How do you create a nation-state? What are the pillars of civil infrastructure that are vital to assure the longevity of a nation and what can be learned from past nation-state creations that can inform and assist in the creation of states in modern times? Research in the Department of Accountancy within the Faculty examined the formation of Iraq in 1920-32 to see what history can teach us.

In 1920 the embers of World War I still flickered across the globe. The most horrendous war in the history of mankind had touched nearly every nation on the planet and Mesopotamia or Iraq as it is known now was particularly affected.

Iraq had been ruled for centuries by the Ottoman Empire and the defeat of its ally, Germany, in the Great War marked the end of the power of this Turkish Empire. Iraq was now wrestling with a new master, a British one, established under a mandate presented by the youthful League of Nations.

Iraq has had many names over the centuries and once its area was known as Babylon. This town was born around the third millennium BC and was the focal point of the Babylonian Dynasty. The Ishtar gate, constructed in 575 BC, now housed in Berlin, is one of the remaining wonders of this period.

‘State creation in this case was conducted under British suzerainty following a League of Nations mandate that involved attempts to create a viable financial system and, finally, the introduction of a national currency. A complicating factor was that Iraq, almost from its inception, was encumbered by Ottoman-era financial obligations and a military agreement negotiated with its contemporary occupier: Britain. Unsurprisingly, financial difficulties arose’ outlined Associate-Professor Geoff Burrows and Mr Phill Cobbin who conducted the research in the Faculty.

Britain imposed a Hashemite monarchy on Iraq through the establishment of the monarchy of King Faisal in 1921. But this newly-created nation faced daunting financial hurdles causing Britain to send a Member of Parliament, E. Hilton Young and the civil servant, Roland V. Vernon, to Iraq to try and balance the budget. Young and Vernon crossed into Baghdad in 1925 in a modern ‘caravan’ of four open top Buicks.Their work to unravel Iraq’s finances would lead to them to confront an activity that has bedevilled accountants to the present day – budgetary biasing. In their report written later, Young and Vernon would outline and decry practices such as ‘intentional over-estimating by the spending departments, to make things comfortable, and under the mistaken impression that there is virtue in a substantial under-spending on a vote. Habitual over-estimation of expenditure is the worst of all nuisances to those responsible for general financial policy’.

Young and Vernon would pore through the finances of the fledging Iraq state and propose a slew of changes to the revenue and expenditure columns of the Iraqi budget, while also proposing recommendations as regards to the creation of an Iraqi currency. In 1930 Young would return again to Iraq further proposing additional measures needed to rectify Iraq’s finance.

 Most of the revenue and expenditure proposals of Young and Vernon were implemented and in its entirety both their missions to Iraq could be seen as being a qualified success. Commenting on this research, Professor Burrows stated, ‘on the budgetary side the key measures were (i) restricting defence expenditure to what was feasible given the Iraq’s financial position, (ii) recognising that in a developing country such as Iraq, revenue had to be raised principally through indirect taxes, while (iii) introducing a fledgling income tax to broaden the future revenue base.  Supporting these measures were a currency board (rather than a more-sophisticated central bank) which ensured a stable stirling-backed currency (the dinar).  Through these measures the Iraqi budget was in balance by 1932 when the League of Nations mandate expired and Iraq became independent’.

 This research work has provided historical insights that have relevance today, ‘Iraq’s experience provides a useful benchmark to assess progress in other nations that have been (re)created in modern times, notably East Timor and the post-1990 liberated member-states of the former Soviet bloc and Yugoslavia.

For these fledgling states, new financial systems and currencies have had to be created. Invariably the IMF has been involved on an advisory basis and it is not too fanciful to view the Young–Vernon 1925 mission to Iraq as a forerunner to the financial-reconstruction work of the IMF’ underlined Professor Burrows.

 Historical insights such as this help to fill what is still a void in this field of accountancy research as Professor Burrows stated ‘at national level, arguably the most severe budgetary and financial discontinuities occur when states are created or recreated. The challenge then is to create viable financial systems which reduce the danger of state failure. Despite their importance, these processes are under-researched in the accounting and finance literatures’.