suitable and beneficial than invest ment which contributes to building hospitals only. Such investments, it should be recognized, are also needed for they improve the quality and capacity of the people and add to their general welfare as well as improve the productivity of the nation. The fourth guideline relates to the need for provision of a special kind of human skill which is lacking in Iraq, namely, entrepreneurial, managerial and | technical skill. The discussion of the problem of the j shortage of these kinds of talent, its effect on economic 255 development of Iraq and what is the best solution to the problem is the main concern of this dissertation and will be discussed in Chapter XVII. PART III A JOINT FO R EIG N -LO C A L PRIV A TE EN TERPR ISE A PP R O A C H FO R IR A Q CHAPTER XVII T H E P R O B L E M O F S H O R T A G E O F EN TR EPR EN EU R IA L, M A N A G E R IA L A N D T E C H N IC A L T A L E N T : A N A P P R O A C H FO R SO L V IN G T H E P R O B L E M I. SC A R C ITY O F SPECIAL H U M A N ABILITY IN IR A Q , A N D ITS IM PLICA TIO N S Iraq, which has a sufficient supply of cheap labor end an abundance of unexploited natural resources, and which does not suffer—like most underdeveloped countries— from a serious lack of capital, is today suffering from a serious shortage of special kinds of human ability tha.t may, without assistance from abroad, inhibit its indus trial development and all hopes for rapid economic growth. There is in Iraq now a scarcity of m en with entrepreneurial, managerial and technical ability; people with skill, know-how snd experience w ho would seek and discover investment opportunities to turn the available resources into productive project s. This lack of ^The scarcity of this kind of talent is recognized by many experts and in many reports such as the Report of the mission organized by IRBD, The Economic Development of Iraq (Baltimore: The Johns Hopkins Press, 1952); the Report by Arthur D . Little, Inc., A Plan for Industrial Development in Iraq (Massachusetts: 1956); end the International Monetary Fund, Background Material on Iraq for 1957 Consultation (Washington, D.C.: 1957)- 2 5 8 Initiative, and the deficient knowledge of business and technical matters is, and has been, a major bottleneck in : the way of realizing a rapid economic development of Iraq. This obstacle is best demonstrated by, first, the inability of the Board of Development to spend all of the I allotments set aside for development programs, particu- j larly In the industrial sector where such talent is | largely needed; and, second, by the Inability of the i available local private capital to flow into the many I profitable Investment opportunities available in Iraq j which are, at the seme time, regarded as favorable to a i i developing economy. I Lord Salter, for example, commented that while i extensive inquiries and surveys have been made, very little work has yet been actually done and little expendi ture actually Incurred. Out of a total sum of 31 million Iraqi dinars assigned for the 1951 development program only a. meager figure of about half a million Iraqi dinars had been actually expended by March, 195^* > and one million I dinars were estimated to be the actual expenditures for the year ending in March, 1955-2 A report by the Inter- j national Monetary Fund also Indicates that this trend has continued in the following years. Actual expenditures on 2 Lord Salter, The Development of Iraq: A Plan of A ction (Baghdad: The Development Board, 1955)» P* 72. “ I 1 259 development during the following years* according to this ; report, have fallen considerably short of estimates j largely due to lack of technical and managerial talent.3 Private local capital available for investment has also been unable to flow into investments deemed most I essential to development of the Iraqi economy. Although | this capital is regarded as relatively substantial,^ yet | it! does not flow into new industries because owners of I capital are "somewhat reluctant to commit resources to ; Industrial ventures where there is lack of experience to j start industrial enterprises."5 The number of willing investors in a new enterprise will doubtless depend I largely on their knowledge of the particular concern, and i i ! the number of those possessing this knowledge is very ; small in Iraq. ■ Ihe Implications of Shortage of Entrepreneurial, Manage rial and Technical Talent to Economic Devel opment of Irao The above mentioned facts and figures reflect the difficulties experienced by Iraq In the course of Background Material on Iraq for 1967 Consultation. 2 D .* c it. , pp. 1 and 9. ^Salter, op. c it. , p. 7 * + - ^Background Material on Iraq for 19 67 Consultation. op. c it., p. 6. The absence of a capital market is, of course, a further complicating factor In marshaling long term and equity capital. 260 development in the 1950’s, and which in the opinion of this writer will continue to delay the development process as long as the nation suffers from the scarcity of entre preneurial, managerial end technical talent. Chapter VI of this dissertation has said much about the dynamic and Important role played by entrepreneurial and other talents in economic progress.6 It is, however, significant to repeat that a great many economists and other thinkers insist that the shortage of entrepreneurs is primarily responsible for the backwardness of under developed countries. The entrepreneur might be an Industrialist with novel ideas on production; he might be a merchant, a chemist or an engineer with new business designs; he might work singly or as a member of a group. In any event he is j recognized as the driving force in the formation of an | advanced economy. Economic development, therefore, is | very intimately tied to people like him. Iraq, at present, suffers from a serious shortage of entrepreneurial talent. True, it has, like most under developed countries, a small class of entrepreneurs, but £ Cf. ante. Chapter VI for a detailed discussion of the role of entrepreneurs In economic development, reasons for scarcity of this talent in underdeveloped countries, and the general measures necessary for promoting and cree-ting an entrepreneurial class In these countries. 261 It is typically a class of merchants and traders engaged in distribution, foreign trade, real estate speculation and money-lending rather than the promotion and management of modern industrial enterprises. So even if there is no shortage of capital, ls.bor and natural resources, scarcity of entrepreneurs able to institute and manage industrial enterprises would still be e , major bottleneck. This scarcity of entrepreneurs may, without assistance from abroad, inhibit the industrial and rapid economic growth of the country. This writer, therefore, believes that in Iraq, which has essentially a private enterprise system of economics, there is an urgent need for people with entre preneurial spirit; skilled people who can perform the function of risk taking, managing and innovating and who are willing to take the Initiative In starting productive as well as profitable projects. In a private enterprise economy, successful economic development and Industriali zation depend greatly on a broad participation by the private sector in industrial and other economic activities. To use Spengler's words: Industrial progress is markedly dependent upon the (a) relative number of imaginative and energetic innovators and entrepreneurs present In population, (b) the extent to which these qualified persons are empowered to make and execute relevant decisions, and (cl the degree to which these individuals are free of 262 hampering legal, a n d I n s t i t u t i o n a l a r r a n g e m e n t s .7 It should be borne In mind that economic develop ment Is not simply a matter of capital and natural resources, but has much to do with human capacities. The experience, the skill and knowledge, the ability and energy, the freedom and attitude with which people work— especially those in whose hands Is the capital—he-ve a distinct influence on the rate and kind of development experienced by any country. II. AN APPROACH FOR SOLVING- THE SHORTAGE PROBLEM OF ENTREPRENEURIAL, MANAGERIAL AMD TECHNICAL TALENT IN IRAQ The governments of Iraq and the main agency for economic development (The Development Board) all recognize the shortage of people with entrepreneurial, managerial and technical talent and its impact on economic development of Iraq. To overcome this Important hurdle the pre revolutionary government, for example, was thinking in terms of establishing and operating enterprises Itself to turn them over later to private hands once they proved to be successful, following, in this regard, the steps "^Joseph J. Spengler, "Economic Factors In the Development of Densely Populated Areas," Proceedings of. the American Philosophlcal Society, Vol. 95« No. 1, February* 1951# p. 22. 263 initiated by Japan at the beginning of its ow n economic ! process.® This kind of thinking is shown in the following quotation from a report by the International Monetary Fund: . . . there is a feeling in government circles that it would be desirable at first for the Govern ment, through the Development Board, to establish industries so as to demonstrate to the private sector that this can be done efficently and to allow the j private sector to move in gradually.9 I ! The present government, also, faced with the short- j I age of entrepreneurial, managerial and technical talent, j is inclined to follow the same approach and act as the entrepreneur in an effort to industrialize and develop the I country rapidly on its ow n Initiative. ; Objections to Government Enterprise Government action of this kind, in the opinion of ! this writer, is not the best alternative for attacking the ®It should be remembered that Japan's government , used both direct and indirect means in attacking the I problem. O n the one hand, the state itself at times acted ! as entrepreneur and capital supplier. M uch of the state enterprise in Japan, however, was in undertakings already widely regarded as appropriate to government such as public utilities, roads, and so forth. O n the other hand, j the state encouraged and fostered private enterprise and Investment, and this perhaps was more important in gener ating a self-sustaining economic development. Norman Buchanan and Howard Ellis, Approaches to. Economic Development (N ew York: The Twentieth Century Fund, 1955)» pp. 181-182. ^Background Material on Iraq for 1957 Consultation. op. .alt-. , p. 6. 26 k problem of scarcity of entrepreneurial and managerial ability for many reasons. For one thing, in a private enterprise system the state should not compete with the private sector. Rather It should induce It to carry on the needed activity. The state activities should be limited to undertakings regarded as appropriate to government such as public ! utilities and transport (that is, those regarded as basic i economic f a c ilitie s ) a n d those activities—such as flood ! control, harbor development, construction of huge dams, and so forth—which private Investors are unwilling or unable to undertake either because they are unprofitable or they are large-scs-le and complex projects which require | tremendous Investment funds. With increased government | activity in the private field, lies the political and i I economic danger of expanding government bureaucracy. Then there Is the objection that the assumption of an entrepreneurial role by government does not of itself solve the whole problem of the shortage of entrepreneurs. i | For the governments of underdeveloped countries themselves are short of people with managerial and high technical talents required to operate the enterprises efficiently. Efforts to train and create a sufficient number of managers end other personnel from domestic sources alone ^Buchanan end Ellis, loc. cit. 265 ; can not produce fruitful results in a short space of time. Furthermore, while the training process is going on it would be hard to prevent undue waste of resources or deterioration in the quality of factory products, d.ue to inefficiency and lack of experience. If the government, in an effort to avoid waste and inefficiency, immediately brings foreign managers and i experts to manage the government enterprise, such an ! enterprise may s till suffer from Inefficiency. For these imported managers and experts would, not have as strong an ' incentive as owners of private firms who bear the risks of ! losses and to w hom all profits or rewards of success would i : accrue. It is also likely that the imported managers and experts— > w h o d _ o not have as much at stake as the owners of private enterprise—may not perform their function of training and developing entrepreneurs and technicians as effectively as the prive.te enterprise. The superiority of private enterprise in providing 1 1 efficiency" need not be demonstrated here at length. In fact, It Is so commonly ! accepted that it is often said that private entrepreneurs are necessary only to the extent that we want to make development and changes as efficiently as possible.-1 - - * - Yale Brozen, "Entrepreneurship and Technological Change," Economic Development• Principles and Patterns. Williamson and Buttrlck (eds.), (N ew York: Prentice-Hall, Inc. , 195*0 > P» 196. 266 Even If we disregard efficiency, the government I enterprise approach still suffers from another grave : difficulty which, in most underdeveloped countries, arises from the existence of weak public responsibility and the absence of a. competent and honest civil service needed for I the administration of development programs. In this I I regard one writer said: i ' The officials charged with the execution of the plans on the spot frequently lack the education, the I skill and the honesty required to direct and supervise development projects which offer so many opportunities for personal enrichment.12 Consequently, the government enterprise approach would probably bring failure to the entire development program in the underdeveloped countries, the result of | which would be wasted, efforts and resources and a delay in the process of economic development.-^ i The weakness of public responsibility and. the ; absence of competence and honesty in public administration remain a. strong objection to a government enterprise approach even if the government follows the steps of Japan, i ! namely, to start the enterprise, get it going end once it Is able to stand on its feet turn It over to prlvs.te -^Alfred Bonne, Studies in Economic Development (London: Routledge and Kegan Paul, Ltd., 1957) , pp. 72-73* -^•^Paul A. Baran, "National Economic Planning," A Survey of Contemporary Economics , Vol. 1, Bernard F. Haley (ed.) , Tlllinois: Richard. D . Irwin, 1952), pp. 381-382. 267 hands. For this Japanese approach could conceivably bring inefficiency and failure to any development plan. For example, administrators of a program, whose main interest is to increase their wealth and preserve their privileges, may favor the construction of some plants or projects which would ultimately add to their own wealth and perhaps with little or no increase in the productivity of the nation. Or these projects may be turned over to private firms made up of favored relatives and friends with weak and wasteful management, the result being that the enterprise will demand and obtain protec tion and paternalistic care for a long time. The early experience of the Japanese t. ext lie industry provides an experience of /this/ sort. To get the industry going the Japanese government gave subsidies to textile operators. Textile firms were started, but their owners were persons with political connections necessary to get the subsidies. They were not enterprisers who raised productivity, end their firms were able to live only because of the subsidies they received. Fortunately, innovating entrepreneurs who did not have the required political connections also entered the industry. . . . Efficiency in these firms was greater than in the subsidized firms. Without protection, it is feared, the favored enterprises owned by relatives and friends could not or would not maintain certain standards of efficiency. All this could happen if, instead of turning over the enter prise to the highest bidders at attractive prices ( that, 15 Brozen, op. cit., p. 221. 