Understanding Urban Informality in Iraq: Findings from the Informal Sector Enterprise Survey May 2023 Dalal Moosa Joanna Abdel Ahad Vanessa Moreira © 2023 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy, completeness, or currency of the data included in this work and does not assume responsibility for any errors, omissions, or discrepancies in the information, or liability with respect to the use of or failure to use the information, methods, processes, or conclusions set forth. 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All Iraq pictures in the report are by: CODEX Productions / World Bank. Understanding Urban Informality in Iraq: Findings from the Informal Sector Enterprise Survey TABLE OF CONTENTS Acronyms ....................................................................................................................................................................................................................... 3 Acknowledgements.................................................................................................................................................................................................. 4 Executive Summary................................................................................................................................................................................................. 5 1. Introduction............................................................................................................................................................................................................. 8 2. Data collection..................................................................................................................................................................................................... 13 3. Key findings........................................................................................................................................................................................................... 17 1. Urban informal businesses are critical for household welfare 17 2. Businesses and their owners face several challenges 21 3. Financial and trust issues hinder registration 29 4. Women owners and their businesses are different in many ways  31 4. Policy options to improve the informal sector: owners, workers and businesses......................................... 37 1. Protect informal owners and workers 38 2. Promote informal workers and businesses 40 3. Enforce laws and regulations on the better-off 44 5. Concluding remarks........................................................................................................................................................................................ 46 References.................................................................................................................................................................................................................... 47 Appendix 1: City boundaries and strata............................................................................................................................................... 50 Appendix 2: Calculating Sample Weights............................................................................................................................................ 53 LIST OF FIGURES Figure 1: Sectoral distribution of informal businesses, by city..............................................................................................................15 Figure 2: Distribution of age of main owner of informal business by city (Years).......................................................................17 Figure 3: Number of workers by the sector of the informal businesses.......................................................................................... 18 Figure 4: Reasons for starting an informal business (share of businesses)..................................................................................19 Figure 5: Average value of sales by city (million Iraqi dinars per month)....................................................................................... 20 Figure 6: Occupation of the main owner prior to establishing the business (share of owners)......................................... 22 Figure 7: Reason the business is located within the household (share of businesses).......................................................... 23 Figure 8: Share of businesses following operation procedures by education of main owner ........................................... 24 Figure 9: Strategies used by informal businesses as market research tools (share of businesses)................................. 25 Figure 10: Distribution of the main source of funding to start or acquire the informal business, by city..................... 26 Figure 11: Distribution of the sources of the most recent loan for the business, by city........................................................27 Figure 12: Distribution of business performance by type of business............................................................................................ 29 Figure 13: Reasons of not registering with the authorities (share of businesses).....................................................................30 Figure 14: Perceived benefits to registration by city (share of businesses)....................................................................................31 Figure 15: Number of workers (in the month prior to the interview) by the gender of the main owner........................ 32 Figure 16: Source of funding to start business by gender of the owner (share of businesses).......................................... 32 Figure 17: Reasons for starting own business by gender (share of businesses)......................................................................... 33 Figure 18: Sectoral distribution of the businesses, by gender of the main owner..................................................................... 34 Figure 19: Sales by gender....................................................................................................................................................................................... 35 Figure 20: Response to the COVID-19 outbreak by gender of main owner (share of businesses)...................................... 35 Figure 21: Types of interventions in the informal sector along the income spectrum............................................................... 38 LIST OF TABLES AND BOXES Table 1: Number of blocks enumerated and interviews completed....................................................................................................14 Box 1 – Defining informal businesses................................................................................................................................................................11 Box 2 – Social assistance examples on expanding coverage to the informal sector during COVID-19............................ 39 Box 3 – Examples of voluntary saving schemes from around the world.........................................................................................40 Box 4 – Mujeres Moviendo Mexico Training: Hard and soft skills for women entrepreneurs in Mexico.......................... 42 Box 5 – Examples of productive inclusion: A bundled approach........................................................................................................ 43 2 ACRONYMS ACS Adaptive cluster sampling COVID-19 Coronavirus pandemic of 2019 CSO Central Statistics Organization GCT General Commission for Taxes GDP Gross Domestic Product GoI Government of Iraq IHFPS Iraq High Frequency Phone Survey ILO International Labour Organization IOM International Organization for Migration ISES Informal Sector Enterprise Survey KRSO Kurdistan Region Statistics Office LFS Labor force survey MENA Middle East and North Africa MSME Micro, small and medium enterprises NEET Not in employment, education or training UNDP United Nations Development Programme WBES World Bank Enterprise Survey WFP World Food Programme 3 ACKNOWLEDGEMENTS This report was prepared by the World Bank Social Protection and Jobs Global Practice. The team comprised of Dalal Moosa (Senior Economist), Joanna Abdel Ahad (Consultant) and Vanessa Moreira (Consultant). The data collection was administered and managed by the World Bank Enterprise Analysis team comprising of Yew Chong (William) Soh (Economist) and David C. Francis (Senior Economist). It was conducted in Iraq by SREO Consulting. The survey, analysis and dissemination of the findings are funded by the Iraq Reform, Recovery and Reconstruction Fund (I3RF) – a trust fund that is financed by donations from Canada, Germany, Sweden and the U.K. We are grateful for comments and feedback received from the report’s peer reviewers, namely: S. Amer Ahmed, Asif M. Islam, Bledi Celiku and Angela Elzir. We are also grateful for comments from the Macroeconomic, Trade and Investments Global Practice, namely Majid Kazemi and Zeina Alsharkas, and for the support and comments of the Finance, Competitiveness and Innovation Global Practice throughout survey design, implementation and analysis, namely Mohammed Abdulkader, Syed Mahdi Hassan and Can Arslan. We are immensely grateful for the support of the Iraq Social Protection and Jobs team, namely Khalid Moheyddeen, Haleem Al-Kazali, Mustafa Al-Missttaf, Sara Hariz and Zheen Almukhtar, as well as the support of Naila Ahmad, Zeina Azar and Waseem Al-Muqdadi through the I3RF. The team thanks the Central Statistics Organization, the Ministry of Planning of Iraq and the Kurdistan Region Statistics Office for their feedback on the findings of this report and the survey. The team also thanks Anush Bezhanyan, Practice Manager for the Social Protection and Jobs Global Practice for the Middle East and North Africa region, and Richard Abdulnour, Head of the Iraq Country Office, for their continued support to conduct innovative and analytical work that advances knowledge about Iraq and the region. The team finally thanks Sarah Alameddine Graphic Design Services for finalizing the report. All Iraq pictures are by: CODEX Productions / World Bank 4 EXECUTIVE SUMMARY In Iraq, like many countries around the world, the informal sector is a major contributor to employment and business activity. The Iraq Labor Force Survey (LFS) of 2021 estimated that more than half of the workers in the country do not contribute to social insurance, consequently informal. Recent surveys conducted by the Central Statistics Organization (CSO) and the Kurdistan Region Statistics Office (KRSO) in collaboration with the United Nations Development Programme (UNDP) found that 80% and 60% of businesses, respectively, are not registered with any public entity, consequently informal. Recognizing the prevalence of this sector and its role in people’s earning and consumption, this report extends the knowledge about Iraq’s urban informality through a new survey. The Informal Sector Enterprise Survey (ISES) was led by the World Bank, with the objective of further illuminating the characteristics of urban informal businesses and their workers. It was conducted in four key cities: Baghdad, Basrah, Najaf and Sulaymaniyah. It is complemented by two other World Bank surveys fielded around the same time: the World Bank Enterprise Survey (WBES) and the Micro-enterprise survey of 2022 – both of which focus on formal businesses. The ISES uses a unique methodology that is the first for the MENA region. Surveys on informal businesses were not often representative. The lack of registration makes informal businesses invisible to the authorities, and consequently a complete list (or sample frame) of businesses that would allow drawing a representative sample has often been unattainable. The ISES uses a novel methodology, an adaptive clustering approach, that creates a sample frame and selects the final sample at the same time. This allows the data to be representative at the city level, an important feat for understanding informality. Urban informal businesses are critical for household welfare The ISES results highlight that surveying informal businesses is essentially a survey of the self-employed. The owner and his or her family are an integral part of the business. Three- quarters of the owners live in households where this business activity is the primary source of income. The average number of workers employed by the businesses is 2.2 (slightly less that their formal peers in the Micro-enterprise survey), out of which is the owner, one family member and sometimes an outside worker. Moreover, over half of the businesses work in trade, while slightly over a third are in services, and about 12% in manufacturing – a similar distribution to their formal peers. Informal businesses often started as a last resort. Around 75% of owners mentioned they were unable to find another source of income, and a third were still actively looking for a wage job. The majority of businesses that opened during the pandemic also opened as a last resort, highlighting the importance of the sector during economic slowdowns. 