Hawkar Atta Karim

Dr.Akeel Abbas
15 May 2016
Economic crisis in Kurdistan
Introduction about economic crisis
During the history of mankind many major economic crisis occurred that caused the
declining of individual revenue and bankruptcy of many companies for example the Wall
Street Crash of 1929 that caused a global economic depression for many years. Another
major economic crisis is the 1985-1986 oil price drops which it is similar to the current drop
of oil prices in the international markets that caused an economic crisis for many oil based
economies like Kurdistan Region. The economy of Kurdistan region is heavily depends on
the oil, agriculture, and tourism because of stronger security and open market policies it has
more developed economy compared to other parts of Iraq. After the autonomous in 1992 the
economy was enormously depends on the UN's Oil-for-Food Program, however after US
occupation of Iraq in 2003, the economy of KRG was based on 17% of the central
governments budget share. During that era, many international companies made investment
in the region due to more stability compared to other parts of Iraq. However, the economic
crisis emergence in 2015 due to the lower oil price in the international markets, disputes with
the central government about oil policy, and ISIS war. This research is about the current
economic crisis in Kurdistan, and the debate about it inside a Kurdish society. Some political
parties believe that the outside situation like Iraqi government and the ISIS war are the major
reasons for this crisis, but other political parties think that it is a corruption and bad governed
by the Kurdish leader are responsible for this situation. However, the main cause for this
crisis is the structure of an economy that depends only on oil revenue. This structure of the

economy in Kurdistan in the political science and economic science it's known as a rentier
state.
What is a rentier state and how it responsible for creating autocratic states?
Firstly, The rentier state concept in the political and economic science refer to a state that
mostly depends on substantial external rent of a natural resources like oil or gas to an
External clients. In the rentier state, internal rent is just a transfer of a domestic payment. On
the other hand, renter state sustains the economy without a strong local sector, so the
economy defined as a rentier state because the main part of it depends on the external rent.
Another characteristic of rentier state is that ''in a rentier state- as a special case of a rentier
economy - only few are engaged in the generation of this rent (wealth), the majority being
only involved in the distribution or utilization of it'' (Beblawi) Moreover, in the rentier state
''the government is the principal recipient of the external rent in the economy'' (Beblawi).
Only a few members of the political elites will control an external rent, so with this economic
power they will also gain a political power. Also, they will have absolute power for
distributing this wealth to the population.
Secondly, Most of the rentier states lead to autocratic states because the leaders and the royal
families have absolute power to control the oil revenue this can be clearly seen in the Gulf
States. Also, as the people did not pay tax and '' the state has a large degree of autonomy from
society by virtue of external revenue; it delivers goods to the population, demanding little in
return except acquiescence'' (Nonneman). As a result of this citizens become less incentive to
put a pressure on the government to become responsive to their needs, and this leads to
autocratic states. Moreover, as citizens become more loyal to a state because of the
government's spending on education, free health care, civic welfare, security, and creation of
jobs, many members of the society become loyal to the state leaders, so they will gain more

power and they will have absolute power over the society. Another reason that made rentier
states to become an autocratic states is most of the oil revenue will be used for military
consolidation to avoid any insurgency among the citizens. , so they maintain their benefits
and autocratic regimes for many years. An example of this can be seen in many Gulf States
and especially in Iraq during Saddam Hussein's regime.
Thirdly, rentier state is equal to a weak state. Because the '' country is heavily dependent on
natural resources, particularly for the financing of the government, then this leads it to have a
weak state (Acemoglu). As the state only depends on the natural resources, and the
economic structure did not developed because of the lack of diverse economy and a good
taxation system. As a consequence of this when there is the global decline of the price of the
natural resource that the country it depends on it heavily will have an economic crisis. An
example of this can be seen in the Spain during the American colonies in the 16th century.
Spain economy was heavily depends on silver, and when the global price of silver declined
the state transformed from a most powerful powers in Europe to a wake state. Another
example is a 1985-1986 oil price drop in the international markets. This decline was one of
the main reasons of the fall of the Soviet Union in 1991 because at that time USSR was
depend on the oil for funding its budget.
Fourthly, the concept of rentier state applies on economic structure in Iraqi Kurdistan and
overall in Iraq also. KRG economy is heavily relies on oil industry as the main source for
funding the government and infrastructure development. ''As prospectors unearthed large
reservesan estimated 45 billion barrelsmajor oil companies including Exxon MobilCorp,
and Chevron Corp. followed, bringing billions of dollars of investment''(Person). The oil
sector become the main sector of economy, so as KRG depends on the external rent of its oil
and gas resources one of the most important characteristic of rentier state apply on its
economy.

