Private Sector Development in Iraq: Continuing Constraints

I.    The Setting
Iraq as a middle-income country, suffering from decades of international sanctions and ravages of war and internal strife, faces challenges that are often found in many low-income economies. These include dependence on a primary commodity, significant reconstruction and rehabilitation needs, unprecedented requirements of strengthening local and indigenous capabilities, and a legacy of poorly-performing institutions.  Some recent successes in stabilizing its macroeconomic and budgetary situation have been instrumental in reversing the trends, but more progress is needed in diversifying its economy and in generating sustainable livelihoods for the majority of its population.  Most important, this transition is expected to take place in a fragile political, security, and institutional context.

II.    Current Initiatives
Private sector development (PSD) is the centerpiece of the objectives of the Government of Iraq (GoI) for sustained economic recovery.  The strategy is also in alignment with the 2008 Paris Declaration on Aid Effectiveness formulated by the international community for assisting the country.  There has been considerable government ownership at the inception of the PSD program, and its design has consisted of several key sub-components both upstream (at the central level) and downstream (provincial/governorate levels).  

To the credit of GoI, necessary measures were instituted at the outset regarding the implementation and supervisory mechanisms.  Noteworthy among these were the formation of a Prime Minister’s Advisory Commission (PMAC), a Steering Committee, the Task Force on Economic Reforms (TFER), and working groups on:  (a) state-owned enterprises (SOE) restructuring; (b) small and medium enterprises (SME) and Access to Finance; (c) Land Policy; (d) Taxation and Financial Management; (e) Strategic Investment; (f) Legislative Reforms; and (g) Social Dialogue and Mitigation.  
By the Council of Ministers’ Order, the TFER was established with the participation of line ministries (Planning, Trade, Agriculture, Transportation, Industry and Minerals), the Central Bank of Iraq, the Iraqi Stock Market, and several employers’ organizations.  The downstream components were expected to facilitate direct interventions in selected governorates for: (a) rehabilitation of energy production, water management, and economic infrastructure; (b) agro-industrial business development; (c) private sector expansion in agriculture; (d) business development services; (e) micro-lending; (f) land development and housing industry; and (g) enhanced women’s participation in private enterprises.

III.    Persistent Challenges
Nonetheless, the achievements to date for creating a viable private sector have been very modest.  After a slow start, the progress has been limited to the ad hoc meetings of committees/working groups, drafting of laws/regulations, conducting of study tours, and imparting of training.  The proposed legislations are still awaiting finalization and/or implementation; the White Paper/Roadmap for SOE restructuring has taken too long in gaining approval from the Cabinet; a comprehensive private sector survey has only recently been completed and released; and the SME program has only now gained some momentum. Significantly, downstream interventions—along with the commensurate meaningful engagement with the civil society organizations (CSOs) have yet to commence in selected governorates.

Limited attention has been paid to assess the absorptive capacity of the line ministries.  Additionally, there is neither a clear agenda nor adequate technical capacity/sufficient decision-making authority for the regional/ governorate-level program steering committees to promote the economic reforms.  Finally, there is a scant focus on the cross-cutting themes of poverty alleviation, gender mainstreaming, and security considerations for creating an overall enabling environment in Iraq.  

Equally important, little headway is being made in overcoming the obstacles even in a relatively-advanced region of Kurdistan where the technical and administrative capacity has not markedly improved.  The main problems stem from: (a) lack of clarity in the mandate, functions, and feedback of the Governorate Steering Committees; and (b) continuing heritage of the previous regime’s culture of lack of initiative by public officials to undertake the reform efforts (such as the planned work on SMEs).  The weakest link in the program is the structure and content of training for institution building—both at the center and in the governorates. According to the stakeholders, these endeavors have not been specific and targeted enough for beneficiaries (even for the middle-level managers) to achieve the desired results.

Donor coordination—without assigned areas of responsibility—has been a perennial challenge for the international development community (and the GoI).  Doubtless, convening of national conferences has been conducive to developing a working relationship with the international investors.  But these forums have yet to produce tangible solutions for building public-private partnerships.

Impact orientation is a serious concern for several reasons: (a) the program has a limited number of individual “champions”; and (b) the security situation (characterized by ethno-sectarian clashes) is still volatile particularly in the vulnerable regions to create a favorable investment climate.

Despite the formulation of a roadmap for SOE restructuring, reforming/corporatizing these 180+ entities which employ 630,000 workers would not be an easy task without commensurate still-to-be-created jobs in the small and medium-sized firms.  To recapitulate the prevailing situation: nearly seven million people in Iraq today live below the poverty line (US$2.20 person/day).  The Iraqi economy is still unable to provide enough work for 28 percent of the labor force, with at least 18 percent unemployed and 10 percent under-employed.  The problem is even more severe for the unemployed youth.  The public sector accounts for almost 60 percent of all full-time employment.  Notably, the oil sector provides 97 percent of the revenue, but only one percent of the labor force.  Significantly, the risk of “Dutch Disease” continues where national income is dependent on a commodity where all other economic sectors remain inefficient and stagnant.
Economic governance (rent seeking and elite capture) is likely to persist in Iraq for the foreseeable future.  In sum, no remedial actions have been contemplated specific to the “costs of doing business.”

In the end, the program has been marred by nascent administrative and technical capacity within the various agencies entrusted with the sub-components – which reflects the legacy of the historical state-owned system of economic governance.  As a consequence: the achievements, efficiency of assistance, and the results on the ground have been modest especially at the downstream level, and steep hills lie ahead.

IV.    Actionable Recommendations
For the effectiveness of PSD program, the three priority areas should be: (a) SME/Access to Finance; (b) Legislative Reform (including Land Management); and (c) SOE Restructuring.  These three sub-components could effectively subsume the other objectives; i.e., taxation policy, investment promotion, and social dialogue and mitigation (which is a pervasive theme across these sub-components).  All these target areas should run parallel to creating an enabling environment for private sector development, broadening the consultative process, devolution of implementation responsibilities, and decentralization of decision-making—with commensurate emphasis on the overarching themes of empowerment, maintenance of security, and equity considerations.

Simultaneously, efforts will be required to re-formulate the agenda with an emphasis on corporate social responsibility (CSR and for public-private partnerships, including the enhanced identification and involvement of CSOs (chambers of commerce, think tanks, and academia/research institutions).

In sum, and overall, the rebuilding of Iraqi state will be contingent upon three parallel undertakings: (a) consolidation of governing institutions; (b) legitimatization of political structure and processes; and (c) formation of a national identity incorporating the interests of a war-torn diverse population.