Diagnostic of the Informal Economy in Iraq

2021

COVID-19 and its staggering impact on Iraq's economy and society, along with the collapse in oil prices, have brought the country's informal economy and its lack of inbuilt protections and resilience under the spotlight.

Iraq’s private sector, which accounts to roughly 40-50 per cent of employment, is mainly informal.  Compared to the public sector, the private sector has lower average wages, job security, benefits, and often lacks formal contracts, affecting the quality of both products and services as well as jobs.

The study examines the drivers of informality in Iraq’s labor market such as limited awareness of rights and obligations, financial and administrative barriers and lack of trust. It also highlights the multiple and wide-ranging factors contributing to informality and the burdens imposed on the formalization of enterprises and their workers in the country.

Findings from a second assessment examining more specifically the state of small-scale enterprises and vulnerable workers eight months into the COVID-19 pandemic are also presented, further highlighting the high degree of informality among enterprises in Iraq. Here, the survey was conducted with 2,490 households and 773 enterprises in KRI and Federal Iraq. 

The report lays out a set of recommendations to address barriers to formalization and promote the transition to formality.

Objective of the Study

Methodology Followed

    Findings

    The causes of informality are multiple and relate to the economic and institutional environment such as the inability of the economy to create quality jobs, an inadequate regulatory framework or a lack of transparency and accountability of public institutions.

    Source: FAFO/CLCI data collected in 2020

    Source: FAFO/CLCI data collected in 2020

    Source: FAFO/CLCI data collected in 2020

    Source: FAFO/CLCI data collected in 2020

    Self-employed workers - who represent 30% of the sample - and unpaid workers are de jure excluded from the labor law, and are therefore not protected.

    Type of employment contract, percentages. Source: FAFO/CLCI data collected in 2020

    Type of employment contract, percentages. Source: FAFO/CLCI data collected in 2020

    The majority of employees in the survey have no written contracts with only 14 per cent of reporting to have written contracts. This is consistent with enterprise survey collected by IOM which indicates few to no written contracts being issued among survey respondents. This essentially indicates the high level of informal employment among employees in Iraq.

    For employees, the transition to formality means providing them with adequate labour and social protection. This means realizing the following actions: (1) extending legal coverage to those excluded or insufficiently covered; (2) providing an adequate level of legal protection (e.g. no exclusion from social insurance because of a threshold regarding working time) and (3) ensuring an effective compliance with laws and regulations. Bringing activities from the informal to the formal economy means that they should be fully declared, covered by legislation and give rise to effective protection.

    Social security coverage, percentages

    Social security coverage, percentages

    Social security coverage, percentages

    Social security coverage, percentages

    The extent of informality is further exhibited by the lack of social security provisions for employees. The majority of workers, 91 percent do not have any social security coverage related to work.

    For enterprises, formalization means bringing them under the regulation with the advantages and obligations that this entails. It includes the extension of the scope of labour and social security regulation as well as laws regulating economic units to all enterprises without exception, the legal recognition and registration of enterprises and compliance with legal requirements. For independent workers, the fact that their enterprises belong to the formal economy or not determines whether they themselves are also in the informal economy.

    New technologies, notably ICT and e-formalization, have been increasingly used to foster transition to formality. They can notably contribute to simplify and reduce costs of registration of enterprises and employment, facilitate access to social security benefits and compliance with laws, boost productivity, and help to give a voice to those working in the shadows.  

    Social dialogue is instrumental in ensuring that policies address informality efficiently, particularly with regard to transition to formality. Tripartite mechanisms and consultations with workers’ and employers’ organizations should be promoted notably when identifying the nature of the informal economy, establishing diagnostics, elaborating action plans or when designing and implementing policies for a particular group of workers and enterprises.

    Tackling informality requires coordinated action between tripartite partners - namely government ministries and agencies, trade unions and employer organizations - along with civil society organizations. These institutions should be the main actors in the formalization process and should coordinate on the development of policies and strategies

    Development partners, including the UN, the World Bank and the IMF, can also provide support to the government and social partners in the formalization process. To ensure cooperation between UN agencies, it is necessary that the formalization of the economy be integrated into the United Nations Sustainable Development Cooperation Framework (UNSDCF) systems. The IMF and World Bank could also ensure that their support to government on the development of fiscal and monetary policies includes a strong focus on formalization and formal employment creation.

    Policy Recommendations

    The following set of recommendations address barriers to formalization and promote the transition to formality:

    #1: Mainstreaming Data collection on Informality

    Adopt standardized definitions on concepts and indicators relating to informality.

    Ensure the timeliness, regularity and coverage of surveys on the informal economy, and ensuring these feed into decision-making processes.

    Consider the use of administrative and big data (including potentially GIS data) to capture information on informality beyond standardized surveys.

    #2: Strengthening Governance

    Strengthen coordination between government ministries, agencies and programmes and interventions to promote an integrated approach to formalization.

    Strengthen the legal environment, including by enacting missing regulations relating to the Labour Law.

    Strengthen the investment climate to promote economic growth and decent job creation.

    Strengthen enforcement capacity and coordination between inspectorates of different ministries.

    Fight corruption and improve transparency and accountability throughout government to instill trust in institutions among workers and businesses.

    #3: Reducing Barriers to Formalization

    Streamline registration and tax payment procedures.

    Reduce financial cost of formalization.

    Raise awareness among firms and workers about their rights and obligations under the relevant legislation.

    #4: Strengthening Incentives to Formalize

    Improve access to and quality of services for workers and businesses to access decent employment in the case of the former, and promote economic growth and decent job creation in the case of the latter.

    Provide/increase awareness about financial incentives to formalize.

    Expand the scope of social security as a means to promote increased coverage.

    Towards a National Framework for the Transition to Formality

    The proposed framework aims to gradually move workers and enterprises into the formal economy in a way that guarantees decent work, a decent life, and social justice for all. This is in addition to establishing a national strategy aimed at increasing productivity and economic growth in the country. The following areas of focus are key to promoting the transition:

    Improving institutional capacity and coordination

    Improving working conditions

    Expanding social security coverage

    Increasing the representation of workers and employers from the informal economy

    Strengthening economic and social solidarity


    The report was developed in partnership between the Government, the International Labour Organization (ILO), and in collaboration with the United Nations Development Programme (UNDP), the International Organization for Migration (IOM), UN Women, the European Union (EU), the Fafo Institute for Labour and Social Research (Fafo) and the Cash and Livelihoods Consortium for Iraq (CLCI), which is comprised of the Danish Refugee Council (DRC), the International Rescue Committee (IRC), Mercy Corps, the Norwegian Refugee Council (NRC) and Oxfam.