Moreover, a lack of the diversity in the economic structure in Kurdistan region is another
main characteristic of rentier state. As estimated 70% of workers in the region works for the
government, so this show that a private sectors did not have a big influence on the overall
revenue. As a result of this when an economic crisis hits the country; the government cannot
pay workers salary, so this state will be considered as a weak state because it only depends on
the external rent. Also, another characteristic of rentier state is that it creates an autocratic
state because from the external rent revenue political leaders will gain more support and
loyalty from the citizens. This can be seen also in Kurdistan as many political leaders used
Oil money to gain loyalty and obedience from citizens.
Causes and effects of an economic crisis, and a debate about it
Firstly, as the Kurdistan region gains more autonomy from the central government in
Baghdad. As a result of it, the KRG established many oil and gas deals with the oil
companies to extract and distribute oil. This leads to a tremendous increment in the budget.
However, a conflict between Kurdish leaders and Baghdad leaders happened about the oil
policy, so the central government in Bagdad withheld budget payment to Erbil. Baghdad
wants to export the oil that is under the control of KRG to be export by the national company
of oil Somo, but Erbil wants to export its oil separately because they see this step as the
important step for independence from Iraq. Plus, global decline of oil price from 100$ to just
under 50$ in the global stock market exchange ,and the ISIS expansion near KRG borders
made Peshmerga enter a war with ISIS that cost many money for purchasing military
weapons from the western countries. Beside this the large number of Syrian refugees that put
more pressure of the KRG budget.
Secondly, Inside the Kurdish society in both of social media sites and television stations there
are endless debates about the current economic crisis. One side of the debate which they are

usually the members of PUK and KDP believes that KRG is not responsible for the crisis, but
the outside situations is the real cause of the crisis. They assumed that Baghdads cut for the
seventeen present of budget share, plus the war against ISIS, then the larger number of Syrian
and Iraqi Refugees because of the war situation, also the declining of oil price internationally,
finally Kurdistan Parliaments focus on the political issues instead of the economic crisis.
According to Mirkhan one of the a member of the Kurdistan Parliament financial committee,
''From the approximate budget of $56 billion for arms purchase by the Iraqi Ministry of
Defence for the period between 2007 to the end of 2013, Peshmerga forces had the agreedupon share of about $9.5 billion, but we did not receive one thin dime( Mamakani). So this
side believes that the outside situation created an economic crisis in Kurdistan region rather
than the KRG.
Thirdly, the other side of this debate believe which they are mostly the members of the
Change Movement (Gorran) in Kurdistan, they assumes that ''KRG did not have an economic
crisis, but it has a cash crisis (Ekurd) as it said by the head of foreign relations for the
Change Movement (Gorran), Mohammed Tofiq. Also, they assume that Government and the
party-affiliated companies that they have made cash deposits for the oil and gas export in the
western banks. Plus, they want KRG to made a reform and bring back this illegal money to
the country to solve the current economic crisis. Moreover, this side believes that
administrative corruption in every sector in Kurdistan and, lack of transparency in
administration of the oil revenue. so they assume that Ashti Hawrami, the KRG Minister for
Natural Resources and his staff must be removed from his position, and the national oil
company must be establish to become responsible for making deals with the international oil
companies and administration of the oil revenue instead of the Minister for Natural
Resources. This are most the claims that made by this site about the current economic crisis.

The rentier state is a main problem

Firstly, the economic crisis that have faced KRG that some political parties imagine that it
happened because of the conflict between Kurdish leaders and Baghdad leaders about the oil
policy, ISIS war costs, and the larger number of Iraqi and Syrian refuges that caused an extra
pressure of the KRG budget. Beside this other parties think that the corruption inside the
system and the irresponsible management and administration of the oil revenue is responsible
for creating this unexpected situation. These are minor factors that caused a situation.
However the main factor is the economic structure in Kurdistan which is responsible for
creating a current economic crisis. The rentier state is the main factor that created this
economic crisis because the elements that made the rentier state are available in Kurdistan.
For example, KRG depends on the external rent for natural resources like oil and gas, so
when the decline of the international price of this natural resources occur the economic crisis
will be happen because the country will extremely depends on this of the revenue of natural
resources for funding its budget.
Secondly, one of the major factors of the current economic crisis in the Kurdistan region is
corruption inside the government and private sectors and a lack of transparency in
administration of the oil revenue. The rentier state is responsible for the corruption and the
lack of transparency because people did not pay tax and the whole economic system is based
on exporting the natural resources, so people has much lower rights for disagreement about
government decisions. Beside this there is not a public policy in a rentier state so this leads to
a corruption. Most of the countries in the Middle East are in the top of the countries which
there are a high rate of administrative corruption. These countries depend on the external rent
of oil in common. So in these counties the royal families and the leaders have absolute power
for controlling the states revenue. Moreover, in these countries the royal families and the
leaders use the oil revenue to buy the loyalty of people and made people did not demanding

