Fiscal Policy and Economic Stability in Iraq

Implications of failure and the desired role

11th August, 2019 by Hamed Abdul Hussain Al-Jubouri

Fiscal policy is one of the economic policies used to achieve the objectives of the economic system. Given the fact that economic stability is the main objective pursued by all different economic systems, fiscal policy will undoubtedly be one of the policies used to achieve economic stability.

What is meant is a situation where the economy does not suffer from the fluctuations of the economic cycle. In other words, it does not suffer from stagnation and does not suffer from inflation. The last century, called “recessionary inflation”.

The role of fiscal policy in the economy
 
Fiscal policy: "is the use of government spending and tax policy as a means of influencing the determinants of aggregate production" [i] in order to address economic volatility and finally to achieve economic stability.

Certainly, the role of fiscal policy in countries varies according to the nature of the economic system adopted by the state, and the nature of the economic structure, and can be explained as follows:

I. THE NATURE OF THE ECONOMIC SYSTEM [ii]
 
Under the capitalist system, the private sector is the main driver of economic activity. The role of the state is limited to two aspects: First, to create the appropriate environment for the private sector so that it can play its role in economic activity. Second, mitigate economic volatility. The role of fiscal policy in the capitalist system is secondary to the economy in supporting the private sector and mitigating economic volatility.

Under the socialist system, the state is the main driver of economic activity and the role of the private sector is very limited. Thus, the role of fiscal policy under the socialist system will be a major role in the economy and not secondary as in the capitalist system.
Second: The nature of the economic structure [iii]
 
If the economy has an advanced economic structure in the sense that it has gone beyond the question of achieving economic development, the role of fiscal policy will be secondary because this economy does not require the intervention of the state significantly to achieve economic development.

While the economy has a growing economic structure, it means that it has not bypassed the issue of economic development, which cannot be achieved in the absence of the state. Therefore, the role of fiscal policy will be a major role in the developing economy in order to fulfill the task of economic development.

In order to demystify the concept of economic development, it is a conscious multidimensional process to achieve qualitative changes that require large capital and a long period of time to change the structure of production in order to leave underdevelopment, raise the average real per capita and improve living life.
Failure of fiscal policy in Iraq
 
Since Iraq was following the socialist system which necessitates the great role of the state in the economy on the one hand and the nature of its economic structure with a developing structure and even underdeveloped on the other hand, the role of fiscal policy has become practiced significantly in the Iraqi economy. - Unfortunately - did not help him from the state of economic volatility to the state of economic stability! This is why the title of this article was chosen.

The implications of the failure of fiscal policy in Iraq include:

First: the economic growth fluctuated, due to the Iraqi economy's dependence on oil in a very large proportion, with the neglect of other sectors, where fiscal policy did not work, through its various tools, from activating other sectors to strengthen the economy and strengthen economic growth [iv] and finally stabilize.

Second, the unemployment rate has worsened, as it constitutes 10% according to the lowest estimates and 40% according to the highest estimates, from the labor force, with a decrease in labor productivity which reached 17 minutes a day for the employee in the country. Unemployment rates and low employee productivity are compelling evidence of the failure of fiscal policy to achieve economic stability because the latter assumes low unemployment rates to their lowest levels.

Third: the deterioration of infrastructure, it is known that the private sector in developing countries, including Iraq does not invest in infrastructure because it requires large investments and for a long period of time, so it has become a task of the state in these countries. The high rate of household disadvantage of infrastructure services, which accounted for 58.95% in 2010, which is very high by international standards, [5] is evidence of the failure of fiscal policy to deliver infrastructure that is reflected in recent economic stability [vi].

Fourth: the absence of financial sustainability, the most prominent evidence of the lack of financial sustainability in Iraq are crises, in the sense that any crisis and its impact on the decline in oil prices will resort to Iraq to borrow to meet its financial needs, and this is reflected in the economic stability, as happened in the 2007 crisis As a result of the recession, and the 2014 crisis, which resulted in austerity, the absence of financial sustainability reveals the extent of the failure of fiscal policy to exercise its required role.

It can be said that these signs of failure cannot be the responsibility of fiscal policy unilaterally, because the Iraqi political, economic and social situation is unstable, especially after 2003, but bear the greatest responsibility, because of the chaos of the management of fiscal policy, where there was no clear vision of the process Withdrawal and who will occupy the vacuum area after creating the appropriate conditions for it, and this led to the lack of flexibility in responding to the requirements of the new phase after the adoption of the transition to the new system.

The required role of fiscal policy after 2003
 
Although Iraq has embraced the transition to a market economy, it is still in the transitional phase.
The first stage, the transition
 
Since Iraq suffers from a bad investment climate, Iraq ranks 171 out of 190 countries in 2019 in the ease of doing business index issued by the World Bank, and the weakness of the private sector and its limitations, and the state continues to seize the means of production, but pay salaries to many employees in its public sector. Since 2003 and so far at no charge!

Therefore, we should work at this stage to revive some of its public sector ready to work only with the private sector, in order to improve the investment climate and strengthen the private sector and alleviate the pressure on the public budget and meet part of the domestic demand and reduce the volume of imports, which pushes towards stability.

Second stage, post-transition
 
After improving the investment climate and strengthening the private sector to be able to exercise economic activity and meet domestic demand at this moment, the state should withdraw and its role is limited to internal security and external defense and judiciary supervision of the private sector so as not to go away from the desired role.

If the private sector is out of its role and there is an economic imbalance resulting in economic instability, the state should intervene through fiscal policy to correct the economic situation and return it to stability and withdraw.With this withdrawal, the supervision role continues to monitor and correct any imbalance that occurs again.

Accordingly, the role of fiscal policy in Iraq in general will be to build the investment climate and encourage and develop the private sector as in the first stage, and exercise the role of supervision of the private sector to ensure that it moves in the required direction and address economic fluctuations if they appear on the surface as in the second stage.  



https://annabaa.org/arabic/economicarticles/20237