I: FUNDING AND TAXATION
Islamic State has declared a caliphate over a population of roughly 2.8 to 8 million people in Iraq and Syria, and its military strength now amasses to
30,000-200,000 fighters (Lister, 2014), 22,000 of whom have joined the jihadist group from other parts of the world (The Guardian, 2016). Completely selffinanced since 2005, as of September 2014, IS daily generates 3- 8 million USD and its total value of assets is estimated at around $1.3-2 bn (Levitt, 2014).
Oil Revenue
Before the coalition strikes, IS was estimated to make about $1.5 million a day (Financial Times, 2016) selling as much as 70,000 barrels of oil daily from
Syria and Iraq (Lister, 2014). Despite the fall in production oil still remains the biggest source of income for the organisation. Depending on the quality
produced, prices on the black market range between $25-45 per barrel (FT, 2016). With the global prices for oil lingering at around $30-40 as of 2016, it is
unclear whether or not this has undermined IS oil production. In theory low prices on the official market should crowd out the cheaper natural resources
sold on the black market. However, in reality this has mainly had a negative impact on the opponents of IS, such as the Iraqi government and Kurdish
opposition, who trade on the official market and heavily rely on crude oil to generate income (RFERL, 2016). Moreover, thanks to the captive local market
in Syria's war-torn northern and eastern regions, oil prices under IS territory have proven to be relatively sticky (FT, 2016). However the sustainability of
Islamic State’s revenue generated from the black market sale of natural resources remains uncertain. Despite the refineries not producing to their full
capacities, IS heavily relies on specialised labour and in many cases has paid and protected pre-existing skilled workers to remain at their posts and maintain
oil fields (Levitt, 2014). With the airstrikes increasingly targeting the sources of the supply chain, prospects of long run productivity are poor.
Ransom
Kidnapping for ransom has proven be a very profitable criminal enterprise for IS, with the estimated income for these activities amounting to about 20
million USD in 2014 alone (Hansen-Lewis 2015), thus comprising nearly 20% of Islamic State’s total revenue (Levitt, 2014). It is rumoured that France paid
around $18 million for the four journalists captured by the organisation. According to the US intelligence sources in 2014 IS made $25 million from ransom
payments (BBC, 2016).
Donations
Endorsements coming mainly from deeply pocketed donors in neighbouring countries amount to only 5% of the group’s budgetary income. Nevertheless,
over the course of 2013-2014, IS still accumulated around $40 million from such donations (Lister, 2014). These transactions are very hard to track as
naturally most of them made in cash and transferred over the borders as ‘humanitarian aid’ (Newsweek, 2015) primarily from the Arabic peninsula.
Following a large amount of pressure from the international community Saudi Arabia, passed legislation to prevent this type ‘humanitarian aid’. Qatar and
Kuwait have also attempted to make funding of the organisation illegal, but have struggle to enforce the relevant legislation, creating a pathway for anyone
looking to support IS (Levitt, 2014).
Taxation
Ever since the 2014 proclamation of a global caliphate, IS have organised an official system of taxation in the areas where they remain affluent. As of
September 2014, efficient tax rates have been imposed on businesses transporting goods from Syria and Jordan via western Iraq ($300 per truck of
foodstuffs and $400 per load of electronic goods, $800 flat rate for trucks). Providing all the necessary paperwork to keep regulations in order, this system
not only acts as a source of revenue for IS, but also provides protection for trucking businesses against bandits and facilitates future transportation (Lister
2014). In expanding their territory, IS has robbed public and commercial banks and imposed discriminatory taxation systems levied on both companies and
individuals, which often come in the form of forced ‘donations’ (Levitt 2014). It has been reported that account holders in Mosul, where IS have imposed
their taxation policies are only allowed to withdraw a maximum of 10% of the money on their account and every withdrawal comes with a 5-10% fee.
