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How Iraq Can Turn Economic Diversification into Growth and Stability

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Nearly two decades after the 2003 war, Iraq finds itself at a crossroads: caught in a fragility trap and faced with increasing instability and multiple crises, Iraq is projected to have the worst annual GDP growth performance since the fall of the Saddam regime. Yet even in the midst of the COVID-19 pandemic, an oil price shock, and recent protests, Iraq can take the path toward sustainable growth, peace, and stability and improve living standards for its people. 

These are the findings of the World Bank’s new Iraq Country Economic Memorandum, titled Breaking Out of Fragility. The report examines why Iraq has not managed to escape the fragility trap. It details what the country can do to turn crises into opportunity, diversify its economy away from the oil sector, and sustain future growth. The report highlights nonetheless that the path will demand persistence, and Iraq will face much uncertainty as it tries to address its long-lasting challenges and change the status quo.

Economic diversification, through reforms and developing the private sector, is critical to reduce the continuous challenges Iraq is facing,” said Saroj Kumar Jha, World Bank Mashreq Regional Director. “This Country Economic Memorandum provides a roadmap to help Iraq and the Iraqi people re-think the existing economic model, build a more diversified economy that creates opportunities for all Iraqis, and rebuild the social contract. The World Bank will be a committed partner in helping Iraq move down the path of reform to ensure peace and stability and give all Iraqis a chance to fulfill their highest aspirations.” 

Breaking out of Fragility details how, for decades, Iraq’s oil wealth allowed the country to obtain upper income status, while in many ways the country’s institutions and social and economic outcomes resembled a low-income fragile country. Oil revenues eroded the country’s economic competitiveness, reduced the need for taxation, weakened the accountability link between citizens and the state, and fueled corruption. 

The COVID-19 pandemic and the oil price shock have thrown into stark relief how much Iraqis have lost in the last two decades. The education system, which once ranked near the top of the MENA region, is now near the bottom. Iraq’s labor force participation is mired at 42%. Combined with one of the lowest female labor force participation rates in the world, Iraq faces low levels of human capital, deteriorating business conditions, and one of the highest poverty rates among upper middle-income countries. 

Breaking out of Fragility outlines key pathways for Iraq to achieve sustainable growth after closely considering the country’s complex political economy. The report highlights that Iraq’s priority should be to refocus the country’s political settlement on development, and improve transparency in the management and allocation of its oil wealth and public resources. The report also underlines the urgent need for Iraq to rebuild the confidence between citizens and the government by strengthening citizen engagement and government accountability in the delivery of priority services and infrastructure, responding to youth demand for jobs and tackling socioeconomic inequalities.

Despite Iraq’s current political and economic challenges, three areas of focus can help lead to economic diversification, growth, and stability:

First, maintaining peace can, by itself, be a strong driver of growth. Iraq’s per capita GDP was about one fifth lower in 2018 than it would have been if not for the conflict that began in 2014, while non-oil GDP was one-third lower. In countries that have undergone a vicious cycle of violence and fragility, coordinated policies from a broad coalition of actors are critical to maintaining “peaceful pathways” and kickstarting a virtuous cycle. The report finds that, in the short term, Iraq should focus on reforms that expand social safety nets for the poor and most vulnerable, improve delivery of basic services such as education and health, and ensure greater transparency in the functioning of the government institutions. 

Second, tapping into Iraq’s export potential to help diversify the economy away from oil production and toward trade and integration. Iraq’s geographical position has the potential to make the country a regional logistics hub; however, Iraq’s logistical performance lags behind its peers so much that it is instead a regional bottleneck. 

Third, reviving Iraq’s agriculture sector to serve as a key pillar of a more diversified, private sector-led economy. Agriculture production; food processing; and related services including logistics, finance, manufacturing, and technology have large potential to expand and create jobs. The agri-food sector has not been subject to the same level of government control as other sectors, so it is well positioned to develop new methods and adopt the latest technologies to maximize its competitive potential. 

The latest Country Economic Memorandum builds on two previous reports, from 2006 and 2012, which noted the need for Iraq to move from conflict to rehabilitation; from state dominance to market orientation; from oil dependence to diversification; and from isolation to regional and global integration. 

Breaking out of Fragility builds on those recommendations by 1) conducting a close analysis of Iraq’s underlying fragility and political economy challenges and their implications for a diversified growth model; 2) analyzing Iraq’s growth characteristics and the country’s potential for and benefits from economic diversification; 3) assessing Iraq’s potential for trade and regional integration to create growth; and 4) reviewing Iraq’s agriculture sector and its potential to support economic diversification. 