5 Informal businesses generally have low sales. The average value of sales in the month prior to the survey was around 1.5 million Iraqi Dinars (equivalent to about USD 1,028) – significantly lower than their formal peers. Around 63% of businesses reported having a profit – with an average of 800,000 Iraqi dinars (approximately USD 550) – which is quite meager given the fact that owners have on average five other household members that rely on the business to survive. However, there is considerable heterogeneity. While there are many informal businesses who have low sales (“survivalist” businesses), there is a significant overlap with formal micro- enterprises at the higher end of the sales distribution. This means that there may be some informal businesses who are able to compete with their formal peers but may be constrained from achieving their potential (“held-back entrepreneurs”) or may be abusing the system. Businesses and their owners face several challenges Owners have limited education and experience. Although owners are on average 39 years old, they have only 6.6 years of experience, mostly as employees in other businesses and not as entrepreneurs. A tenth of the main owners were unemployed prior to the business. Moreover, most of the owners completed intermediate level education at most (9th grade). The businesses are also young, with an average age of 6 years, much lower than the average of 14 years found among their formal peers. Less than half of informal businesses keep written business records or separate the business and household finances. However, owners with higher education are more likely to adopt sound business procedures, and businesses that keep written business records are more likely to separate business and household finances. Formal financial institutions play a negligible role in these businesses. When asked about the source of start-up funds, 83% of respondents said they used their own savings and 13% borrowed from family or friends. Owners also rarely use bank accounts to conduct their daily business activities. Moreover, only a minority of owners had loans at the time of the survey – less so than their formal peers - and the majority did not apply for a loan at all. Owners often cited difficulties such as complex application procedures, high interest rates and needing a guarantee. Financial and trust issues hinder registration The main reasons behind not registering the business relate to financial constraints and limited confidence in the government. More than two-thirds of the owners mentioned wanting to avoid taxes, and almost two-thirds also reported wanting to avoid informal payments (bribes) associated with formalization. Another common reason is to circumvent inspections by government officials, especially for businesses operating from the household. Still, around 45% of businesses reported the cost and time of registration as a deterrent. Lastly, about two-thirds of informal businesses do not see any benefit from registering the business, and thus opt not to register. Women owners and their businesses differ in many ways Women-owners are few and they face many challenges. Only 6% of the businesses in the sample were owned by women. Women owners tend to be less educated. They are more likely single owners. They have fewer workers, but these workers are more likely to be women as well. They make less sales and are more likely to be the second breadwinners of the family - and thus began their businesses out of convenience more than a last resort. They are more likely to borrow from friends or relatives to start the business as opposed to using their own savings like men, which is related to the fact that few women in Iraq work at all to be able to save. Linked to 6 this, they are more likely to cite the lack of guarantee that constrains them from borrowing. They operate more in the manufacturing and services sector compared to men. However, they were more likely to keep written records than their men peers, more likely to use cellphone devices for the business, and have at least one computer-literate worker, and more likely to have profits. They are also more likely to have adapted their businesses with the spread of the pandemic. This implies that women-owned businesses may be smaller, but more carefully managed. Informal sector policy and programs should protect, promote and enforce Improving the state of business activities and the welfare of the people that work in the informal sector requires a mix of government tools. These tools depend on where the business and the worker are in the spectrum of the income distribution. The report proposes a “Protect – Promote – Enforce” framework, where protection is for those who are at the lower end of the income spectrum (“survivalist” businesses and low-income households); promotion for those at the lower-end and middle of the spectrum (who may also be “held-back entrepreneurs”) and enforcement is for those who earn higher income and already compete with their peers in the formal sector – thus abusing the system. Protecting informal owners and workers includes social assistance and innovative social insurance tools. Social assistance programs, such as Iraq’s Cash Transfer Program, should ensure the inclusion of informal workers and also be shock responsive. The coronavirus (COVID-19) pandemic has highlighted the importance of this, and Iraq’s social assistance system is not easily adaptive to shocks today. Moreover, innovative social insurance tools, such as voluntary saving schemes (VSS) – currently also inexistent in Iraq - can also be useful for owners and workers that have a lower capacity to save, especially women. Promoting the informal sector includes elevating the skills of its workers and the productivity of the business. While reforms should start in mainstream education, the Government of Iraq (GoI) can make some strides towards modernizing training and ensuring its accessibility to informal workers and owners. This includes allowing them to attend short-term courses and offering more options in terms of hours and costs. Training content must expand considerably into entrepreneurship and business courses, including financial heuristics and soft (life) skills, and must teach workers and owners on innovative solutions, such as mobile applications to record business transactions and digitalize operations. Access to finance is crucial. The GoI must work on financial sector reforms that open up the sector and allow for a thriving microfinance environment – currently extremely limited in the country. Moreover, innovations in mobile money and e-wallets facilitate business creation and growth. For the poor and vulnerable, productive inclusion programming can be useful, offering layered interventions. Foundational business environment reforms are important. The objective of these reforms should be to encourage formalization, such as simplifying business registration, reducing costs, or simplifying processes. The GoI, however, should recognize that the success of these reforms often requires broad and consistent macroeconomic and governance reforms. Lastly, enforcement is essential but must be gradual and tailored. For Iraq, this could mean expanding the role and capacity of the authorities to enforce the laws and regulations and fine those that do not comply. However, enforcement should target the better off, who already compete with their formal peers. It should come with significant reforms in government accountability and transparency. And it should be gradual and with clear communication and engagement. 7 1. INTRODUCTION In most countries around the world, the informal sector is an important contributor to economic activity. Informal economic activities, defined as legal activities that are not registered with government authorities and consequently do not appear in national accounts or tax revenues, are prevalent all around the world. At the macroeconomic level, the average annual value of informal economic activities between 1991 and 2015 was estimated globally at around 32% of the gross domestic product of countries (GDP) (Medina and Schneider, 2018). In the Middle East and North Africa (MENA) region, it ranged from a low of 16% in Qatar to as high as 35% in Tunisia. At the same time, the informal sector is a key contributor to employment. Defined as workers without social insurance (against disability, old age, or other life events), the share of informal employment globally in 2019 was estimated at around 58% of all employment (ILOSTAT, 2022)1. In the MENA region where data is available the share of informal employment is as high as 77% in Morocco and as low as 16% in Bahrain. When looking at the private sector alone, this share rises to 86% in Morocco and 18% in Bahrain (Islam et al, 2022). The disadvantages of informal economic activities and employment are many, from both human and economic development perspectives. Informal workers in some MENA countries have been engaged in lower productivity jobs; they are paid less when compared to their formal sector peers, and they are less likely to report being satisfied in their work (Gatti et al, 2014). Moreover, the majority of informal workers in Jordan and Egypt stayed working informally years later or became unemployed or out of the labor force (Ridao-Cano et al, 2023). This emphasizes that informal work is not a steppingstone into formality. At the same time, informal business activities around the world are on average less productive than formal ones; they are more financially constrained; they have less access to the market and services; they tend to be small without growing to scale or unable to thrive in the formal sector; and lastly they may operate in an economy that is disconnected from the formal one (Ohnsorge and Yu, 2021, La Porta and Shleifer, 2014). This can have large ramifications on a country’s economic growth and transformation. In Iraq, the informal sector plays a key role in employment. The LFS of 2021 finds that 66% of workers in Iraq work informally. This is higher among men (69.5%) than women (44.8%) – since many working women are in the public sector. The lower the education of the worker, the 1. The share was estimated for 53 countries of varying income per capita. 8 higher the chance of being informally employed. About 80% of workers with primary education work informally, compared to 64% among those with secondary education, and 37% with tertiary education. Moreover, while the agriculture sector has the highest informality rate (98.1% of employment), nearly 89% of workers in the industry sector work informally, and about 53% of those in the services sector - noting that services includes the public sector. The prevalence of informal employment is linked to labor market challenges in the country. Women remain largely excluded from gainful employment, with only 10.6% labor force participation compared to 68% among men. Youth also have limited participation, of 26.5%, while 36.7% of youth are not in employment, education or training (NEET). The unemployment rate stood at 16.5%, particularly higher among women, at 28.2%, and youth, at 35.8%. When taking time-related underemployment into consideration on top of unemployment, 31.0% of the working age population is essentially underutilized. These limited labor market outcomes are inextricably linked to the prevalence and state of the informal sector in Iraq. Lastly, while two- thirds of workers are employees, 26.8% are self-employed, with the majority being own-account workers. Informality in Iraq is also linked to structural weaknesses in the formal private sector and the larger economy. While this report does not delve into the causes of informality, it recognizes that the private sector in Iraq has long suffered from many constraints. The latest WBES for Iraq, conducted in 2021, shows that formal firms often report difficulties obtaining specific licenses, accessing finance and having to pay informal payments (bribes) to manage their business (World Bank Group, 2022). These challenges are part of the broader issues that the country faces. The public sector, for instance, remains a key player in employment, with almost 38% of workers employed by the state. Moreover, state-owned enterprises absorb many graduates, compete in the private sector, and are often exempt from the taxes and regulations that burden other businesses. Unstable electricity, as well as corruption and lack of transparency, weaken trust in the economy and limit the prosperity of the private sector (World Bank, 2020). This, along with Iraq’s fragile political reality, with multiple government changes in the past two decades, directly affect the extent and condition of the informal sector. Recent surveys conducted by the UNDP and the Government of Iraq (GoI) finds that most business activities are informal. The first survey, conducted with the CSO (thereafter “CSO- UNDP”), showed that a staggering 83% of business activities in the governorates of Baghdad, Basrah and Nineveh, are not registered with any government agency. Among the few formal ones, most are registered with General Commission for Taxes (GCT), the municipalities or the agricultural associations, while only 1% having registered their workers in the private sector social security fund (UNDP-CSO, 2021). The second survey, conducted with the KRSO (thereafter “KRSO-UNDP”) finds that 60% of businesses in the four governorates of Erbil, Sulaymaniyah, Halabja, and Duhok are unregistered, and less than 1% registered their workers in the social security fund – thus confirming the ubiquity of informal activity and employment across the country. The spread of COVID-19 in the early months of 2020, has further exacerbated the economic situation in Iraq. The first COVID-19 case in Iraq was detected on the 24th of February 2020, and it was followed by a series of curfews and mobility restrictions. Rapid phone surveys conducted by the World Bank, the International Labour Organization (ILO) and the International Organization for Migration (IOM) highlighted the halt of economic activity of many businesses – small and large. The World Bank’s phone survey showed that seven months into the pandemic only half of surveyed firms were operating their usual full hours, while the other half reduced to partial hours and some fully closed. Businesses had major challenges paying the cost of their utilities, their rent, their loans, and even worker wages and suppliers (Moosa and Moreira, 2021). As the findings from the ISES shows, two years after the pandemic, employment is still not at the same level as it used to be for many of Iraq’s businesses. 