administrative reform in the government. This can be clearly seen in Kurdistan as many
members of PUK and KDP used oil money to cover their corruption by giving a bribe.
Thirdly, another problem that caused the economic crisis is the lack of diversity in the
economic structure. In the 1970 and 1980, the economy of Kurdistan region was dependent
on the agriculture, but because of the destroying of the agricultural villages by Saddam
Hussein regime. As a result, an agriculture sector was destroyed and still has not recovered
yet. In the 1990s the economy was enormously depended on the UN's Oil-for-Food Program,
and the international organizations aids like Food and Agriculture Organization (FAO) and
WHO. However, after 2003 the KRG budget depended on the 17% of the share of the Iraqi
budget, but in the more recent years; KRG begins to exporting oil to international markets.
As a result, the whole economy is now heavily depends on oil sector. So without a diverse
economic system that depend on multiple resources the economic growth is much harder to
achieve. Also, this creates a much less competition between local companies because
government is responsible for exporting the natural resource. Plus, Kurdistan region is
depends on the neighbour countries for food supplies and the region depends on the
importing everything from electronic devices to clothes. As the result of this massive
importing, there will not be a local investment and all money goes outside.
The suggested solutions to Kurdistans economic crisis
Firstly, the possible solutions for current economic crisis can be divided into a short term and
a long term solutions. In the beginning the short term solutions is that ''the political actors
should first agree on the central issues in order to reach consensus on potential solutions.
Some of the causes of the economic crisis are the lack of a comprehensive economic policy to
diversify the economy, reliance on single export commodity [oil] for revenue, and stagnated
growth of the private sector''(MERI debate). So the political parties must did not focus on the

political issues between them, but they must focus on the current economic crisis and try to
activate the Kurdistan parliament again. One of the short term solutions is that every country
in the economic crisis do is an austerity in the budget and getting a Loan from international
banks. KRG must use austerity system in managing the budget for the different sectors and
made a reform in the salary system without changing the salary of the ordinary employees.
KRG also must try to get a Loan from international banks to pay salary and made a quick
recovery to the economic system.
Secondly, the long term solutions. KRG must make the reform in the investment systems and
in the banking system in order for improvement in the agriculture, industrial, tourism, and
every other private sector. In Kurdistan region many private sectors are run by the political
leaders directly and indirectly, so this caused a monopoly in many private sectors. As the
result of this, the competition between companies is very rare, so to make the economy more
open the private sectors must be differentiated from the public sectors which are run by the
government itself. Beside this KRG must try to nationalize oil by establishing a national oil
company that it is responsible for extracting and exporting the oil instead of the foreign oil
companies. As the result of this the revenue of oil will increase because now part of the oil
revenue goes to the foreign oil companies. Moreover, as one of the long term solutions is to
establish a Central bank that it is responsible for a state currency and its money supply not
that the current one that it is only used to keep money inside it. Another sector that KRG can
improve it is the electricity sector because every year the government spends billions of
dollars on this sector by providing a gas and oil for the Power stations. So if KRG established
renewable energy power stations the government can save lot of money every year.
Thirdly, the real solution is to transform the country from a renter state to a state with devise
economic system. However this transformation needs a lot of planning and work from the
government to improve all the economic sectors in Kurdistan not just the oil. For doing this

KRG must support the local products by putting a tax on the imported goods, and give a loan
to the local investments. Also, the government must use the oil money to improve other
sectors like agriculture, industrial, tourism as the government of United Arab Emirates used
this plan to make the economy of UAE more diverse. By this plan the economy will not
become only depends on the oil, and when oil runs out the country will not face any
economic crisis.
Conclusion
The current economic crisis in Kurdistan region created a huge debate inside a Kurdish
society about the causes, effects, and possible solutions. Some political parties believe that
the outside situation has created a crisis, but other political parties assume that corruption,
lack of planning, and lack of transparency in the government administration is caused the
problem. However, the economic structure which is heavily depends on the oil revenue, and it
lack of the diversity in the economy is the man factor for this crisis. Also, the rentier state
model in Kurdistan is responsible for the corruption and lack of evolve in the economy.
Finally, there are a short term solutions like austerity in the budget and getting a Loan from
an international banks, and long term solutions like made a plan for focusing on other sectors
instead on oil sector only.
Work cited
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June 2013. Web. 18 Apr. 2016
Beblawi, Hazem, and Giacomo Luciani. The Rentier State. London: Croom Helm, 1987.
Web.

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"MERI Debate on the Current Crisis in the Kurdistan Region." MERI. N.p., 16 Feb. 2016.
Web. 18 Apr. 2016.
Mamakani, Ehsan. "Five Reasons for Kurdistan Region Financial Crisis." Kurdistan24. N.p.,
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Nonneman, Gerd. "Rentiers and Autocrats, Monarchs and Democrats, State and Society: The
Middle East Between Globalization, Human 'Agency', and Europe." International Affairs Int
Affairs 77.1 (2001): 141-62. Web
Person, and Joe Parkinson. "Kurds Reel as War Batters Weak Economy." WSJ. N.p., n.d.
Web. 09 May 2016.