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H. Estimates of the Economic Impact of the ISIS Crisis Attributable to Trade

# H. Estimates of the Economic Impact of the ISIS Crisis Attributable to Trade

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KRI: Assessing the Economic and Social Impact of the Syrian Conflict and ISIS

FIGURE H.1

Import Demand and Export Supply

Price

Domestic Price (gross of transport): Postshock

Domestic Price (gross of transport): Initial

Import Demand

Import Quantity

Price

Export Supply

Domestic Price (net of transport): Initial

Domestic Price (net of transport): Postshock

Export Quantity

Kurdish share on the export side, given that we know exports are almost

all oil.

In a simple import demand or export supply framework the 2 percentage point ad valorem change in world prices has an impact on welfare

according to the following formula:

∆W = value of trade [∆t – 0.5(∆t)2ε,],

(1)

Estimates of the Economic Impact of the ISIS Crisis Attributable to Trade

where

∆W is the change in welfare associated with a given trade flow

∆t (=0.02) is the percentage point change in the transport cost share of

total cost and

e is an estimate of the relevant trade elasticity.

On the basis of estimates in the literature, we choose an elasticity of five.

This value is not important for these calculations (as it would be for studies

of tariff changes, which affect government revenues). However, note that

an elasticity of five would suggest that a 2 percent increase in international prices (resulting from a 20 percent increase in trade costs) leads to a

10 percent change in trade. We have observed reductions in imports of

about 45 percent and argued that between one-quarter and one-third is

attributable to the budget freeze. The remaining 10 to 120 percent change

in imports is broadly consistent with the estimates we use here.

The first term in brackets in equation (1) is the rectangle (increased

costs of serving the initial imports and exports). The second term is the

triangle that complements the Harberger triangle: It is the cost that does

not have to be paid because imports and exports are lower.

The welfare multiplier of trade value is [0.02−0.001] = 0.019.

Losses from more expensive imports = 0.019×\$20.785 billion =

\$394 million (2013 dollars). (The import value of \$3.8 billion would

produce a loss estimate of \$72 million.)

Losses from lower prices for exports = 0.019×8.8 billion = \$167.2 million

(2013 dollars).

Total trade losses (annualized) = \$561 million (compared with

239.4 million if imports were only \$3.8 billion).

Total trade losses (per month) = \$561 million/12 = \$46.75 million

per month (compared with 20 million per month with the lower import

figure).

Trade-related losses as a share of GRP (assume GRP of \$20 billion) =

0.561/20 = 0.028, or 2.8 percent of GRP (compared with 1.2 of GRP with

the lower import figure).

Per capita loss = 561/5 = \$112 per citizen (assuming a population of

5 million).

Total impact on current citizens = \$561 million.

Assuming impact per head on refugees and IDPs is the same as that

on current citizens because of the increase in trade costs, total impact on

1 million refugees/IDPs = \$112 million.

Therefore, total stabilization needs = \$673 million.

The stabilization interventions could take the form of offsetting steps—

costs. It is worth emphasizing that these crude estimates do not include

the impact on services trade and overall foreign investment.

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KRI: Assessing the Economic and Social Impact of the Syrian Conflict and ISIS

There may be another reason why these figures may be underestimates. Analysis of the U.S. input-output table has revealed truck

transport to be a general purpose technology (meaning that it serves as a

reasonably important input into many if not all other sectors in the

economy).2

The lesson of this discussion is that shocks to the productivity of

general purpose technologies have much larger and much more enduring impacts on output than shocks to sectors that are not general purpose sectors (in the closed economy setting studied by these authors).

The implications for open economies have not yet been studied, but

presumably the lesson that shocks to the transport sector will have

important spillover effects to the other sectors is an important consideration here.

Notes

1. Data are available from http://www.wiod.org/new_site/database/niots.htm.

2. Based on working paper, http://repositori.upf.edu/bitstream/handle/10230

/6053/1206.pdf?sequence=1, with substantial changes. Facts about the

truck transport sector are only in the working paper version.

APPENDIX I

Iraq and KRI Microfinance

Sector Assessment

This technical appendix analyzes the impact of the ISIS conflict and Syrian

refugee and IDP crisis on the sustainability of the Iraq microfinance sector,

with specific reference to MFIs operating in KRI. The microfinance sector

in Iraq has developed through nongovernmental organizations providing

microcredit to informal micro- and small businesses and households.

MFIs in Iraq have emerged as credible sources of financing for low-income

households and entrepreneurs, both underserved by conventional banks.

Microfinance in Iraq is generally used to promote household welfare by

spurring economic activity and helping manage economic shocks (for

example, unemployment, death in the family). Data presented were produced through stakeholder interviews and follow-up engagement with

MFIs and industry support institutions, including the Iraq Microfinance

Network and the MENA regional microfinance association (Sanabel).

Meetings were also held with industry support institutions, including

donors and technical assistance providers (for example, the SEEP network and the Consultative Group to Assist the Poor).

Snapshot: Microfinance in Iraq and KRI

History and Sectoral Outreach in Run-Up to ISIS Crisis

The microfinance sector in Iraq has grown significantly over the past

10 years, in large part because of extensive support from donors (most

notably USAID) in funding and scaling-up of NGO MFIs. All of the MFIs

in Iraq are NGOs. The microfinance sector in Iraq includes 12 NGO MFIs

operating in all 18 provinces (figure I.1), with an outstanding portfolio

totaling \$150 million (ID 174.6 billion), equivalent to 0.25 percent of the

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KRI: Assessing the Economic and Social Impact of the Syrian Conflict and ISIS

FIGURE I.1

Microfinance Industry Outreach

State of Iraq’s microfinance industry, USAID Tijara, October 2012. © USAID. Used with the permission of USAID; further

permission required for reuse.

banking sector’s assets. The outstanding portfolio balance grew

17 percent in 2012, down from 48 percent in 2009. In addition to NGO

MFIs, the Ministry of Labor and Social Affairs began microfinance programs in 2007, although the programs have used subsidized interest

rates. With regard to penetration as a percentage of the overall population, the Iraq microfinance sector remains one of the smallest and least

developed in the MENA region. The sector’s growth is a product of the

relatively high average loan size (\$1,500) as opposed to client outreach

levels. The industry’s viability and growth continues to be challenged by

civil conflict, with violence intensifying over the last year, and growing

significantly in June 2014.

Two larger MFIs control more than half the market in Iraq: 38 percent

of the outstanding portfolio is held by CHF, and 18 percent held by Al Thiqa.

Ten other smaller MFIs thus hold the remaining 44 percent of the outstanding portfolio. MFIs currently do not offer savings, insurance, or payments and transfer services. Generally Iraqi MFIs can be divided in two

categories: the large and fastest-growing MFIs, showing strong portfolio

quality and profitability, and the smaller MFIs, witnessing much lower

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