Iraqi economy was adversely affected by four major factors: the war with Iran during the 1980s, an international oil glut in the 1980s and 1990s, the economic sanctions imposed by the United Nations (UN) after the invasion of Kuwait in 1990, and the Persian Gulf War in 1991. 20th century revealed that Iraq’s real gross domestic product (GDP)—that is, its GDP adjusted for inflation—fell by 75 percent from 1991 to 1999. In the late 1990s the country’s real GDP was estimated at about what it was in the 1940s, prior to the oil boom and the modernization of the country. As a result, per capita income and the people’s calorie intake plunged from the levels of relatively better-off Third World countries to those of the desperately poor Fourth World states, such as Rwanda, Haiti, the Democratic Republic of the Congo, and Somalia.

Iraq had an almost exclusively agricultural economy until the 1950s. Since the 1958 revolution, economic development has been strong, and Iraq now has the second largest economy in the Arab world, after Saudi Arabia, and the third largest in the Middle East. Oil is the most important sector of the economy. Oil contributes approximately half the gross domestic product (GDP), industry and agriculture about 10 percent each, and services about a third. Massive oil revenues, particularly since 1973, have enabled the government to set ambitious development goals, including industrial diversification, reduction of imported manufactured goods, agricultural self-sufficiency, and a large increase in non-oil exports. At the same time, investment in infrastructure has been high, notably in water projects, roads and railways, and rural electrification. During the 1980s, however, the Iran-Iraq War delayed many projects and caused widespread deterioration and destruction of infrastructure. The economy faces a number of problems, including a huge foreign debt accumulated through continuing high military spending, a shortage of labour (although this has been partially offset by greater participation of women in the labour force), and the movement of the population away from agriculture.

Iraq's economy is dominated by the oil sector, which has traditionally provided about 95% of foreign exchange earnings. In the 1980s, financial problems caused by massive expenditures in the eight-year war with Iran and damage to oil export facilities by Iran led the government to implement austerity measures, borrow heavily, and later reschedule foreign debt payments; Iraq suffered economic losses of at least $100 billion from the war. After the end of hostilities in 1988, oil exports gradually increased with the construction of new pipelines and restoration of damaged facilities. Iraq's seizure of Kuwait in August 1990, subsequent international economic sanctions, and damage from military action by an international coalition beginning in January 1991 drastically reduced economic activity. Although government policies supporting large military and internal security forces and allocating resources to key supporters of the regime have hurt the economy, implementation of the UN's oil-for-food program in December 1996 has helped improve conditions for the average Iraqi citizen. For the first six, six-month phases of the program, Iraq was allowed to export limited amounts of oil in exchange for food, medicine, and some infrastructure spare parts. In December 1999, the UN Security Council authorized Iraq to export under the program as much oil as required to meet humanitarian needs. Oil exports are now more than three-quarters their prewar level. Per capita food imports have increased significantly, while medical supplies and health care services are steadily improving. Per capita output and living standards are still well below the prewar level, but any estimates have a wide range of error.