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Sustainable infrastructure can drive development and COVID-19 recovery

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Zimbabwe has long struggled with crippling power outages, some of which can last up to 18 hours a day. The cuts have been especially hard on the country’s hospitals and clinics, forcing nurses to deliver babies by candlelight and doctors to postpone emergency surgeries.

But that is starting to change. Since 2017, Zimbabwe has installed solar panels atop more than 400 healthcare facilities, steadying power supplies and replacing expensive and polluting diesel-fired generators. The “Solar for Health” initiative is a prime example of the type of sustainable infrastructure development that will be vital to combating climate change, improving public services and driving the economic recovery from COVID-19.

So says a new report from the United Nations Environment Programme (UNEP). It urges planners and policymakers to take a more systematic approach to sustainable infrastructure, incorporating it into their long-term development plans and ensuring human-made systems work with natural ones.

“We can no longer use the business-as-usual approach to infrastructure, which is leading to ecological destruction and massive carbon dioxide emissions. Investments in sustainable infrastructure are not only environmentally sound but also bring economic and social benefits. Low-carbon, nature-positive infrastructure projects can help minimize the sector’s environmental footprint and offer a more sustainable, cost-effective path to closing the infrastructure gap,” said Inger Andersen, Executive Director of UNEP.   

A source of emissions

Built infrastructure, which includes everything from office blocks to highways to power plants, is responsible for 70 per cent of all greenhouse gas emissions, mentions the report, the International Good Practice Principles for Sustainable Infrastructure. Poorly designed, infrastructure can also displace communities, endanger wildlife and weigh, often for decades, on public finances.

“There is an urgent need to include sustainable and climate resilient infrastructure as an integral part of green growth to deliver energy, water, and transportation solutions that will facilitate opportunity, connection, and sustainable growth,” said Ban Ki-moon, former United Nations Secretary-General and the President of the Global Green Growth Institute, a UNEP partner.”

Ban said the new report is a “very useful guiding framework for governments to lay the groundwork for a future where sustainable infrastructure is the only kind of infrastructure we know.”

To help countries reach that goal, the new UNEP report offers guiding principles for governments to integrate sustainability into their decision making on infrastructure.  Among other things, it recommends that states align their infrastructure planning with the United Nations Sustainable Development Goals, humanity’s blueprint for a better future. It also urges them to minimize the environmental footprint of construction projects and meaningfully engage local communities in infrastructure decision making.

Return on investment

The report also highlighted the economic return on sustainable infrastructure, which includes renewable energy plants, eco-friendly public buildings and low-carbon transport. Investing in renewables and energy efficiency, it said, creates five times more jobs than investments in fossil fuels. Similarly, investing in resilient infrastructure in developing countries can create a return of US$4 for every US$1 invested, according to the World Bank.

Trend setters

Alongside the report, UNEP released a series of case studies that showed how many countries are finding innovative ways to develop sustainable infrastructure.

In Ecuador, the government has turned to nature-based solutions to bolster water supplies to several major cities. By replanting trees, fencing off rivers and purchasing land for conservation, one region has revived watersheds that support more than 400,000 people.

In Singapore, which is aiming to have 80 per cent of its buildings certified as green by 2030, builders have used recycled materials to construct everything from schools to corporate offices. (The country was the first to unveil a building constructed entirely of recycled concrete aggregate and demolition waste.)

With COVID-19 sparking a global wave of stimulus spending, Ambroise Fayolle, Vice President of the European Investment Bank said the publication of the principles “is timely, reminding us all of the importance of building back better by tackling the long-term challenges we face.”  

UN Environment

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COVID-19 is reversing the important gains made over the last decade for women

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Progress for women in work could be back at 2017 levels by the end of 2021 as a result of the COVID-19 pandemic, according to analysis conducted for PwC’s annual Women in Work Index, which measures female economic empowerment across 33 Organisation for Economic Cooperation and Development (OECD) countries*.  The evidence emerging globally is that the damage from COVID-19 and government response and recovery policies, is disproportionately being felt by women.

For nine years, countries across the OECD* made consistent gains towards women’s economic empowerment. However, due to COVID-19 this trend will now be reversed, with the Index estimated to fall 2.1 points between 2019 and 2021, according to analysis undertaken for PwC’s annual Women in Work Index. The Index will not begin to recover until 2022, where it should gain back 0.8 points. 

In order to undo the damage caused by COVID-19 to women in work – even by 2030, progress towards gender equality needs to be twice as fast as its historical rate.

