Policy Analysis of the Weakness and Dependence of the Private Sector in Iraq
Anwer Adnan, Mohammed Salh, Ali Suheil, Sara Fadhil
During the time this report is being written, protesters cut the streets of Sulaymaniah demanding to receive their late salaries. With the fall of oil price that started in 2014, Kurdistan Regional Government (KRG) entered in a series of financial crisis that forced it to cut the salaries of its employees by half. This is, of course, expected in rentier states with a small private sector and an army of government employees. The problem, however, is not related to oil prices only. There are different reasons behind the problem, including unfavorable oil contracts between KRG and oil companies, the bad relation between the central government and KRG as well as corruption. The policy problem this analysis is going to focus on is the structure of the Iraqi economy, KRG included, which is also one of the reasons behind the current crisis. In the beginning, we aimed at analyzing the problem of unemployment as caused by the dependency and weakness of the private sector in the KRG. Due to fear from the KRG that data might be distorted and used as a weapon against the government, we could not obtain the necessary data for analyzing the issues and writing a meaningful policy paper. Thus, we had to shift to another place, namely Iraq. This paper analyzes the unemployment problem of Iraq as caused by the weakness and dependency of the private sector in Iraq. This paper has made use of Bardach’s method of eight steps towards solving policy problems. First, the problem is defined, and then evidence, mainly from the World Bank, a credible source, and other sources, is made use of to illustrate the problem. Additionally, alternatives are developed, alongside criteria for judging their outcomes. Later on, the preferable policy is selected, and then the outcomes are projected. Finally, we will tell our story by segmenting our policy so as to maximize supporters and minimize opposition to our policy.
Defining the Problem
Iraq is officially a rentier state. According to the United Nations Development Programme, oil sector constitutes 99% of the national revenue. Only 1% of Iraqis, however, work in this sector. Also, according to the same organization, the Iraqi Government provides 40% of the jobs. This makes the Iraqi government one of the biggest governments in the world. This is, however, is not a “policy problem” per say. The policy problem appears when the “rent” of the rentier state goes down and this impedes the government from paying its army of employees. Since there are many aspects of this problem, what we are going to focus on is the weakness and dependence of the Iraqi private sector. Hence, the policy problem in this analysis is that the Iraqi private sector is too weak and dependent. This policy paper defines the problem of unemployment due to dependency and weakness of the private sector in Iraq.
In the 2016 edition of Doing Business, which is a survey published by the World Bank to rank countries based on the ease of doing business as well as the opening of new business, Iraq ranked 165 out of the 190 that are included in the survey. The survey, also, contains sub-ranking beside the overall ranking. In Getting Credit, Iraq ranked 181 out of 190 countries, which makes it one of the worst countries in the world in terms of “the strength of credit reporting systems and the effectiveness of collateral and bankruptcy laws in facilitating lending.” In “strength of legal rights” index, which is an (1-12) index of the legal strength of the collateral and bankruptcy laws, Iraq scored 1 while the average score of high-income OCED countries was 6. In addition, Iraq ranked 165 out of 190 in terms of the ease of opening a new business. While it takes on average 9 procedures, 34 days, and cost of 50% of Iraqi income per capita to open a new business, it takes on average 4.8 procedures, 8.3 days, and cost of 3.1% of income per capita in high-income OCED countries. According to data published by World Bank, as of 2014, the unemployment rate is 16.4 percent. The Iraqi labor force equals 44% of Iraqis, roughly 7.9 million people. (UNDP) Nearly four million Iraqis active in the workforce are employed by the public sector. This stems, mainly, from the philosophy of the Middle Eastern countries with their socialist legacies alongside the nature of rentier states, which function mostly to form patronage networks and provide subsidies. The state is similar to a patron or a parent. A parent has to take care of his or her children. This 16.4 percent of unemployment is not the natural rate of unemployment. According to literature on rentier states, the oil industry has a crowding-out effect on other industries. (Ross) Moreover, entrepreneurial activity in Iraq is fairly weak. The World Bank, with the support of the Kauffman Foundation, conducts surveys on entrepreneurial activities. Two indicators are used, and they are New Business Density and Number of New Limited Liability Companies. For New Business Density, Iraq’s score is 0.13 and for new limited liability companies its score is 2309. Thus, entrepreneurial activity is very low. The private sector may have been doing better if there had been foreign investment, but even in terms of foreign direct investment, according to The Global Economy, the amount of total foreign direct investment ration of GDP in Iraq in 2014 was 2.14, which dropped to 2.06 in 2015. (The Global Economy) The problem could be formulated through production-function method. Since the input, in this case, the private sector, is weak, so the output, in this case jobs, are low as well. Unemployment is high.
