How can Iraq boost job growth?

Flare stacks burn in an oil field and installation in Iraq's southern Basra governorate. AFP

Iraq is running out of time. The most serious challenge facing the country is the rapid growth in the number of people seeking employment. Every year about a million Iraqis become old enough to work.

Even after adjusting for retirement and the very low labour force participation rate of women, the country must create about 350,000 new jobs every year to prevent a rapid growth in the number of unemployed and underemployed.

From the 1980s to 2014, Iraq’s government used oil export earnings to create enough government jobs to keep unemployment from rising. This has resulted in a bloated, inefficient bureaucracy that employs almost 40 per cent of the labour force.

However, the weakening of Opec, Russia’s need for increased energy exports to finance its war economy and US president-elect Donald Trump’s intention to rapidly increase oil production are all likely to bring a fall in oil prices. The Iraqi government will no longer be able to act as the “employer of first resort”.

Therefore, unless there is a substantial increase in the private sector employment, Iraq faces significantly higher unemployment and underemployment – especially among young men. Not only would this be a waste of economic potential, but rising unemployment and underemployment could be politically destabilising.

What regulatory changes and what public services are necessary to create a private sector that creates productive well-paid jobs? Good policy is based on good data. The 2024 World Bank report, Iraq: Business Ready, provides a rich trove of data on three aspects of 10 key sectors of the economy.

However, it is not a cookbook. Many of the categories and subcategories of data are non-intuitive compared to the now-discontinued World Bank Ease of Doing Business report. And the 60-page Iraq: Business Ready report has two serious gaps that reduce its applicability to Iraq.

It doesn’t discuss corruption and it does not attempt to measure or collect data from informal firms including self-employed and household businesses. Since an estimated two thirds of Iraq’s private sector employment is informal, this is a serious omission.

The Central Bank of Iraq. While Iraq continues to pursue a serious anti-corruption effort, the results have been limited. AFP

According to the World Bank, Iraq’s current private sector business environment is poor. Among the 50 countries part of the Business Ready reports, 16 – including Iraq – are upper-middle income countries and 22 are at lower levels of economic development. Averaged across all 10 topics and three aspects – called pillars in the report – Iraq ranks last among the upper-middle income countries and 45th overall.

Regulations for private sector firms are often unnecessarily complex but the major failing is a lack of public services that make it difficult to comply with regulations. The areas where Iraq has the lowest scores are taxation, market competition and business insolvency. For these topics, Iraq ranks 49th out of 50 countries.

The Iraq Britain Business Council autumn conference in Dubai on December 12 and 13 will feature a discussion of the recent IBBC report Is Iraq Business Ready? This report goes into detail about the World Bank’s Iraq: Business Ready report and makes seven recommendations for improving the private sector to encourage job creation. The most important recommendations concern reducing corruption and simplifying regulation.

While Iraq continues to pursue a serious anti-corruption effort, the results over the past decade have been limited. One option to increase the chances of victory is to improve governance by moving most government procurement online. This could speed up the process, increase the number of bids from smaller firms and lead to lower prices.

The expansion and formalisation of existing informal firms, which is necessary for a substantial increase in private sector employment, will also require reductions in the complexity and high cost of conforming to the current web of business regulations.

An example of an unnecessary barrier to registering a business is the requirement in Iraq for paid-in capital. As a guarantee for creditors, such capital requirements have generally failed. And the World Bank research has shown that even minimal paid-in capital reduces business start-ups. As a result, 120 countries, including a dozen in the Mena region, do not require any paid-in capital.

Improvement in these areas and the others identified in Iraq: Business Ready will require both focus and the expenditure of political capital. But the cost of failure is high. Continued dependency on oil export funded government employment will become more difficult over the next decade resulting in increased unemployment and underemployment, especially among young men. This result is not only economically inefficient but could also be socially and politically destabilising.

Frank R Gunter is a professor of Economics at Lehigh University, a member of the Iraq Britain Business Council, and the author of “The Political Economy of Iraq: Restoring Balance in a Post-Conflict Society”