268 j is, to those people w ho are willing to bid. high and who : are efficient and therefore confident that they can turn I the enterprise into a profitable venture), the irrespon sible government administrators wilfully sabotage the transferring process, practicing favoratism and nepotism, ; a practice which is very prevalent in underdeveloped | countries. I Hence, those w ho insist that the absence of private ! j ! entrepreneurs in most underdeveloped countries means that j the government will have to perform these functions if i j development is to be achieved, must fully recognize what j this means in terms of government and public responsibility which prevails in these countries. "To assume that the |governments of underdeveloped countries will necessarily be an efficient agency of administration is often unwe.r- I ranted. i While the new administration of the Republic of I Iraq, for the first time in the history of this country, I has started energetically to put an end to corruption; to jclear the Government apparatus from rotten elements who i have utilized their official positions for private gain, it. should not be expected that its administrative staff will, in a short time, fully develop those qualities of loyalty and devotion which are regarded In most Western 1*1 ^Buchanan and Ellis, op. cit. , p. 82. 269 communities as the prerequisite for the exercise of any official function. To resist the practically unlimited opportunities for personal enrichment, and hence for defeating the purpose of public service as such, require® a mentality which is not yet com m on in Iraq and other underdeveloped countries. Consequently, the ’ ’Government Enterprise” approach is likely to be moderately successful only if it does not involve any excessive demands on the personal loyalty and conscientiousness of the officials who execute the Government projects. In order to create a sufficient supply of adminis trative staffs, fully loyal and devoted to the aims of the State and the public welfare, the element of time appears as significant. The more time that will be avail able to absorb all the parties concerned, through a broadly conceived educational effort, with new concepts of devotion and identification with the cause of the State and its development policies, the more promising will be the prospect for success. In conclusion, the Government enterprise approach, for many reasons--lncluding waste and inefficiency in the use of resources, the weakness of public responsibility and the lack of competence and honesty in public adminis tration, and the political and economic danger of an expanding government bureaucracy—is not the best 270 ! alternative for attacking the problem of shortage of ; entrepreneurs and assisting the rapid growth of the econ- [ : om y on s. sound democratic basis. Joint Foreign-Local Private Enterprise a Better- Approach A better approach for overcoming the shortage problem of entrepreneurial, managerial and technical ' I talent, this writer believes, is through the aid of direct I | I | private foreign investment in participation with local ! private investors. This type of investment has some special advantages over the Government Enterprise approach. This writer believes that this approach is more capable of j introducing the entrepreneurial and managerial talent end I also the skilled labor required by a developing economy, I while at the same time helping to develop a sound and i growing economy. Advantages of. the joint private enterprise approach to Iraq. In the first piece this approach is more compatible with the private enterprise system of economics |which Iraq now maintains. Secondly, this approach will directly supply all or most of the needed entrepreneures and other qualified personnel. Cf. ante, Chapter VII, for further discussion of the advantages of this approach to underdeveloped countries in general. 271 T h i r d l y , t h i s k i n d o f I n v e s t m e n t , b e i n g s u b j e c t t o j p r i v a t e p r o f i t m o t i v e s a n d b u s i n e s s c a l c u l a t i o n s i s m o r e ; l i k e l y t o b e p r o d u c t i v e l y e m p l o y e d . B o t h p a r t i c i p a n t s ( f o r e i g n a n d n a t i v e s ) w i l l s t r i v e f o r e f f i c i e n t o p e r a t i o n o f t h e i r e n t e r p r i s e b y a t t e m p t i n g t o r e d u c e c o s t s a n d m a x i m i z e t h e i r p r o f i t s . F o u r t h , a n d t h i s i s a v e r y i m p o r t a n t r e a s o n , i t h e l p s t o p r o m o t e t h e s p r e a d o f m o d e m t e c h n o l o g y and. e f f i c i e n t m a n a g e m e n t m e t h o d s , m o r e e f f e c t i v e l y t h a n t h e g o v e r n m e n t a p p r o a c h s i n c e t h e i n c e n t i v e i s s t r o n g e r h e r e f o r b o t h f o r e i g n a n d l o c a l p a r t n e r s . T h i s w o u l d b e t r u e b e c a u s e t h e p r o f i t m o t i v e w i l l i n d u c e t h e n a t i v e p a r t n e r s t o b e c o m e e f f i c i e n t a t t h e v e r y m om ent o f i n c e p t i o n o f j t h e e n t e r p r i s e . On t h e o n e h a n d , t h e l o c a l p a r t n e r s w i l l i h a v e a n o p p o r t u n i t y t o o b s e r v e t h e m o re e f f i c i e n t m e t h o d s ; o f b u s i n e s s o p e r a t i o n a n d b u s i n e s s m a n a g e m e n t i n p r e n t i c e s i n c e t h e f o r e i g n p a r t n e r s h a v e g r e a t e r i n c e n t i v e i n a c h i e v i n g e f f i c i e n c y . On t h e o t h e r h a n d , t h e n a t i v e I p a r t n e r s t h e m s e l v e s h a v i n g v e n t u r e d t h e i r c a p i t a l w o u l d i h a v e a m o re p o w e r f u l m o t i v e t o l e a r n and. u n d e r s t a n d t h e b a s i c t e c h n i q u e s a n d p r i n c i p l e s o f b e c o m i n g e f f i c i e n t e n t r e p r e n e u r s a s q u i c k l y a s p o s s i b l e . I t c a n n o t b e r e a s o n a b l y a r g u e d t h a t t h e g o v e r n m e n t a p p r o a c h c o u l d p r o d u c e t h e sam e f r u i t f u l r e s u l t s b y I m p o r t i n g i n d i v i d u a l f o r e i g n e x p e r t s t o m a n a g e t h e p l a n t s a n d t o t e a c h t h e n a I v e s t h e b a s i c t e c h n i q u e s a n d 272 principles of doing business or running the plant, because \ these Imported experts may not have the strong Incentive possessed bj' owners of private firms who bear the risk of ! losses and to w hom all profits or rewards of success would accrue. It Is likely, therefore, that the imported | managers and experts—w ho do not have as much at stake as i | the owners of private enterprise—may not perform the | function of training and developing entrepreneurs and 17 ; technicians as effectively as the private enterprise. ' j Advantages of direct foreign Investment in partner- I ship with local partners, of course, would not be confined to directly supplying foreign talents and generating a I supply of indigenous entrepreneurial and managerial ability 17 This writer further objects to the approach of ;Importing individual managers, experts and technicians as the main solution for the problem of shortage of entre preneurial, managerial and technical talent on the ground that it is always Inferior in its results. This is so 'because men of the wrong type may be attracted and required to adjust themselves to tasks well beyond their abilities in an almost completely strange surrounding. ;The employer—whether it be the government or a local enterprise—of such m en lacks experience both in recruiting foreign staff or making best use of the men he can get. The combination of such an employer and sub-standard staff may cause acute disappointments, resentments, and a succession of unsavory resignations which completely destroy the continuity of management and delay the emer gence of competent local staff. Use of so wrong a method j not only means failure to achieve the immediate object, but | also aggravates the underlying antagonism potential to { every situation of this kind and renders any solution more j difficult. Therefore the use of this approach should never be encouraged as the main solution to the problem. 273 i ■ for the future. This approach can also contribute in the ; training and development of a skilled labor force. Foreign enterprises would provide both experienced trainers and working places necessary for the training of a large number of workers. It can also assist in provid ing additional capital for investment. Above all, it can | effectively assist in raising the productivity of the ! economy, not only by directly initiating productive ! enterprises but also by stimulating the development of or by giving birth to corollary enterprises, all of which is expected to speed up economic development and raise the standards of living without a great deal of governmental ! action i To sum up the facts which have been discussed so ! f a r with regard to the problem of lack of entrepreneurial, managerial and technical talent in Iraq, this writer maintains that direct foreign investment in participation 1 8 Direct foreign investment is regarded to have advantages over all other possible external sources of capital formation and economic development in that its contribution to economic development is greater. To quote Nurkse: 1 1 It Is worth emphasizing* once more that direct business investment has . . . this to be said In its favor that it goes directly Into capital formation. . . . Normally and almost inevitably, foreign entrepreneurial Investment creates a real addition to the productive capacity of primary country. I stress this because it is not true of all the possible external sources of capital (such as international loans and grants).'* Ragnar Nurkse, Problems of Capital Formation in Underdeveloped Countries (Oxford: A. T. Broome & Son, 1957), p « 88. 27^ with private local investment (that is. Joint enterprise) | for the solution of the problem of introducing the above i needed talents and fostering economic development is in many ways a superior approach than the Government enter prise approach toward which the Iraqi governments are j leaning. This approach, of course, assumes that it Is not very difficult to attract foreign investments into Iraq | and that foreign Investors, as a rule, will be willing to i | go Into partnership with the local people. This assump- ! tion is based on the belief that Iraq Is capable of providing an attractive investment climate. i ; III. T H E IN V E ST M E N T C L IM A T E IN IR A Q , In the first place, there are at the present time I j good investment opportunities in Iraq. The abundant ; natural resources available In the country, and the fact ' that these resources are still, In most cases, untouched, I provides an unusual opportunity for profitable Investment. i O ne must also remember that Iraq still lacks a large degree of development and is presently endeavoring to develop Its potentialities and improve the standard of living of its people. The possibilities for development are, indeed., very wide. But In these days w e frequently hear that there I exists little or no basis for direct private investments 275 j ! in foreign underdeveloped countries largely due to risks ! of nationalization and confiscation; the availability of I I exchange restrictions—involving the important problem of I repe.triation of the initial capital in the currency in which it was imported, together with the profits derived | from the enterprise; and lack or absence of social over- ! head capital and sufficient domestic markets in j underdeveloped countries.^9 This writer believes that in the case of Iraq per 86 these objections or obstacles are not serious enough to warrant a total dismissal of the Joint enterprise approach suggested for Ira.q. Below, these major objections are examined to support the contention of the author that they j should not constitute a serious obstacle in the way of the iJoint-enterprise approach for Iraq. I(A) The Risk of Nationalization and Confiscatlon in Iraq It Is often said that the people of the under developed world, and the Arabs in particular, are becoming 19 These are the main obstacles which are emphasized in various reports Including the following: United Nations, The Internatlonal Flow of Private Capital 19*4-6-1953 (New j York: 1 9 5* 1 -); United Nations, Survey of Policies Affecting Prlvate Foreign Investments (New York: 19 50): Foreign Investment Laws and Regulations of the Countries of Asia and the Far East (New York: 1951/J Economic and Legal. Status of Foreign Investments in Selected Countries of Latin America (New York: 1950); United States Department of j Commerce, Factors Limiting United States Investment Abroad (Washington, D.C.: 1953)- 276 increasingly conscious of themselves as a nation. Their i new nationalism is first and foremost a demand for | political and economic Independence, an expression of resentments built up in people subordinated for years to the aims and Interests of European powers. It is further | said that the presence of foreign-owned enterprises are I viewed by the people of the underdeveloped countries with I extreme suspicion and fear of Interference economically | and politically with their domestic and foreign i | policies.^0 Therefore, the demands and pressures exerted | on the governments of these countries for nationalization or confiscation of the foreign-owned enterprises would be great. Since it is an Indispensable prerequisite for any i ! prospective investment that the capital employed with all j Its accessories, and the profits derived from any particu- i j ; lar enterprise must enjoy security, such a. political state of affairs, it is concluded, will act s.s a strong deterrent to direct private Investment abroad. This view on nationalism in the underdeveloped countries and the Arab world Is described in some detail In various reports including the following: The Middle East Institute, Nationalism in. the Middle. East (Washington, D.C.: 1952); William Sands (ed.), Tension in the Middle East (Washington, D.C.: 1956); Sydney N. Fisher (ed.), Evolution in the M l dale East: Reform. Revolt and Change (Washington, D.C.: 1953); Harvey P. Hall (ed.), The Evolution of Public Responsibility in the Middle East (Washington, D.C.: 1955); Helen A. Kitchen(ed.), Americans and the Middle East: Partners in the Next Decade (Washington, D.C.: 1950). 