Moreover Jizya (poll tax) obliges Christians and other non-Muslims living in Mosul under IS “protection” to pay a $720 head tax per adult male. In practice
this demotion to second-class citizenship, has led the vast majority of Shia and Christian inhabitants to flee from IS-controlled areas.
Interestingly, the largest quantity of IS taxation revenue is transferred indirectly into the pockets of the Iraqi and Syrian governments, who continue to pay
salaries to the employees living within the boundaries of their states (Hansen-Lewis 2015).
Other Criminal Enterprises
Another non-negligible source of income for IS comes from the sale of artefacts that have been acquired by the organisation from the 4,000 archaeological
sites under its control. Iraqi officials claim this to be “the second most important commercial activity after oil sales, earning the militants tens of millions of
dollars” (The Washington Post 2015). With the recent airstrikes damaging infrastructure, thus complicating the black market sale of crude oil, it is possible
that IS will focus even more on illegal excavations.
Moreover, 40% of Iraqi wheat production is now also under IS control. Farmers are forced to either pay tax or set aside a proportion of their products, so
that it can be sold illegally for half the usual market price. Similar procedures are also witnessed in the sale of foreign fighter passports, livestock, seizure and
leasing of agricultural machinery (Hansen-Lewis, 2015).
II: INSTITUTIONS
In their empirical analysis of why some nation-states succeed in
developing prosperous economies while others are unable to sustain
their political systems, Darren Acemoglu and James Robinson argue
that the recipe for economic prosperity stems from the inclusiveness
of the established institutional environment. Providing numerous
historical examples, the authors reject cultural, geographical and
ignorance hypotheses (the idea that some rulers simply don’t know
what is best for their country) thereby showing that it is extractive
political and economic institutions that lead nations to fail
(Acemoglu and Robinson, 2012, p. 3). With regards to this thesis, we
shall examine the institutions established by IS and determine the
prospects for its economic development.
A lot of the recent successes and territorial gains made by the group
can be attributed to its efficiency in exploiting the power vacuum
that has been created by the conflict in Syria and Iraq. The inability
of the existing governments to counter the spread of Islamic State
has further facilitated its development. IS has been successful in
establishing a system of governance, an army, a taxation and
education system and has ensured the provision of security and
other social services (Bakke, 2015).
Al-Baghdadi has also maintained a small cabinet of “ministers” as
well a military council (Lister, 2014). The governing body of IS have
been able to gain popular support via food and fuel subsidies as well
as securing permission for their presence by reaching agreement with
tribe leaders (Lister, 2014). Furthermore, the organisation have tried
to assure a more egalitarian provision of existing services in
comparison with the previous government. Islamic State have even
established a central bank known as the ‘Muslim Financial House’,
(The Washington Post, 2016) and have proclaimed a creation of
their new currency, the Gold Dinar, which essentially sees an
establishment of the Golden Standard under their rule (Economist,
2016)
However the economic future of Islamic State remains unclear.
Once the revolutionary momentum has died down, the lack of
democracy and social prospects will become apparent. The taxation
system imposed is very extractive, discriminatory towards minorities,
and does not incentivise business development. Lack of property
rights and access to the free market, do not encourage investment,
which is crucial for economic growth. According to Acemoglu and
Robinson, authoritarian military regimes are destined for eventual
failure, yet it is too soon to comment on the long-term prospects of
IS. According to Avinash Dixit this system points to a predatory
state with extractive institutions, where the supposed protectors of
property rights, exploit the institutions for their own purposes,
reducing any incentives to produce or invest (Dixit, 2004, 138).
IV:WHATTYPEOFECONOMYISISLAMICSTATE?
Capitalisteconomy
III: DOES IS HAVE THE POLITICAL CHARACTERISTICS TO BECOME A STATE?
Two key definitions of state recognition:
The constitutive theory: the acceptance of the state seeking recognition by other existing states is constitutive to its sovereignty, affirming the state’s position as a subject of international law.