Constructing the Alternatives and Selecting the Criteria.
This paper analyzes four possible policies that could be used for mitigating the problem. It is of essence that a policy maker should have the Do Nothing policy, or let the present state of affairs persist, as the main and first policy. In this case of Iraq, that would mean allowing the public sector to be all time big, in which case unemployment is bound to persist. Iraq’s public sector is colossal, and in terms of economic freedom, it has impeded and distorted the market, including the labor market, to a great degree. This will mean patronage networks, a weak private sector, high unemployment, corruption and a weak economy. For that reason, the system of checks and balances has been set by the government in order to prevent a certain sector from having too much control. The purpose behind the checks and balances system is to distribute powers among sectors equally; thus, we will talk about the next course of action. The second alternative is privatization. Privatizing the SOEs would help the economy and the country. They entail cutting huge expenditure costs. The state will no longer have to pay for sustaining these enterprises. A private company will manage and run these factories or enterprises. The state will also be relieved from managing factories. This is economically efficient, and it leads to economic freedom since the government will retreat from the market and the distortions with which the market is faced might probably be mitigated. In the long run, further investment will be made, and the balance will tilt towards the private sector. Consequently, the larger the private sector gets, the higher the rates of employment. Additionally, there could be another reasonable course of action. The course of action is setting up a system of incentives for incentives. As the aforementioned information indicates, investing and doing business in Iraq is not an easy task. It involves long procedures. To mitigate this problem, it is possible that a system of incentives, which dictates that whomsoever invests more money in the country will the bureaucratic procedures and doing business facilitated, from all time long of 77 days to a matter of a couple of days. When incentives are presented, the lengthy process will most surely be mitigated, so investment might increase. Foreign direct investment would help in transferring savings or capital from a place where it is plenty to a place, like Iraq, where these are scarce. It will bring about technological and managerial expertise transfer from the investors to Iraq. This brings about economic freedom and is very efficient. Another alternative could be handing certain things to cooperatives. Instead of the government handling things, a neighborhood or a village could undertake investment in any sector they want. Cooperatives would help because they are efficient. Government officials will not have to interfere, but it might not bring about economic freedom. Investment by the locals means employment as well. The government is often oblivion of the necessary things, but cooperatives are aware of what is necessary.
To avoid any ideological presuppositions, the policy maker has to judge the alternatives based on their outcomes. Therefore, we have used four criteria for judging the outcomes of the alternatives. Efficiency, Economic freedom in the sense of market freedom, equity, and political acceptability are four alternatives by which we have to judge the alternatives. The following table illustrates what percentage each alternative received. Since Iraq suffers from economic inefficiency and lack of economic freedom, the greatest emphasis has been given the two, with efficiency having the weight of 30% and economic freedom having the weight of 40%, political acceptability meriting 20% and equity meriting only 10%. The following table follows what we think is best for Iraq:
The table illustrates that, for our own choice, that privatization seems to be a very favorable policy alternative. From a scale of one to three, it merits three on economic freedom side and efficiency.
It is easier to imagine the model in which our problem, the weakness and dependence of the private sector, is located. The problem is simply the lack of incentives for investors to open new businesses combined with the workers’ favorability to be in “safe” government jobs rather than the private sector. Thus, any reasonable policy alternative would imply incentivizing either the investors or the potential employees or both.
Projecting The Outcomes & the Trade-Offs:
We will have to choose a course of action that is favorable to fixing the situation. We conclude that a combined policy of privatization alongside with facilitation of foreign direct investment is solid and scores well on economic freedom, efficiency and political acceptability. Our projection of this policy denotes that the economy will benefit from this policy but also the country and the people. The government should give some of the private sectors freedom to operate and have control over distribution in order for this policy to work out. The writers determine that the threshold for the policy includes elements of employment, foreign direct investment and entrepreneurial activity. If the unemployment drops from 16.4 to 10 percent in the first six months, then that is an acceptable outcome and the course of action shall be followed. In addition, if foreign direct investment ratio of GDP increases from 2.06 to at least 2.4 in six months, which will most surely lead to new job opportunities, is an acceptable outcome for the policy to be followed. Moreover, an increase in the new business density indicator from 0.13 to 1 would be favorable as well. Thus, there are three thresholds.