277 i But, are these fears from nationalization and : confiscation warranted in Iraq? i O n the basis of past history, traditions of the Arab societies , and on the basis of actions to date and present attitudes, it appeals to this writer that the ; Iraqi economy will remain essentially a private-enterprise ! ; system. j Free enterprise has always been a rooted Institu- ! tion in the Arab countries compatible with their i j traditions and the way of life of their people. The ! constitutional structure of every Arab country has always respected and guaranteed the right to private property and i its free disposition. T o date It has never been the ;policy of any of the Arab governments to suppress, dellb- ierately, private initiative. So far, Iraq has largely confined nationalization S to enterprises In fields generally regarded as belonging :to the public sector, such as the Central Bank, Industrial |Bank, Agricultural Bank, and various public utilities Including roads and railroad, the Port, telephone and telegraph and electricity. While it is true that the very large financial resources accruing to Iraq from petroleum exploitation In recent years have enabled, and is further inducing, the Government to take a more active part in promoting directly the development of other aspects of the I economy, the Government by following this line of policy, 278 does not intend to supplant the private enterprise. For I the general idea is that the &overnraent will at a later time sell the enterprises which it establishes to private businessmen. In all Iraq’s nationalization actions; there is no I record of expropriation without compensation. National- ; ization of the former British owned electric company in j I Baghdad, for example, was accomplished by making full | payment for the owners. It appears, then, that barring I unforeseen surprises there should be little or no fear I ! from nationalization or confiscatlon, on the ground that | the Iraqi economy Is and will remain essentially a private enterprise system. ! W ow , if this is so, what Is the attitude today in : Iraq toward foreign Investment? Can the private foreign enterprise operating there enjoy security against nation- : alization and confiscation? After the revolution of July 1^, 1958, there was some agitation for Government action to nationalize or to transfer to Iraqis the foreign ! enterprises operating in Iraq. Such opposition to foreign investment has come from politically active groups which do not have a full comprehension of economics and are, without justification, convinced that the mere presence of foreigners and their enterprises will Invite a return to colonialism. This group, apparently, Ignores the fact that Iraq, today, is an Independent country which Is perfectly 279 ; free to take sovereign decisions concerning Its economic i development and political affairs. If this group of i | thinkers need be assured-that foreign investment need not be accompanied by an encroachment of sovereignty they should be required to study the history of the United ; Sta.tes and other Western countries where economic develop- j ment wan greatly accelerated by foreign Investments, j In any event, the more balanced and mature view | toward foreign Investment has prevailed in Iraq, and therefore the government resisted any proposals for nationalization or Iraqianization of foreign investment. To assure foreign investors of its position and to provide | | the feeling of security among future Investors the govern- iment declared to the world in June, 1958, that it will not ! nationalize or Iraaianize the foreign Investments in Iraq. Thus, it could be concluded that the danger of nationalization and confiscation of foreign Investment in Iraq is a remote possibility. And if the Iraqi capital land nationals (sometimes the government too) are associated In a "joint enterprise" as suggested by this writer, the risk of nationalization and confiscation will be reduced to a minimum—far less than that which might be faced by an entirely foreign firm—because Iraqis In general look at them with favorable eyes. If the risk of nationalization and confiscation does not constitute a serious problem In the way of direct ; 280 I : foreign investment approach in Iraq, would exchange i restrictions or the problem of repatriation of the initial I i j capital and remittance of profits be one? This problem is taken next. (B) Exchange Restrictions and Capital Transfer Difficulties j j in Iraq | The problem of exchange restrictions in under- j | developed countries Is frequently cited as one of the | ? major deterrents to direct foreign investment abroad. i I Exchange control is usually a symptom of balance of pay ments pressure in underdeveloped countries; should the pressure increase, control may be tightened or the currency I devalued. Either alternative, but particularly the former, j I may represent a powerful deterrent to direct foreign ;Investment because foreign enterprises are bound to feel the impact of such controls in connection with both the remittance of income (and the reps-trlation of capital, if desired) and the payments for Imports required for opera- !tions. i What is the situation in Iraq with regards to its balance of payment? Does it call for tightening of exchange controls or devaluation of currency? A great advantage which Iraq enjoys over most of the underdeveloped countries seeking foreign Investors is its balance of payment situation. As indicated in a previous 281 ? T ~ i chapter, the Iraqi balance of payment is very satlsfac- : tory for many reasons. First, it is on the positive side; : second, it has already a great reserve of foreign exchange which has been accumulated from oil revenues since the conclusion of 50/50 profit sharing agreement. This reserve amounted to $392 million in January, 1957. And third, barring unforeseen events, it is expected that the ; flow of foreign exchange into Iraq will continue high : since the oil companies have undertaken to produce certain ; minimum quantities. Therefore, it is expected that there would be no j need, at least for some time in the future, for tight | exchange controls for the particular purpose of maintain- ; lng a favorable balance of payments. Future foreign Investors, therefore, need not worry very much about severe exchange restrictions operating against them in Iraq. Similarly, there would be no need for devaluation to reduce imports from abroad and encourage domestic exports, a measure usually resorted to in an effort to icorrect an adverse balance of payments. In fact, due to the favorable position with regard to foreign exchange balances which Iraq Is expected to continue to enjoy, Professor Iverson suggested that a revaluation upward may 21 Of. nost, Chapter XII, entitled "Foreign Trade and International Balance of Payments." 282 I be an appropriate step to take.22 It was this favorable situation of the balance of i j payments, perhaps coupled, with a view to encourage foreign ! investment, which induced Iraq to relax In the past several years' exchange restrictions affecting foreign ; capital in Iraq. Consequently, as reported by the Inter- I national Monetary Fund in 1958: I ; . . . foreign investment in Iran is permitted freely . . . , foreigners are permitted to bring | capital into Iraq . . . , repatriation of capital to | the country of origin is allowed . . . , exchange Is provided for the repatriation of reasonable p r o f it s.23 22 This writer, however, disagrees with Professor Iverson with regard to the suggestion of revaluation upward for the following reasons: First, it can stifle foreign investment and trade in Iraq by creating an unsettled state of affairs In business. W hen a. change in | the price of foreign exchange takes place—whether It be j devaluation or appreciation—it affects anyone engaged In ; foreign investments or trade. Furthermore, the change Itself will upset business confidence, since further changes may be expected. A nation which changes the value of Its currency upward may, or may have to, devaluate In the future. Even mere thinking of the possibility of ’ changes or fluctuations in the price of currencies adds :uncertainties to business. It will certainly make fore- j casting of trends in international Investment and trade as |well as government action a difficult Job. (For a detailed I analysis of the kind Just given see C. Lowell Harris, The American Economy (Illinois: Biehard D . Irwin, Inc., 1956), p* 599)* In sum, evaluation of Iraqi currency upward may discourage foreign Investment in Iraq. Second, evaluation upward would encourage a very large supply of foreign goods to be brought into Iraq which will compete with enterprises producing In Iraq, thereby reducing their chances of operating profitably and of becoming useful to the riation. 23 International Monetary Fund, Ninth Annual Report: Exchange Restrictions (Washington: 1958), p. 188. 283 This author feels that in view of the importance of direct foreign investment to the development of the i country the government of the new Republic of Iraq should continue to follow the same policy of easing up exchange restrictions which have inhibiting effects on foreign investment. For Iraq is capable, indeed, of doing so without serious consequences in the balance of payments or i serious drain in the foreign exchange reserve. If risks of nationalization and confiscation, and ; the problem of repatriating the initial capital in the currency in which it was imported, together with the | profits derived from the foreign enterprise, are not I i regarded as serious obstacles in the way of direct foreign Investment (or Joint enterprise) approach, can we say the same thing about the other major obstacle: namely, lack of social overhead facilities and sufficient domestic market in underdeveloped countries? (C) Lack of Social Overhead Facilities and Limited : Pomestlc Markets in Underdeveloped Countries as an 1 ! Obstacle for Foreign Investment It Is generally argued that one of the most serious i i i obstacles to industrial and economic development in under developed countries Is the absence or lack of the basic j social overhead facilities and the limited size of their j t i i domestic markets. The limited size of the market, it is i 28 b said, will prevent the establishment of modern, low-cost | methods usually associated with mass or relatively large- scale production; and the absence or lack of basic public facilities—that is, transportation and power systems— further aggravate the situation because, as one United j Nation's report put it: A n increase in the production of goods in under developed countries must at least be paralleled by, or even in certain cases preceded by, the establish ment of public utilities of various kinds, particularly | transportation and electric energy facilities that pave the way for industrialization, division of labor, marketing of industrial goods, e t c . 2 * 4 - The significance of both adequate transport and power system for industrialization and economic develop ment is best illustrated in the following excerpt from j another United Nation's report: i Secondary industry /or manufacturing/ is particu- ; larly vulnerable to transportation difficulties, for I the actual manufacturing process is often no more than a brief act of separation, synthesis or transformation J preceded by the lengthy operation of assembling raw materials and fuel and followed by the complicated business of distributing the product to its multiple consumers. Economic secondary production consists very largely in the correct choice of a location which j will minimize the combined costs of assembly and distribution, and is thus very dependent upon the availability, cost and effectiveness of the transpor tation system. . . . 25 q 1l The International Flow of Private Capital 19bo— 1952. op. c it♦. p. 37- 2'’United Nations, Department of Economics and Social Affairs. Processes and Problems of Industrializa tion in Underdeveloped Countries (N ew York: 1955)> p. 12. 285 Concerning the importance of adequate power to industrialization this report states that: With increasing mechanization, manufacturing industry comes to depend more and more upon local power facilities, end although large concerns may be capable of generating their ow n power, this procedure is usually inappropriate to less developed countries, partly because it involves new establishments and considerably larger capital charges, partly because the resulting energy is more costly and partly because it is the lighter industries and smaller units which are usually pioneers in the industrialization process. Shortage of purchasable power, therefore, is a distinct disadvantage from the point of view of indus trial expansion. In recent years it is a disadvantage from which most of the underdeveloped countries have suffered in varying degree s. 26 Absence of such basic facilities and the smell income and purchasing power of the people , it is e.rgued, all narrow the size of the market and, consequently, weaken the incentive of foreign entrepreneurs to invest in underdeveloped countries. It is as simple as this: foreign investors would have no incentive to invest because of the small size of the market. Is Iraq capable of overcoming this obstacle? Does it possess the resources to enlarge the size of the market? These questions will be answered Immediately. Can Iraq provide adequate power energy and trans portation system? The matter of power is taken first. According to a report by the American experts, who were 26- ,, Loc. clt. 286 i j hired to introduce a plan for industrialization of Iraq, | the country has ample resources for the generation of low ! 1 cost electric power. So ample, the report says, that they greatly exceed her current and foreseeable n e e d s . ^7 However, the report also stated that these | resources were s till largely in an underdeveloped stage | and hence power w a.s inadequate to meet industrial demands. In order to enable new enterprises, particularly small and | | Intermediate-sized proJects,28 come into existence the [ | report recommended the exploitation of natural gas to generate electricity at a very low cost to many key centers in Iraq. The report was submitted to the Iraqi Board of Development in 1956 and action was taken immedi ately to meet these recommendations. Within two years considerable progress was made and a new capacity of 165>000 K w . has been added to a total previously existing capacity of only 70,000 K w . Three j — — — — — — 2^Arthur D . Little, ojo. c lt. . p. 353- 2®Small and Intermediate sized projects were thought of by the Report because in the case of large enterprises with substantial Investment funds, the absence of cheap power supplies Is not always very Important, but when small and inteimedlate sized projects are being planned It may be of vital importance. In those cases capital Is usually limited, and the additional financial strain of building captive generating capacity may prevent new enterprises from coming into existence. These smaller units are of the greatest Importance to lndustris.1 development; they supply consumer goods ax*d consume the products of the larger establishments. Loc. c lt. i major electric power projects were constructed in Baghdad, 29 ! Dibls, and Basrah as follows: i The Dibls Power Station in the Northern Part of Iraq, near Kirkuk, has an initial capacity of 60,000 K w , and it is designed for an ultimate capacity of 150,000 K w . Power from this station Is carried (by 300 K in of double | circuit 132 K v transmission lines) to the major Northern j towns of Mosul, Erbil, Kirkuk, Suielmaniyah. ! The Baghdad Power Station has an initial capacity of 80,000 K w , and a possible ultimate capacity as much as 200,000 K w . The major portion of the power generated Is consumed in Baghdad itself. The remainder Is carried (by 200 K m of 132 K v and 90 K m of 66 double circuit lines) to the Central Euphrates area towns of Huia, Kerbela, j Hindiya, Mussayab, Najaf, Kufs-, Shamiya and Diwaniys.h. : The Basrah Power Station has an initial capacity of : k-5,000 K w , and a possible ultimate capacity of 150,000 K w . I As an Initial step, power from this station is fed into the distribution networks of Basrah town and the Iraqi Ports Administration by means of 33 K v underground cables. In the future a 132 K v switchyard will be added, from ^Information on the description of these three power stations and the areas they serve Is taken from: Development Board and Ministry of Development, Progress Summaries Report for the Fiscal Year St arting April 1.956- | March 1957 (Baghdad: Development Board, 1957)> pp. 1-2. 