93858 v1 The Unfulfilled Promise Of Oil and Growth Poverty, Inclusion and Welfare in Iraq 2007–2012 OVERVIEW This is an overview of the World Bank (2014) report, “The Unfulfilled Promise of Oil and Growth: Poverty, Inclusion, and Welfare in Iraq, 2007 to 2012” Overview Wealth is Hard to Come by; but FIGURE 1: Annual GDP Growth in Iraq, Poverty is Always at Hand1 2007–2012 (%) With one of the world’s largest proven oil reserves, 10 9 8.58 8.43 and strong economic growth following the establish- 8 ment of a civilian elected government in 2005–06, 7 6.61 5.81 5.86 Iraq appears to have firmly entered the ranks of upper 6 5 middle-income countries (per capita GDP 2472 con- 4 stant 2005 US$ in 2012). This poverty and inclusion 3 assessment provides the first in-depth analysis of Iraq’s 2 1 1.38 economic and social development spanning the period 0 2007 to 2012, since the end of sectarian war of 2006– 2007 2008 2009 2010 2011 2012 07, accompanied by recovery in the oil sector, a mas- GDP Growth (% annual) sive scaling up of oil revenues, and extensive efforts by the government to meet the high expectations of Source: World Development Indicators, 2012. the people. In principle, this period of relative stabil- ity, accompanied by enviable rates of economic growth could have finally set the stage for inclusive growth. The Poor are the Silent Ones of the Land2 Yet, economic growth translated into very mod- During the 2007 to 2012 period, poverty rates, est rates of poverty reduction, and in 2012, a fifth measured on the basis of per capita expenditures, of the Iraqi population remains below the poverty fell by a modest 4 percentage points. Almost 1 in 5 line. Between 2007 and 2012, Iraq’s GDP grew Iraqis had expenditure levels below the amount re- at a cumulative rate of over 40 percent, and aver- quired to meet a minimum nutritional requirement aged an annual rate of 7 percent between 2008 and and to cover basic non-food needs such as clothing 2012. Per capita consumption, the basis for measur- and shelter in 2012. Moreover, a significant share ing poverty, grew by only 9 percent in cumulative of Iraq’s population consumes at levels close to the terms, or at 1.75 percent per year. Moreover, wel- poverty line and remains vulnerable to falling into fare improvements did not trickle down as fast to the poor. The top 40 percent of the consumption 1 The Electronic Text Corpus of Sumerian proverbs: http:// distribution experienced annual growth in real per etcsl.orinst.ox.ac.uk/cgi-bin/etcsl.cgi?text=c.6.1*#. capita consumption of almost 2 percent, compared 2 The Electronic Text Corpus of Sumerian proverbs: http:// with 0.7 percent for the bottom 20 percent. etcsl.orinst.ox.ac.uk/cgi-bin/etcsl.cgi?text=c.6.1*#. iv THE UNFULFILLED PROMISE OF OIL AND GROWTH FIGURE 2: Division Headcount Rates (Percent) their families to be poor or very poor; and one in and Changes (Percentage Point), five are dissatisfied with their life (2012). This dis- 2007–2012* satisfaction stems from a number of dimensions, the most important of which are housing, income, 35% work and education; with a third of adults report- 30.2% 28.8% 28.7% 30% ing being somewhat or very dissatisfied. 22.3% 21.9% 25% 19.3% 18.0% 20% What welfare improvements were experienced be- 14.5% 13.8% 12.3% 15% tween 2007 and 2012 have been uneven—across 10% space and across groups. Poverty reduction was 5% 1.6% driven by rural areas, where headcount rates de- 0.3% 0% creased by 8 percentage points. Moreover, welfare –1.4% –1.4% –5% improvements were concentrated almost entirely in –10% the central part of the country—Najaf, Karbala, Wa- –15% –14.3% sit, Babylon, Anbar and Diyala—where poverty rates –20% Kurdistan Baghdad North Centre South fell by 14 percentage points; as well as in Kirkuk and Salahadin. In contrast, poverty increased sharply in Headcount poverty rates 2007 five governorates—Nineveh in the north and Qa- Headcount poverty rates 2012 disiya, Thi Qar, Missan and Muthanna in the south. Headcount poverty rates change (2012 relative to 2007) Consumption has also grown faster for the non-poor Source: Authors’ calculations, IHSES 2007 and 2012. than the poor. Household size and composition, the * Kurdistan includes Erbil, Duhouk, Sulaimaniya; North includes Kirkuk, Nineveh and Salahadin; Centre includes Najaf, Karbala, Wasit, Babylon, Anbar and Diyala; South includes Basra, Qadisiya, Thi Qar, Missan and Muthanna. Poverty in Basra and the Rest of the FIGURE 3:  South, 2007–2012* poverty. In other words, a small increase or decrease in incomes and consumption can lead to large chang- 0.5 es in the incidence of poverty. For instance, a five percent increase in the cost of basic needs (including 0.4 0.40 food, fuel, clothing and shelter) in Iraq would raise 0.30 0.3 0.27 poverty by 16 percent, while a ten percent increase would raise poverty by more than 30 percent. 0.2 0.13 0.10 0.1 Poverty in Iraq, as in the developing world, goes well beyond material deprivation—the inability to 0 satisfy basic needs of food, shelter, clothing and –0.1 other necessities that make up a minimum standard –0.14 of living. Over and above the material deprivation, –0.2 South Basra South excl Basra household self-assessments of their welfare status incorporate a range of other measurable and un- Headcount poverty rates 2007 measurable dimensions of welfare. More than a fifth Headcount poverty rates 2012 of the Iraqi populations have current expenditure Headcount poverty rates change (2012 relative to 2007) levels that are below the stated minimum incomes needed to cover basic needs. Similarly, more than a Source: Authors’ calculations, IHSES 2007 and 2012. quarter of adult Iraqis (aged 15 and above) consider * The rest of the South includes the governorates of Thi Qar, Muthanna, Qadisiya and Missan. Overview v FIGURE 4: Poverty Headcount Rates by Share of the Poor, by Education of FIGURE 5:  Education of the Head of Household the Head of Household 0.35 100% 0.30 90% 80% 0.25 70% 0.20 60% 0.15 50% 0.10 40% 30% 0.05 20% 0.00 10% Illiterate Incomplete primary Complete primary Intermediate Secondary Higher secondary Tertiary 0% 2007 2012 Tertiary Higher secondary Secondary Intermediate Complete primary Incomplete primary Illiterate 2007 2012 Source: Authors’ calculations, IHSES 2007 and 2012. Source: Authors’ calculations, IHSES 2007 and 2012. efforts. However, Iraq’s relationship with violence is education and sector of work (in general) of the head not yet at an end: in 2013, sectarian violence led to of household and the location of the household are an increase in civilian mortality that has not been all strong determinants of consumption and pov- seen since the 2007 spike in violence. Moreover, a erty. But households dependent on agriculture and violent insurgency in 2014 has left parts of the coun- construction are no less likely to be poor relative to try outside of government control, leading to mas- households with heads who are unemployed or out sive internal displacement in parts of the country yet of the labor force; while public sector jobs are in gen- eral associated with a lower probability of