Report No. 92681-IQ IRAQ The Unfulfilled Promise of Oil and Growth Poverty, Inclusion and Welfare in Iraq, 2007-2012 (In FourVolumes) Volume 3: Policy Notes November 17,2014 Poverty Global Practice Document of the World Bank ÿþ STRENGTHENING THE GROWTH- EMPLOYMENT-WELFARE NEXUS POLICY NOTE I The Unfulfilled Promise of Oil and Growth: Poverty, Inclusion and Welfare in Iraq, 2007-2012 Modest Welfare Improvements Despite among the employed rather than an expansion in Healthy GDP Growth employment or higher public transfers. In particu- Between 2007 and 2012, Iraq's GDP grew at a cu-associated with job mulative rate of over 40 percent, and averaged an theapoor are ployed. annual rate of 7 percent between 2008 and 2012. Yet, per capita consumption, the basis for measur- ing poverty, grew by only 9 percent in cumula- GDP Growth Did Not Lead to Substantial tive terms, or at 1.75 percent per year. Economic Employment Generation growth translated into very modest rates of poverty The sectors of the economy that drove overall growth reduction, and in 2012, a fifth of the Iraqi popu- in GDP did not create jobs. Recent economic growth lation remains below the poverty line. Moreover, has been driven by the oil sector, which represents al- welfare improvements did not trickle down as fast most half of Iraq's GDP and almost all exports. But to the poor. The top 40 percent of the consumption the oil sector accounts for only 1 percent of employ- distribution experienced annual growth in real per ment in Iraq, and growth in the oil sector does not capita consumption of almost 2 percent, compared directly create new jobs. In fact, a 1 percent increase with 0.7 percent for the bottom 20 percent. in oil output generated a 0.2 percent reduction in employment in the sector. Why? Growth did not go hand in hand with employment Because the Links between Growth, growth in other sectors of the economy either. Employment, Earnings and Welfare are Weak The modest decline in poverty in Iraq between 2007 and 2012 was driven by an increase in earnings Iraq experienced healthy GDP growth But only a modest decline in poverty between 2007 and 2012 25 108_ ~20- GP w 15 D 2 6- 10 in GD i o rat os eet cnmcgot 0- 20 2007 2012 2008 2009 2010 2011 2012 h Official poverty line a Regional poverty line POLICY NOTE I Even in the manufacturing sector, which employs In contrast, agriculture and construction, which 10 percent of the labor force and is relatively labor employ more than a fifth of the population, and a intensive; a 1 percent increase generated an increase third of Iraq's poor, barely experienced any increase in employment of 0.6 percent during the 2007 to in earnings. Agricultural incomes fell by 2.5 per- 2012 period. Overall, job creation was inadequate cent, whereas construction earnings increased by a to absorb the growing workforce. mere 0.8 percent. With employment and earnings falling in agriculture, rural livelihood options are New Jobs and Increases in Earnings Were becoming insecure. In the southern governorates, Concentratedpoverty among households dependent on agricul- t h e P r iv a t e d i nt t h e P u b li cM S e c t o r,t N o tP o n tu re h a s ris e n sh a rp ly , a n d w h ile p e o p le a re le a v in g the rivte ecto, W ereMostof he oor agriculture, they have nowhere to go as the local Work. economy continues to stagnate. While oil did not directly create jobs, oil revenues did enable a significant expansion in public sector jobs. 80 percent of new jobs were created in the Public Sector Expansion Has Created public sector, especially in the financial, insurance Economy Wide Distortions in the Incentives and professional services sector, with accompanying to Look for Work and to Invest in Education increases in wages and salaries. Moreover, these new The increasing possibility of a public sector job, public sector jobs have absorbed less educated work- with greater job security, benefits and fewer hours ers, with 60 percent of these jobs going to workers of work, has in effect, raised the reservation wage with less than primary education. At the same time, among the working age population, and limited ac- earnings grew rapidly in the oil and mining, pub- tive job search as people wait and queue for open- lic administration, health and education sector, by ings in the public sector. 7 percent or more per year. Both are dominated by the public sector. Share of public sector jobs, Distribution of the poor, by economic sector o r s r by economic sector a i s Other serveges Other services Public administration Public administration Financial & insurance Financial & insurance Transport & storage Transport & storage Commercet& retail Commerce & retail Construction Construction Utilities Look_for_WorkandtoInvestiUtilities Manufacturing Manufacturing Mining & quarrying Mining & quarrying Agriculture & fishing Agriculture & fishing 0 20 40 60 80 100 0 5 10 15 20 25 30 0 2007 U 2012 0 2007 U 2012 STRENGTHENING THE GROWTH-EMPLOYMENT-WELFARE NEXUS A one percentage point increase in the public sector What Needs to Be Done employment rate in the governorate of birth low- ers labor force participation among adults by 30 Establishment and Maintenance of Peace percent; and by 40 percent among young Iraqis of and Security working age. * Prerequisite for economic growth and welfare With the expansion in public sector jobs for less ed- improvements ucated men, the returns to education in the public sector level off after primary school, and do not pick Growth, Oil Management and Economic up again until after tertiary education. As a result, Diversification the incentives to invest in education beyond prima- 0 Greater oil revenue transparency ry school have become limited. 