288 ; which one or more double circuit lines at that voltage ; will be built to serve the areas of Southern Iraq, j Ultimately, these lines will meet those built, south from : Baghdad to provide interconnection between the Baghdad and Basrah Power Stations. Plans were also prepared for the possibility of producing electric power from Ssmarah Barrage and Dokan D am to provide adequate supply of electricity in the i j Central Zone of Iraq after 1961. j | In sum, the above facts and figures lead to the I I conclusion that Iraq, unlike most underdeveloped countries, is capable of providing adequate supply of power energy for the purposes of future foreign Investment there. The ! same thing may be said with regard to the transportation I system for the following reasons. j In 1952 a mission organized by the International : Bank for Reconstruction said Development at the request of ; the Government of Iraq reported the following with regard i to transport and communice.tions of the country. T o quote: O n the whole, the existing transport serves the present needs of the country adequately. For the future the principal problems will be to make provi- ; sion for essential renewals of track and rolling stock j and to standardize the gauges on the railways; to i develop an adequate network of metalled main roads, supplemented by feeder roads; and to establish effective control over road transport. If these problems are solved, transport capacity should have no difficulty in meeting the growing requirements of j 289 agriculture and industry.30 The importance of improved transport to successful l jeconomic and industrial development in Iraq has well been understood by the Development Board, and substantial expenditures for extension and Improvement of the trans port and communication system have a.lready been made. This writer does not have access to statistics and !figures to show the exact magnitude and degree of progress ;in this field. However, to indicate that progress has j been substantial, it may suffice to mention that transport and communications in Iraq's development plans- accounted for 25 per cent of total outlays since the beginning of I the development program almost a decade ago.^1 i ! Thus one may reasonably maintain that Iraq is I capable of providing an adequate transport system. W hen it ;ls remembered that Iraq has ample public funds (coming to ! iit from oil) to spend on further development of transport systems and energy resources, as the need arises, it may safely be concluded that transport and power situations in Iraq should not be a deterrent to foreign investment there. 30 The Economic Development of Iraq , op. c lt. , p. i+ 3 • ^ Background Material on Iraq for 1957 Consul t ation, o p . c lt . , p . 1 0 . 2 9 0 But it is objected by some economists^ that though transport end power are probably the most important ; requirements to induce investment in underdeveloped i countries, they are by no means the only elements deter mining the suitability of the economic environment. ; Investment will depend very largely on the size of the market, which is a function of national income and produc- : tivity in the country. In sum, it is argued that the size of the market in underdeveloped countries is small because | income and purchasing power are very small. This small ! | size of the domestic market and lack of domestic purchasing power, therefore, will inhibit foreign investments working for the market. H ow can this obstacle be removed? H ow | can the market be enlarged? A general solution for the enlargement of. the size 91. Ihg. market in underdeveloped countries. A general solution for the problem of limited market is given by the well known economist Ragnar Nurkse.^3 H e rejects the : popular prescription that small adjacent countries should abolish restrictions on trade with each other, in order to enlarge the extent of the country's territory, as a basic remedy. For the smallness of a country is not the basic O O - ■ Bee for example, Processes and Problems of Industrialization in Underdeveloped Countries, op. c lt., p. 13. 33 ‘ "'Nurkse, ojo. clt. . pp. 4—20. 291 difficulty. The difficulty can exist even in very large countries such as China and India. The basic market difficulty according to Hurkse is the low productivity in the underdeveloped countries. To quote Murkse in this regard: The crucial determinant of the size of the market is productivity. In an all-inclusive view, the size of the market is not only determined but actually defined, by the volume of production. In the economy as a whole, the f l o w of goods and services produced and consumed is not a fixed magnitude. With a given population, it is a variable depending on people's productive efficiency. 3^ M ow , since productivity—or output per m an hour— depends largely on the degree to which capital is employed in production (that is, the degree to which machinery and other equipment are used) it is a function of the capital - intensity of production. But, for any individual entre preneur, the use of capital is inhibited, to start with, by the small size of the market. The way out toward the enlargement of the size of the market, Nurkse suggests, is to hs.ve a balanced growth. By that It is meant that underdeveloped countries should attempt to promote a wave of capital Investments In a number of different projects if they are to succeed in enlarging the size of the market. For any substantial Investment by an Individual entrepreneur in any particular •^Ibld. , p. 8. 292 i project may be blocked or discouraged by the limitations of the pre-existing market, whereas investments over a | ; wide range of activities may succeed because they will support each other. To quote from Nurkse: Where any single enterprise might appear quite inauspicious and impracticable, a wide range of projects in different industries may succeed because I they will support each other, in the sense that the people engaged in each project, now working with more real capital per head and with greater efficiency in terms of output per man-hour, will provide an enlarged ma.rket for the products of the new enterprises in other industries. In this way the market difficulty, ! and the drag It imposes on individual incentives to Invest, Is removed or at any rate alleviated by means of a dynamic expansion of the market through invest ment carried out in a number of different Industries. The rate at which any one industry can grow is inevitably conditioned by the rate at which other Industries grow, although naturally some industries will grow faster than others since demand and supply elasticities will vary for different products, i Through the application of capital over a wide range | of activities, the general level of economic effic- ! lency Is raised and the size of the market enlarged.35 In sum, here is a general solution for the problem i : of limited markets in underdeveloped countries, even If the foreign enterprises are required to produce for the | domestic market alone. But since the process of enlarging I ! the market, In the sense presented by Nurkse, seems to be no more—end no less—than the process of developing the economy the possibility of expanding production for sale on foreign markets should also be borne in mind. For this may be a significant means of accelerating industrial ~^Ibld., pp. 13-1^. 293 idevelopment at least In its early stages. , Foreign investment in. projects producing partly, or ! even largely, for exports should not be despised, since it brings with it various direct or indirect benefits. There is no reason why foreign Investment should be ideliberately kept away from Investing in projects produc ing additional goods for the domestic market. Potential [markets, therefore, should be sought both within the [country and abroad. ; Iraq at present, according to a study made by |experts, possesses a good number of suitable investment opportunities for which there are both satisfactory jd.omestic and/or foreign markets. It lies beyond the scope j of this dissertation to describe here the nature of the : potential investments and the precise size of the market i available for them. However, a brief list of some of the *3 A The record of the contribution to the growth of the economy of underdeveloped countries of foreign |investments producing for exports may be seen in many reports, particularly the following: National Planning [Association, United States Business Performance A broad: The Case Studv of the Creole Petroleum Corporation in Venezuela (Washington: 1955); National Planning Association,! United States Business Performance Abroad: The Case Stud.v of the Firestone Operations in Liberia (Washington: 1956); National Planning Association, U nited States Businesg Performance Abroad: The Case Study of Stanvac in Indonesia (Washington: 195?); U . S. Department of Commerce, Invest ment in Venezuela (Washington); David H. Finnie, Desert Enterprise: The Middle East Oil Industry in its Local Environment (Cambridge, Massachusetts: Harvard University Press, 1958). 294 1 • existing opportunities for Investment is given below. Probable f ields off investment in Iraq. Based on many expert studies, Including the works of the United States Operations Mission to Iraq, snd the World Bank Mission to Iraq, a brief list of som e of the potential i j fields of Investment available in Iraq, and for which | there are satisfactory markets Is given below:37 The extension and improvement of existing i I industries. This includes the following fields: I a. Building material and construction projects ! I i for the production of concrete blocks, tiles, pipes, i | beams, sand-lime, cement bricks, gypsum concrete and gypsum blocks. b. Date and fruit-product projects for the I production of natural, clarified and bleached syrup, ; liquid sugar, and fruit and vegetable concentrates. c. Agricultural projects for Improving the . yield and quality of livestock, cotton crop and dairy ■ products, the establishment of centralized milking opera- I i tions and equipment to sterilize milk, the establishment of cold-storage facilities, the expansion of the wine -^This brief list is taken from Arthur D . Little, on. c it.. pp. 277-290. For a detailed description of the kind of the enterprise, Its capacity and market available for it, and the capital required for the Investment, see Arthur D . Little, op. c it. . pp. 17-316, and The Economic Development of Iraq, op. c it. , pp. 33-38 and 277-293• 295 j industry and ready-made clothing industry, the establish- ;ment of modern slaughter houses, the expansion of the leather Industry, and the establishment of sea-fishing fleets and flsh-preparatlon plants. d. Metal-product projects to provide the following manufacturing and service facilities: metal jdoors and windows, pipe fittings, air coolers, kerosene- jflred water hes-ters and stoves, metal furniture, refriger ators, aluminum kitchen ware, solar stoves, spare parts for agricultural machinery, machine shops and foundries, I jmobile agricultural repair shops, and garages. ) i i (2) The establishment of new industries. This 1 ’includes the following: j a. Manufacture of caustic soda and chlorine. A plant with a capacity to produce ten thousand metric 1 tons of 100 per cent caustic sod.a and 8,315 metric tons of liquified chlorine annually is needed. b. Rayon manufacture. There is need for the iestablishment of the following rayon plants: one to be a I I weaving mill with a capacity of 12.5 million square meters, together with finishing facilities; another, consisting of a mill with a spinning capacity of seven million square I meters and a weaving capacity of 12.5 million square j meters, together with finishing facilities. Still another I i I plant, to produce viscose rayon filament yarn and viscose i 296 i | staple fibre with a capacity of seven million pounds of i filament yarn and three million pounds of staple fiber is | needed. c. Sulfur recovery from Kirkuk Natural Gas and fertilizer production. There is room for the establish ment of a plant to recover the 275 metric tons of sulfur ! that are currently being wasted daily in Kirkuk oil fields. ! Once this is done, one or more nltrogeneous-fertilizer !plants using part of the sulfur recovered can be estab- | | lished. i j d. Building materials industries. There is need for the establishment of industries for the production of light weight aggregate from local clays, and plants for the production of lime to provide superior bricks and I improved mortar, and also to be used in the agricultural I I iand chemical industries. ! e. Date-product Industries. Construction of a ;plant to produce animal feed concentrates from dates and ;other food stuffs is needed. | f. Paper manufacture. There is room for the establishment of a pulp and paper mill with e. nominal capacity of fifteen tons per day to provide writing and printing paper a.s well as wrapping and cement bags. g. Steel rolling and steel making. There is room for establishing a steel-rolling mill with an annual capacity of sixty thousand tons; a furnace to make 9,300 tons of steel from domestic scrap each year; a steel foundary; and additional steel furnace and equipment to melt Imported pig iron or scrap. h. Utilization of natural gas. There is a possibility for the use of natural gas as a raw material for producing petrochemicals for export. 