Without this, the state cannot be judged responsible for its actions towards other states, and vice-versa (Lauterpacht, 1970: 310)
The declaratory theory: based on the legal criteria stipulated in the 1933 Montevideo Convention of a permanent population, defined territory, government and a capacity to enter into relations
with other states, a state’s de facto existence is the determinant factor in its objective existence and render it a subject of international law (Crawford, 2006: 45-46). Any statements of recognition by
other states towards the entity are “nothing else than a declaration”, offering no additional constructive elements to its existence (Crawford, 2006: 24).
The consensus for state recognition, based on empirical examples, appears to sway more towards the constitutive theory’s explanation of state recognition. Given recent history, it seems highly
unlikely that IS would achieve constitutive recognition, given the UN condemnation of the group in November 2015, and the otherwise poor relations between core UN states and I.S., goals of
constitutive state recognition However, even if the chances of I.S. achieving formal constitutive, and thus de jure, recognition seem low, such recognition is not necessarily essential for an entity to de
facto exist and operate as a state. Indeed, we have already seen the potential for such entities to function with relative success through current unrecognised states. Approximately 20 such entities
exist, all with common characteristics that echo those from the Montevideo Convention; high internal sovereignty and legitimacy, territory under their de facto control, and aspirations for statehood.
In addition, certain unrecognised states, such as Palestine and Kosovo, have even managed to establish relations with other states.
IV: DO IS’ CURRENT CHARACTERISTICS CORRESPOND WITH UNRECOGNISED STATES? IF NOT, COULD THEY?
1. High internal sovereignty and legitimacy:
Several political scientists have contended that given the lack of external recognition for unrecognised states, they place increased importance on domestic sovereignty and legitimacy in
compensation (Caspersen and Stansfield, 2011: 11). In a recent study carried out by Dr. Kristin Bakke, it was determined through the example of the de facto state of Abkhazia, that the key
determinants of the internal legitimacy of an unrecognised state’s regime are; the provision of public goods and services to citizens and its ability to be perceived as a state-builder by its population
(2015). As seen in section I, IS does provide certain public goods. However, ever since a global coalition was formed in 2014 against IS, the regime’s capacity to secure such services for its
population have come under threat. In recent months, this has been exemplified by increased air strikes on IS-controlled territory by the United States, Russia, France, the United Kingdom and
others, weakening the regime’s capacity to provide security to its population and destroying oil fields, which has decreased the group’s revenue stream. It is plausible that such actions will have
consequently had a significant impact on the group’s legitimacy. In addition, in spite of a proclamation by I.S. leader Al-Baghdadi of the organisation’s intentions to forge a worldwide caliphate in
June 2014, the group has shied away from official public communication for around one year now – hardly the image of a state-builder.
That said, due to obvious reasons, it is impossible to find out first-hand the exact impact of such developments on the group’s legitimacy. In addition, it is crucial to remember that the population
under IS control are not comparing life under the organisation with that of a successful state but rather against life under Assad or the Iraqi Shia government. For an unrecognised organisation to
show credibility to a population accustomed to stability and strong institutional foundations is very difficult. To show that you can provide such services to a higher degree than the preceding Syrian
and Iraqi regimes, however, is not such a tall order People living under the regime have already shown signs of recognition of this (Mahmood, 2015).
2. Territory under de facto control: see map (Figure 1)
As we can see on Figure 1, IS claims control over territories spanning across Iraq and Syria. However, it is important to know that these territories are just that, claimed. They are neither legally
recognised, nor consensually defined. The latter cannot even be said regarding those within the organisation, given the ambitions for an ever-larger expanse of territory controlled. It follows that
with no right over this claimed land, IS equally has no right to protect it (Boyle, 2015).
3. Aspirations for statehood:
The Islamic State’s unilateral declaration of a worldwide caliphate made breaking news when it was proclaimed in June 2014. However, if such a proclamation is to be understood in the spirit that it
appears to have been intended, it has little to do with statehood. Under sharia law, such a caliphate would mean a pan-Islamic theocratic authority for the global Muslim community. This seems to be
an entirely different proposition than one implying inclusion into the international community of sovereign states.
