Private Sector Job Creation: the Cornerstone of International Development in Iraq

(Copyright: Orange Corners Baghdad)

An often-repeated statistic about Iraq’s labour market is that at least 500,000 Iraqis enter the job market annually. This is similar to the crisis in Egypt, which has an estimated 900,000 annual entrants. For some countries, it’s even worse: Ethiopia is estimated to require 2 million new jobs per year. A good question to ask therefore, is why have development efforts in Ethiopia, a country affected by dictatorship and conflict, strongly focused on job creation, while Iraq has not had the same focus in over a decade of on-off stability?

Clearly, unsustainable public sector employment and low private-sector employment has been corrosive in Iraq. Urgency among international organizations has not led to decisive action: in 2009 the UN warned that unless 450,000 jobs could be created annually, Iraq’s “socio-economic stability and recovery would be jeopardized.”

Unfortunately, the focus on sustainable job creation has come after other priorities, a point made in 2009 by the EC External Relations, as violence levels plummeted 80%. The EC stated that capacity building priorities would be:

“i) institutional building in the area of good governance; ii) basic services.”

While both are necessary to attract foreign direct investment, job creation strategies in Iraq have often centred on approaches that have local, short term impact. National systemic weakness can undercut these gains, eg., an NGO’s loan to help a small business may have limited effect due to prohibitive bureaucracy. This may be good for short term stabilization, but little more.

Other international organizations have focused on decentralization, public sector modernization, reconstruction and subsidy reduction. Many of these goals will only be sustainably met with more employed Iraqis in the private sector, particularly the goal of increased utility tariffs, which is vital to sustain the electricity sector.

In Iraq, private sector development, while a component of many international programs, has tended to be short term (see this program in Basra.) Or it has focused on local economic development, microfinance and state-owned enterprise (SOE) reform rather than aiming for deep-rooted change that would reposition Iraq towards creating a national enabling environment for private investment. The latter effort would have to be long term, joining up the local and the national.

At the national level, Western assistance for Private Sector Development has been linked to Iraq’s national development strategies, made with the Ministries of Finance and Planning, whose efforts are only partially joined up with the budget process which in reality, is driven by parliament and tends to focus on the public sector.

As Iraq’s cabinet explores new ways of raising capital investment in infrastructure, a part of this strategy is focused on improving the investment environment. In this area, capacity-building efforts have had some success fostering Iraq’s involvement in International Investment Agreements (IIAs) but efforts must continue: Iraq is currently dealing with its first claim under ICSID and the outcome will help determine investor confidence.

State-led growth?

In 2018, a sense of urgency returned due to the southern protests, with the World Bank’s “Primer on Job Creation in Iraq.” While suggesting reforms to the agricultural sector will boost rural unemployment, the report emphasizes rapid infrastructure-related job creation to integrate reconstruction and stabilisation.

Considering the lack of adequate service provision not only in conflict-affected provinces but in all of Iraq, the World Bank argue for technical and vocational educational training (TVET) for this growth area, with course attendees paid by the state to train. The report outlines the potential for investing oil revenues in job creation through reconstruction, which needs tens of thousands of Iraqis.

This assumes the quality of TVET training can be given to a high standard in a relatively short time. Evidence on TVET here is mixed; one study from Ethiopia found that “despite being one of the biggest job creators in the country, the textile and garment industry remains one of the areas in which more than half of TVET graduates remain unemployed.” Iraq will have to carefully manage its planned training program, recently announced by the government, which aims to help 150,000 Iraqis. Far better, Iraq could coordinate such a program with foreign investors for “demand-led” TVET.

A second risk element of TVET for reconstruction is dependency on the oil price. The WB study notes, “Each $100m invested in roads and simple infrastructure would be expected to be associated with about 20,000 short-term jobs.” With a national estimated cost over $7 bn, this assumes the oil price remains stable.

SME Finance: the more the merrier?

While linking TVET with reconstruction might be worthwhile, Iraq’s development partners should consider accelerating loan to SME programs. In 2016 the Central Bank of Iraq (CBI) launched the $5 billion Tamwil initiative offering five year, 4.5% interest loans with the aim of creating 250,000 private-sector jobs. But disbursal has been slow due to difficult collateral requirements.

In October 2018, Commerzbank signed an agreement with the Trade Bank of Iraq to release $110 million for SME finance in Iraq, an export finance arrangement where Iraqi SMEs would have access to finance on terms far more attractive than most small loans, while borrowers would then buy from German suppliers. Another interesting initiative is a new lending facility established by Rafidain bank which dispersed $2 billion in small loans in 2018, although at a slightly higher interest rate than the TBI’s SME facility.

Attacking the problem locally and nationally

Improving access to loans is vital, but if Iraq really wants to overcome the curse of unemployment, radical new approaches must be explored. The multifaceted problem of unemployment needs a concerted effort from all sides.

This brings us back to Ethiopia’s challenge, where the government has partnered with China on industrial city projects, manufacturing for the developing world’s emerging consumer class. Ethiopia hopes these plans could lead to tens of thousands of new jobs. Similar parks could be made in Iraq through the proposed oil revenue for infrastructure plan with Beijing (far more attractive than a typical BRI loan arrangement.) Located near Iraq’s ports and hoped for petrochemical plants in Basra, such an initiative could kick-start local stabilization.

Iraq should no longer look to ageing, inefficient SOEs. Entirely new industrial zones should be created on a firmly for-profit basis, rallying support from international lenders such as the European Investment Bank and the Japanese Bank for International Cooperation. Such plans would be ambitious, but Iraq’s challenges require nothing less than ambition. Iraq should benefit from both BRI and the new EU-Japan Infrastructure Pact, while harnessing Gulf support.

All ideas should be explored, such as unit assembly in high growth industries such as air conditioning and light electric vehicles, such as electric Tuk Tuks to reinvigorate Iraq’s existing automobile assembly industry at Iskandariyah. This may sound radical, but these items are already being assembled or manufactured across the region.

As with any ambitious initiative in Iraq, it will require what Simon Maxwell calls “muscular conditionality,” oversight to avoid problems that have hindered many development projects. International organizations should act quickly where local actors see development projects as personal opportunities, to avoid a repeat of controversies in Nineweh and Basra. Basra is now an example of what is possible when the government mobilizes in a crisis since electricity supply in the province improved within an 18-month timeframe. The same urgency should now turn to job creation.

Conditionality could extend to demanding strong Iraqi commitment to co-investing in these projects, subsidizing the private sector to encourage FDI. The international community will need a radically new modus operandi in Iraq to ensure progress, but a major push for private sector development would be a good start.

This article is published as part of Iraq Energy Institute (IEI)’s initiative ‘Towards Sustainable Job Creation in Iraq’. Learn more information on this initiative and our contribution guidelines by clicking here.

Editor, Iraq Energy Institute | + posts

Robert Tollast, is a freelance political risk analyst focused on Iraq who is the editor at the Iraq Energy Institute. His previously worked for the Iraq Advisory Group, CEIS (France) and the Brecon Group.

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