1. Manufacture of plastic material. There is also a possibility for constructing plants to produce the plastic materials polyethylene and polyvinyl chloride, with annual capacities of thirty-five million pounds and ten million pounds, respectively. (3 ) Industrial possibilities that appear to need further consideration at present. This includes: the use of natural gas to provide a gas supply system for domestic and industrial uses; construction of a plant to manufac ture phosphatic fertilizers; the manufacture of a bottle and flat glass; the manufacture of pharmaceutical products; and the establishment of textile facilities for manufactur- ;ing flne-count cotton fabrics. i One may, therefore, conclude with regards the problem of limited markets cited as a deterrent fa.ctor to foreign Investment in underdeveloped countries, that it is not an impossible problem to overcome, and that in the case of Iraq per se this problem—and, indeed, all the other problems of risk of nationalization, confiscation, exchange 298 restrictions against repatriation of capital and profits, and lack of social overhead facilities—Is at the minimum j and should not constitute serious obstacles to the flow and operation of private foreign investments there- However, it may be argued, that even if private i l foreign enterprises actually begin to operate in Iraq their large investment expenditures may entail a serious disad vantage, namely, Inflation. Since inflation has a direct |impact on economic development, and constitutes the major i jargument in evaluating the approach presented In this jdlssertation, a separate chapter (Chapter XVIII) Is devoted to the analysis of the problem of inflation. CHAPTER XVIII INFLATION AS A MAJOR ARGUMENT AGAINST THE JOINT | FOREIGN-LOCAL PRIVATE ENTERPRISE APPROACH I ! I. THE DISADVANTAGE OF INFLATION Iraq of today is a country which has already substantially increased investment activities, which were iinduced by the development program almost a decade ago. t j As a result of these activities, there is now some infla tion in Iraq. Obviously, then, there is some fear that i additinal large investment from outside sources (foreign enterprises) would Induce a dangerous Inflation which could distort the general economy, and delay and obstruct j jreal development work. ; If there should be a high, galloping inflation it is ipossible that labor, enterprise and capital would be attracted into investments where profit prospects would I seem to be high and therefore draw resources away from j investments that were required most by the country for the | |development purposes. Consequently, development would be delayed and made expensive due to a shortage of labor, material and higher costs. Income distribution, too, would become different and those with fixed incomes—such as salaried persons, Including civil servants and workers who are not strongly organized—snd all those who save and r 300 i i keep their income in the form of cash or bonds suffer a i | reduction in their standard of living. Social unrest i could result if inflation is permitted to go very far, ! ; uncorrected, perhaps leading- to serious interruption of ; the progress of Iraq. Furthermore, it may be argued that if inflection becomes severe it could entail serious pressure on the i | balance of payment. Should the pressure Increase the j | situation may demand tightening of exchange controls or devaluation of currency. Either alternative represents a powerful deterrent to foreign investment. Thus, theoretically speaking, the approach sug gested by this writer may carry within it the seeds of its defeat. It may not only work out against Itself, but also via the inflation it creates; it may distort the general !economy, and delay and obstruct reel development work iInstead of aiding It. | Does this mean that the Joint enterprise approach suggested for Iraq should be dismissed? The answer Is simple. If this approach Is really expected to cause balance of payments difficulties and calls for such measures as devaluation, exchange controls, then it Is questionable. If this approach is really expected to distort the economy and delay its development, then this writer will be the first to call for Its dismissal. i | But it is his belief that, with proper policies 301 maintained, additional expenditures by the new Joint j enterprises should not bring about the undesirable results I ' | of the kinds just mentioned. As for the balance of I payment, Iraq enjoys a great advantage. As noted in the i preceding chapter, it has two safeguards against the | danger of Inflation. The oil revenues, which in all j probability are expected to flow in large amounts, come to it in foreign exchange and its balance of payment is positive and supported by a large reserve of accumulated foreign exchange. Consequently, inflation in Iraq is not expected to entail either the balance of payment difficul ties or exchange controls or devaluation which are usually measures taken to correct an adverse balance of payment. Similarly inflation, which will be caused by new | foreign investments, is not expected to distort the | | general economy or lead to serious interruption of the | country's progress since, as this writer thinks, the kind of inflation which would appear is not of the menacing ! type. And if proper policies—of the kind which will be | recommended, later in this chapter—are maintained, the pressure of inflation could be reduced to a minimum. In the following, the author proceeds to support this contention. 302 ? II. KIND OF INFLATI ON EXPECTED IN IRAQ, NOT MENACING In order to sustain the assertion that the kind of : inflation expected to appear in Iraq would not be of grave consequences, It is necessary to distinguish between three kinds of Inflation because each kind is caused by differ- i ent. factors, follows its own course of events, and has its jown consequence. These are, as Dr. Pollard celled them, jthe demand-pull kind of inflation (or hyper-Inflation); !the coBt-push kind; and the expansion-pressure kind of | inflation.^ The Demand-null Kind of Inflat ion | i This kind of Inflation is caused by the failure of |the government to raise revenue to meet its bills and ;expenditures, and by either printing new money or borrow ing from the banking system to meet its deficit. When large amounts of new money are created in this way and demand for goods rises, with no increase in their supply, prices rise and the value of the monetary units decline, i causing a loss of people's confidence in it. This induces I people to spend money at a faster rate In order to avoid further depreciation In its value and this Increase in the ■^Spencer D. Pollard, "Three Kinds of Inflation," (unpublished talk presented to the Faculty Club of the University of Southern California, March 12, 1958), p. 2. 303 ! velocity of circulation is self-accelerating.2 i "The snowballing of these effects can drive infla- I tlon to fantastic heights in a, surprisingly short time."^ | ; M any European and non-European countries experienced this : disastrous form of inflation after World W ar I and in | modern times too. The following excerpt from Professor i jPollard provides many examples of such experience: The cla-ssic case is the German Inflation of 1919- 1923. Incredible as It may seem, the price level In | Germany rose by 150 billion times In those few years, I based on issues of paper currency which by the end of j 1923 totalled nearly 500 trillion marks. Naturally | the value of the mark on the foreign exchange also fell, to a ratio of b-2 billion marks to one American cent. God did not save that mark, but at the end of 1923, the Germans replaced it with a new mark. W e have seen other runaway inflations of this type in modern times—In Hungary before the Communists took it over—In China before it fell to the Communists—(do you remember the picture In the newspaper of a little Chinese boy manfully pushing a wheelbarrow full of money to the store to buy a. lollipop?) and in some of ! the nations of South America.^ As for Iraq, this writer thinks that there need be i jno real fear that the country will pass through the same !experience. There are no Indications that the country |will follow this disastrous course of events. There is nothing In Iraq's record (which for almost a decade has shown more surpluses than deficits), or In her general 2 Ibid., p. b. Loc. _ o i t . \ o c . c it. j 30^ | ; position or recent traditions to suggest any serious i danger of this kind of inflation.-^ | i | The Cost-Push Type of_ In flat ion This type of inflation (which is regarded as less I serious in its consequences than the previous type) is | caused by the demands of strongly organized labor unions for wage increases in excess of increases in productivity. W hen labor unions succeed in raising wages in this manner ! costs of production Increase and the businessmen will either accept a cut in their profits or more usually try to pass the burden of higher costs to the consumers in the form of higher prices. W hen prices are pushed up, cost of t living is also pushed up and the consumers, therefore, are i forced to reduce their demand for luxuries and durable | goods. I j This situation soon produces unemployment in those ! industries which make luxuries and durable goods, which I will be added to the other unemployment caused by low profits in the unionized Industries. The level of unemployment will keep rising until It reaches a point where the unions cannot continue to raise wages further, and that terminates the Inflation.^ ^Salter, pp.. c it. , p. 25- ^Pollard, op, c it.. p. 2. I Regardless of the possible solutions that might be suggested to cope with this problem, one might observe j that the cost-push type of inflation has been more charac- ; teristic of the situation in Europe and North American I countries where labor is strongly organized and not a characteristic of underdeveloped countries. In Iraq, and j in most underdeveloped countries, labor is not now so j strongly organized as to be able to demand successfully a great increase In wages except perhaps when there Is proportionate Increase in productivity or when demand for labor--in particular areas or of particular kinds— has unusually Increased. Consequently, there should be no real fear that this type of inflation, witnessed In so many advanced countries, will appear now In Iraq. i The Exnansion-Pressure Type o f Inflation The cause of thiB kind of inflation Is new heavy investment in industrial plants and facilities and other economic activities. As a result of such heavy invest ments and increased economic activity, demand for capital goods and other materials rise, prices rise, wages rise and profits rise. Those whose profits and purchasing power Increased may spend more, causing another round of higher prices, wages and profits. W hen a circle of this kind is greatly widened the result is usually a great ; inflation. I In Iraq it is, more or less, this kind of inflation i i which may be feared; the kind of inflation which may result from the injection into the economy of large investment expenditures. It may be feared that additional I investment expenditures by the new 1 1 joint foreign-local | enterprises,1 1 which will be added to public expenditures | would inject a very large sum into the economy. And when | a large sum is devoted to development in relation to the | ! available national resources (human and material) it ! j could, unless corrective measures are taken, result in shortages of goods and services. Consequently, prices and wages rise, causing perhaps a serious inflation. In other words, the problem of Inflation in Iraq needs to be thought of in terms of probable shortages of available labor (both quantitatively and qualitatively) ! and of certain materials and goods (both consumer and capital goods) which entrepreneurs and consumers enjoying ; higher incomes are likely to want to buy. If the only kind of inflation which Iraq may have to seriously consider is to be thought of in terms of shortages of the kind mentioned above, then it seems to this writer that Inflation does not present a serious obstacle to the approach he has suggested in this dissertation to speed up the pace of economic development in Iraq. This conclusion Is reached because he does not I 307 i foresee serious shortages of goods s,nd services arising in i Iraq from future foreign investment. If proper policies I j are maintained, to prevent the appearance of serious shortages of goods and services, it would be possible to ; avoid a dangerous Inflation while obtaining at the same ! time the advantages of the Joint enterprise approach. j | ! In the following section,a policy which Is expected j | | | to achieve Just this,is suggested. j j ; | 111. A PRO PER POLICY FO R C O M B A T IN G - IN FLA TIO N Inflation occurs when total purchasing power substantially exceeds the cost, at existing prices, of the goods and services it seeks to buy, and does so without bringing In new sources of supply to match the excess I ! d em an d .7 Speaking In general terms inflation, therefore, I ' ; can be countered or reduced either by restricting demand I for or increasing supply of goods and services or by ; doing both simultaneously. i Price control -policy undesirable; provides no remedv. The policy of price control by law to restrain ! prices from rising Is no remedy and may easily produce undesirable results. Aside from its interference with the normal operation of the price system, it is difficult to 7 Salter, op. pit., p. 2*K j 308 ! i enforce and when enforced it does nothing in the way of j | reducing demand or increasing supply of goods and services I to meet the excess demand.® Price controls only shift the excess purchasing power from one item of expenditure to i another, and since the goods for which prices have been fixed are likely to be essentials, the production of j luxuries will be made more profitable and will therefore ! Increase. In sum, As Lord Salter put it, "Fixing prices i does nothing at all to remove the basic cause of the trouble, excess demand . . . £ancL/ the remedy . . . must be sought in another direction."9 A more liberal Import policy provides a better solution. H ow can inflation be best combated or managed in Iraq? Based on the facts presented earlier in this | chapter and elsewhere in this dissertation regarding the | j Iraqi economy, the best way, in the opinion of this writer, | is by Increasing the,supply of goods and services to meet the excess demand caused by expansion of production, Incomes and consumption. This m ay be done at the initial stages through extended and more efficient utilization of domestic materials and human resources which are in many respects in abundant supply. Since In the short run some 8Ibid., p. 25- 9 Loc. cit. , 309 i . | domestic resources may run short in relation to demand, i then increased imports from abroad would help a great deal I | in cushioning the effects of inflation. Here lies the significance of the existence of sufficient foreign | exchange in Iraq. ! If one asks how can liberal import and tariff ]policy help combat or reduce Inflation in Iraq, or, to be more specific, if one asks how can such policy prevent possible shortages of goods, machines, equipment, workers, and entrepreneurs,the answer is simple. If due to Increased economic activity (caused by the introduction of the joint enterprise approach), higher incomes and demand caused a shortage of consumer or capital goods there is no reason why they could not be Imported from abroad since I { jIraq has large reserves of foreign exchange and expects a !sufficient flow of foreign exchange which can be used for |this purpose. So far as purchasing power is spent abroad it has no inflationary effect. If, for examply, one million dollars is spent on buying machinery, equipment and other materials from abroad, the demand and the Increased supply are equal, and there will be no inflation. Similarly, when a shortage of human resources develops, there is no reason why they could not be imported from abroad. Here a point of clarification with regard to the kind of human resources which will be needed from abroad is necessary. As far as com m on or unskilled labor , 310 1 is concerned no shortage is expected. N o shortage exists j at present, and the posslDilities of increasing the supply | of this kind of labor from domestic resources are bright, "beacuse a large number of the grown-up population in most ! parts of the country seem to be virtually unemployed or at least greatly underemployed. 1 , 1 0 Consequently no import of this kind of human resources is needed. So far as skilled labor is concerned no serious shortages are expected in Iraq.11 As was previously mentioned, the experts believe that the Iraqi workers are quick to learn, and it is expected that a sufficient number of them could be quickly trained to perform the skilled work. Training programs now under way by the training schools and centers1^ are expected to create some of the needed skill. Most of the needed skilled labor would be created, however, by training on the Job by the Joint foreign-local enterprises to be established in Iraq. Such enterprises would provide both experienced foreign trainers and working places necessary for training a large number of workers. 10Iverson, op. cit. . p» l^f-3 • 11Cjf. ante . Chapter XI. ■^Such as the governmental technical schools, the special schools and workshops of the oil companies, the railways and the bus company, and the program of sending students abroad to obtain technical education. 