poverty. FIGURE 6: Poverty Headcount Rates by What explains this modest performance in terms of Employment Status, Urban and Rural broad-based welfare improvements and what needs Households, 2007 and 2012 to be done to build a more inclusive development path in the future? This is the fundamental question 0.5 addressed by the report. To a substantial extent, 0.4 these outcomes are the legacy of three decades of violence, fragility, and institutional weakness, one 0.3 that has been incredibly hard to overcome. The 0.2 continued absence of peace and security in some parts of the country has limited the scope for eco- 0.1 nomic revival. Together, these have influenced the 0 development strategy adopted by the state, which 2007 2012 2007 2012 has had limited success in spreading the benefits of Urban Rural the nation’s oil riches and economic growth. Full time employed Unemployed Part time employed Out of the labor force In any country with such an onerous legacy, the path to development will require sustained and committed Source: Authors’ calculations, IHSES 2007 and 2012. vi THE UNFULFILLED PROMISE OF OIL AND GROWTH again. Perhaps the lessons from the 2007 to 2012 Many market activities shifted to the informal sec- period can provide answers to inform a more inclu- tor, with consequent effects on productivity, invest- sive and sustainable development path for the future. ment horizon, and job quality. The US-led invasion of Iraq in 2003 was followed You Don’t Speak of That Which You by the establishment of a civilian government. have Found. You Talk Only about However, a rapidly deteriorating security situation What You have Lost3 transformed into the sectarian civil war of 2005-06, resulting in high levels of displacement across the The potentially beneficial effects of Iraq’s promising country and within Baghdad. The security situation endowment (agriculture, hydrocarbons, and human) made it impossible for the government to focus on have been negated by recurrent violence and instabil- reconstruction (especially for fragile network infra- ity, leaving the country with significant challenges of structure like electricity and water) or chronic and delayed development today. Significant gaps in human accumulating sector problems such as agricultural capital and access to basic services remain unfilled, decline. As a result, broad-based economic devel- and regional disparities across a range of outcomes are opment and diversification, which needs such basic stark. With low rates of labor force participation, and infrastructure, was effectively on hold until some limited education, young Iraqis are unable to produc- semblance of stability could be restored. tively participate in the economy, and the potential for discontentment with the state is real. Girls lag behind In terms of economic growth, the oil sector started boys in access to education and women earn sharply to ramp up production, but in an enclave model of lower wages when they enter the labor markets. Early development: the focus of the companies was on oil- childhood nutrition poses a challenge, and is affected field rehabilitation and export infrastructure, with by a range of factors including inadequate nutrition limited local spillovers. With restored oil production among young mothers. coming on stream at a time of high and rising global oil prices, large amounts of revenue and spending While Iraq’s progress in poverty reduction may began flowing through the government, but in a have been modest with respect to the healthy rates context of very weak public financial management of economic growth; any progress at all is com- (PFM) and governance mechanisms. In the face of mendable in face of the far-reaching and challeng- instability, the government had no appetite to un- ing consequences of Iraq’s difficult legacy. The dertake major reform of state-owned enterprises country has been a nexus of conflict and fragility (SOEs), even though many had been defunct since since the early 1980s, and has experienced mul- the 1980s. tiple types of conflict: insurgency, international war, sectarian strife, persistent terrorism, regional While oil remained the main driver of economic fragmentation, and spillovers from conflict in other and fiscal developments, there were other bright countries. spots, notably the reopening of trade with Iran and a revitalization of the pilgrimage cities (Najaf An important consequence of these three decades of and Karbala), also linked to increased openness violence and fragility, has been a skewed economic with Iran. But there was no transformation in the structure, with the public sector in particular, play- structure of GDP; it is noticeable that the share of ing an inflated role. For much of this period, while oil rents in GDP remained broadly stable from the the private sector was unable to function, many ac- tivities were implemented through administrative fiat, giving privileged access to state enterprises and 3 The Electronic Text Corpus of Sumerian proverbs: http:// certain cadres, especially during the sanctions era. etcsl.orinst.ox.ac.uk/cgi-bin/etcsl.cgi?text=c.6.1*# Overview 1 FIGURE 7: GDP Per Capita (current US$), 1960–2012, and Timeline GDP per capita (current US$) 7000 Sanctions; weapons 6000 2003-May 2013: inspection, no- y Iraq invades Kuwait; 2nd Gulf war Saddam Hussein comes to power US troops complete withdrawal 113,299 violent Nationalization of petroleum US led coalition invades Iraq zones' Oil for food Iran-Iraq war; 1st Gulf war 5000 1980–88 civilian deaths Iran-Iraq program 4000 war 3000 2000 1000 0 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Source: World Development Indicators (2012); estimates for 1990–1996 from CSO, Iraq. mid-1990s to the present, despite the tumultuous Another consequence of these lost decades has been events during this period. The crude oil sector ac- the erosion of human capital, the destruction of es- counted for 44 percent of real GDP in 2012. sential infrastructure and the loss of qualified staff to deliver basic services. Stagnation and deteriora- Very little structural policy reform took place dur- tion in human capital matter especially because they ing the reconstruction period, and private sector are currently affecting the younger cohorts of Iraq’s development is probably the weakest reform area of working age population. Almost half of the popula- all. Iraq ranks 169 for starting a business and 189 tion of Iraq is below the age of 30, and the genera- for resolving insolvency—the worst score in the tional deficit in human capital will have significant world—because it is not possible to legally close a implications for the future. business. The informal sector in Iraq is very large vis-à-vis the formal sector and formal sector firms In the 1980s, Iraq had one of the best educational are squeezed between SOEs with open-ended fund- systems in the region. Iraq’s 1970 Provisional Con- ing and informal firms that don’t have to comply stitution guaranteed the right to free education at with the same rules as them. all levels for all its citizens and stated that education FIGURE 8: Oil Rents (% of GDP), 1960–2012 120 100 80 60 40 20 0 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Source: World Development Indicators (2012). 