0 Minimize the impact of oil revenue volatility through the creation of a sovereign "parking fund" and a fiscal stabilization fund The Private Sector is Getting Crowded 0 Strengthen the links between the oil sector and out; and its Ability to Grow is Severely manufacturing; encourage private investment in Constrained construction, banking, industry and tourism Iraq's private sector is getting increasingly crowd- 0 Rationalize the role of the public sector; in- ed out by the public sector, and is unable to match crease the efficiency of public expenditure superior pay, benefits and working hours to attract talent. Many private businesses are small and infor- Private Sector LedJob Creation mal; mainly operating in retail and trade and con- * Create an enabling business and investment cli- struction and transportation services. Agricultural mate including finance on competitive terms, jobs are also overwhelmingly in the private sector. and flexible labor market mechanisms and The World Bank's Doing Business 2012 Report institutions ranks Iraq 164 out of 183 economies in terms of 0 Eliminate regulatory barriers and discrimina- the costs of doing business. Private sector firms cite tory implementation and enforcement of rules fundamental constraints to growth - lack of reliable and regulations power supply, the political and security environ- 0 "Resource corridors" to generate spillover ment, corruption, inadequate access to credit, land activities and other capital and the lack of a trained workforce 0 Improve power and transport infrastructure (Iraq Investment Climate Assessment, 2012). E Invest in a technically skilied workforce For Economic Growth to have * Illiterate a Positive Impact * Incomplete primary t Complete primary on elfare, it maInuturig;encuaepaemeteti 6 contructe Needs to Generate L 2%NHghrscodr Employment and * Tertiary Income for Those Who Need it the Most. The Unfulfilled Promise of Iraq's Economic Growth Between 2008 and 2012, Iraq's GDP grew at an average rate of 7% each year. Yet, 20% of the Iraqi population remains below the poverty line 7 290 CL 0 0 2007 2008 2009 2010 2011 2012 I U Annual GOP Growth WHY? Because the links between growth, employment, earnings and welfare are weak. The oil sector 80% of new jobs & higher Expansion in the represents almost 50% earnings were in the public public sector has of GDP, but only sector, not in the private sector - lowered incentives to 1% of employment where most of the poor work search in the private sector for jobs Growth in the oil Agriculture & construction, Fewer people are sector did not directly which employ 1 /3 of Iraq's looking for work in create new jobs poor, barely experienced any expectation of getting increase in earnings public sector jobs WHAT NEEDS TO BE DONE? Economic growth needs to generate employment and income for those who need it the most Establishment and Growth, oil revenue Private-sector-led job maintenance of peace management & creation and security economic diversification Pre-requisite for Ensuring positive Create an enabling economic growth and spillovers from oil to business and welfare improvements industry and services investment climate and improve power and transport infrastructure ADDRESSING THE CONSEQUENCES OF IRAQ:S DIFFICULT LEGACY POLICY NOTE II The Unfulfilled Promise of Oil and Growth: Poverty, Inclusion and Welfare in Iraq, 2007-2012 Three Decades of Violence and A Skewed Role of the State Insecurity The invasion of Kuwait and the subsequent Iraq has been a nexus of conflict and fragility since tions era marked a fundamental rupture in Iraq's de- the early 1980s, and has experienced multiple types velopment trajectory. With the government focused of conflict: insurgency, international war, sectarian on regime survival, and the private sector unable to strife, persistent terrorism, regional fragmentation, work, the formal sector began to function increas- and spillovers from conflict in other countries. A ingiy through administrative flat, while market ac- promising endowment of natural resources (land, tivities shifted into the informal sector. This marked oil, and gas) and human capital has been repeatedly the beginning of large-scale detachment between confounded by war and repression. The immediate the state and its citizens, laying the grounds for pro- focus of this report is Iraq's economic and social found marginalization. development spanning a period of relative