311 i If some shortage s till develops, then the skilled | workers may be imported from abroad. As was reported ! previously in Chapter XI, many of them could be obtained from among the Arab refugees from Palestine and from other countries in the Middle East at relatively ! moderate wages. Such imports will cushion the effects of j I ' i shortages, whenever they appear, and, therefore, will i ; I help reduce the pressure of inflation. Finally, as far as the qualified or expert techni cal, managerial and entrepreneurial personnel are concerned they are definitely In short supply, and again there is no reason why this kind of human skill should not be permitted to flow from abroad. In fact, when foreign investors begin to operate in Iraq they automat 1- ; cally Import with them all the necessary managerial and ; technical talent they need. ! In sum, liberal import policy can, through increas ing the supply of material and human resources which are In great demand, counter or reduce the effect of inflation resulting from the process of economic expansion in Iraq. ; Liberal Import policy and economic expansion. In order to be able to use Imports as a remedy to inflation, Iraq must have sufficient foreign exchange reserves. This would suggest that intensity of economic expansion should not be carried to a point at which the increase in imports I 312 i I | would absorb all the current flow of foreign exchange and i ; the reserves which have been already accumulated in Iraq. In case expansion is carried that far the country would ; run into the balance of payments difficulty—unless it takes measures to increase the rate of savings in the country, and to absorb som e of the spending.power, or measures to reduce expenditures incurred by the government. If it would be difficult to induce people to save more, or to use the measure of taxation, the speed of economic expansion in Iraq would have to be set at the point where the balance of payments is kept more or less balanced. Therefore the extent to which direct foreign investment can expand the economy will be set by that limit unless the country chooses to run a deficit in its balance of payments. In this connection it may be noted i |that many economists believe that there is nothing wrong i jwith having a deficit in the balance of payments. For I example, the Assistant Director of the Middle East Depart- ! ment of the International Monetary Fund maintains thst, The fact that an underdeveloped country is running an international payments deficit is not necessarily a danger signal. Rather it is a typical situation for ; it means imports are at a high level to provide j capital goods needed for the development program or consumption goods needed to meet the higher domestic demand arising from domestic expenditure for develop ment ^John w . Gunter, "Recent Monetary Developments in the Middle East," Tension in the Middle East, Sydney N. Fisher (ed.), (Washington, D.C.: 1956TT p. 52. 313 | Therefore, in case Iraq carried on the Intensity of economic expansion to a point where a deficit in the balance of payment is created temporarily it should not be i viewed with alarm. It is always possible for Iraq to ; borrow from the International Monetary Fund and obtain [ grants and loans from other countries to meet the tempo rary deficit. A deficit should be viewed with alarm only If it is persistent and the country cannot earn enough foreign exchange to be able to afford it, or if the . deficit is not serving to support a development program which over a period will add strength to its balance of payments position by increasing exports or decreasing the need for Imports.-*-^ However, considering the size of current flow of foreign exchange from oil revenues averaging about $200 million a year, and the reserve which has been built up (close to $A 00 million) in relation to Iraqi national ! income, the joint enterprise approach can help expand the economy considerably without the fear of a dangerous deficit in the balance of payments or dangerous inflation appearing in the process. This is not to suggest that there will be no Inflation whatsoever. True, there will be inflation, but it will be mild—not a dangerous inflation. For example, 1A Loc. cit. prices of particular goods for which the demand is Increasing more than for others will rise some. But this ] is a natural part of the process by which supply adjusts j j itse lf to demand and should be welcomed, not prevented. i Also, as economic expansion Increases the productivity of i the nation, its general standard of living should rise and j i : this will usually express itse lf in a rise in wages, and other Incomes xirhich exceeds the rise in price.^-5 Mild ! inflation is not to be regretted, for it is, as history suggests end as Professor Pollard so ably argued, "inevitable during periods of rapid economic expansion and, therefore, it is the price which Iraq may have to pay for economic expansion and progress. 15 Salter, loc. c it. 16 Pollard, op. cit., p. 7* CHAPTER XIX | SUMMARY AND CONCLUSIONS The primary goals of this study were, first, to ! determine how direct private foreign Investments can contribute to the growth of Iraq's economy; second, to determine whether or not there are serious barriers to j such investments in this country; and third, to devise possible solutions to the problems which may arise to ensure a successful development of Iraq's economy via the aid of the private foreign Investments. Because Iraq Is an underdeveloped country, a theoretical discussion of the subject of economic growth of underdeveloped countries In general was called for and j | an attempt was made to determine whether or not private : foreign Investment approach could be applied to under- j I developed countries In general. All this was done first ! in Part I. The principal conclusion reached was that I ! those underdeveloped countries which can provide a reason ably attractive investment climate (free from risks of nationalization, confiscation, exchange restriction; and free from other obstacles of social overhead facilities and limited markets; and, above all, rich in their Investment opportunities) stand to gain more from the direct foreign investment approach. Parts II and III show that Iraq Is capable of provldinj; such a climate. i 3 1 6 i j ! The purpose of this chapter Is to restate and bring I together— in the form of a summary— the more important j | facts, conclusions and findings contained in the preceding ! chapters. The State and the Future of thg, Iraqi Economy Among the underdeveloped countries of the world Iraq Is one of the most fortunate in her possession of a i unique combination of attributes. It possesses, first, i | significant untapped resources and, second, a large source of foreign exchange from oil revenues. In resources, the country Is rich, particularly In land and the waters of the two rivers which can be exploited to increase output and incomes In the agricul- S tural sector of the economy. The country possesses, also, 1 slgnifleant untapped mineral resources which could form j the basis for light and some heavy industry. It has huge quantities of energy-generating resources In its petroleum, j white coal and water flows. Labor in Iraq Is cheap, r plentiful and generally capable of acquiring skills quickly with a little training. With its oil revenues which come to it in foreign exchange, Iraq is capable of importing goods and materials which are necessary for economic development without entailing persistent difficulties In the balance of pay ments. These revenues, furthermore, have helped Iraq to | 317 ! maintain a balanced budget free from burden of heavy debts, and enabled the country to start a development program, concentrating mainly on constructing huge irriga tion projects and establishing basic social overhead i facilities. In sum, Iraq, in its possession of vast unused resources and a large source of foreign exchange from oil, has an altogether exceptional opportunity for achieving a rapid economic growth. Lack of Entrepreneurial. Managerial and Technical Talent: 4 Bottleneck in the Wav of Rapid Economic. Growth However, despite the excellent potentialities for economic development and higher standard of living, Iraq— like most underdeveloped countries— Is today suffering from a serious shortage of men with entrepreneurial, | managerial and technical ability; people with skill, know- | how and experience who would seek and discover Investment | opportunities to turn the available resources into productive projects.• The scarcity of such human talents Is a major bottleneck inhibiting the Industrial and agricultural development and all hopes for rapid economic growth of Iraq. In a private enterprise economy, successful economic development and industrialization depend greatly on a broad participation by the private sector In Industrial and 318 other economic activities. Therefore, in Iraq, which has ankessentially private enterprise system of economics, there is an urgent need for people with entrepreneurial, ' managerial and technical talent. | The Joint Enterprise Approach Best Wav fox. Solving the i Problem r The best way for providing the above needed talent, | while at the same time helping to rapidly develop a sound and growing economy, is through the aid of direct private foreign Investment in the form of Joint enterprise with the private local investors. In the first place, It is more compatible with the private enterprise system of economics. It will provide much of the needed personnel directly from abroad. Above all, it helps to promote the spread of modern technology i i and efficient managerial techniques. Not only this I approach directly supplies foreign entrepreneurs, managers, i | and technical experts, but also generates a supply of indigenous talent for the future. Furthermore, this approach can bring about economic ! expansion by initiating productive enterprises directly as well as indirectly by stimulating the development of or by giving birth to corollary enterprises, all of which are expected to speed up economic development and raise the standards of living of the Iraqi people. : 3 i9 | N fl. Ma.lor Obstacles Against Application. o£ This. Approacji la | SjCaa Iraq is capable of benefiting from the Joint enter- I prise approach because the risks* and. obstacles (such as nationalization and confiscation, exchange controls | against capital and profit transfer, lack or absence of I social overhead facilities and markets) so often mentioned i ; | as being the major factors Inhibiting direct private | Investments In underdeveloped countries, either do not S exist In Iraq or are at a minimum. Consequently they i should not constitute serious obstacles to the flow and operation of direct private investment in Iraq. The fact that Iraq provides attractive opportunl- | ties for profitable investments in the abundant resources |available In the country, which are still in most cases i i untouched, further sustains the assertion that there are no serious obstacles against the flow and operation of direct private foreign Investment in Iraq. jWith Pgoper gQl.l.cle.8 Maintained Inflation Can Bp Contained j But the Joint foreign-local private enterprise approach is expected via the additional Investment expendi tures it incurs to bring about inflation. This is regarded as a major disadvantage of the joint enterprise approach. However, the type of inflation which is expected to appear j is less menacing than other forms of inflation (such as ! 320 the hyper-inflation, the cost-push type of inflation which is caused by pressure from strong labor unions), and presents a limited problem which is manageable if proper policies were maintained. I Recommendations s M Conclusions. In the text of this dissertation the author made several suggestions with regard to the over—all economic policy which should be adopted in Iraq, and those specific policies which should be adopted to obtain the advantages of the Joint enterprise approach while at the same time avoid the disadvantage of serious Inflation. In the following a summary of the more important considerations Is given. „ Emphasize agriculture. In its policy for economic | growth, Iraq should emphasize agricultural expansion. There are three main Justifications for this. Such expan sion would provide, first, food which is urgently required ; by the people; second, it would provide employment and therefore raise the Income of a large segment of popula tion which is engaged in agriculture; and, third, it would help enlarge the size of the market for the Industrial products. Etophaslze industry. Iraq should emphasize expan sion of industry as well, for successful economic 321 j ! development requires a balanced growth between Industry ! and agriculture. Industrial expansion is desirable [ ! because evidence points, with the exception of some countries which are few in number, to the fact that Indus trialization is a prerequisite condition for achieving ; high living standards. It is desirable, furthermore, to avoid the violent shocks and fluctuations caused by the i | world market upon which It would be highly dependent if i | the industry in Iraq remained underdeveloped. I Emphasize education and health. Iraq should empha size education and health in general for they can Improve the qualities and capacities of the people and add to their general welfare as well as raise the productivity of ! the nation. In particular, Iraq should emphasize voca tional and agricultural training since the Implementation of the industrial and agricultural development projects, ^ and the continued growth of the economy in the years to ; come will depend upon the availability of expert business men, managers and technicians. Attract foreign entrepreneurial, managerial ana technical talent. Iraq should attempt to attract the above talent because its scarcity may Inhibit industrial and agricultural development and all hopes for rapid economic growth. Iraq should, particularly, encourage the I direct private investment approach In the form of Joint ! enterprise with local Investors for its superiority over | other approaches. j ! Allow free repatriation of capital and profits. | In order not to discourage the flow of direct private ; Investment Into the country, Iraq should permit repatrla- I tlon of the Initial cpaltal In the currency In which it i was imported, together with the profits derived from the enterprise. No exchange restrictions or devaluation I will he needed to correct an adverse balance of payment since Iraq possesses and expects to obtain in the future sufficient foreign exchange. Maintain & liberal, import policy t& Eg&ueg. infla tion . As economic activity increases and domestic supply ! lags behind the Increasing demand, Iraq should eliminate | most of the import barriers In order to make possible the j import of the kind of goods which people want buy with i their increased Income. I In order to make the effect of Inflation less with as little pressure as possible on the available foreign exchange, Iraq can do the following: a. Encourage Investment in projects in which capital output ratio is relatively low, that is, where the return Is large and quick on a given amount of invest ment. This would decrease Inflation because output quickly increases as expenditures increase. 