2 THE UNFULFILLED PROMISE OF OIL AND GROWTH FIGURE 9: Major Business Constraints, Iraq 2012 Electricity Practices of the informal sector Political instability Access to land Major business constraints Inadequately educated workforce Business licensing and permits Labor regulations Access to nance Tax rates Customs and trade regulations Corruption Crime, theft and disorder Tax administration Transportation 0 5 10 15 20 25 Iraq Middle East & North Africa All countries Source: Authors’ calculations, World Bank Enterprise Survey, Iraq, 2011. was compulsory. In 1978, the state launched a man- most prevalent level of education is primary school- datory campaign for combating illiteracy, in which ing or less: among 18–27 year olds, about 60 per- it was obligatory for all Iraqi citizens between the cent of have no more than primary education and ages of 15 and 45 to join. The program supported 18 year olds in Iraq today are as likely to have com- participants until they achieved fourth-grade level pleted primary school as those 30 years older. The of reading, writing and mathematics. The Iran-Iraq incidence of intermediate, secondary and higher war, the first Gulf war and the subsequent sanctions, secondary school taken together is around 30 per- as well as the decades of violence that followed led cent for young Iraqis ages 18–22, the same as for to large scale destruction and deterioration in infra- Iraqis in their 40s. While this in itself is worrying, structure and severe shortages of qualified teachers. within this group, over time, the share of higher sec- Today, adult male and female literacy rates in Iraq ondary graduates has remained stagnant with some are below the MENA average and well below the improvements in tertiary education only evident average for similar upper middle income countries. among the youngest cohorts. Overall these trends suggest a stalling of progress in education and a pos- There is evidence of the long term impact of conflict sible worsening of outcomes for some cohorts. on educational outcomes across generations. For one, illiteracy rates for the cohort in their mid-30s Health outcomes have also worsened. Until the mid- or younger in the 2012 are actually higher relative 1970s, Iraqi males enjoyed higher life expectancy to those in their late 30s. These cohorts were born than their counterparts in the Middle East and North after 1975, were of school-going age during the Africa (MENA) region. Since 1980, the beginning Iran-Iraq war and thereafter, when the mandatory of the Iran-Iraq war, they have lagged behind. As literacy campaign became harder to implement. 12 may be expected in periods of violent conflict, this percent of those born in the 1980s, who might have trend is linked to the increased rates of adult male been in primary school at the time of the first Gulf mortality since 1980. Despite the Iran-Iraq war, war, are illiterate in 2012. For Iraqis of all ages, the adult male mortality fell slightly between 1980 and Overview 3 FIGURE 10: Mortality Rate, Adult (per 1,000 CONFLICT, GROWTH AND Adults), Iraq, 1980–2010 DEVELOPMENT 400 The relationship between growth, development and conflict can run 300 both ways. On the one hand, a negative shock to economic growth is associated with a significantly higher likelihood of conflict. On the other, 200 episodes of conflict can also negatively affect growth and development. This report uses innovative analysis to establish and quantify the 100 negative relationship between conflict and economic growth on the one hand, and the positive relationship between development efforts 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 and growth on the other. Estimates suggest that compared to a district with no civilian casualties, a district with the average number of casualties Mortality rate, adult, female (per 1,000 female adults) experienced between 5.7 and 11.4 percent lower growth during Mortality rate, adult, male (per 1,000 male adults) the period from 2003 to 2010. On the other hand, a doubling of development and reconstruction projects increased growth between Source: World Development Indicators (2012). 5.8 and 8.4 percent. This suggests that while development efforts by the government and other actors can mitigate the negative role of violence, the required effort to compensate for the negative growth effect of violence is substantial. Moreover, violence disproportionately were underweight.4 More recent analysis of IHSES affects growth in poorer parts of the country, while development efforts are more effective in richer parts of the country. This implies 2012 suggests that almost a third of Iraqi children that it will take an even larger development effort to maintain growth are stunted; an outcome which is correlated not only when violence affects poorer districts. with parental wealth and the ability to satisfy caloric Thus, on a macro-economic level, and absent the establishment of and nutritional requirements, but also with varying peace and security in the nation, maintaining growth can in itself be a challenge in Iraq, and without these two pre-conditions in place, poverty access to health care and services across space and reduction and broad-based prosperity will be difficult to sustain. with early motherhood and maternal malnutrition. Finally, Iraq has one of the lowest employment- to- adult population ratios in the region; only the Pal- 1990. This trend appears to continue until the mid- estinian Territories have a lower rate. This is also in 1990s. However, since 2002, Iraq has witnessed a contrast to many of the other oil- rich countries in sharp increase in male mortality: from 167 per 1000 the region. Moreover, in the last two decades, the to 295 per 1000 in 2011. Worryingly, the adverse adult male employment-to-population ratio has re- impacts of the protracted insecurity on health and mained stagnant at 58 percent, and at the same time, basic services infrastructure is also reflected in rising male labor force participation (LFP) has declined, adult female mortality since the 1980s, and a dete- especially among the youth. While the latter could rioration in infant mortality relative to the rest of the suggest increasing years of education, it is also likely region. In 1960, Iraq’s ranking by infant mortality that the ten percentage point decline in male youth rate within the region was roughly in the middle LFP is because the decades of insecurity, violence (World Development Indicators, 2012). While across and limited job opportunities have left young people the region, these rates have come down sharply, frustrated and discouraged. As in the rest of the ME- Iraq has not brought down IMR at the same pace. NA region, gender differences in labor market par- In 2011, Iraq’s IMR was the highest in the region, ticipation are striking in Iraq. Contrary to men, data barring Yemen (and possibly Djibouti). There is also from the World Development Indicators suggest that evidence of