stability, The resumption of growth in 2007 was driven by ex- following the end of the sectarian violence of 2007, panded crude oil production. Oil revenue has since and ending in 2012, prior to the militancy and in- been an enabler of public sector employment growth surgency in the northern governorates of the sum- rather than a source of productive and economy wide mer of 2014. However, the legacy of three decades investments. At the same time, state owned enter- of violence and instability has been far-reaching in prises remain dominant; the decline of agriculture terms of the structure of the state and the economy; has continued unabated; and continuing civil conflict a massive human capital deficit; and the exclusion of has further fragmented the economy and society. parts of the country from the development process. GvP per capita (current USt) 7,000- Sanctions, weapons 2003fuay 2013. found m inspection, no-fly 5,000en ones,fr Fo o u i113,299 violent rather 1980-88 a pro du civilian dea o w Iran-Iraqnptogham t tn 4,000- Lw war 3,000- prssrmi omnn;tedcin farcle ha=otne nbae;adcniuigcvlcnlc 2,000 6,00 P 1,000- 19088-prga a, aaD a, oo oo 0 2, 00 a 20 13 112 vi ent, a POLICY NOTE II Internal integration is limited and spatial divergence region. Since 1980, the beginning of the Iran-Iraq has become pronounced, with very limited devolu- war, they have lagged behind. In 2011, Iraq's In- tion of functions, powers and revenues to sub-na- fant Mortality Rate was the highest in the region, tional governments and 90 percent of total public barring Yemen. spending executed through the federal government Similarly, adult male and female literacy rates i Iraq and its deconcentrated structures. and ts econentate strctues.are below the MENA average and well below the average for similar upper middle-income countries. A Massive Development Deficit For cohorts born after 1975, who were of school Iraq's historical endowment and comparative ad- going age during the Iran-Iraq war and thereafter, vantage in human capital has been steadily eroded progress in education stalled. For Iraqis of all ag- as a consequence of 30 years of violence, and the es, the most prevalent level of education is primary accompanying destruction and deterioration in in- schooling or less, and 18 year olds in Iraq today are frastructure and severe shortages of qualified per- as likely to have completed primary school as those sonnel. Girls and women lag behind in education, 30 years older. health, and workforce participation. Today, Iraq has one of the lowest employment- to- Unequal Spaces adult population ratios in the region, and male and Relative peace and stability alone, where experi- female rates of employment and labor force partic- enced, has not been sufficient for economic revival. ipation are low and stagnant. Male labor force par- Displacement and civilian deaths during the 2007 ticipation was around 74 percent and female labor to 2012 period have been concentrated in Baghdad, force participation around 11.5 percent in 2012. the North, and in some of the Central governorates. There is also evidence of long-term deterioration in The absence of peace and security has implied littie health outcomes. Until the mid-1970s, Iraqi males change in welfare in Baghdad and the North, where enjoyed higher life expectancy than their counter- the post-2003 violence was concentrated. It is only parts in the Middle East and North Africa (MENA) in the Centre where peace and stability have to some extent combined with an improvement in economic Estimates of displacement, by year of moving, 1970 to 2012 2000- 1800 1600- 1400- 1200- 1000 800 600- 400- 200- 0 - g Total Kurdistan -gBaghdad diNorth t Centre South ADDRESSING THE CONSEQUENCES OF IRAQ'S DIFFICULT LEGACY activity, and where job growth has outpaced the Strengthen the Citizen-State Relationship growth in the male working age population. 0 Build "bottom-up" accountability by providing While the South and Kurdistan were both subject citizens with information to severe prosecution under the Saddam Hussein * Improve "top-down" accountability through regime, they have remained relatively untouched a joint commitment from all levels of govern- by the post 2003- violence; yet, they appear to be ment to address the most glaring gaps in social on opposite trajectories. In Kurdistan, outcomes are improving significantly for the young, and they are * Link capacity building of sub-national govern- catching up to the rest of the country. On the other ments directly to spending activities or the de- hand, while there is some improvement in educa- velopment of targets tional attainment over cohorts within the South, the g e g gap with the nation is widening. with accountability mechanisms and needs Male employment has not kept up with the growth Bridging the Human Capital Deficit and the in working age male population in the South, while, Spatial Divide in contrast, employment growth outpaced growth 0 Invest in infrastructure to guarantee basic lev- in the working age population for men in the Cen- el of access to