4. Relations with other states:
Currently the Islamic State has no official ties with any recognised states. However, in spite of the moral issues it may pose to any potential future trade partners, given its history of extreme
violence and expansionist motivations, it is plausible that it could establish relations with resource-poor states.
As suggested by Harvey and Stansfield, unrecognised states in areas rich in natural resources (as IS are – see map), can often provide goods that other states “have a desperate for”, creating a
precedent for them to be accommodated within the international system (Caspersen, 2011: 13). In light of this, theoretically if IS continues to produce oil at competitive rates, and its stocks can be
sustained long enough to dry out competitors, states could be forced to enter trade agreements with them. Such arguments must nonetheless be nuanced in light of recent developments regarding
oil supplies caused by the dive in oil prices, which could crowd out demand for IS oil altogether.
Thus, whilst the opaque nature of happenings in the Islamic State make all analysis of its characteristics mere informed conjecture, it would appear that the group could potentially achieve de facto
statehood. Though the opaque nature of IS render all analyse mere informed conjecture, it can be stated with some confidence that the group has at least some internal legitimacy, could have
precedent for potential future trade links, and has the foundations of a defined territory. That said, constitutive recognition seems impossible, and it would appear that no matter how legally close
the group may get, the political intransigence that has been rendered imperative by the group’s previous actions makes its integration into the international community, even at a de facto level, highly
improbable.
VI: MODELLING THE IS TAXATION SYSTEM
The I.S. war economy has thus far revealed close affinities with both the centrally planned and feudal economic models. However,
little is known about the exact economic apparatus it uses to function. We have seen that I.S. can be classified as a predatory state with
extractive institutions. Dixit’s model (2004), adapted to this institutional makeup, can be used to offer a more precise understanding of
what its taxation system currently looks like and thus either prove or disprove our previous classification of its economy as a mixture
of a centrally-planned and a feudal economy.
Privateproperty,markets Thereareins3tu3onsgoverning
Legi3macyisclaimedtobeinthenameofthe
andfirmsareessen3aland
theprocessofproduc3onand
peoplethroughelec3ons
protected
distribu3onofgoodsandservices
IslamicState
economic
characteris3cs
✗
✗
✗
Centrally-plannedeconomy
IslamicState
economic
characteris3cs
Mostproduc3ontakesplace
instate-owned
establishments,private
propertyislimitedifnotnonexistent
Governmentistheins3tu3on
governingproduc3onand
distribu3on
Legi3macyisclaimedtohavebeengrantedto
aminoritybythepeople
✔
✔
✗
Feudal/Manorialeconomy
Alleconomicac3vityoccurswithin
eachself-sufficientmanor,taxes
Produc3oniscentered
paidtothelord,inhabitants3edto
aroundlord'sestate/manor
thelandtheyaregivenin
exchangeforwork
IslamicState
economic
characteris3cs
✗
✗
Figure 1: Map of IS territory and foreign fighters
Legi3macyfromdivineright-hierarchical
societysupportedbyamassofpeasants
✔
Conclusions:Basedoncross-analysisofthethreecoredefiningfeaturesofeachofthesethreeeconomicsystems,themost
compellingclassifica8onoftheI.S.economyisthatofamixturebetweenacentrally-plannedeconomyandafeudaleconomy.
Thekeysourcesofproduc3on,i.e.oilfields,kidnappingforransomandothercriminalenterprisesareeithercontrolledor
administeredbythestate,asinacentrally-plannedeconomy.Likewise,thelawsconcerningproduc3onanddistribu3onofgoods
andservices,andanychangesmadeintheirregardaremetedoutbytheregime.Nevertheless,thegroup'seconomyhasshown
increasinglyfeudalelementsinthisarea,giventhatinrecentmonthsIShasclaimedestablishmentofextra-territorialprovinces,
whichwouldsendtaxestoRaqqainexchangefortheirsupport(TheIndependent,2015).Finally,Al-Baghdadi,leaderofthe
IslamicStatesince2010,leadswithallegeddivinerightastheCaliphoftheworldwidecaliphatethathehaspledgedtocreate.