Bhushan Sethi, Joint Global Leader, People and Organization at PwC, said:

“The setbacks that we are experiencing with COVID-19 in terms of the workforce tell a worrisome story. While the impacts are being felt by everyone across the globe, we are seeing women exiting the workforce at a faster rate than men. Women carry a heavier burden than men of unpaid care and domestic work. This has increased during the pandemic, and it is limiting women’s time and options to contribute to the economy. In the labour market, more women work in hard-hit human contact-intensive service sectors  – such as accomodation and food services, and retail trade. With social distancing and lockdowns, these sectors have seen unprecedented job losses.”   

Between 2019 and 2020, the annual OECD unemployment rate increased by 1.7 percentage points for women (from 5.7% in 2019 to 7.4% in 2020). In the US, the female unemployment rate increased sharply from 4% in March 2020 to 16% in April 2020. The female unemployment rate stayed high for the remainder of 2020, ending the year in December 2020 at 6.7%, 3 percentage points higher than in December 2019.  In the UK, the full impact of job losses from COVID-19 is yet to be realised due to job retention schemes, but furlough data shows that women are at greater risk of losing their jobs when these schemes come to an end. Between July and October 2020, a total of 15.3 million jobs were furloughed in the UK. For furloughed jobs for which gender was known, 52% of these were women’s jobs, despite women only making up 48% of the workforce.*** 

The disproportionate burden of unpaid childcare falls on women

Before COVID-19 hit, women on average spent six more hours than men on unpaid childcare every week (according to research by UN Women). During COVID-19, women have taken on an even greater share and now spend 7.7 more hours per week on unpaid childcare than men**  – this ‘second shift’ equates to 31.5 hours per week; almost as much an extra full-time job. 

This increase in unpaid labour has already reduced women’s contribution to the economy. If this extra burden lasts, it will cause more women to leave the labour market permanently, reversing progress towards gender equality and reducing productivity in the economy. 

While some women may choose to leave the workforce temporarily due to COVID-19 with the intention to return post-pandemic, research shows that career breaks have long-term impacts on women’s labour market prospects, and women will return to lower paid and lower skilled positions. 

PwC Women in Work 2021 Index (performance prior to COVID-19 pandemic)

Iceland continues to hold the top spot on the Index out of OECD countries. It is a consistent strong performer in female labour force participation (84%), has a small participation rate gap (5%), and even smaller female unemployment rate (3%).  

Greece saw the largest increase in terms of Index score between 2018 and 2019, driven by improvement in all labour market indicators except for the share of full-time female employees. On the contrary, Portugal experienced the largest decline in Index score between 2018 and 2019 due to a widening of its gender pay gap by 5 percentage points.

New Zealand and Slovenia both increased their rankings on the Index by one position. New Zealand saw an upward trend across all five indicators and has risen by 5 spots on the Index over the course of nine years. Government policy and a history of female representation in political institutions have helped to drive these gains. Slovenia’s improvement was driven by a fall in the participation rate gap and in female unemployment, as well as an increase in the share of full-time female employment. 

If OECD countries increased their rates of female employment to match Sweden’s (consistently the top performer), the gain to GDP would be over US$6 trillion per annum. The US, with one of the highest female unemployment rates, is expected to gain the most – as much as US$1.7 trillion per annum. 

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65% of Adults Think Race, Ethnicity or National Origin Affects Job Opportunities

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A recent Ipsos-World Economic Forum survey has found that 65% of all adults believe that, in their country, someone’s race, ethnicity, or national origin influences their employment opportunities. When considering their own race, ethnicity, or national origin, more than one-third say it has impacted their personal employment opportunities.

The online survey was conducted between 22 January and 5 February 2021, among more than 20,000 adults in 27 countries. It also reveals that 60% of adults think that someone’s race, ethnicity, or national origin plays a role in education opportunities, access to housing, and access to social services.

As Black History Month in the United States draws to a close, awareness of the impacts of race, ethnicity and national origin on opportunities in life is exceptionally high. It follows a tumultuous year when the pandemic put inequality into the spotlight, and events in the US sparked international protests as long-simmering, systemic racial inequities came to the forefront.

Of those surveyed, 46% say the events of the past year have increased differences in opportunities as well as access to housing, education, employment and/or social services in their country. In comparison, 43% say the events have had no impact on differences and 12% say they have decreased differences.

About 60% of respondents in Latin America, Spain and South Africa, and nearly half in France, Italy, Malaysia, Japan, Sweden, Belgium and the US say recent events have increased race, ethnicity, or national origin-based differences in opportunities in their country, compared to only about one in three in Germany, Poland and Saudi Arabia, one in four in China, and one in seven in Russia.

Perceptions versus the reported personal experience of inequality also vary significantly in countries. Compared with the 27-country average for all four types of opportunities measured, several countries stand out.

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