education, health and basic ser- tre. In the southern governorates, and with the ex- vices for all Iraqis, with a particular focus on the ception of Basra, the last five years appear to have South compounded the neglect of the past. 0 Gender-sensitive design of the schooling and health system What Needs to Be Done 0 Improve the quality of education, curricula, and strengthen vocational training in collaboration Establishment and Maintenance of Peace with the private sector and Security * A broad-based and inclusive development pro- cess will help secure a fragile peace The Legacy of Violence in Iraq Casualties by region, shares: 2007-2012 Has Been Far-Reaching-the 1% Loss of Life and Livelihoods; the Displacement of People; the Destruction of Social Infrastructure and Markets; Weakening the Rule of Law and Governance, and by Severely Constraining Economic Activity. Kurdistan *Baghdad *North NSCentre South Iraq's Difficult Legacy: Three Decades of Instability A promising endowment of natural resources (land, oil, and gas) and human capital has been repeatedly confounded by war and repression. A skewed ro[e of the state State unable to r :oide ' unme nI services incudin : peace & econorric secuty dJeveopment bask: services oil reriu .ì [n G pUbik Ln wI r; url d l x:Ctof capr O nlO !Lrit Sr.3J. ielv eriVC sUd O C r.a nd cm afe- r ow d r rgj 0| Nsig pival e h oI†h du tl0 ori an erw nmerirrdr ctor aii l eNi Fut th il irr 1oci rF! v .1 re 1'; l lj l C:- fh-,ge noo m ss' cRv.ln:- l I Which implies o massive development deficil ErdeEoyment 0 Grts wornenIlag búhind 0r ::duar0 ate5l eTployment ihn r-roi rbo Ir nsalth, arn r and latmr [ormt riee at e ooon~ is worKtorm DorticpQ[Ior are !ow imary sc |ririg ca i#5 porflcpaton and sloqnani a lrass of Oh om UnequaL Spaces Contlinued insecuraty Fconrornic rev#ival con[need ne~glct it e oper os pea claet et ex.ctarlsen frit and~ oL:crity obralim~ r>.r goer ndle woriy dv orn rtrros '||1-.]nr ::r -n,-r, [An Dy o[ o ron wosit, Krbl. (Th aio, MXf,a r ody S hd. kkN . &it S.icioC." a r!a) neve. Brghdod- .uk. Bosro EXPANDING PROTECTION TO THE POOR AND VULNERABLE POLICY NOTE III The Unfulfilled Promise of Oil and Growth: Poverty, Inclusion and Welfare in Iraq, 2007-2012 A Significant Share of the Iraqi Population Remains Vulnerable to which more than 80 percent is comprised of pub- Falling Into Poverty le transfers. In some parts of the country, such as the South, more than 60 percent of income for the A significant share of Iraq's population consumes at bottom 10 percent of the distribution comprises of levels close to the poverty line and remains vulner- transfer income rather than earned incomes. able to falling into poverty. In other words, a small increase or decrease in incomes and consumption can lead to large changes in the incidence of pov- High Rates of Poverty Among Certain erty. For instance, a five percent increase in the cost Types of Households of basic needs (including food, fuel, clothing and Despite significant poverty reduction in rural ar- shelter) in Iraq would raise poverty by 16 percent, eas between 2007 and 2012, poverty among rural while a ten percent increase would raise poverty by households remalns high. Similar households face more than 30 percent. higher poverty simply because they live in rural ar- eas. For instance, at each education level, poverty Therates are almost double in rural areas. An urban Assistance household whose head has primary education has Assisancethe same likelihood of being poor as a rural house- The poor are disproportionately dependent on hold whose head has completed higher secondary non-labor incomes and, in particular, on transfers education. from the Public Distribution System (PDS), due to a lack of assets and employment opportunities. The concentration of the poor has also increased: Public and private transfers still account for 36 pn 2012, five governorates-Nineveh, Thi Qar, Almost 60 percent of Iraq's poor live in these More than half of certain types of rural five governorates households are poor 60- 1.0- 50- 0.8 40-0 0.6- 1 30- 0.4- 0.2- o20- 10- 0- 11 Qadisiya Missan hi Oar Muthanna 0h o Poverty rates, Agricultural household Ninevah Thi Oar Missan Qadisiya Muthanna p Poverty rates, Non-employed household POLICY NOTE III Missan, Muthanna and Qadisiya-accounted for dissatisfaction with life appears to be driven more almost 60 percent of Iraq's poor, compared to 40 by where an individual lives, reflecting the addition- percent in 2007. al importance of location specific factors including About half of Iraq's poor live in the South-in Thi security concerns, local labor market conditions and Qar, Missan, Muthanna and Qadisiya. High pover- service delivery. ty rates in the South also combine with poor hu- Using these deprivations to construct a multidimen- man development outcomes, and limited livelihood sional index of deprivation; headcount rates would options, especially in rural areas. In the South, es- be higher than as measured by consumption pov- pecially, agriculture has been in long term decline, erty-25.6 percent-if