Report No. 112333-IQ Public Disclosure Authorized IRAQ SYSTEMATIC COUNTRY DIAGNOSTIC February 3, 2017 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized i CONTENTS Acronyms and Abbreviations .................................................................................................................. vii Executive Summary .................................................................................................................................... 1 I. Introduction............................................................................................................................................ 6 II. Understanding Iraq’s Predicament ...................................................................................................... 6 A. Legacy of Conflict and Poor Governance ........................................................................................ 9 B. Oil Wealth and Oil Dependency .................................................................................................... 13 C. Ethnic and Religious Diversity and Spatial Inequality .................................................................. 16 D. Governance Failures ...................................................................................................................... 19 E. Violence and Fragility.................................................................................................................... 24 III. Poverty, Shared Prosperity, and Exclusion ............................................................................... 27 A. Poverty and Shared Prosperity ....................................................................................................... 27 1. Poverty and Inequality: The 2007-12 Period .......................................................................... 28 2. The Impact of the Twin Crises: Reversals in Poverty Reduction in 2014 ............................... 36 B. Excluded Groups: IDP, Youths, and Gender Inequality ................................................................ 39 1. Internally Displaced Persons .................................................................................................. 39 2. Youths ...................................................................................................................................... 44 3. Gender Inequality ................................................................................................................... 47 IV. Challenges and Opportunities .................................................................................................... 51 A. Economic Management ................................................................................................................. 51 1. Absence of Oil Revenue and Expenditure Management ......................................................... 52 2. Diversification and Trade ....................................................................................................... 55 3. Near-Term Challenges ............................................................................................................ 60 B. Weak Public Sector Institutions ..................................................................................................... 64 1. The Civil Service ..................................................................................................................... 64 2. Public Financial Management ................................................................................................ 67 3. State-Owned Enterprises ......................................................................................................... 70 4. Justice System and the Rule of Law ........................................................................................ 71 C. A Stunted Private Sector ................................................................................................................ 72 D. Declining Quality of Human Capital and Skills ............................................................................ 78 1. Education and Skills................................................................................................................ 78 2. The Health Sector.................................................................................................................... 82 3. Social Protection ..................................................................................................................... 85 E. Critical Infrastructure Gaps ............................................................................................................ 89 1. Energy Sector .......................................................................................................................... 89 2. Transport ................................................................................................................................. 90 3. Information and Communications Technology ....................................................................... 91 F. Agriculture and Threatened Natural Resources ............................................................................. 94 1. Agriculture .............................................................................................................................. 95 2. Water ....................................................................................................................................... 96 3. Environment and Natural Resources ...................................................................................... 98 V. Sustainability ...................................................................................................................................... 100 A. Social and Political Sustainability: A Focus on Decentralization ................................................ 100 B. Environmental Sustainability ....................................................................................................... 103 C. Fiscal Sustainability ..................................................................................................................... 105 i VI. Prioritization of Areas for Reform ........................................................................................... 107 A. Priorities for Addressing Iraq’s Underlying Constraints ............................................................. 108 1. Reestablishing Security ......................................................................................................... 108 2. Rebuilding the Social Contract and State Legitimacy .......................................................... 109 3. Oil Revenues and Economic Management ............................................................................ 111 B. Risks............................................................................................................................................. 112 Annex 1: Multidimensional Poverty in Human Development ............................................................ 120 Annex 2: Characteristics of the Poor and Non-Poor ........................................................................... 121 Annex 3: Iraq’s Top Exports, 1980-1988/2012-2014 ............................................................................ 123 Annex 4: Iraq Pension Reform .............................................................................................................. 124 Annex 5: Assessment of Iraq national statistical system ..................................................................... 127 ii Figures Figure 1. Governance Failures Are at the Core of Iraq's Predicament .......................................................... 7 Figure 2. GDP by Economic Activity, 1968-2015 ...................................................................................... 12 Figure 3. Oil Exports as a Percentage of Total Exports, OPEC Members .................................................. 14 Figure 4. Quality and Coverage of Public Services .................................................................................... 15 Figure 5. Electricity Prices, 2014 ................................................................................................................ 15 Figure 6. Distribution of Iraq's Minorities .................................................................................................. 17 Figure 7. Oil Reserves and Production, by Region, 2015 ........................................................................... 18 Figure 8. Control of Corruption .................................................................................................................. 20 Figure 9. Citizen Poll on the Key Challenge Facing the Country ............................................................... 20 Figure 10. Firms’ Experience of Corruption in Interactions with Government .......................................... 21 Figure 11. Impatience with Reforms........................................................................................................... 22 Figure 12. Voice and Accountability .......................................................................................................... 22 Figure 13. Broad and Narrow Solidarity ..................................................................................................... 22 Figure 14. Civilian Deaths from Violence .................................................................................................