9 Between 2021-2022, the World Bank conducted an innovative survey to better understand informal businesses and the people who work in them. The ISES was fielded between August 2021 and February 2022, in four major cities: Baghdad, Basrah, Najaf, and Sulaymaniyah. These four cities are among the larger cities in the country, and they were home to 42% of the labor force according to the LFS. Moreover, the majority of non-agricultural employment in Baghdad, Najaf and Sulaymaniyah was informal, and 44% in Basrah. These four cities are geographically dispersed, across the north, middle and south of the country, and each is known for distinct characteristics. Baghdad, the largest city in Iraq, is the center of the federal government and is a vibrant commercial city. Najaf is home to religious sites that attract pilgrimage all year round. Basrah boasts a thriving oil and gas industry. And Sulaymaniyah has been home to waves of internally displaced persons over the past decade and is under the jurisdiction of the Kurdistan regional government. The ISES follows a unique methodology. The methodology, called Adaptive Cluster Sampling (ACS), establishes a sample frame and draws the sample simultaneously. It consequently fully circumvents the major challenge that informal business surveys face, which is the lack of a sample frame or list of businesses that would allow the survey to draw a random sample from. This ACS methodology makes the ISES representative at the city level and its findings robust. Moreover, the unit of observation is the business itself, and the questions asked about the business are directed to the primary owner or manager him/herself who is more equipped to answer them. Iraq is one of the first countries around the world that has this survey. The ISES thus provides a different value-add than that of the UNDP-CSO and UNDP-KRSO surveys on informality. The Mixed Formal and Informal Micro, Small and Medium Enterprises (MSME) survey conducted with the UNDP uses the household as the primary sampling unit, as opposed to the business. It draws the sample from the latest census, which is a decade old. This makes it representative across households but not necessarily at the business level. Moreover, within the selected households, it asks all adults who either own a business or work in an MSME questions about the business itself, about its employees, its financing, its innovation and technology, among others. While a business owner is well equipped to answer these questions about his/her business, a waged worker may not be. Moreover, the ISES defines an informal business as one that is not registered with the Directorate of Companies Registration at the Ministry of Trade – be it at the Federal or Kurdistan levels (see Box 1 for more details), whereas the CSO-UNDP and KRSO-UNDP surveys define it as any business that is not registered with any authority, such as the GCT, Municipal Departments, the General Authority for Industrial Development, Directorate of Companies Registration, or others. Thus, the fact that the ISES has a stricter definition of informality gives it a larger pool of businesses to survey from. However, as the ISES is city-specific, it excludes agricultural activities, whereas the other surveys are at the governorate level and consequently include agriculture. The ISES complements two other World Bank surveys fielded around the same time. The first is the World Bank Enterprise Survey (WBES) of 2022, which is the second the Iraq has had – following the one in 2011. The WBES surveys formal small, medium and large enterprises (5 workers or more), asking a standard set of questions about business performance and challenges. The second is the Micro-enterprise survey of 2022, which focuses on formal micro-enterprises with less than 5 workers, asking questions that are a mix of those found in the WBES and those found in the ISES. When possible, this report compares findings from the ISES to those of the Micro- enterprise survey, since they are close peers. The next sections are organized as follows. Section II explains the data collection process and final sample. Section III highlights the key findings. Section IV proposes some key policy and program priorities to improve the lives of the people who work in the sector and the performance of the businesses. Section VII concludes with a few remarks on the potential for future research on Iraq’s informality. 10 Box 1 – Defining informal businesses Informal businesses are defined in the ISES as those that are not legally registered with the Directorate of Companies Registration at the Ministry of Trade – be it at the Federal or Kurdistan region levels. This means that every business that operates a legal activity but is not a “company” in Iraq’s law is an informal business in the ISES. This is different from the definition that is often followed by the GoI, in which barber shops, for instance, can register as a type of “personal” business and can be deemed formal if they register with the Chamber of Commerce, or pay fees of relevant ministries or municipalities. The ISES’s definition is directly linked to the automatic creation of a tax ID and file. Companies that register with the Ministry of Trade have their files immediately transferred to the GCT to create an ID and can be easily monitored, ensuring their payment of corporate, payroll and other taxes. Registering with the Chamber of Commerce is merely for the reservation of the name. Changes in the laws guiding the work of the Chamber of Commerce in the 2003/2004 removed the obligation of the Chamber to submit the registration (and consequently the creation of the business) to the GCT automatically. This means that registration with the Chamber and with relevant ministries (such as the Ministry of Health for food-related production), and other entities does not guarantee the continuous payment of corporate tax or other types of taxes. This definition is also practical for two reasons. The first is international comparability, given the fact that tax payment (and tax identification numbers) is the standard definition that the World Bank uses. The second is that this definition creates two clear universes between the ISES and the two other surveys that the World Bank started around the same time targeting formal business activities (the WBES and the Micro-enterprise survey of 2022). However, it is worth noting that even with other definitions, the majority of business activity in Iraq is informal. 11 12 2. DATA COLLECTION The ISES uses an area-based sampling methodology, the ACS to establish a sample frame and draw the sample simultaneously. To create a sample frame for the survey, each of the four cities was overlayed with a spatial grid of equal size (150 meters x 150 meters squares) using a Graphic Information System (GIS).2 Every square, referred to as a block, constituted a Primary Sampling Unit (PSU).3 Blocks in the grid of each city were consequently categorized into five strata: residential, commercial/industrial, mixed (commercial and residential), market center, and open areas. This categorization was created based on local knowledge of cities by the respective field teams of the data collection company4 (Refer to Appendix 2 for GIS images of the cities). An initial sample of starting blockswas randomly selected from the city’s grid. All encountered informal businesses within each starting block were then fully enumerated using a basic questionnaire that includes the type of premises (household, non-household with permanent or with temporary structure, or non-fixed), the sub-sector of economic activity (manufacturing, trade, services), number of workers (size), and whether it is registered, for all informal businesses located in the block is collected. Businesses that refuse the enumeration exercise as well as those that are unavailable at the time of fieldwork (e.g., during off-hours) are still enumerated and accounted for by recording the refusal/unavailability in addition to some information by observation. ACS takes advantage of the expectation that informal businesses are geographically clustered. Hence, a threshold number of informal businesses is defined (Table 1, column 4). All blocks during the enumeration exercise that meet the threshold trigger full enumeration of all surrounding blocks. This process of sample frame expansion (elaborated further in Aga et al, 2022) continues until no blocks meet the expansion threshold.5 Blocks stratified as market centers were not selected using ACS but only through simple random sampling. A randomly selected subset (sample) of the enumerated businesses is then interviewed. The probability of selection is defined by integrating selection probabilities from both stages – i.e., the starting block and expansion blocks - for each interviewed business resulting in a sample that is representative of the informal sector at the city level. 2. The boundaries of the cities match the administrative boundaries obtained from Google Maps and corroborated by internal counterparts based in Iraq. More on shapefiles outlining administrative boundaries of the 4 cities of Iraq can be found in the Iraq 2021 – Informal Sector Enterprise Survey Implementation Report. 3. Note that regardless of the city population density, the blocks would be enumerated based on the adaptive clustering approach methodology. 4. There is a sixth category for blocks that are physically inaccessible. This category is excluded from the sampling. 5. If the expansion process is considerably longer than expected, a WBG Task Team Leader can force a stop to expansions. 13 The data collection took place from August 2021 through February 2022 in the cities of Baghdad, Basrah, Sulaymaniyah and Najaf.6 The fieldwork in all 4 cities faced similar challenges that extended the duration of the data collection period, including inaccessibility to some blocks due to unexpected security issues, prolongation in the movement between blocks because of roadblocks, protests and civil unrest and a relatively limited response rate in some areas.7 Additionally, the unstable political situation and changing government policies on access for research required significant efforts in gaining access to some locations. These challenges were especially severe in Mosul where fieldwork was initially launched and then terminated because of the immobility of the fieldwork team and their inability to get responses. 8 The ISES sample frame included 5,193 enumerated businesses, and the final sample consisted of 1,996 businesses (Table 1). Baghdad, being the largest of the four cities, had the highest number of starting and enumerated blocks, and consequently the highest number of interviews, representing 34% of the sample. This is followed by Basrah, with 30% of the final sample, Najaf, with 21% and finally Sulaymaniyah with 15%. TABLE 1: NUMBER OF BLOCKS ENUMERATED AND INTERVIEWS COMPLETED Threshold Informal Starting Total Number Universe Number of Business Interviews City9 Blocks of Blocks of Block Informal Units Completed Enumerated Enumerated Businesses Enumerated Baghdad 28,296 1,272 13 1,352 2,282 680 Basrah 11,645 520 16 554 1,609 599 Sulaymaniyah 6,013 470 4 760 871 294 Najaf 3,950 317 1 342 431 423 TOTAL 49,904 2,579 - 3,008 5,193 1,996 Source: Iraq ISES 2021 Implementation Report Surveyed firms were asked a brief questionnaire. The questionnaire collected five types of information: (1) Characteristics of the owner such as sex, age, education, previous work experience and some characteristics of the household and its members; (2) Characteristics of the business such as its starting conditions, location, financing, access to infrastructure, sales and supplies; (3) The reasons behind the choices made related to startup, location, finances, informality, and others; (4) Challenges that the business activity faced during COVID-19; (5) The day-to-day business practices and planning. The questionnaire was administered in 20-25 minutes to minimize interruption to the business. Moreover, the majority of the questions had “Yes” or “No” answers. 