deteriorating nutritional outcomes for adult female labor force participation has been slowly young children: according to a 2007 World Food increasing over time, albeit from much lower levels. Program report, 22% of children aged 0–5 were stunted (low height for age, and indicator of chronic 4 World Food Program, 2007. Comprehensive Food Security malnourishment); and almost 10 percent of children and Vulnerability Analysis: Iraq. 4 THE UNFULFILLED PROMISE OF OIL AND GROWTH FIGURE 11: Labor Market Outcomes, Share of EARLY MOTHERHOOD AND CHILD Working Age Population STUNTING (ages 15–64), 2007–2012* Stunting is a primary manifestation of malnutrition in early childhood, 1.0 0.89 0.89 including malnutrition during fetal development brought on by the population out of the labor force malnourishment of the mother, both of which are likely correlated with 0.8 Fracton of working age the income level of the household. Stunting and child underweight rates vary in Iraq with household incomes, with the highest prevalence 0.6 rates among the poorest 20 percent of the population, where a third of children aged 0–5 years are stunted. However, stunting rates are 0.4 0.30 0.30 high even for the richest portion of the population, with more than a fifth of children having low height-for-age, suggesting widespread 0.2 malnutrition in the past among all segments of the population. 0 Stunting is more prevalent among the children below 36 months, 2007 2012 2007 2012 suggesting that perhaps malnourished mothers may be giving birth Females Males to malnourished children, with some of the nutritional deficit being bridged with time as infants move from breastfeeding to a food diet. 35 0.8 percent of Iraqi children below the age of 1 are stunted, compared to a 0.67 0.67 0.7 third of children aged 12 to 35 months, and approximately a fourth of children aged 26 to 60 months. 0.6 0.5 0.42 This suggests that over and above household incomes (and the ability 0.36 to provide basic food and nutrition) and the place of residence (which 0.4 0.30 determines access to health and other basic services); maternal 0.3 0.24 malnutrition also plays an important role. We find that in fact, early 0.2 motherhood poses particular risks in terms of child malnutrition. 0.1 0.090.11 0.080.11 0.02 0.02 In Iraq, by age 16, 5 percent of girls are married; and by age 18, 11 percent 0 of all girls are married. On average, between 40 and 50% of those who get 2007 2012 2007 2012 married before the age of 18 also bear a child by that age. The prevalence Females Males of relatively high rates of early marriage, and correspondingly, early motherhood in certain well-off governorates, explains their relatively Employed full time Employed part time high stunting rates, despite relatively high welfare levels. Employment to working age ratio The relatively high rates of child stunting in Iraq is thus explained by a combination of factors: Source: Authors’ calculations, IHSES 2007 and 2012 Note: * ILO definition, 7 day recall. 1. Place of residence: Living in an urban area reduces the likelihood of having a stunted child in the household by 5.2%. Households living in Baghdad and the southern governorates are 17.6 and 20.4 percent more likely to have stunted children, relative to that basic needs could be met more effectively. On those living in Kurdistan. 2. Household welfare: Children belonging to households at the the other hand, the southern provinces saw a double bottom of the wealth distribution are more likely to be stunted. negative impact: the destruction of wars now com- Households belonging to the top 4th and 5th quintiles are 5 and 10 percent less likely to have a stunted child relative to those pounded by a failed rebellion. In principle, these belonging to the bottom quintile. trends should have moderated post-2003 since 3. Early childbirth: A mother aged 12–23 is 12 percent more likely Iraqi government could direct resources to areas of and a mother aged 24–30 is 7 percent more likely to have a stunted child relative to mothers aged 31 or above. greatest deprivation. The administrative system for governorates not in a region is de-concentrated and therefore might be insulated from capacity differen- tials across regions. In practice, there seems to be Spatial divergence also became more pronounced. a significant variation in the quality of delivery of Whereas the Kurdish region had been the most vic- common services across the country: the equalizing timized before the 1990s, with de facto indepen- role of the central government was not effective. dence from Baghdad, food and nutrition distribution was directly implemented by UN agencies. These With the uneven nature of security restoration had more flexibility—and access to cash—than the across the country, the ingredients for a new set Baghdad government for the rest of Iraq, meaning of divergences between the provinces were now Overview 5 TABLE 1: Completed Level of Education, Share of Iraqis Aged 15–64: Division Relative to National, 2007–2012 Education level (Share of working age population), All Iraq 2007 2012 Illiterate or incomplete primary 0.34 0.40 Complete primary to secondary school 0.47 0.45 Higher secondary and higher 0.16 0.15 Kurdistan Baghdad North relative Centre relative South relative relative to Iraq relative to Iraq to Iraq to Iraq to Iraq 2007 2012 2007 2012 2007 2012 2007 2012 2007 2012 Illiterate or incomplete primary 23.01 17.81 –13.01 –12.51 4.85 3.60 –3.51 –4.07 4.27 3.35 Complete primary to secondary school –19.03 –14.26 12.62 7.29 –2.18 –1.18 0.11 3.91 –4.17 –1.75 Higher secondary and tertiary –5.92 –3.56 1.75 5.24 –2.13 –2.40 2.62 0.12 –0.27 –1.59 Source: Authors’ calculations, IHSES 2007 and 2012. in place. Since the southern provinces were finally In contrast, the pattern is reversed for those in their out of the grip of a hostile government in Bagh- 20s. These young people are much more likely than dad, and home to many of the country’s oil fields, their counterparts to have secondary and higher lev- the pace of economic development could pick up. els of education. While oil continued in the enclave development model, other sources of economic activity such as In the South, in contrast, young people in their pilgrimages, trade with Iran, and the Basra port, 20s are further behind their peers than their fa- came into play as drivers of regional growth. On the thers were. A 60 year old in the South was 5 per- other hand, the provinces north and west of Bagh- cent more likely to be illiterate and 2 percent less dad were in effect contested regions: between sects, likely to have secondary education than an average ethnicities, tribes, and insurgents, all interacting in 60 year old Iraqi while a 20 year old person is 8 different ways with the government. In particular, percent more likely to be illiterate and 6 percent the government faced a complex calculation vis-à- less likely to have secondary education. Similarly, vis the provinces: those with clear majorities of one health outcomes are also work in the southern gov- sect could be taken for granted—perhaps to their ernorates. 