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 e 10- _ ~20- GP w 15 D 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 i v a t e d i nt t h e P u b l i cM S e c t o r ,t N o tP i n t u r e h a s r i s e n s h a r p l y , a n d w h i l e p e o p l e a r e l e a v i n 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 walt 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 sectorh(%) by economic sector (%) Other services Other services Public administration Public administration Financial & insural re Financial & insurance Transport & storage Transport & storage Commercet& retail Commerce & retail Construction Construction Utilities toLookforWorkandtoIvestioUtilities Manufacturing Manufacturing Mining & quarrying Mining & quarrying Agriculture & fishing Agriculture & fishing sco 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 fuind" 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 m Intermediate Needs to Generate consucton,ani 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 7 220 cI 4 2007 2008 2009 25_ 1 2011 2012 0 Annual GOP Growth WHY? Because the links between growth, employment, earnings and welfare are weak. The osets tor SQ 0% of new jobs & higher Expansion in the represents almost j0 0 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 securty 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