6. The data collection was done through an Iraq-based firm called SREO consulting with a local team of enumerators. 7. The response rate was 29% in Baghdad, 37% in Basrah, 34% in Sulaymaniah and 98% in Najaf. 8. Originally, the fourth city was Mosul, but due to difficulty in getting informal businesses to participate (survey fatigue) as well as security issues, Mosul was dropped, and Najaf was added in its place. 9. The city of Baghdad covers 204.2 Km2 and has a population of 7.5 million. The city of Basrah covers 181 Km2 and has a population of 1.4 million. The city of Sulaymaniyah covers 20.1 Km2 and has a population of 780 thousand. The city of Najaf has a population of 930 thousand. 14 The results show that more than half of the businesses operate in the trade sector, while slightly more than a third operate in the services sector, and only 12% in manufacturing.10 This distribution is very similar to the Micro-enterprise survey of formal peers, which had 50% operating in wholesale and retail trade, 31% in services and 19% in manufacturing.11 Some difference exist between cities, as Figure 1. shows. Most of manufacturing business produce food or goods (such as clothes), while most of services work in the repair of motor vehicles and motorcycles, but also cleaning and washing services. There are statistically significant differences between the cities such that Najaf, for example, has more manufacturing, and Sulaymaniyah has more services. Compared to the CSO-UNDP survey, the ISES distribution of sectors is more heavily skewed toward trade (compared to around 28% in the CSO-UNDP, and 29% and 32% in KRSO-UNDP surveys for businesses not registered with any entity). FIGURE 1: SECTORAL DISTRIBUTION OF INFORMAL BUSINESSES, BY CITY 15% 18% 36% 35% 39% 54% 68% 52% 53% 51% 32% 11% 11% 13% 12% Baghdad Basrah Sulaymaniyah Najaf Total (n=680) (n=599) (n=294) (n=423) (n=1996) Manufacturing Trade Services Source: Iraq ISES 2021 [weighted]12 Note: Differences between cities are statistically significant 10. Distribution of informal businesses by sector and subsector in each of the 4 cities is presented in detailed in table 3 in appendix 2. 11. The 2022 Iraqi Micro-Enterprise Survey was administered in Baghdad, Basrah, Sulaymaniyah, and Erbil with a total of 482 observations. 12. Appendix 1 describes the weight calculation methodology. 15 16 3. KEY FINDINGS 1. Urban informal businesses are critical for household welfare Urban informal businesses in Iraq are mostly men-owned and often as single owners. Across the four cities, 88% of the owners are men, and only 6% are women. The remainder were not identified by the respondent.13 More than 80% businesses had only one owner, 15% had 2 owners, and 3% had 3 owners (Figure 2). The Micro-enterprise survey has similar findings, with 94% being men-owned and only 6% women-owned. Moreover, 81% of ISES businesses are fully owned by the main owner. Businesses in Basrah and Najaf were more likely to have multiple owners. Similar findings were reported by the CSO-UNDP and KRSO-UNDP surveys with 89% of surveyed enterprises being single-owned, especially among micro-enterprises that have at most 3 workers. Owners are not very young (Figure 2). The average age of the main owner is 39 years across the four cities combined, with women owners being only slightly older. Owners were youngest in Sulaymaniyah and Basrah, with an average of age around 37 years old, and oldest in Najaf. This highlights the fact that for the majority of owners that start and work in these businesses, they are not fresh graduates or new labor market entrants that jump to entrepreneurship. FIGURE 2: DISTRIBUTION OF AGE OF MAIN OWNER OF INFORMAL BUSINESS BY CITY (YEARS) 85 85 81 68 65 39.1 40.0 38.7 37.6 37.5 40 Minimum 40 38 38 39 Median Average Maximum 19 19 15 16 15 Baghdad Basrah Sulaymaniyah Najaf Total (n=628) (n=578) (n=293) (n=419) (n=1918) Source: Iraq ISES 2021 [weighted] Notes: The differences between cities are statistically significant. 13. The unidentified gender of the owner is often due to the interviewee being a hired worker for the business, instead of the owner him/herself. 17 Around three-quarters of the owners live in households where no other member worked. More precisely, 81% of owners reported that they were the only income earner of the household, with a slightly higher share among owners in Basrah. Results were similar in the Micro-enterprise survey with 78% of main owners being the only members in their household with steady employment. Moreover, among the households with no members working at the time of the interview, only 9.4% had a member who had previously worked.14 The average number of members in the house where the owner lives is six, which is the same as the national average and very close to the 5.7 members per household among formal peers. The majority of owners, 84%, were fully dedicated to working in their informal businesses, while the remainder reported working in other jobs. Still, 34% of the owners were actively looking for a job with a temporary or a permanent contract. The Micro-enterprise survey showed that like the ISES, 83% were fully dedicated to the business, and that 40% could leave their enterprise if they were offered a full-time job with comparable income. This highlights the fact that opening an informal business in Iraq, and perhaps even a formal one too, may be a last resort for many owners whose preferred option is wage employment. The average number of workers per business is small, and often includes a family member. When asked about the number of workers in the month prior to the interview, responses varied between no workers at all and 15 workers, with an average of 2.24 workers per business (very similar to an average of 2.92 workers among formal peers). The majority of workers were paid. There was on average one family member working in the business (making up 44% of workers in the survey). There is some volatility in terms of workers between months. In a regular month, businesses had a slightly higher average of 2.40 workers. In the busiest month, the informal businesses reported 2.97 workers on average (3.09 workers among formal businesses) while in the month with least workers, an average of 1.84 people (compared to 2.22 workers among formal businesses) (Figure 3). Informal businesses in the manufacturing sector employ more workers on average, followed by the services sector (similar to the findings in the Micro-enterprise Survey). FIGURE 3: NUMBER OF WORKERS BY THE SECTOR OF THE INFORMAL BUSINESSES 3.65 3.28 3.13 2.9 2.94 2.71 2.63 2.48 2.38 2.14 2.24 2.11 2.12 1.99 1.83 1.69 Last month (n=1992) Regular month (n=1673) Highest month (n=1606) Lowest month (n=1564) Manufacturing Retail Services Total Source: Iraq ISES 2021 [weighted]15 14. 19% of the respondents were uncertain if another member of the main owner’s household worked. 15. Appendix 1 describes the weight calculation methodology. 18 When asked about the reason behind starting an informal business, the majority reported the opportunity to make income and the convenience of location and workhours. Over 90% of respondents reported being motivated by the potential to make a profit (an income for the household), and three-quarters also mentioned their inability to find other sources of income (Figure 4). Only a fifth were unable to find another source of income and less than 15% were motivated by having secondary source of income. This further highlights that informal businesses may be more of a last resort for owners and their families, and the fact that they come with some convenience makes them feasible. FIGURE 4: REASONS FOR STARTING AN INFORMAL BUSINESS (SHARE OF BUSINESSES) 94% 93% 76% 33% Convenience Opportunity to start and develop Have secondary Unable to find another source of of location or hours a profitable business source of income income Source: Iraq ISES 2021 [weighted] Still, these businesses do not necessarily make high sales. The average value of sales in the month prior to the survey was around 1.5 million Iraqi Dinars (equivalent to about USD 1,028) (Figure 5).16 This is lower than the average sales reported by formal peers in the micro-enterprise survey, which was an average of 6.1 million Iraqi Dinars (equivalent to about USD 4,178). Sales fluctuated considerably between the busiest and the slowest months – like their formal peers. Moreover, Najaf informal businesses had higher sales on average. About 63% of the interviewed informal businesses reported having a profit. The average net profit was around 800 thousand Iraqi dinar (approximately USD 550) in the month prior to the interview. Another 19% reported no profit or loss, and 18% reported losses, of an average of 350,000 Iraqi Dinars (around USD 240). To put the profits into perspective, a poor Iraqi family, of a size of about 5 members, receives around USD 200 of cash transfers month, if they are in the federal safety net program, to be able to fulfill its consumption needs. The highest percentage of profitable informal businesses was reported in Najaf (84%) and the lowest in Baghdad (55%). Within sectors, manufacturing businesses were more likely to report a profit, and the retail sector the least likely. What came to be clear during the pandemic is the importance of informal businesses during economic slowdowns. About 80% of the main owners that started their informal business during the pandemic reported that they did so because they were unable to find another source of income. Moreover, women were less likely to open these businesses during the pandemic – potentially due to the additional burden of childcare when schools shut down. 16. These values remove outliers. To do so, the values were standardized using a z-score and observations that were three standard deviations away were removed to calculate this particular statistic. 19 FIGURE 5: AVERAGE VALUE OF SALES BY CITY (MILLION IRAQI DINARS PER MONTH) 2.9 2.7 2.6 2.5 2 1.9 1.9 1.7 1.6 1.6 1.5 1.4 1.2 1 0.9 0.8 0.5 0.5 0.5 0.2 Baghdad Basrah Sulaymaniyah Najaf Total Last month (n=1558) Regular month (n=1465) Slowest month (n=1445) Busiest month (n=1383) Source: Iraq ISES 2021 [weighted] Note: The differences in sales by cities are statistically significant With the rise of the pandemic, many informal businesses were gravely affected, especially in terms of sales. More than 60% of businesses reported a decrease in monthly sales compared to a regular month prior to the pandemic, especially in Basrah, where 80% of businesses reported a decrease. On the other hand, those in Najaf seemed to have been less likely to be impacted, with only 13% of surveyed firms reporting drops in sales. More than a quarter of informal business did not report a change in their sales, while only 3% reported an increase during the pandemic with the highest percentage in Najaf (16%). The reported decrease in the sales is in line with findings from different surveys that tries to quantify the effect of the pandemic such as that of the Iraq High Frequency Phone Survey (IHFPS) by the World Bank17, surveys from the ILO18 and the IOM.19 Findings are in general similar to the results of the Micro-enterprise survey with 63% of them witnessing a decrease, 30% not witnessing any change and only 7% witnessing an increase. Moreover, two years after the pandemic, employment has not fully recovered. A third of informal businesses are smaller, reporting a decrease in the number of workers they employ in a regular month since the COVID-19 outbreak (similar to the Micro-enterprises survey share of 28%).20 Similar to the effect on sales, the percentage of informal businesses that report a decrease in the number of workers in a regular month is lowest in Najaf (6%) and highest is Basrah (42%). On average, 2% of informal businesses employed additional workers since the outbreak (5% in Micro-enterprise survey), while 64% maintained the same number of workers throughout (67% in Micro-enterprise survey). 17. Conducted by the World Bank through a collaboration with the World Food Programme (WFP). It was administered over the phone to 671 firms from the manufacturing and services sectors in Iraq on a monthly basis from October until December of 2020. 18. Conducted by ILO in June 2020 jointly with the Danish Refugee Council, Oxfam, Mercy Corps and the Norwegian Council. It was administered to 1175 firms in the Northern governorates and the KRI, namely Anbar, Diyala, Kirkuk, Ninawa, Salah al-Din, Erbil, Duhok and Sulaymaniyah. 19. Conducted by IOM, in collaboration with the International Trade Centre (ITC) and the Food and Agriculture Organization (FAO). It was administered to 893 small and medium enterprises in Iraq over three rounds (panel survey) 20. A regular month is neither the month with the highest nor the lowest activity. It is more like a typical or average activity level. 20 Even family members employed by businesses experienced unemployment. Of the businesses that employed family members, 24% reduced the number of family workers. Among formal businesses, only 12% reported a decrease in the number of family workers. This highlights the fragility of informal businesses and the impact they have on the work of the family. 