The writers of this policy had to confront tradeoffs. One of the tradeoffs was letting the present state of affairs continue and easy money be given to the people. The current state of affairs, with a huge public sector and an army of employees, means an inefficient economy. Also, the current system is not even egalitarian in the sense that those who work hard and those who drink tea instead of working seem to be treated the same way. The current state of affairs encourages laziness and lack of motivation. The private sector denotes that each employee would have to work to keep his/her job. Motivation leads to efficiency and hard working individuals. Foreign direct investment means that high-skilled jobs will be offered, so Iraqis will have to work harder and educate themselves to get the jobs, jobs that require skill and that are high paying. This means that education in Iraq has to be fixed and investments made. This ripple effect of foreign direct investment and privatization will most surely lead to an adequate labor force. This policy alternative will help create market freedom since the government will not be involved directly in the market. As a result, the unemployment rate will decrease and more job opportunities will be provided to the people. Thus, more employees will be employed by the private sector since they are the ones managing the market. Consequently, the unemployment rate will decrease. Going by this alternative means helping out people and the only disadvantage of this alternative will fall upon the government because the private sector will grow large while the public sector will stay still.
The Twenty-Dollar-Bill test simply states that “if your favorite policy idea is such a great idea, why no one thought about it before?” We understand that privatization is always thought of in times of financial crisis. However, it is not a popular option because it is presented in a misleading way. The way lazy people think about privatization usually comes along the line of “firing people and put them under the control of greedy businessmen.” Thus, an addition to our policy can be, for example, enforcing new businesses to hire government employees. There needs to be regulations for the private companies. Foreign direct investment combined with privatization, alongside regulations, help in fostering growth.
Telling Our Story
Grandma Bessie Test is a test used to make sure that the decided policy alternative is presented in a simple way that even grandmas that have nothing to do with public policy can understand. In our case, the “story” that even grandma Bessie would understand is the following- the oil prices went down, thus, the government cannot afford to pay that large number of employees so people need to work outside the government.
Segmentation and Presentation:
Our policy needs to be segmented and presented to different audiences. Our first audience is our boss. We would have to tell him that privatization will save the government from laborious tasks of managing every SOE and all the sectors there is. Moreover, the private sector is more efficient, and if the private sector is not working well, they will be criticized, not the government. For example, when it comes to electricity, the government is often criticized for not giving citizens 24/7 electricity. However, if the private sector is in charge, then the government cannot be criticized.
Our second audience is the politicians. Our approach with them would be that since the oil prices have crashed, and there is a budget deficit, it is a strenuous task for the Iraqi government to try to sustain the SOEs. Similarly, the government is suffering due to paying the salaries of its army of employees. That has stalled growth and prevented GDP per capita rising. For us to be able to pay and sustain the Iraqi government, we need to let go of as many tasks that are not for a government to take on as possible and let the market decide with having regulations, and at the same time preserving some social help programs. This way Iraq can witness economic growth in a short period of time.
Our third audience is the people. The people have doubts about the government paying them, and the youth are afraid of being left without jobs. We should try and tell them that this way, we will be creating jobs for them and that their university degrees will not go to waste. They will have stable jobs in the private sector. For example, the youth working in the private sector in KRG are paid regularly, but the youth and other people working in the public sector are not paid their salaries regularly. This means that those youths who study and work harder to educate themselves will get good jobs in the private sector or in a foreign company investing in Iraq, and their income will rise. They no longer have to work for the government. Basically, more jobs and higher income for the people is a good way to convince them. This is a truthful analysis since our policy will help the youth and create more jobs.
This paper delved deeply into the matter of unemployment in Iraq as caused by dependency and weakness of the private sector. This policy paper explored potential courses of action or policies that would mitigate such a consequential issue. This paper suggested four courses of action, but the most preferable policy was a combination of privatization of State Owned Enterprises, not the critical sectors, and a system of incentives that would facilitate foreign direct investment. It is expected that this system will decrease the rate of unemployment from a high 16.4% to at least 10% and increase foreign direct investment ratio of the GDP. Iraq has suffered due to the philosophy of “the state is the father, so it should take care of its children”. This system encourages laziness and kills creativity. A system in which the market functions without distortions is essential for any economy. A capitalist economy leads to better economic growth and creativity because of a fundamental inequality produced by the system. Iraq is in need of a system that would bring it closer to a capitalist system to save it from the past state socialism it has inherited from the past Iraqi governments and transcend the rentier state model. A state in which the market functions perfectly well is a country closer to political freedom and democracy as well. Political freedom goes hand in hand with economic freedom. This policy paper explored the options that would facilitate the establishment of strong market in Iraq. This paper was not only an attempt aiming at mitigating a problem, but also attempted at establishing a market system in Iraq, and the projected outcomes, as aforementioned, seem to incorporate the elements necessary for a healthy strong solid economy
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