35 percent of children aged 0-5 in the detriment—while those with more finely balanced southern governorates are stunted, double the rate populations could also attract more competition for in Kurdistan and significantly higher than that in influence but also more violence and insecurity. other parts of the country. Today, Kurdistan and the South appear to be on op- In the southern governorates, and with the excep- posite trajectories. Poverty trends mask the improve- tion of Basra, the last five years appear to have com- ments in education and labor market outcomes that pounded the neglect of the past, and the human cap- have been experienced in the three Kurdish gover- ital deficit has been accompanied by declining male norates, which have also experienced a significant employment and labor force participation, suggest- increase in population. Older generations in Kurd- ing that men are dropping out of labor force is due istan (those 30 and above in 2012) started out with to discouragement. These southern governorates much higher levels of illiteracy and incomplete pri- also had the lowest rates of full time employment mary education relative to Iraq and lower levels of in 2012, declining female employment, and among complete primary education and higher education. the lowest rates of part-time employment. 6 THE UNFULFILLED PROMISE OF OIL AND GROWTH FIGURE 12: Changes in Per Capita Labor Income between 2007 and 2012 (‘000s of Iraqi Dinar) for the Bottom 3 Deciles of the Consumption Distribution, National and by Division 25 20 15 10 5 0 –5 Decile 1 Decile 2 Decile 3 Decile 1 Decile 2 Decile 3 Decile 1 Decile 2 Decile 3 Decile 1 Decile 2 Decile 3 Decile 1 Decile 2 Decile 3 Decile 1 Decile 2 Decile 3 Iraq Centre South Kurdistan Baghdad North Source: Authors’ calculations, IHSES 2007 and 2012. It Became Cloudy, but it Did Not Rain. focused on distributing benefits through expanding It Rained, but Not Enough for People public sector employment, bringing in relatively to Undo Their Sandals5 less educated men, while expanding the wage and benefit gap with the private sector. This has had The Iraqi state faces long term challenges: sustained important unintended consequences, dampening progress towards development would have required labor force participation among men and women major efforts—establishing rule of law and good gov- in a market with already widespread labor market ernance, reviving economic activity in the private discouragement. Moreover, it has skewed the incen- sector and large scale and transformational invest- tives to invest in education, especially for men; while ments in infrastructure, education, health and social limiting the incentives for women to participate in services. The limited instruments available to the state private sector employment. The other major strat- in a continued fragile environment as well as signifi- egy is maintaining the public distribution system, cant pressure to show results implied the adoption a which is a universal food subsidy. A single universal relatively myopic two-pronged policy to redistribute social protection program has guaranteed a basic oil revenues: by continuing the universal food subsidy level of calories to all, but is inadequate in a con- system and expanding public sector employment and text where a significant share of the population faces earnings. Even this expedient strategy however, left out multiple dimensions of deprivation. certain parts of the country and certain groups, con- tributing a further weakening in the relationship be- Given this strategy, it should be no surprise that tween citizens and the state; while the major obstacles the primary driver of poverty reduction between to development remained unchanged. 2007 and 2012 was not through private sector led growth and employment generation. Rather, it The weak links between economic growth and occurred primarily through earnings increases, es- welfare improvements are explained in part by the pecially for public sector employees; accompanied structure of the economy. Growth has not been ac- by some expansion in low-skill public sector jobs. companied by an expansion of jobs and earnings in the private sector, where most of the poor work. 5 The Electronic Text Corpus of Sumerian proverbs: http:// The current development strategy thus has primarily etcsl.orinst.ox.ac.uk/cgi-bin/etcsl.cgi?text=c.6.1*#. Overview 7 FIGURE 13: Economic Growth and Welfare: Main Channels Economic growth Demand for labor Private Government and capital transfers budget Peace and security; Employment Earnings Public transfers Health, education Rule of law (Labor and non-labor) and service delivery and governance Household welfare Iraq’s fundamental challenge—an economic struc- In contrast, agriculture and construction, which ture that translates the benefits of Iraq’s endowment employ more than a fifth of the population, and a to a selected few—remains unchanged. third of Iraq’s poor, barely experienced any increase in earnings. Agricultural employment fell by 5 per- Economic growth during the period was driven by cent each year, and incomes, by 2.5 percent, where- the oil sector, which represents half of the total GDP, as construction earnings increased by a mere 0.8 the bulk of government revenues, and almost all ex- percent. While poverty reduction was led by welfare port revenues. While the sector grew at an annual rate improvements in rural areas, certain types of rural of 8 percent, it only accounts for 1 percent of jobs, households, those completely dependent on agri- and thus had almost no direct impact on employ- culture for their livelihoods, faced sharp increases in ment. Other sectors which grew—utilities, construc- poverty in the southern governorates. tion, and commerce and retail—created few new jobs. The current development strategy thus has primar- Of the 750,000 new jobs that were created, which ily focused on distributing benefits through expand- were inadequate to absorb labor market entrants, ing public sector employment and maintaining the 80 percent were in the public sector, a majority of public distribution system, which is a universal food which were created in the financial, insurance and subsidy. The particular features of public sector em- other professional services sector. While employ- ployment expansion in Iraq has functioned more as ment in this sector grew by 15 percent per annum, a safety net, bringing in relatively less educated men, output grew by less than 4 percent per year, sug- while expanding the wage and benefit gap with the gesting that these were not high skill, high produc- private sector. This has had important unintended tivity jobs. Indeed, these new public sector jobs have consequences, dampening labor force participa- absorbed less educated workers, with 60 percent of tion among men and women in a market with al- these jobs going to workers with less than primary ready widespread labor market discouragement. education. At the same time, earnings grew rapidly Moreover, it has skewed the incentives to invest in in the oil and mining, public administration, health education, especially for men; while limiting the in- and education sector, by 7 percent or more per year. centives for women to participate in private sector Both are dominated by the public sector. employment. 