323 j j b. Encourage Investment in import competing | Industries such as In fertilizer plants, rayon plants, i ; and so forth. This will reduce the need for imports. c. Encourage investment in export goods industries. I This, of course, will bring more foreign exci ige to the ! country rather than take It out. i In case Iraq wishes to carry economic expansion i beyond the point at which the increase in Imports will absorb all the current flow of foreign exchange and the j reserves which already have been accumulated, the country In order to avoid serious inflation should follow one or more of the following courses: It should take measures to increase the rate of savings, and to use taxation to absorb some of the spending power. If it would be difficult to Induce people to save i more or to use the measure of taxation, Iraq should borrow j i from foreign sources to meet any temporary deficit In the j balance of payments. Although the possibility of j borrowing is suggested here it is really only a remote I j possibility that Iraq will run short of foreign exchange. The experts believe that the Inflow of foreign exchange will in all probability be so plentiful in the years to come that economic expansion will hardly entail conditions necessitating the removal of the liberal import policy for balance of payments reasons. 32^ In conclusion, It is expected that if these recom mendations are strongly applied Iraq would have a bright opportunity for achieving a rapid economic growth, and by means more favorable to a private enterprise system of economics. B IB LIO G R A PH Y 326 B IB L IO G R A PH Y A . B O O K S Abramovitz, Moses, "Economics of Growth, 1 1 in B. F. Haley (ed.). A Survey of Pontemoorarv Economics♦ Illinois: Richard D . Irwin, Inc., 1952. Baran, Paul A. "National Economic Planning," in B. F. Haley (ed.). A Survey of Contemporary Economics. Illinois: Richard D . Irwin, Inc., 1952. Bonne, Alfred. Studies in Economic. Development. London: Routledge and Kegan Paul, 1957- Brozen, Yale. "Entrepreneurship and Technological Change," in H. F. Williamson and J. A. Buttrick (eds.). Economic Development: Principles and Patterns. N ew York: Prentice-Hall, Inc., 195A. Buchanan, Norman S., and H. S. Ellis. Approaches to Economic Development. N ew York: The Twentieth Century Fund, 1955* Committee for Economic Development, The Research and Policy Committee. Economic Development Abroad and the R o J L s . & f American Foreign Investment. N ew York: 1956. Condllffe, J. B. The Commerce of Nations. N ew York: W . W . Norton and Company, Inc., 1950. Damluji, F. Som e Aspects of Modern Iraq. London: The Diplomatic Press and Publishing Company, 1952. Finnie, David H . Desert Enterprise: The Middle East Oil Industry and its Local Environment. Massachusetts: Harvard University Press, 1958. Fisher, Joseph L. "The Role of Natural Resources," In H. F. Williamson, and J. A. Buttrick (eds.). Economic Principles and Patterns. N ew York: Prentice-Hall, Inc., 195^. Gamble, F. H. Economic and Commercial Conditions In Iraq♦ London: His Majesty's Stationery Office, 19^9- Golenpaul, Dan, a t a l. Information Please Almanac 1958. N ew York: The Macmillan Company, 1958. 327 Gunter, John W . “Recent Monetary Developments In the Middle East," In Sydney N. Fisher (ed.). Tensions in the Middle East. Washington, D . C.: 1 9 5 6 . Harris, 0. L. The American Economy. Illinois: Richard D . Irwin, Inc., 1956. Iverson, Carl. A Report on Monetary Policy in Iraq♦ Baghdad: The National Bank of Iraq, 195*4-. Lewis, W . A. The Theory of Economic Growth. Illinois: Richard D. Irwin, Inc., 1955• L ittle , Arthur D . , jg£ a l. A Plan for Industrial Develop ment in Iraq♦ Massachusetts: Arthur D . L ittle, In c., 1956. Longrigg, Stephen Hemsley. Oil in the Middle East. London: Oxford University Press, 195*4-. Moore, W . E. Economic Demography of Eastern and Southern Europe. League of Nations, 1 9 * 4 -5 - Nurkse, Ragnar. Problems of Capital Formation in Under developed Countries. A. T. Broome and Son, 1957. O'Connor, Harvey. N ew Light on Iraq. London: The Union of Democratic Control, 1958. Rostow, W . W . The Process of Economic Growth. N ew York: John Wiley and Sons, In c., 1952. Salter, Lord. The Development of Iraq: A Plan of Action. Baghdad: The Development Board, 1955- Society of Graduates of American Universities In Iraq. Revolution in Iraq. Baghdad: Al-Rabita Press, 1958. Spengler, Joseph J. “Demographic Patterns," In H. F. Williamson and J. A. Buttrlck (eds.). Economic Development: Principles and Pattern^. N ew York: Prentice-Hall, Inc., 1 9 5 * 4 -- _ _ _ _ _ _ _ _ _ _. "Theories of Socio-Economic Growth," In National Bureau of Economic Research. Problems in the Study of Economic Growth. N ew York: 1 9 * 4 -9 - Taylor, W ayn C. United States Business Performance 4kr.o.ad: The. C & ag. S.tqOy of £hg. Fjrgs.tpn.e Qperati. on.g in Liberia. Washington, D.C.: National Planning Association, 1956. 328 Taylor, W ayn C., and J. Linderman. United States Business Performance Abroad: The Case Study of the Creole Petroleum Corporation in Venezuela. Washington, D.C.: National Planning Association, 1955. The Indonesia Project Centre for International Studies. United States Business Performance. Abroad: The Case Study of Stanvac in Indonesia. Washington, D.C.: 1957. Viner, Jacob. International Economics. Illinois: Free Press, 1951* _ _ _ _ _ _ _ _ _ _ . International Trade and Economic Development. Illinois: Free Press, 1952. Williamson, H . F. “Introduction,1 1 in H . F. Williamson, and J. A. Buttrick (eds.). Economic Development: PEi.nc.ial.ea . and Patterns.. N ew York: Prentlce-Hall, Inc., 1954. B. PER IO D IC A LS Adams, Doris G . “Current Population Trends in Iraq," The Middle East Journal. 10:151-164, Spring, 1956. Bernstein, E. M . "General Problems of Financing Develop ment Programs," The Journal of Flnanoe. 12:167-177, M ay, 1957. Bloomfield, Arthur I. "Som e Problems of Central Banking in Underdeveloped Countries," The Journal of Finance. 12:190-204, M ay, 1957. Burns, Norman. "Planning Econom ic Development in the Arab World," Lands East: T hg. Near and Middle East Magazine, 3 :9-10, November, 1958. Goode, Richard. "Reconstruction of Foreign Tax Systems," Proceedings of the Forty-Fourth Annual C onference of the National Tax Association. 44:212-222, November, 1951. Griswold, Lawrence. "Updating Mesopotamia," Lands East: The Near and Middle East Magazine. 1:4-11, November, 1956. 329 Hoselitz, Bert F. "Entrepreneurship and Economic Growth," The American Journal of Economics and Sociology. 12:97-110, October, 1952. Khadduri, Mojld. "The Problem of Regional Security in the Middle East: A n Appraisal," The Middle East Journal. 11:12-22, Winter, 1957- Patterson, Gardner. "Impact of Deficit Financing in Underdeveloped Countries: Sometimes Neglected Aspects," The Joumal of Finance. 12:178-189* M ay, 1957. Quint, Malcolm N. "The Idea of Progress In A n Iraqi Village," The Middle East Journal, 12:369-38**, Autumn, 1958. Singer, H . W . "The Mechanics of Economic Development: A Quantitative Model Approach," The Indian Economic Review. 1:1-18, August, 1952. Spengler, Joseph J. "Economic Factors In the Development of Densely Populated Areas," Proceedings of the. American Philosophical Society, 95:20-53* February, 1951. Stevens, Georglana. "Arab Nationalism and Bandung," The Middle East Journal, 11:139-152, Spring, 1957- The Arab Information Center. "Iraq," The Arab World. **:8-13» February to April, 1958. C . PU B L IC A T IO N S O F G O V E R N M E N T S A N D L E A R N E D O R G A N IZ A T IO N S Annual Report of the National Bank of Iraq, July 1 9 * * 9 _ December 1950. Baghdad: The Times Printing and Publishing Company, Ltd., 1951* Annual Report of thg. N ational Bank of Iraq, 19.51 • Baghdad: Thomas Press, 1952. Annual Report of tL he National Bank qf Iraq, 1952. Baghdad: The Baghdad Printing Press, 1953- Annual Report of the National Bank of Iraq, 1953* Baghdad: The Baghdad Printing Press, 195 * * » 330 Annual Report of the National Bank of Iraq. 1 9 5*1-. Baghdad: Ai-N*ajah Press, 1956. Government of Iraq. Annual Report of the Agricultural Bank of Iraq. 1950-51. Baghdad: The Government Press, 1953- Government of Iraq, Embassy of Iraq. Education In Iraq. Washington, D. C. Government of Iraq, General Directorate of Industry. Annual Report for the Year 1950-1951. Baghdad: Al- Rabita Press, 1951* _ _ _ _ _ _ _ _ _ _. Annual Report for the Y ear 1951-1952. Baghdad: Al-Rablta Press, 1952. _ _ _ _ _ _ _ _ _ _. Annual Report for the Years 1952-1953 and 1252.- 195k. Baghdad: Al-Rablta Press, 195*4-. _ _ _ _ _ _ _ _ _ _• Aonual R fiE Q Jg iL for Ygarg. 19 5 * f - 19 55 . fifld 1255- 19 56. Baghdad: Al-Rablta Press, 1956 _ _ _ _ _ _ _ _ _ _. Laboratories Q _ f Industrial and Scientific Research: Seventh Annual Report for the Years 19 5k- 1955 and 1955-1956. Baghdad: Al-Rablta Press, 1956. Government of Iraq, General Directorate of the Budget. The Iraqi Government Budget for the Years 1952-1953. Baghdad: The Government Press, 195k. Government of Iraq, Institute of Industrial Research. Annual Report for the Year 19k9-1950. Baghdad: Baghdad Press, 1950. overnment of Iraq, Ministry of Economics. S tatistical Abstract. 19 55. Baghdad: The Government Press, 1956. Government of Iraq, Ministry of Interior. Iraq Today. Baghdad: The Government Press, 1953- Government of Iraq, Office of the Cultural Attache in Washington, D.C. Agra£l£Jl Reform hm. 3 & S . R qpubllg . of Iraq. Washington, D.C.: Colortone Press, 1958. Government of Iraq, Principal Bureau of S tatistics. S tatistical Abstract. 1950. Baghdad: The Government Press, 1952. 331 Government of Iraq, Principal Bureau of S tatistics. Statistical Abstract. 1951. Baghdad: The Government Press, 195^- S tatistical Abstract. 1955. Baghdad: Zahra Press, 1956. G-overnment of Iraq, The Development Board. Annual Report for the Financial Year 1952-53. Baghdad: Al-Ani Press, 1956. Afirm&l geP.Qr. f r tPE. f r h f i . H3.nfiiicj.al Yg.ar 1 9 .5 3 - 5 k - Baghdad: Tafaiyudh Press, 195^* Annual Report for the Financial Year 195*4— 5 5 ■ Baghdad: Tafaiyudh Press, 1956. Annual Report on the Operations of the Develop ment Board for the Year 1951. Baghdad: Al-Ani Press, 1956. Compilation of Laws Concerning: the Development Board. Baghdad: The G-overnment Press, 1952. Development of thg. Tjgri^-Eupbhfite. S . Valley- Baghdad: Al-A.nl Press, 1955- . Dokan D am Project. Baghdad: Al-Ani Press, 195^- Law No.. kl tor thfi. Y gfiE . 19.55. fO£ frhg Programe . of frhg. Projects of. th.fi. Development Board and the Ministry of Development. Baghdad: The Government Press, 1955* hm. No. 5k tor the. Ze&r 19.56 Amending thg. Law of t h.g G eneral IfcPgramme of the Projects of . thg PfiV fil opm gnfr, g .Q .S E d and the Ministry of Development No. *tl for the Year 1955. Baghdad: Al-Ani Press, 1956. Major Irrigation Projects. Baghdad: Al-Ani Press, 1956. Major Irrigation Pro j ects. Baghdad: Al-Ani Press, 1956. iQgre.ss Sam ioarJL aa Report tor Iks. Ygar A gX jJL 1 9 - 5 . 6 tP H & X L Q h 1952- Baghdad: The Development Board, 1957* Bulletin Of the Development B^ayd,. Baghdad: The Education Press, 1955* 332 G-overnment of Iraq, The Development Board. The Habban 1 yah Scheme. Baghdad: Al-Ani Press, 1955* Government of Iraq, The Industrial. Bank. Annual Report for the Years 1947-1948. Baghdad: The Government Press, 1948. _ _ _ _ _ _ _ _1948-1949. Baghdad: Baghdad Press, 1949. _ _ _ _ _ _ _ _ _ _, 1949-1950. Baghdad: Al-Rabita Press, 1950. _ _ _ _ _ _ _ _ _ _> 1950-1951 and, 1951-1952;. Baghdad: Al-Rabita Press, 1952. _ _ _ _ _ _ _ _ _ _ , 1952— 19 53. Baghdad: Al-Rabita Press, 1953* _ _ _ _ _ _ _ _ _ _, 195?— 1954. Baghdad: Al-Rablta Press, 1954. _ _ _ _ _ _ _ _ _ _ , 1954-1955* Baghdad: Al-Rabita Press, 1955* _ _ _ _ _ _ _ _ _ _, 1955-1956. Baghdad: Al-Rablta Press, 1956. _ _ _ _ _ _ _ _ _ _, 1956-1957. Baghdad: Al-Rabita Press, 1957. International Bank for Reconstruction and Development. The Economic Development of Iraq. Baltimore: The Johns Hopkins Press, 1952. International Monetary Fund. Balance of Pavments Year book. for the years 1947 to 1953. Washington, D.C. _ _ _ _ _ _ _ _ _ _. Ninth Anam! Report on Exchange Restrictions. Washington, D.C.: 1958. _ _ _ _ _ _ _ _ _ _. Seventh Balance of Payments Yearbook, for the years 1947 to 1955* Washington, D.C. Quarterly Bulletins of the Central Bank of Iraq for the period January to December, 1951. Baghdad: Thomas Printing Press, 1951. Quarterly Bulletins of the Central Bank of Iraq for the period January to December, 1952. Baghdad: Thomas Printing Press, 1952. Quarterly Bulletins of the Central Bank of Iraq for the period January to December, 1953* Baghdad: Thomas Printing Press, 1953. 333 Quarterly Bulletins of the Central Bank of Iraq for the period January to December, 195^* Baghdad: Thomas Printing Press, 1 9 5 * + » Quarterly Bulletins of the Central Bank of Ira.q for the period January to December, 1955* Baghdad: Thomas Printing Press, 1955* Quarterly Bulletins of the Central Bank of Iraq for the period January to December 1956. Baghdad: Thomas Printing Press, 1955. Quarterly Bulletin of the National Bank of Iraq. April- June, 1955. Baghdad: Ai-Rablta Press, 1955* Royal Institute of International Affairs. The Middle East. London: Oxford University Press, 1955. The Middle East Institute. Americans and the Middle East: Partners In the Next Decade. Washington, D.C.: 1950. Evolutlon in the Middle East: Reform. and Change. Washington, D.C.: 1953- East. Resources: Problems and Prospects Washington, D.C.: 195^. Nationalism In the Middle East. Washington D.C.: 1952. Tensions In the Middle East. Washington, D.C.: 1956. _ _ _ _ _ _ _ _ _ _- T & & Evolution of P j A b J L l S . Reaaona lb 111 tv la the. Middle East. Washington, D.C.: 1955• United Nations, Department of Economic and Social Affairs. Epgngmls. a n d ,. Leggi S ta tic of Foreign Investments l a Selected Countries. & £ Latin America. N ew York: The United Nations, 1950. gg.pnfiff.la Development la t h . e _ Middle East., 19 J+5 - 19 5L. N ew York: The United Nations, 1955. Economic Development la the Middle East. 19 56- 19 57. N ew York: The United Nations, 1957. Foreign Investment Laws and Regulations of the Countries of Asia and the Far East. N ew York: The United Nations, 1951. 3 3 ^ United Nations, Department of Economic and Social Affairs. Measures for the Economic Development of Under developed oountries. N ew York: The United Nations, 1951. PopulaklaZl £row£h & nd the Standard, of Living in Underdeveloped Countries. N ew York: The United Nations, 195^* Processes and Problems of Industrialization in Underdeveloped Countries. N ew York: The United Nations, 1955* Review of Economic Conditions in the Middle East . N ew York: The United Nations, 1951. Survey oil Ppl l g X p g , Afcfecftlqg PrJlvatS gprjeiga N ew York: The United Nations, 1950. . The Determinants and Consequences of Popula tion Trends. N ew York: The United Nations, 1953- The International Flpjg of Private Capital 19^6- 1952. N ew York: The United Nations, 195^* United Nations, Economic and Social Council. Advances in the W om en8 s Rights. N ew York: Department of Public Information, 1955- Commission Q A the, Status, OX. E a m f iZ l. N ew York: The United Nations, 1955- United Nations, Technical Assistance Administration. Taxes end Fiscal Policy in Underdevel oped N ew York: The United Nations, 195^. U. S. Department of Commerce. Factors Limiting United States Investment Abroad. Washington, D.C.: 1953. _ _ _ _ _ _ _ _ _ _. Investments in Venezuela. Washington, D.C. D . U N PU B LISH ED M A T E R IA L S • ’Background Material O n Iraq for 1957 Consultation." Unpublished material released in mimeographed fora by the Middle Es.st Division of the International Monetary Fund, July 30, 1957. 335 Pollard, Spencer D. “Three Kinds of Inflation." Unpub lished paper read before the meeting of the Faculty Club of the University of Southern California, Los Angeles, California, March 12, 1958. E. NEWSPAPERS AND MAGAZINES Fortune Mpgaajjaja., July, 1950 _ _ _ _ _ _ _ _ _ _ _ _ _September, 1958. G ood H ousekeeping. November, 1958. The Iraq Times A nnual, December, 195^•