derived from the subjective with falling employment and earnings. Consequent- poverty measure and 28.4 percent if the life (dis) ly, rural households that are completely dependent satisfaction measure were used (compared to 19.8 on agriculture and have been unable to find em- percent consumption poverty) in 2012. ployment in other sectors faced extraordinarily high poverty rates, of 70 percent in some places. Only One Dimension of Protection ManyWhile welfare and deprivation are multidimensional, ManyDim nsios o Depivaiononly one source of protection covers all of the poor: Over and above consumption expenditures, Iraqi the Public Distribution System. It is hugely import- people take into account many other dimensions ant, and is the overwhelming source of calories for when evaluating their own welfare-education, the poor and bottom 40 percent, accounting for 74 health, housing and basic services, local labor mar- and 64 percent of their total caloric consumption kets and security concerns. In determining subjective respectively in 2012. self-assessments of poverty status, the largest weight is placed on lack of consumption or income, with caloric needs; while nutritional deficiencies remaln smaller but relatively equal weight on educational an important challenge, influenced by a broad range deprivation or on place of residence. In contrast, Share of 15+ population dissatisfied, selected dimensions, 2012 0.6- 0.5- -~0.4- 0.3- -'0.2- 0.1 0 Food Housing Income Health Work Local security Education beKurdistan hhBaghdad taNorth a Centre South EXPANDING PROTECTION TO THE POOR AND VULNERABLE of factors, including early marriage, and spatial in- Therefore, in the short term, there is no substitute equality in access to basic services. Moreover, the for a comprehensive and diversified safety net sys- universal nature of the PDS and the lack of other tem that addresses the multiple deprivations of the safety nets imply that barring a few exceptions, de- poor, and targets pockets of high poverty. mand for PDS items is almost inelastic. As a result, any one-shot reform of the PDS will have an adverse What Needs to Be Done welfare impact in the absence of a significant expan- sion in earnings and employment opportunities, Establish and Maintain Peace and Security and a comprehensive safety net system. Essential for service delivery and reviving local markets and economic activity A Comprehensive Safety Net is Needed Design and Implement a Comprehensive Ensuring adequate and quality work for Iraqis is a Safety Net long-term challenge. Over and above the continu- Nationwide public works program, with spatial- ing violence and insecurity, the private sector has ly differentiated components to: been increasingly crowded out of market activities. * Provide employment and incomes in the Access to adequate infrastructure including reli- immediate term; able power supply and capital are major hurdles to job creation. Moreover, with low average educa- delivery; tion levels, the workforce lacks the skills for many * Invest in skills for future employment. private sector and entrepreneurial activities. Many * Physical labor works to build roads, schools, Iraqi children are still dropping out or never going health posts, sanitation improvements; environ- to school because of financial considerations; social norms; and worryingly, lack of interest. In part this ed with social services in urban areas is due to the deterioration in infrastructure, lack of 0 Specifically target young men who have the qualified teachers, poor teaching quality and curric- highest rates of joblessness, and prepare them ulum, but also because the incentives to invest in for future employment in formal labor markets education have become distorted. Unless the pri- * Targeted conditional cash transfers to ease fi- vate sector can create jobs and reward investments nancial constralnts and provide incentives to in education appropriately, this vicious cycle of low attend school and access health care human capital and poor employment opportunities 0 Where poverty rates are very high, especially will continue, in rural parts of the South, universal programs would have enormous benefits The current Public Distribution System is inadequate to address multiple deprivations in human capital and labor market opportunities faced by poor and vulnerable Iraqi population. However, the continuing instability and insecurity in the country have made it difficult to put in place alternative means of securing livelihoods, either through public intervention or through the revival of local economic activity. The Many Faces of Vulnerabilit in Ira Almost 1/3 of Iroqi children, ages 05, are stunted T/2of the population has ly primary Since 2Do r educaion or less suffered more than 100,000 civilian casualties. The current systern " of safety nets is inadequate. 1/3 of Iraqi men& 90% of Iraqi women, ages 15- 01o 64, are neithernoshlsi Baghdad and central and southern governorates receive less flhan 12 hours of electriclty dolly 60% of the calories consumed by the poor come from the PDS