2. Businesses and their owners face several challenges Owners have limited education and experience Owners have limited educational attainment. More than half of main owners have at most completed intermediate level education (up to the 9th grade) compared to 65% of the main owners of formal micro-enterprise who completed secondary level education. Owners in Sulaymaniyah and Najaf appear to be the least educated, with more than a third of them having at most completed primary education. These findings are in line with results from the LFS, which shows that of all informal workers (including both the self-employed and wage workers), over 66% have primary level education. Despite their older age, owners have limited years of experience. On average, owners have 6.6 years of experience. Owners in Sulaymaniyah had an average of 12.5 years of experience working in the same industry as their current informal business, while those in Basrah had 8.5, those in Najaf had 6.5 and those in Baghdad had 5.1. In contrast, top managers in the Micro-enterprise surveys have more than 17 years of experience working in the same sector as their current enterprise. Much of this experience was as employees in other businesses and not as entrepreneurs.21 In fact, 39% were employees in the same type of business, 28% in a different one, and 18% were self-employed (Figure 6). The results are in line with the results from the Micro-enterprise survey where 40% of main owners were employees in the same type of business, 25% were employees in a different one, and 20% were self-employed. However, they are different from the CSO-UNDP survey that found that almost half of the surveyed owners were self-employed prior to their current business. This may stem from the fact that the CSO-UNDP survey may have 21. 81% of men-owners and 85% of women owners were the original establishers of the business, whereas others acquired it from someone else. 21 been able to capture household-based enterprises more than the ISES and that these owners may have a longer history of operating businesses from the house. However, the same survey also mentioned that 40% of owners were employed in failed businesses prior to the current one. Still, around a tenth of the owners were unemployed prior to establishing their business, with a higher share of women being either unemployed or out of the labor force altogether. The data shows that 11% of the owners were unemployed prior to being in this business, and 3% were out of the labor force altogether (with corresponding percentages from the Micro-Enterprise Survey being 8% and 6%, respectively). This further highlights the idea that informal activities may be a last resort for people that cannot find jobs. FIGURE 6: OCCUPATION OF THE MAIN OWNER PRIOR TO ESTABLISHING THE BUSINESS (SHARE OF OWNERS) 40% 39% 35% 30% 25% 28% 20% 15% 10% 12% 11% 5% 6% 0% 3% Worked for someone Worked for someone Self-employed in a Self-employed in the Unemployed Other (e.g., else in the same type else in a different different type of same type of housewife, student, of business type of business business business etc.) Source: Iraq ISES 2021 [weighted] Not many workers appear to be digitally literate. Almost a third of businesses are uncertain about the computer-literacy of their personnel – a sign of the lack of use of these skills. Of those businesses that use computers or tablets, 23% have one computer-literate worker, 28% have two, and 19% have three or more. However, 8% report that none of their workers have computer skills. The percentage of businesses that have at least one computer-literate worker is higher in Najaf (68%) and Basrah (54%) and lower in Sulaymaniyah (36%) and Baghdad (34%). Informal businesses are relatively young, with an average age of 6 years. This is much younger than the average age of 14 years among their formal peers. While the year of establishment ranged from 1956 to 2021, 95% of these informal businesses were established after the year 2000 and 84% after 2010. On average, informal businesses operating in Sulaymaniyah were the oldest, while those operating in Najaf were the youngest. Three-quarters of the interviewed businesses were located outside of the house. Almost half were located in premises with permanent structure, another 13% in temporary structures including stalls or stands, and 11% in non-fixed premises such as street vendors. The highest percentage of informal businesses located inside the house was in Basrah (34%) and the lowest in Sulaymaniyah (13%). Basrah also had the highest percentage of informal businesses located in non-household premises with permanent structure (55%) while Baghdad had the highest percentage located in non-household premises with temporary structure. Household-based businesses appear to be motivated by tax avoidance. Around 85% of businesses reported that operating from the household minimizes their chance of being identified by the tax authorities, followed by 76% that mentioned reduced costs, and 65% that also mentioned that did not see a particular advantage in working from outside the house (Figure 7). 22 FIGURE 7: REASON THE BUSINESS IS LOCATED WITHIN THE HOUSEHOLD (SHARE OF BUSINESSES) 87% 87% 85% Costs less to run a business from home 76% 65% Easier to manage family responsibility No benefit to working outside the housheold premises Safer and secure Minimizes chance of being identified by tax authorities Total (n=290) Source: Iraq ISES 2021 [weighted] Still, many informal businesses highlight the importance of access to customers in choosing their location. About 78% of businesses with fixed premises reported the importance of access to customers in their location, 9% identified the importance of freedom from harassment, 7% safety and 4% access to food and toilets. The highest percentage of respondents selecting freedom from harassment and safety were in Najaf and Sulaymaniyah, respectively. Less than half of interviewed businesses own the premises where they work, while others typically pay rent. In fact, only 35% of informal businesses that operate outside of households own their premises, compared to 67% of those operating within the households. About 81% of non-household businesses that work in permanent structures pay rent. The highest percentage of businesses that own their premises is in Najaf (79%) and the lowest is in Baghdad (40%). Women were more likely to own the premises in which they operate compared to men, which may be related to the fact that many of them operate from the house. Few owners follow sound business practices Almost all informal businesses operate all year long with an average of 65 hours a week, highlighting their permanence. The highest average hours of operation are recorded in Basrah (80 hours per week) and the lowest in Sulaymaniyah (46 hours per week), which is still considerable. In general, women-owned businesses operate fewer hours than those led by men, which again may be related to their need to care for others and manage other household responsibilities. Meanwhile, micro-enterprises operated an average of 73.5 hours a week, 8.5 hours more than the average of informal enterprises. A minority of businesses follow procedures to ensure sound business practices (Figure 8)22. This further highlights their informal status and can limit them from further growth. Khadim and Choudhury (2019) found a significant positive relationship between record keeping practice and business growth in India. Peacock (1987) found that the lack of accounting records was responsible for the failure of three out of five businesses within the first few months of operation. Moreover, a study by Kind et al. (2010) of primary healthcare businesses in Australia found the performance of businesses to be positively associated with the use of written budgets. 22. Regressing regular sales on the adoption of formal business operation procedures among other independent variables reveals that all, except keeping the accounts of the business separate from the finances of the household, do not have a statistically significant effect. Note, however, that the issue of endogeneity arises here with the possibility of the higher ability to adopt such business operation practices because of higher sales and not just having higher performance, i.e., higher sales, because of the formality in the business operation procedures. 23 Less than half of informal businesses keep written business records or separate the business and household finances. The share of businesses keeping written records was as low as 22% in Sulaymaniyah. Businesses in Basrah are most likely to separate the finances. It is important to note, however, that businesses that keep written business records are more likely to separate the account of the business from the household and vice versa. This highlights a correlation between the two that could safeguard the household in case the business experiences an income shock. Linked to the previous two business practices, is the fact that only 27% produce goods or provide services under contract or agreement and only 33% purchase inputs or supplies under contract or agreement. The majority of businesses that follow formal purchasing procedures also produce goods or provide services under contract or agreement and vice versa. Last but not least, few informal businesses prepare clear budgets or targets, less so than formal micro-enterprises. Around 46% of informal businesses reported having a written budget for monthly costs; only 22% prepared a budget of costs for the following year; 31% had a target for sales for the following year and 41% reported preparing a profit and loss statement at least once a year compared. While the share of formal micro-enterprises that report having a written budget for monthly costs was only slightly higher, at 50%, they were more likely to prepare a budget (38%), have a target for sales (45%), and report a profit and loss statement (53%). More importantly, 67% of formal micro-enterprises keep written business records of their costs and sales. Of the few informal businesses that set a sales target for the following year, 31% compare actual sales to target on a monthly basis or more often, 14% two or three times a year, 29% once a year or less frequently and 25% do not compare at all. FIGURE 8: SHARE OF BUSINESSES FOLLOWING OPERATION PROCEDURES BY EDUCATION OF MAIN OWNER 54% 53% 53% 49% 39% 39% 38% 36% 35% 33% 32% 29% 30% 26% 25% 21% Keeps business Keeps written Produces goods Purchases Has a written Has a target for Made a budget Prepares a profit account business or provides inputs or budget for sales over the of costs for next and loss separate from records services under supplies under monthly costs next year year statement at household contract or contract or least once a finances agreement agreement year Main Owners with Low Education Main Owner with High* Education Source: Iraq ISES 2021 [weighted] *High education is defined as those that have completed upper secondary school (high school) or higher 24 Owners with higher education are more likely to adopt sound business procedures. Informal businesses owned by graduates of secondary schools, preparatory technical schools and tertiary schools are more likely to have in place the business operation procedures discussed in this section.23 Almost all informal businesses are aware of the prices offered by their competitors in the formal sector with a small minority offering higher prices than competitors. Around two-thirds of the businesses claim that their products or services have roughly the same price as those of registered businesses that offer similar products or services. Another 28% claim that the price of their products or services is lower than that of products or services offered by formal businesses - leaving only 4% with higher prices. This emphasizes the fact that some informal businesses are able to compete with their formal peers. Businesses use varying strategies to conduct their market research to direct their production, sales and service provision (Figure 9). Around a fourth of informal businesses had visited their competitors to check the products they had for sale, around a third consulted with their current customers about expanding the production or sale to other products, while 30% reached out to former customers to understand the reason they seized buying their products or using their services. More than half of informal businesses asked suppliers to help them identify the products that are selling well, around the same percentage attempted to negotiate with suppliers for lower prices and 55% used special offers to attract customers. FIGURE 9: STRATEGIES USED BY INFORMAL BUSINESSES AS MARKET RESEARCH TOOLS (SHARE OF BUSINESSES) 55% 51% 51% 34% 30% 24% Special Offer Negotiate with Consulted with Consulted Current Consulted Former Visited Competitors Suppliers Suppliers Customers Customers Source: Iraq ISES 2021 [weighted] Access to and use of financial instruments are low The majority of owners used their own funds to start or acquire their informal businesses similar to owners of micro-enterprises. In fact, 83% of respondents used their own funds and 13% borrowed from friends or family. Few borrowed from money lenders or used remittances and almost none borrowed from banks (Figure 10). This is very similar to formal counterparts in the Micro-enterprise survey, where 84% of whom used their funds to start the business. However, a higher share, 12% borrowed from banks and only 3% borrowed from friends or relatives. 