8 THE UNFULFILLED PROMISE OF OIL AND GROWTH TABLE 2: Growth, employment and labor incomes across economic sectors Employment Earnings Annual Annual Output Annual Output growth rate Labor Share growth rate elasticity of growth rate elasticity of Economic Activities (%) 2007–12 (%) 2012 2007–12 labor 2007–12 earnings Agriculture & fishing 2.69 8.94 –4.78 –1.78 –2.54 –0.95 Mining & quarrying 7.80 1.02 –1.29 –0.17 8.26 1.06 Manufacturing Industry 9.45 9.67 5.96 0.63 4.74 0.50 Utilities 16.08 2.21 1.87 0.12 5.94 0.37 Construction 15.30 13.63 2.96 0.19 0.82 0.05 Transport, storage & communication 7.96 11.43 3.65 0.46 6.65 0.84 Commerce and retail 12.39 15.61 0.17 0.01 6.93 0.56 Financial, insurance 3.61 14.37 15.51 4.30 3.23 0.89 Public administration 5.66 17.23 –2.81 –0.50 6.95 1.23 Other services 4.00 5.89 1.90 0.47 4.64 1.16 Total 7.09 100.00 1.95 0.27 4.77 0.67 Source: Authors’ calculations, IHSES 2007 and 2012. Female labor force participation in Iraq is amongst irrespective of the sector they are working in. In the lowest in the region. There are many factors at 2012, men earned 20 percent more than women play, many of which increase the opportunity cost of if they were working in the public sector. This gen- women to work—conservative social norms, their der wage gap dramatically increases up to almost dual responsibilities in the home and outside, and 8 times of that observed in the public sector when security risks. Yet, the labor market systematically considering workers in the private sector. rewards women less than similarly qualified men, lowering the benefits to work. Men earn a substan- The nature of public sector job increases also has tial premium in the labor market relative to women important long-run implications, especially for FIGURE 14: Trends in Headcount Rates of Different Types of Households, by Division, 2007 and 2012 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 Kurdistan Baghdad North Centre South Kurdistan Baghdad North Centre South 2007 2012 Non-agricultural household Diversi ed household Agricultural household Non-employed household Source: Authors’ calculations, IHSES 2007 and 2012. Overview 9 Iraq’s youth. Youth labor force participation in Iraq openings in the public sector. In fact, an increase of is low and stagnant. Only 40 percent of Iraqis be- one percentage point in the public employment rate tween the ages of 15 and 24 who are not in school, of the governorate of birth reduces the labor force are employed or looking for work. This means participation of the youth by more than 40 percent, that 6 out of every 10 young Iraqis who are not from already low levels. in school are neither working nor actively seeking work. However, labor force participation rates vary Second, the increasing availability of relatively well- significantly by the level of education of the youth. paying public sector jobs to less educated people It ranges from 25 percent for illiterate individuals has also distorted the returns to education. When to 66 percent for those with tertiary education. In we examine the earnings gains for each additional contrast, the employment rate does not vary much education level, we see that in 2012 an average male by education. This implies much higher unemploy- in the working-age population received 20 percent ment rates among the highest educated youth. In more in the public sector by having complete pri- 2012, unemployment rates rose to almost 25 per- mary education relative to being illiterate. However, cent among youth with tertiary education in com- the premium for getting an additional level is almost parison to about 5 percent for illiterate youth. negligible thereafter except when he completes ter- tiary education. Thus, the signals from the public The expansion of public sector employment between sector are currently suggesting to young Iraqis that 2007 and 2012, which primarily took the form of there are little gains to going beyond primary edu- jobs for men with less education, has two major cation, and these can further inhibit educational at- implications for Iraq’s youth. First, the increasing tainment in a country where the median education possibility of a public sector job, with greater job level is only primary school. security, benefits and fewer hours of work, will raise the reservation wage among the working age popu- The other major element of the current strategy for lation and in particular new entrants into the labor is the social protection provided by the Public Distri- market. As a result, young people in particular, have bution System. Iraq’s PDS, the largest publicly subsi- limited active job search as they wait and queue for dized food distribution system in the world, remains FIGURE 15: Share of Poor and Non-Poor Individuals Receiving Public and Private Transfers, 2012 100 90 80 70 60 50 40 30 20 10 0 Rations Pensions Social Domestic Zakat International protection remittances remittances Public transfers Private transfers % of poor receiving 99.39 19.50 10.60 28.62 2.42 0.81 % of non-poor receiving 98.58 26.73 7.55 29.90 1.33 1.80 % recipients poor 19.95 15.29 25.77 19.13 31.12 9.95 Source: Authors’ calculations, IHSES 2007 and 2012. 10 THE UNFULFILLED PROMISE OF OIL AND GROWTH the only safety net covering the poor and vulnerable in the country. Yet, the PDS remains the overwhelm- MEASURING THE DEPENDENCE ON ing source of calories for the poor and bottom 40 THE PDS percent, accounting for 74 and 64 percent of their total caloric consumption respectively in 2012. While the PDS provides a level of broad food security to the poor and vulnerable in Iraq, it also covers more than 95 percent of the non-poor, and is therefore, a very expensive safety net program, Moreover, it is inadequate to protect the poor and involving a sizeable fiscal burden. Moreover, in its current form, it suffers from significant inefficiencies in procurement, distribution, vulnerable across the range of dimensions they are and management, and implies significant macro-economic distortions deprived in. In a nation where the median level of because of its heavy reliance on food imports and its universal nature. educational attainment is only primary schooling; For this and many other reasons, including the need for the introduction of a comprehensive safety net system going beyond food subsidies, the where significant gaps remain in access to health government of Iraq is considering further reforms to the PDS. care and other essential services; where employment In order to better understand the potential impact of any such reform, rates remain stagnant; and where peace and security the report analyzes consumer behavior in terms of the responsiveness of household demand to possible changes in prices and incomes. The is still a concern; poverty and vulnerability goes well estimates suggest that Iraqi households are almost non-responsive beyond material deprivation. Each of these depriva- in terms of