Linked assets

University of Southern California Dissertations and Theses

Conceptually similar

PDF

Consumer Instalment Credit As A Variable In The Quantity And Velocity Of Money In California, 1950-1960

PDF

Minimizing Iraq'S Disguised Unemployment Through Industrial Development

PDF

The Optimization Of Economic Resources For Economic Growth In Iran

PDF

The Inflation Process: An Economic Analysis

PDF

An Economic Analysis Of The Problems Of Federal Debt Management

PDF

A Portfolio Approach To Domestic And Foreign Investment

PDF

Factors Affecting The Growth Of Small Business Investment Companies On The Pacific Coast

PDF

The Evolution Of The Labor Injunction With Particular Emphasis Upon Contemporaneous Factors Influencing Its Application

PDF

The economics of air cargo transportation

PDF

An International Comparison Of The Role Of Government In The Economic Development Of Developed And Emerging Economies, With Particular Reference To Government Corporations

PDF

Income Distribution And The Social Welfare Function: A Study Of Theories Of Distributive Justice

PDF

A Solution To The Problem Of Food Shortages In Korea

PDF

Economic Factors Influencing Migration Of Manufacturing Firms

PDF

Grade Labeling And The Demand Curve: Theoretical Implications And Empirical Evidence

PDF

Analysis Of Small Manufacturers: Pricing Policies In Southern California

PDF

The Interaction Among Financial Intermediaries In The Money And Capital Markets: A Theoretical And Empirical Study

PDF

The relationship between industrial and legal jurisprudence

PDF

A Positive Approach To Advertising And Publicity As A Function Of Consumer Preference

PDF

An Analysis Of The Feasibility Of The Use Of Fiscal Policy To Stimulate Economic Growth In Iran

PDF

A Theory Of Regional Economic Growth: Growth Poles And Development Axes

Asset Metadata

Creator Tellew, Fuad H. (author)

Core Title Private Foreign Investment As A Possible Aid For The Economic Growth Of Iraq

Degree Doctor of Philosophy

Degree Program Economics

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag Economics, Commerce-Business,OAI-PMH Harvest

Language English

Contributor Digitized by ProQuest (provenance)

Advisor Garis, Roy L. (committee chair), Anderson, William H. (committee member), Michael, William B. (committee member)

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c18-53856

Unique identifier UC11357348

Identifier 6000398.pdf (filename),usctheses-c18-53856 (legacy record id)

Legacy Identifier 6000398.pdf

Dmrecord 53856

Document Type Dissertation

Rights Tellew, Fuad H.

Type texts

Source University of Southern California (contributing entity), University of Southern California Dissertations and Theses (collection)

Access Conditions The author retains rights to his/her dissertation, thesis or other graduate work according to U.S. copyright law. Electronic access is being provided by the USC Libraries in agreement with the au...

Repository Name University of Southern California Digital Library

Repository Location USC Digital Library, University of Southern California, University Park Campus, Los Angeles, California 90089, USA