23. The association between the business operation procedures and the level of education is statistically significant. 25 FIGURE 10: DISTRIBUTION OF THE MAIN SOURCE OF FUNDING TO START OR ACQUIRE THE INFORMAL BUSINESS, BY CITY 8% 11% 18% 13% Other sources 32% Remittances Banks or microfinance institutions 90% 84% 83% 78% Moneylenders 68% Friends or relatives Own funds Baghdad Basrah Sulaymaniyah Najaf Total (n=667) (n=592) (n=293) (n=293) (n=1972) Source: Iraq ISES 2021 [weighted] Note: The difference between the cities is statistically significant Only 10% of owners use a bank account to run the business. Another 8% have bank accounts for the household but not for the business. In contract, a higher share of 20% of formal micro- enterprises have a checking or saving account for the establishment and 25% of owners use a separate bank account for the household. The limited use of a bank account is aligned with the fact that few people in Iraq have an account at all. According to the latest Global Findex survey of 2021, only 19% of people aged 15 years or older in Iraq are estimated to have an account. However, among the owners in the ISES that have an account, an overwhelming majority, 80% of them, have a separate account for the household as well, which could aid the better management of the business and the welfare of the household. A previous study also documented the low rate of use of bank accounts and loans for businesses in the informal sector (Farazi, 2014). The CSO-UNDP survey found a smaller share of 0.7%, and the KRSO-UNDP about 0.6%, of informal businesses with bank accounts mostly because of the lack of funds to open an account or because businesses did not need them. Only a minority of owners had loans at the time of the survey. In fact, only 25% of interviewed businesses reported having a loan, with the highest share, 27%, in Baghdad, and lowest, at 19%, in Sulaymaniyah. Still, even when businesses borrowed, 61% did so from friends or family (Figure 11). From the total of informal businesses surveyed, only 2% borrowed from banks, 1.8% from money lenders, 1% from microfinance institutions, 0.75% from input suppliers or customers, and 4.25% from other sources.24 This is low and similar to the results from the WBES25 which has found that for firms with 5-19 workers, only 2.3% had bank loans/lines of credit. In total, 3% of informal enterprises26 borrowed from financial institutions (banks and microfinancing institutions), compared to 4% of formal micro-enterprises. The CSO-UNDP survey found that only 1% of micro-enterprises had loans, 2.6% of small enterprises and 16% of medium ones. Unfortunately, there is no disaggregation by formal/informal firms. 24. Respectively equivalent to 8%, 7%, 4%, 3%, and 17% of the 25% of businesses which had loans at the time of the survey. 25. https://www.enterprisesurveys.org/en/data/exploreeconomies/2022/iraq#finance 26. Same as 12% of the 25% which reported having opened loans. 26 FIGURE 11: DISTRIBUTION OF THE SOURCES OF THE MOST RECENT LOAN FOR THE BUSINESS, BY CITY 3% 4% 3% 5% 5% 11% 4% 14% 8% 7% 5% 6% 20% 8% 26% 17% 20% 7% Friends or relatives 11% Others 86% Banks 10% Money lenders 64% 61% 58% Microfinance institutions 37% Input suppliers or customers Baghdad Basrah Sulaymaniyah Najaf Total (n=116, p=27%) (n=109, p=24%) (n=44, p=19%) (n=92, p=22%) (n=361, p=25%) Source: Iraq ISES 2021 [weighted] Note: The differences between cities are statistically significant. Slightly less than half of owners with loans at the time of the survey, 45%, were required to have a guarantee to finance their loan.27 This percentage varied across regions with 76% of borrowing- businesses in Basrah having to show a guarantee and 29% in Sulaymaniyah – and it includes those that borrowed from family or friends as well. The majority of owners did not apply for loan at all which is similar to their formal peers. Only 12% have applied for loans in the previous year (similar to the 10% of micro-enterprises). Among the ones that did not apply, 21% reported that complex application procedure was the main reason against applying (compared to 13% among formal micro-enterprises). An additional 16% identified high interest rates as the main reason (compared to 35% among formal micro- enterprises), and 14% reported not having the required guarantee (compared to 6% among formal micro-enterprises). This adds to 51% of businesses that did not borrow because of difficulties in the processes of the financial system. Still, 36% of businesses across the four cities reported not needing a loan as the main reason behind not applying (compared to 25% among formal micro-enterprises). When it comes to financing their day-to-day operations, businesses still resort to their friends or relatives. In fact, 31% of informal businesses resort to friends or relatives when they need to survive their day-to-day needs. Only 7% of reported using moneylenders, 5% microfinance institutions and 4% banks. Even when it comes to the purchase of machinery, equipment or vehicles, businesses rely on family or friends. Around half of surveyed businesses use machinery, equipment or vehicles for their operation. Of those that purchased machinery, equipment or vehicles, 34% relied on money from family or friends, 13% borrowed from moneylenders, 7% from banks and 7% from other financial institutions. Note that formal micro-enterprises also 27. All informal enterprises that had loans at the time of the survey were asked whether they required a collateral to finance their loan, irrespective of the source of loan. While 92% of micro-enterprises were required to have a loan – compared to the 45% of the informal enterprises – it is important to note that the question on loan addressed to micro- enterprises only included those that had loans from financial institutions. 27 seem to resort to friends or relatives when they need for their businesses, where 43% report doing so – much higher than informal businesses. This further emphasizes the limited role of formal financial institutions in promoting business activity in Iraq. Only 7% of informal businesses use mobile money with a higher percentage among women- owned businesses. Of those few businesses that use mobile money, they often use it to pay utility bills, to receive payments from customers, pay suppliers and sometimes to save or to pay their workers. These findings are very similar to the Micro-enterprise survey, where only 5% of businesses use mobile money. Informal businesses face significant infrastructure challenges Weak infrastructure in Iraq poses challenges to the operation of informal businesses – much like formal ones. About 60% of businesses mention needing electricity to produce goods or services. However, 18% of them are not connected to the electricity grid, and consequently relying on private local generators for households or neighborhoods. Almost two-thirds of micro-enterprises report that electricity – or the lack of it – is a major or very severe obstacle to the operation of the establishment. Being connected to the grid does not spare the businesses from power outages. The vast majority of businesses (83%) that require electricity for their production or service provision experienced power outages in the month prior to the survey. Variation is apparent across cities, as high as 95% of businesses in Basrah and 79% in Baghdad. This affected both women- and men-owned businesses. Insufficient water supply is another challenge. Around a third of informal businesses use water for their production or provision of services but more than two-thirds of them experienced insufficient water supply in the month prior to the interview. In contrast, almost two-thirds of micro-enterprises use water for production and 26% of them experienced insufficient water supply in the last fiscal year prior to the interview. Across the four cities, a smaller share of informal businesses in Basrah, 44%, experienced insufficient water supply, compared to higher rates across the other 3 cities (between 76% and 83%). Last but not least, informal businesses are likely to be technologically challenged. Although 60% of businesses have workers that use cellphones or smartphones, only 17% use computers or tablets. Almost all businesses that use computers or tablets also use cellphones and smartphones. Results from the CSO-UNDP survey show only 24% of businesses use the internet for their business needs. Even if businesses do not necessarily need this technology for their day-to-day operations, a digital upgrade can undoubtedly benefit the business. Many businesses are survivalists, but there are also “held-back entrepreneurs” There has been a significant debate over the years about where informal businesses fall in the spectrum of private sector production. De Soto (1989) had argued, as was the case in many Latin American countries, that informal businesses are entrepreneurs who are held back from achieving their potential due to system issues, such as the burden of registration, taxation, governance and others. Tokman (1992), on the other hand, had argued that informal businesses focus only on survival – the survival of the activities and the income for the owners and workers’ – as opposed to growing bigger. Besides this dual view, some have also argued that informal businesses are “parasites,” who are as well off as their formal peers but evade taxes and regulations and consequently abuse the system (e.g., Levy, 2008). 28 FIGURE 12: DISTRIBUTION OF BUSINESS PERFORMANCE BY TYPE OF BUSINESS a. Log of sales b. Log of labor productivity 0.3 0.25 0.2 0.2 0.15 0.1 0.1 0.5 0 0 0 5 10 15 20 0 5 10 15 20 Log of Sales in Last Month Log of Labour Productivity in the Last Month Informal businesses Formal microenterprises Source: Iraq ISES 2021 [weighted], and Iraq Micro-enterprise Survey 2022 [weighted] Urban informal businesses in Iraq appear to have two distinct groups: survivalists who clearly do worse than their formal peers, and those who can compete with them. Recognizing that the average number of workers is quite similar between informal businesses and formal micro-enterprise, as Section 2 showed, the distribution of the value of sales for informal business has two distinct peaks – while that of formal micro-enterprises has one (Figure 12.a). The first peak is at the lower end of the distribution, where many urban informal businesses fall. This peak is below the distribution of sales for micro-enterprises, meaning they earn much less than them, and this is potentially where survivalists fall. The second peak is closer to that of the formal micro-enterprises, and there is significant overlap between the sales of informal businesses, who do not pay taxes, and those of formal businesses who do and can be under the scrutiny of the government. This second peak may have a mix of held-back entrepreneurs, who have the potential to grow to the sales of their formal peers, but also clearly those who are “parasites” and abusing the system. Some informal businesses also have similar productivity to their formal peers (Figure 12.b). While formal micro-enterprises tend to be more productive (defined as sales per worker), the higher end of the sales distribution tend to have a significant overlap between informal businesses and formal micro-enterprises, with more informal businesses have higher productivity. These are businesses that can, at least in principle, compete with their formal peers. 3. Financial and trust issues hinder registration The most common reasons for not registering the business with the authorities relate to financial reasons and limited confidence in the process. The ISES provided different reasons to respondents, asking them whether they think each of the reasons is valid for their lack of registration. The most common reason is to refrain from paying taxes (Figure 13). More than two-thirds of businesses reported this as a reason behind staying informal. This is in line with previous research by the World Bank, which found that a majority of informal businesses refrain from registration in order not to pay taxes (Farazi, 2014). Even among formal micro-enterprises, 66% report that tax rates are a major or very severe obstacle to the operation of the business. 