altering demand to changes in food prices of ration items tions is even starker in some parts of the country, and their free market equivalents. If, for example, the price of ration brown flour increases 10 percent, consumers living in rural areas would in rural areas and in the southern governorates in decrease their demand for ration by only 0.3 percent if they are in the particular. These broader elements of welfare are bottom 40 percent of the consumption distribution. Most ration items are normal goods i.e. their consumption increases when incomes reflected in the subjective self-assessments of wel- increase, and are necessary goods, so that consumption increases are on fare expressed by Iraqis: for instance, more than 40 average lower than income increases. However, there are exceptions- percent of adults aged 15 and above in the southern ration brown flour is a marginally “inferior” good in urban Iraq: if household incomes increased by 10 percent, demand for ration brown governorates of Thi Qar, Missan, Qadisiya, Muth- flour would decrease from 0.5 up to 1.5 percent in urban areas. anna and Basra reported being dissatisfied with their However, there are also some indications that ration goods slowly incomes, work and housing. Continued violence become less preferred at least for those households who have larger and protracted insecurity in Baghdad is reflected in budgets. With higher welfare levels in Kurdistan relative to urban Iraq, and in urban Iraq relative to rural Iraq, the flexibility of consumer its residents’ widespread dissatisfaction—the high- demand to changes in prices increases. Thus, as the economy grows, est in the nation—across a range of dimensions consumers face greater options and ability to substitute away from ration items and increase their consumption of free market goods. In sum, as the income levels rise and with well-functioning markets, some segments of the population will naturally substitute away from the PDS and increase their consumption of market substitutes. Overall, FIGURE 16: Rates of Dissatisfaction, Selected this suggests that while any one-shot reform will have adverse and sizeable welfare impacts, over time, and with increases in incomes, Dimensions, by Division some households may not be as significantly affected. Conversely, it will be important to put in place a comprehensive safety net before 0.6 considering major reforms to the PDS. 0.5 0.4 0.3 0.2 including food, work, income, local security, educa- 0.1 tion, and housing. 0 However, the only safety net that almost univer- Food Housing Income Health Work Local security Education sally covers the poor is the PDS, which guarantees a certain level of food security but cannot address other vulnerabilities and deprivation—in human Kurdistan Baghdad North Centre South capital, economic opportunities and earnings, ser- vice delivery and housing, internal integration and Source: Authors’ calculations, IHSES 2012. security. These will require a comprehensive safety Overview 11 net, substantial and sustained investments by the The foundational pre-requisite to economic growth government in establishing the rule of law, in in- and how and whether it translates into shared pros- frastructure, and in service delivery, as well as the perity and poverty reduction is the establishment revival and growth of the private sector. and maintenance of peace and security. That be- ing said, an inclusive and broad-based development process can mitigate the risks of recurring violence, Whoever Has Walked with Truth and vice versa, the deterioration of socio-economic Generates Life6 conditions can severely test a fragile peace. The analysis in the report points to the myriad and Moreover, Iraq will need to strengthen the natural deep-rooted challenges to poverty reduction and links between growth and welfare through better broad-based prosperity in Iraq. More than in most management of oil resources, diversified develop- countries, poverty and deprivation in Iraq are symp- ment of the economy, enabling the private sector tomatic of its daunting legacy of violence and fra- and implementing a well-designed and comprehen- gility, of a skewed economy heavily dependent on oil sive safety net system. If the status quo- the current and on public intervention, and of decades of lost relationship between, growth, redistribution and development. Addressing the goal of broad-based and poverty reduction - remains unchanged, it will take sustainable development in this context and with a sustained and significant effort in terms of growth continuing violence will require a concerted and and/or redistribution to achieve meaningful pov- multi-sectoral approach, combining short-term and erty reduction in the medium term. In other words, medium-term efforts. if nothing else were to change, and Iraq wanted to halve poverty by 2030, an average annual rate of In identifying areas for policy action, a few key prin- GDP growth of roughly 7 percent would have to be ciples are critical to keep in mind: maintained over the next 15 years, which is a chal- lenge for any country. If a more ambitious target • Peace, security and economic growth are foun- were conceived, GDP would have to grow even dational pre-requisites for development, with- faster. The fundamental challenge is that the rela- out which welfare gains will be difficult to real- tionship between GDP growth and consumption ize and sustain; growth is weak; and strengthening the relationship • Sequencing will be very important to secure between the two, which will require a change in the gains from reform, and supply and demand composition and drivers of growth, will translate side constraints will need to be relaxed simul- into larger gains in terms of poverty reduction for taneously: for instance, investing in education the same rate of GDP growth. access and quality will not bear fruit absent ad- equate productive employment opportunities An economic growth process that creates employ- that generate appropriate returns on the labor ment and increases earnings, while maintaining in- market; centives for labor participation and investments in • Taking advantage of spillovers and complemen- education, is the least costly path to poverty reduc- tarities, such as spatially targeted public works tion and inclusion. At the same time, Iraq faces a programs to generate employment and increase large deficit in infrastructure, services and human incomes which also have the potential to redress capital, which will need to be redressed. Moreover, the infrastructure deficit and build skills for fu- targeted interventions are called for, to address ture jobs; long-standing inequities across space and groups. • Finally, while there is clear scope for urgent ac- tion, other efforts are also needed that will re- 6 The Electronic Text Corpus of Sumerian proverbs: http:// quire a medium to long term horizon. etcsl.orinst.ox.ac.uk/cgi-bin/etcsl.cgi?text=c.6.1*#. 