Economics of ISIS

The Atlantic put out an article in September about the working of the ISIS economy. High taxes in a highly oppressive state. It is working for now but how will this play out? What does history show about such economic tactics?

ISIS cannot be easily compared to other states but there are some significant parallels. Economics is about the allocation of resources. Allocation of resources for ISIS is fully about supporting the warfighter. Through coercion they can dictate where resources go. Are they devoting an unsustainable amount of resources towards the war?

The Soviet Union under Stalin had a similar goal though not acting as belligerent as ISIS. They sought to take resources from agriculture and put them towards industry (military included). Agriculture prices were suppressed and all economic activity was controlled to maximize the goals of the regime. Farmers (the poor) suffered greatly but it was successful in greatly increasing industry. The US was greatly fearful of what they saw happening in the USSR and on the surface there was plenty to be worried about.

The machine was working brilliantly until the 1960s when there was nothing left the strip from the agricultural sector. The USSR was on the brink of collapse. That is until they discovered more oil. As some may recall, oil prices were soaring in the early 1970s and remained high. This provided a massive windfall to the Soviets and their machine could lumber on without skipping a beat. Prices began to fall in the 1980s and by the end of the decade, well we know what happened. The Soviet Union collapsed. The stripping of resourced had been exhausted.

figure-1-fsu-oil-production-vs-oil-price

ISIS is getting as much as they can from the people and able to sell oil on the black market. Is this activity unsustainable? Yes but the more important question is how long will this all last?

The Soviet Union took over 50 years to fall apart and no one wants ISIS around for even close to that long. No one has a crystal ball but one can surmise that stripping from the people will be exhausted rather quickly. They do not have a large population like the Soviets to draw from and ISIS looks more like Great Leap Forward China than the USSR. In short the Great Leap Forward in China was the USSR’s economic system on speed. In three years agriculture was decimated and at least 30 million perished. China had no oil to cushion the blow.

The people in ISIS controlled lands have a long history of oppression and there is not cultural affinity with many of its subjects as ISIS is a sectarian group that many do not fall into. The people only have so much left to have taken from them and will likely run out in a few short years if not months.  ISIS tactics are also harder to stomach as they come in forms that are very visible to the people. ISIS controls food and charges highly inflated prices. No citizens of any country take kind to excessive increases on basic necessities. High takes are more opaque. Seeing 20% increase in your taxes is hard to quantify though you would be upset. When the price of bread goes from $1 to $10, everyone knows exactly how ridiculous it is. Taxes would serve ISIS better but they are harder to enforce, therefore ISIS has to find another way.

ISIS does have plenty of oil but having oil and getting oil to a buyer are two different things. CNN estimates that ISIS makes about $1 to 2 million a day in oil sales. This is before any military action has been taken against oil facilities. Most of the production is happening in Syria meaning there is much more they could be earning in Iraq if they can get those facilities online.

Can military action eliminate ISIS from benefiting from oil? Not fully but they can put a serious dent in the activity. Enough to put a serious squeeze on the regime. The USSR didn’t run out of oil in 1989, they just didn’t have enough at the prevailing prices. ISIS can face a similar fate in the near future. The US will be mindful of environmental damage but the political calculus is certainly working towards reducing the role oil is playing for ISIS.

ISIS will be on the decline soon and many are at least hinting at acknowledging that but this by no means that ISIS will be fully out of the public eye anytime soon. Russia at times does not look too much different than the Soviet Union and we all know how good Afghanistan looks right now. To answer the larger question of the future of the region, one guess is as good as the other. But as optimistic as one wants to be, this is one region where even I struggle to be hopeful about.

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