29 Moreover, almost two-thirds of businesses reported wanting to avoid informal payments associated with formality. In fact, more than 20% of informal businesses find that they are already obliged to give gifts, informal payments, or bribes to remain in business. This practice is more common in non-household premises than household-based ones. It is also more widespread among businesses in the manufacturing sector and least widespread in businesses in the services sector. Another reason informal businesses decide not to register is to circumvent inspections and meetings with government officials. On average, 57% of interviewed informal businesses reported this as a reason behind informality (53% of formal micro-enterprises also reported tax administration as a severe obstacle to their operation). Less than half of the interviewed informal businesses were aware of the option of registration with the directorate of companies’ registration of Federal Iraq or Kurdistan region. Still, when asked about reasons behind not registering with the authorities, 44% of the businesses reported not having information about the whereabouts and process of registration as a reason for not registering their business.28 Moreover, 45% of businesses reported the cost and time of registration as a deterrent. This is especially the case in Najaf compared to the other cities. Last but not least, about two-thirds of informal businesses do not see any benefit from registering the business, and thus opt not to take that step. FIGURE 13: REASONS OF NOT REGISTERING WITH THE AUTHORITIES (SHARE OF BUSINESSES) 71% Taxes that need to be paid if registered 66% 64% (n=1936) 61% No benefit to being registered (n=1941) 47% 47% Informal payments if registered (n=1921) Inspections and meetings with government officials (n=1922) Cost and time (n=1958) Lack information about where and how to register (n=1951) Source: Iraq ISES 2021 [weighted] Businesses were also asked what benefits registration could give them. Among those that find some benefits, 52% said it would reduce the need to resort to the payment of bribes (Figure 14). Another benefit to registration, selected by 39% of informal businesses, is better access to potential customers. In general, access to financing or loans is considered a benefit of registration by 35% of the informal businesses on average but this percentage changes greatly among the cities. In Najaf, it seems businesses are more positive regarding the possible benefits of registration, with 73% of informal businesses considering that registered businesses have an advantage when it comes to access to financing and loans. Lastly, less than a third of interviewed businesses consider access to raw material, infrastructure and government services a benefit of registering the business and this also varied among the cities (from 22% in Baghdad to 66% in Najaf). 28. Considering only the pool of informal businesses aware of the option of registration with the directorate of companies’ registration of Federal Iraq or Kurdistan region, a similar percentage, 44%, reported not having information about the whereabouts and process of registration as a reason for not registering their business. 30 FIGURE 14: PERCEIVED BENEFITS TO REGISTRATION BY CITY (SHARE OF BUSINESSES) 73% 68% 68% 67% 66% 65% 52% 53% 52% 49% 46% Better access to 42% 44% financing or loans 38% 39% 35% 35% Access to raw material, 30% 30% infrastructure, and Government services 22% Less bribes to pay Better access to potential customers Baghdad Basrah Sulaymaniyah Najaf Total Source: Iraq ISES 2021 [weighted] Note: The difference between cities is statistically significant 4. Women owners and their businesses are different in many ways  There are several statistically significant differences between women- and men-owned businesses. Women owners tend to be less educated and single owners. Among women owners, a higher percentage have no schooling at all compared to their men peers, and fewer have completed their tertiary education. Moreover, only 3% of women-owned businesses had more than an owner – with co-owners also being women. Men-owned businesses rarely had women co-owners. In fact, less than 1% of men-owned businesses with more than one owner partnered with women. Women-owned informal businesses have fewer workers. The average number of workers in women-owned businesses in the month prior to the survey was around 2 workers (besides the owner), compared to a slightly higher average of 2.42 for men-owned businesses (Figure 15). This result is similar to global findings. In many countries in Latin America, women-owned businesses tend to be smaller in terms of employment (Bruhn, 2009). Moreover, women-owned businesses in Iraq were more likely to hire other women workers – on average one per business – whereas there was practically a negligible share of women workers among men-owned businesses. At the same time, they were also more likely to have an unpaid worker. 31 FIGURE 15: NUMBER OF WORKERS (IN THE MONTH PRIOR TO THE INTERVIEW) BY THE GENDER OF THE MAIN OWNER 2.4 2.0 2.1 1.6 1.2 1.1 0.9 0.6 Women Men 0.3 0.2 # of workers # of paid workers # of unpaid workers # of family workers # of Women workers (n=1993) (n=1870) (n=1451) (n=1841) (n=1639) Source: Iraq ISES 2021 [weighted] Note: The difference according to the gender of the main owner is statistically significant When starting their businesses, women-owners were more likely to use funds from friends and family, and remittances or money lenders. Men, on the other hand, were more likely to use their own funds (Figure 16). A survey from Mauritius on women in the informal sector finds that women rely heavily on their own savings and on informal sources of financing such as borrowing from relatives and friends (Kasseeah and Tandrayan-Ragoobur, 2015). This is a logical finding given the fact that many women in Iraq do not work and were not likely to accumulate savings to be able to fund their businesses. FIGURE 16: SOURCE OF FUNDING TO START BUSINESS BY GENDER OF THE OWNER (SHARE OF BUSINESSES) 84% 65% 23% 13% Women (n=159) 9% 2% Men (n=1707) 0.4% 1% 1% 1% 1% Own Funds Friends or Remittances Moneylenders Other Sources Banks or Relatives Microfinance Institutions Source: Iraq ISES 2021 [weighted] Note: The difference according to the gender of the main owner is statistically significant. Most of women-owned businesses did not have loans at the time of the survey (75% of them) and there were significant differences regarding the main reason behind not applying for a loan. Among the women owners that did not apply, a slightly higher share attributed it to not needing a loan but 25% of them did not think they would be approved because they were not 32 registered. Evidence from around the world shows that women may be reluctant to apply for a loan also because they expect to be rejected (Carter and Shaw, 2006; Marlow, 1997). Findings from South Africa also showed that women entrepreneurs in general were discouraged because of the need for a collateral that they do not necessarily have, or because of the lack of business registration or even little education altogether (Garwe and Fatoki, 2012). In starting their own businesses, women and men owners alike mostly mentioned the convenience of location and/or hours of operation, and the opportunity to start and develop something profitable. However, women are less likely to see their businesses as a last resort for income generation, and instead more as complementary to their household income (Figure 17). Moreover, while 83% of men-owners were the primary earner in the household, only 45% of women-owners reported being so, highlighting the fact that they may be secondary breadwinners. FIGURE 17: REASONS FOR STARTING OWN BUSINESS BY GENDER (SHARE OF BUSINESSES) 91% 93% 91% 94% 77% 65% 44% 32% Women (n=147) Men (n=1511) Opportunity to start and Convenience of Unable to find another Have secondary develop a profitable business location or hours source of income source of income Source: Iraq ISES 2021 [weighted] Note: The difference according to the gender of the main owner is statistically significant. Women-owned businesses are more evenly distributed between the trade, manufacturing, and service sectors (Figure 18). While a quarter of women-owned business operate in the trade sector, the rest are almost equally distributed between the manufacturing and services sectors. Women-led businesses in the manufacturing sector were mostly focused on manufacturing food products, clothes and shoes, and household items. The majority of women businesses operating in the services sector were hairdressers or barbers. These are the typically traditional sectors that women entrepreneurs in other countries are also found in, such as those found in Africa (Bardasi, Sabarwal and Terrell, 2011; Aterido, Hallward‐Driemeier and Pagés, 2011), Indonesia (Singh, Reynolds and Muhammad, 2001) and other countries around the world (Carranza et al, 2018). In the trade sector, women mostly sold clothes or household items, but also computers, phones and related items, or food products for immediate consumption. On the other hand, more than half of the businesses mainly owned by men were in the retail sector, follow by 36% in the services sector, and only 11% in the manufacturing sector. Men-owned businesses in retail mostly work in reselling finished food products, in services such as construction and reparation of vehicles and motorcycles, and in the manufacturing of food (including bakeries). More than half of women-owned businesses, 57%, operated from within the household. When asked about the reason for choosing the household as the location of the business, almost all women report that it is easier to manage family responsibilities as well as have more safety and security. This is well in line with global evidence, (Bosma and Harding, 2006, Carranza et al, 2018). This is also especially important for Iraq as few children are enrolled in childcare services. In 2018, where government data is available, only 4% of children below the age of 6 years old 33 were enrolled in a nursery or kindergarten (Moosa et al, 2022). Moreover, 17% of women owners reported the importance of freedom from harassment (compared to 9% among men), and 17% reported the importance of safety (compared to 6% among men). FIGURE 18: SECTORAL DISTRIBUTION OF THE BUSINESSES, BY GENDER OF THE MAIN OWNER 55% 39% 37% 35% 25% Women (n=160) Men (n=1,724) 10% Manufacturing Retail Services Source: ISES 2021 [weighted] Note: The difference according to the gender of the main owner is statistically significant. In general, women-owned businesses generated less sales than men-owned ones. This is similar to the findings from the Micro-enterprise survey and global experience. Evidence from Latin America and Africa shows that sales of women-owned businesses were lower than those of men (Bardasi et al 2011, Bruhn, 2009). The average sales in the previous month to the survey of a woman-owned business was 1.2 million Iraqi dinars (equivalent to USD 822), while that of men-owned businesses was around 1.6 million (around USD 1,095) (Figure 19). However, women businesses appear to be less volatile. The difference between the busiest and the slowest month for a woman-owned business was equivalent to about 75% of sales in the month previous to the survey, while it was over 100% for men-owned businesses. However, a higher percentage of women-owned businesses report profits. About 78% of women- owned businesses reported a profit in the month prior to the survey, compared to 63% among men. The average net profit was also higher for women-owned businesses. Women exhibited higher flexibility in adapting their business to the changes imposed by the pandemic. While only 23% of businesses mainly owned by men changed their business location in response to COVID-19, 35% of those owned by women did so. Additionally, 35% of women- owned businesses changed the products they sold or services they rendered and 60% adapted no-contact sales methods compared to 21% and 37% respectively, of men-owned businesses, respectively (Figure 20). The use of cellphone devices by the informal business is more likely if the main owner was a woman. While 72% of women-owned businesses use cellphones or smartphones only 57% of men-led businesses do so. Moreover, women-owned businesses are more likely to have at least one computer-literate compared to men. 34 FIGURE 19: SALES BY GENDER 2.5 2.0 Millions of Iraqi Dinar 1.7 1.6 1.2 1.2 1.1 0.8 Women Men Last Month Regular Month Slowest Month Busiest Month (n=1558) (n=1465) (n=1445) (n=1383) Source: Iraq Informal Sector Enterprise Survey (ISES), 2021 [weighted] Note: The difference according to the gender of the main owner is statistically significant. Women owners are more likely to keep written business records when compared to their men counterparts, but they are less likely to separate the business and household finances, and purchase inputs or supplies under contracts or agreement. Women and men owners use similar strategies to conduct their own market research to direct their production, sales and service provision. More of the women-owned businesses opted for special offers to attract customers but also resorted to consultations with suppliers and offering special offers. Only around one fourth of the women-owners, visited their competitors. FIGURE 20: RESPONSE TO THE COVID-19 OUTBREAK BY GENDER OF MAIN OWNER (SHARE OF BUSINESSES) 60% 37% 35% 35% 23% 21% Women Men Adapted no-contact Changed business Changed products sold or sales method location services rendered (n=1809) (n=1884) (n=1809) Source: Iraq ISES 2021 [weighted] Note:The difference according to the gender of the main owner is statistically significant 35 36 4. POLICY OPTIONS TO IMPROVE THE INFORMAL SECTOR: OWNERS, WORKERS AND BUSINESSES