12 THE UNFULFILLED PROMISE OF OIL AND GROWTH A comprehensive policy framework for enhancing Iraq faces numerous and difficult challenges ahead the welfare of Iraq’s citizens will require a three- on its path to poverty reduction. These are made pronged approach: more complex by the recent crises, compounding the problem of persistent poverty in some areas with 1. Establishing and maintaining peace and security the emergence of newly deprived parts of the coun- is a fundamental pre-requisite try, and the increased vulnerability of the population 2. Maintaining economic growth, managing oil to poverty due to a new wave of internal displace- revenues, promoting the diversification of the ment and far-reaching economic disruptions. The economy in favor of non-oil and private sec- findings of this assessment can underpin a new strat- tor led activities. While these will bear fruit in egy for poverty reduction that promotes truly inclu- the medium and long terms, the seeds must be sive growth, policy approaches that support allevi- sown now. ating disparities in income, and those across space 3. Implementing an effective and comprehensive and gender, and special programs to target pockets system of safety nets to address the multiple de- of deep and stubborn poverty. It also needs to take privations and vulnerabilities of the population, into consideration the urgent needs brought to the while redressing the human capital deficit. fore by the current crisis and yet another wave of forced displacement. The report recommends a series of policy priorities and actions organized along three themes, which are summarized below. Overview 13 Increasing oil revenue transparency Minimizing the impact of oil revenue The translation of natural resource rents into volatility on expenditure policy development gains will require credible government commitment and a more inclusive process of decision making and public accountability to maximize investments in service delivery and public good provision Reorienting and increasing the e ciency of public expenditure Economic growth, oil management and diversi cation Enhancing the links between macro- scal policies and resource allocation Creating a favorable investment climate and promoting private investment in construction, banking, industry and tourism Ensuring the availability of nance on competitive terms, and exible labor market mechanisms and institutions An expansion in job creation led by a diversi ed private sector will be essential to address the multiple development challenges Investing in agriculture—infrastructure, technology and extension services—to protect rural livelihoods and stimulate the local economy Strengthening the linkages between oil, manufacturing and services 14 THE UNFULFILLED PROMISE OF OIL AND GROWTH Easing regulatory barriers including the clari cation and simpli cation of existing rules The fundamental constraint to private sector growth in many parts of the country is the environment of insecurity and instability; which combines with Eliminating discriminatory implementation concerns about corruption and the lack of a level and enforcement of rules and regulations playing eld to hinder investment and growth. Strengthening of transparency in public procurement, and enhancing the accountability of public institutions Investing in infrastructure quality and access, especially power and transport Easing regulations governing land Private sector led job creation and facilitating registration and the use of property as collateral Private sector growth has also been impeded by the Strengthening the education and vocational lack of power and transport infrastructure; limited training system in partnership with the private sector access to land and nancing, and the absence of a and curricula reform to better re ect the technical skilled labor force. skills sought by the private sector Expanding access to competitive nancing for private businesses through nancial sector reforms Increasing the access to nance and business support services will enable informal rms to compete in the formal economy A 'resource corridor' approach—a set of complemen- Mapping the oil and gas value chain into the tary investments by international and domestic private demographic and geographic structure of Iraq to allow investors and the government to manage natural the domestic private sector to leverage large scale resource development in a way that generates spillover international and government investments into activities—holds promise downstream entrepreneurship and job opportunities Overview 15 Strengthening "bottom-up" accountability by providing citizens with relevant information about budget ows from allocation to facility level Improving "top-down” accountability through a joint commitment from the central government, governorates, and governorate councils to address the most glaring gaps on social and public The spatial variations in outcomes point to the services; with a common consensus on budgets and targets importance of strengthening the relationship between di erent layers of government and improving coordination between them Revamping the central government's e orts to build capacity, for instance by linking capacity building directly to spending activities or the development of targets Agreeing on a set of spending assignments for all governorates based on capacity and need, and have funding follow these assignments Improving school quality by investing in teacher training, improved teaching methods and revising the curricula Inclusion and Social Protection Signi cant investments are needed to invest in health, education and service infrastructure to Incentivizing school attendance and completion by providing guarantee a basic level of access for all Iraqi nancial incentives conditional on school attendance, and on citizens, and these need to be sta ed by completing di erent levels of education. quali ed personnel. Developing a cadre of quali ed female teachers, separate toilets for girls and boys, and where necessary, the provision of safe and reliable transportation to get girls to attend and stay in school A combination of investments in infrastructure and service delivery and Implementing a nationwide self-targeted public works program to individually or spatially targeted cash provide employment and incomes in the immediate term, to transfers conditional on health, education rebuild local infrastructure and service delivery and skills for future or work, integrated into a uni ed delivery employment system based on a universal registry. Focusing on physical labor works in rural areas , supplemented by basic service delivery in urban areas There is need for a phased implementation of a Speci cally target young men and prepare them for future comprehensive safety net system which includes employment in formal labor markets by linking program a variety of programs to address di erent participation to training in vocational or professional skills or dimensions of deprivation. apprenticeships and internships Integrating women into improved service delivery and training them as supplementary teachers and basic health care providers Implementing universal programs in high poverty areas such as rural parts of the South 1818 H Street, NW Washington, DC 20433