However,anydefini8veclassifica8onsofISmustbenuancedasitdoesnotfitanypreviouseconomicstructureperfectly,given
thatfundamentallyitisanon-stateorganisa8onnotwithstandingitsproclama8ons,hasachievednorecogni8onasotherwise,
andsoliAleisobjec8velyknownregardingitsinternalapparatus.
Figure 2: Adapted
version of Dixit’s
model for taxation
Dixit shows that at a basic level, state taxation systems are borne out of a trade-off between tax revenue (r) that the government can
obtain from its population, and the utility (u) from inhabitants private post-tax consumption (Dixit, 2004: 140). He foresees that a
kleptocratic, predatory state will choose a tax/utility bundle corresponding to K, whereby a higher tax rate, Rk, will be chosen as the
government seeks to maximise its direct income, however is obliged to provide a minimum of utility, uk, to keep agents alive and
avoid revolution. A benevolent state (for example, a democratic state) would instead prioritise social welfare, thus restricting tax rates
to the level necessary to be able to carry out its necessary functions, Rb, in order to maximise citizens’ private utility at a peak of ub
(Dixit, 2004: 140).
As mentioned before, taxes are high in the Islamic State, reaching several hundreds of dollars for a single truckload of goods.
However the suggested flat tax rate that Dixit claims to characterise predatory states appears to be too reductive to perfectly fit I.S.’
characteristics. As mentioned above, Shiites and Christians are taxed to a higher extent than Sunnis. The (uk, Rb) bundle would thus
only be applicable to tax rates imposed on non-Sunnis. This bundle typifies the taxation system of a centrally planned economy e.g.
that of the USSR during the Cold War.
However, the lower tax rate afforded to Sunnis can still be reconciled with Dixit’s model with a slight theoretical adaptation, and with
our classification exercise. Dixit suggests that a given government’s preferences regarding its tax-utility bundle will be based on an
assumption of a classical mechanism-design problem whereby a principal hires an agent to perform a task, but their relationship is
characterised by asymmetrical information in favour of the agent. If the state obliterates all incentives for economic production,
agents within the state will be encouraged to hide their assets to avoid taxation and make minimal effort as they know that the
government will rob the fruits of their labour irrespective of effort levels (Dixit, 2004: 139). In such a case, it is impossible for the
state to achieve maximum revenue from high-skilled agents without incurring costs. These costs are manifest either in surveillance
aimed at finding the true extent of agent’s abilities and activities, or the provision of incentives to encourage agents’ revelation of
such capacities. Consequently, state predators committed to the long term will instead seek to build up trust and provide incentives for
agents to seek economic growth to the best of their ability. This is akin to the situation of a feudal economy, where serfs were bound
to the land they worked, but equally were rewarded for good work with portions of land that they could possess themselves.
The tax incentives afforded to Sunni I.S. inhabitants are surely motivated in part by such further indirect revenues. However, it would
appear that this is not the prime motivation behind the lower tax bundle, denoted as point S (us, Rs). Instead, the distance between
point K and point S represents the ideological premium that IS state leaders are willing to pay for cohesion amongst Sunnis as part of
an ideological ideal to establish a Sunni Muslim caliphate. They accept higher costs of a relative tax relief, to provide Sunni agents
with increased utility to incentivise their commitment to I.S.’ cause. Thus, through Dixit’s model we see that IS’ taxation of nonSunnis and Sunnis show key consistencies with the findings in section IV, albeit with religion and not economic value as the major
source of incentives and societal categorisation.
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