from Follow the Money

One side effect of the war in Iraq: a surge in development aid

April 9, 2006

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According to the OECD, the amount of development assistance rich countries provide to poor countries rose from around $80b in 2004 to $106.5b in 2005 - driven by the cost of writing off Iraq's debt ($14b) and writing off (some of) Nigeria's debt ($5b).  Debt relief counts as development aid -- even if the debt was never going to be repaid.

The US did its part: US development aid rose from around $20b in 2004 to $27.5b in 2005, pushing aid flows up to 0.22% of US GDP.   Aid to Iraq rose from $2.3b in 2004 to $3.5b in 2005.   

The OECD tries to count real development aid flows, which presumably is why its number for US aid in Iraq is well below the $20b or so that was appropriated.  A lot of the funds were diverted to pay for security.   Plus, the entire $20b allocation also was not actually spent in 2004 and 2005 - some will show up in the 2006 data.

Still, even with the Iraq related surge in US generousity, the EU provided about twice as much aid as the US: $55.7b, or 0.44% of EU GDP. 

And unless something changes, US aid flows will fall, big time, in 2007.  The amount of US aid to Iraq is set to fall sharply.

Of course, rather that measuring dollars spent, we probably should be measuring results.   And at least in Iraq, there is - sadly - lots of evidence that the US hasn't gotten much bang for its aid buck.   Or maybe the US hasn't gotten the reduced bang it expected from its aid buck.

Before I started blogging, I wrote an opinion piece defending the Bush Administration's decision to ask Congress to provide US aid in the form of a $20b grant rather than as a long-term loan.    That was back when some in the Pentagon seriously still thought Iraq could pay its own way -- even with oil at $20 a barrel -- and that all the US really needed to do was let Iraq borrow against its future oil revenues.

The US aid program -- in addition to the $20b in US aid, the New York times estimates that about $40b in Iraqi money has been spent under US auspices (see this article) -- looks to have accomplished far less than anyone expected.  Iraq's basic infrastructure -- amazingly -- seems to be in worse shape than it was in 2003.  But I stand by my orginal argument.  Providing the aid as a grant was the right thing to do.  At least the US isn't sticking Iraq with an (inflated) bill for schools and health care clinics that have yet to built, powerplants that still don't work, and the like.   

That is scant comfort.   The US really should have been able to do better with all the money it helped to spend.   $60b is something like two times Iraq's 2005 GDP (estimated at $33b by the IMF).  It would have been enough to write every Iraqi a check for $1000 in 2003, 2004 and 2005 -- and $1000 is a lot of money in country with a per capita GDP of $1500.

Incidentally, by 2007, the US aid package will have been exhausted and all of the assets the US and all the assets the current Iraqi government inherited from Saddam (this includes Saddam-era assets the US froze, the unspent balance in the oil for food program and the like) will have been spent.  If I am reading the IMF's report correctly, the combination of spending existing assets and US grant aid provided about $12-13b of funding for Iraq in 2004 and 2005 -- and should provide a comparable amount of financing in 2006. 

The total in 2007?  $1.5b.   Moreover, Iraq is the one oil state that already is  spending pretty much everything that it takes in.  The 2006 budget is based on a world oil price of $56 a barrel ($46 for Iraq's blend).  That currently looks low, but I am not sure oil production has matched the IMF's forecast either.  

So how does the IMF make the sums add up in 2007, when aid flows dry up?   Simple: it assumes a big increase in Iraq's production.  Enough to increase oil revenues (based on a oil price of $56 a barrel) from $22.2b in 2005 to $35.4b in 2007.

Should oil fall - perhaps an unlikely possibility given all the sabre-rattling about Iran - Iraq will have one additional problem. It will be bankrupt.   OK, not bankrupt.  Iraq isn't actually paying anything on its (reduced) debt right now -- all interest is being capitalized.  But the Iraqi government would have to pare back its spending (big time).  And that would probably tend to make a lot of other problems worse.  

Unless someone bails it out.

Iraq -- for all the talk of economic reform -- right now is a classic government-dominated oil state.   Oil accounts for almost all ($22.2b of $22.8b) of Iraq's exports.    Oil provides almost all of the government's revenues.  In 2005, oil accounted for about 2/3s of Iraq's GDP -- and that wasn't enough to cover the government's recurring expenses, which were around 80% of GDP.    Total government spending -- including investment -- topped 100% of GDP.    Rather amazing, particularly given all the talk about liberating Iraq's economy from the state that floated around Washington in 2003. 

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