Improving the state of business activities and the welfare of the people that work in the informal sector requires a mix of government tools that protect workers, promote their livelihoods and enforce the laws and regulations on those who can afford it. The findings highlight how important informal business activities are in generating income for the owner, his/her family and some workers outside of the family. These businesses were often started as a last resort for many owners, especially during the COVID-19 pandemic. Moreover, while many of these businesses generate profits, these profits are not large and, as the findings show, they are subject to much fluctuation between the busiest and slowest months. Still, there is some heterogeneity in sales and labor productivity that puts some informal businesses at the lower end of the spectrum, while some can compete with their formal peers and earn higher income. Where the state intervenes to protect, promote, or enforce depends on the vulnerability of the informal business and the people that derive their consumption and welfare from it (Figure 21). Workers who are at the lower end of the income spectrum, and businesses who do not necessarily generate significant revenues (“survivalists”), would need protection and promotion. The higher the income is, the more useful enforcement becomes. Workers and businesses in the middle of the income distribution (“held-back entrepreneurs”) may benefit from the promotion of their skills and productivity. While those who are the higher end of the income distribution – i.e., businesses that already compete well with their formal peers (“parasites”) can see more enforcement of the registration and taxation laws. 37 FIGURE 21: TYPES OF INTERVENTIONS IN THE INFORMAL SECTOR ALONG THE INCOME SPECTRUM Spectrum of Lowest Highest income for workers income income Informal Survivalist "Parasite" Held-back entrepreneurs business types businesses businesses PROTECT POLICY OBJECTIVES PROMOTE FOR WORKERS & BUSINESSES ENFORCE 1. Protect informal owners and workers Protecting informal workers and owners means ensuring their survival for the welfare of the families that depend on their income. Protection in this sense may include the typical tools of social assistance, but also innovative social insurance options, in addition to the laws and regulations that protect workers and businesses and ensure a path to judicial justice. The role of government is to provide the type of social programs that ensure protection, but also promote private sector-led solutions through rules and regulations. Make social assistance inclusive and responsive to shocks Social assistance, be it cash transfers or in-kind support, should recognize the volatility of informal income for owners, workers, and their families. In the ISES, the revenue from the slowest month is about 45% less than a regular month, and the revenue from the busiest month is about 56% higher than a regular month. This fluctuation can severely impact the consumption of a household, especially when they rely on the informal business for their welfare, and when there is no consumption smoothing mechanism available for the family. This highlights the importance of ensuring that people in the informal sector are not excluded from social assistance, such as Iraq’s Cash Transfer Program (CTP), and that income volatility should be incorporated in models that affect the selection of the poorest. Moreover, as is the case with many countries where informality is prevalent, having the community help the government and the CTP know who the poorest are can be useful (Grosh et al, 2022). Social assistance must also reach informal owners and their workers in case of shocks. The spread of the COVID-19 pandemic heightened the weaknesses of many social assistance programs around the world in terms of identification, outreach, and coverage. Informal workers and informal businesses bore the brunt of the mobility restrictions and economic downturn, given the fact that they were more likely to operate in sectors that were more affected by the pandemic (e.g., trade and services) and that they were often ineligible for any government program targeting businesses because they were unregistered. Governments around the world expanded emergency cash support to reach informal workers and especially the informally self- employed (Box 2). Due to fiscal constraints and a lack of contingency financing, Iraq could not offer much support to informal workers. In fact, Iraq’s CTP, despite having a strong foundation, is not adaptive by design. 38 Box 2 – Social assistance examples on expanding coverage to the informal sector during COVID-19 Brazil scaled up its reach to informal sector workers during the COVID-19 crisis by providing phased cash assistance for about a year from April 2020. Individuals that did not have a formal source of income were allowed to apply for a monthly benefit of about R$600 (or USD 114) for up to two adults in the households for five months. From the sixth month, the benefit dropped to R$300 (or USD 57) for an additional 5 months. While the emergency program officially ended in October 2021, a large portion of the 68 million beneficiaries continued to receive some support through the long-standing social assistance program “Auxilio Brasil” (also called Bolsa Familia). Morocco responded to the COVID-19 shock with a broad campaign to reach and support informal workers. A couple of months into the pandemic, the government created a specific budget line to distribute emergency cash transfers, that delivered DH 800 (about USD 82) as a one-time transfer for families with one or two members, and DH 1,000 (about USD 103) for families with three to four members, and DH 1,200 (USD 124) for families of five or more. They created and advertised a specific website for people to apply and distributed the transfers both electronically and in-hand. For people living in further away areas, vans were mobilized to register people and deliver the transfers. Source: Grosh et al (2022) Diversify social insurance schemes to reach informal workers Protecting informal workers can be bolstered by encouraging savings through innovative social insurance schemes. Voluntary saving schemes (VSS) can be a useful tool for workers that have a lower capacity to save. These schemes essentially allow a worker, often informal and unregistered with a mandatory pension scheme, to contribute periodically into an individual savings account. The account would be managed, as in many countries around the world, by the private sector social security fund - which itself can be administered by either a public or a private entity (Ridao-Cano et al, 2023). Some of their key features include a low minimum period of contributions by the worker. This makes them manageable and may encourage owners and workers to commit over a longer period. Some schemes allow for the withdrawal of savings after a defined period of time. In some examples around the world, governments also match, either partially or fully, the savings to further incentivize and protect the workers (Box 3). In general, VSS can help workers protect themselves against short-term shocks (employment loss, health risks, etc.) and ultimately encourage longer-term savings for old age. The GoI, however, does not offer anything beyond the regular private sector insurance that has poor coverage. By the end of 2020, there were only 252,465 workers in the private sector that were paying contributions and covered by the Social Security Fund, out of more than 6.2 million workers in the private sector.29 While reforms for the main scheme are essential, the fund can also diversify its offerings and develop a relevant VSS for informal workers, learning from global experience. 29. The Iraq Labour Force Survey of 2021 estimated a total of 10,304,000 Iraqis employed, out of which around 61% are in the private sector (ILO, 2022). 39 Box 3 – Examples of voluntary saving schemes from around the world Mexico has a voluntary retirement saving scheme that is completely unlinked to mandatory contributions. While some countries with VSS sometimes use it as a top up to mandatory schemes (such as Chile), Mexico’s program allows workers to save in an individual account a manageable small amount with contributions over time. Contributors can withdraw their savings after 2-6 months, if they chose the short-term savings option, 5 years if they chose the medium-term option, or at retirement if they chose the long-term option. The fund administrator would invest these deposits based on an agreed upon investment strategy and contributors would have to pay 20% tax on capital gains if and when they withdraw the money. Workers can also make partial withdraws to cover certain expenses, such as marriage, or if they fall into unemployment. This last option is a novelty because it allows VSS to also act as an unemployment insurance scheme. Colombia has been innovating in the area of old age social insurance for informal workers over the past couple of decades. Through the Pension Fund Administrators (AFP), it now offers a few types of voluntary saving scheme for low-income (informal). The first type of voluntary schemes encourages the accumulations of savings by allowing workers to contribute whatever amount periodically to an individual account. They can withdraw the savings partially or fully any time. However, if they contribute to the account and commit for at least five years, the worker would be eligible for some tax benefits provided he/she use the withdrawal to purchase a house, or if this withdrawal is done when the worker is eligible for retirement. The second type of voluntary saving scheme, called Beneficios Económicos Periódicos (BEPS) program, targets income earners that make less than the minimum wage (including the self- employed) and those with irregular and volatile, such as casual or seasonal workers. The scheme offers annuities once the worker reaches retirement, without having a minimum of contribution weeks before being eligible for these annuities. Whatever the amount saved, the government matches it with a value equivalent to 20% upon reaching the retirement age. However, unlike other schemes, savings cannot be withdrawn until reaching retirement age. Source: Bosch et al (2018) 2. Promote informal workers and businesses Beyond protecting the welfare of individuals that work in the informal sector and operate its economic activities, it is equally important to elevate the skills of workers and the productivity of businesses. Years of conflict has left Iraq with limited education outcomes. In 2020, the share of 25-year-olds and above that have completed intermediate level education (up to the 9th grade) was only 49%, and those that have completed upper secondary (12th grade) was a meager 32% (UNICEF, 2020).30 A child born today is expected to have only 7 years of education by the time he/she reaches the age of 18 years old, according to the World Bank Human Capital Index. The limited education of business owners in the ISES is unsurprising given this reality. It is imperative, therefore, to offer informal workers who currently operate in the sector the opportunity to improve their skills. 30. Among women, the share that have completed intermediate education is 47%, and upper secondary only 35%. 40 Promote inclusive and higher quality training Beyond the mainstream education, the GoI can make some strides towards improving the Technical and Vocational Education and Training (TVET) in the country. The majority of TVET providers are public, typically under MOLSA, the Ministry of Education (MOE) or the Ministry of Higher Education and Scientific Research (MOHESR). To get into them, student must pass an exam when in intermediate level education. However, as the data shows, most people, including ISES owners do not go beyond this level of education. There is room in particular to improve the provision of quality private TVET providers and make them accessible to owners and workers in the informal sector. For instance, while the morning classes in public TVET institutions are free, if the student is accepted, evening classes that tend to be more convenient for informal workers are mostly paid by the student him/herself. Blended financing for these classes is not available (IFC, 2022). On the other hand, short-term MOLSA TVET courses have relatively few students compared to the millions of informal workers, the unemployed and the out of the labor force. In 2018, the Ministry trained no more than 11,300 Iraqis – most of them have high school degrees. Facilitating entry into TVET institutions and offering more options in terms of hours and financing could help upskill informal workers. Entrepreneurship and business development training should be expanded to informal workers to help elevate their businesses. These include management skills that go beyond the first few months of operation, as well as financial heuristics and financial literacy, using practical and innovative tools. For example, as the ISES found that few businesses keep written records or create a budget, courses can incorporate these practical techniques, and even promote the use of phone applications that facilitate this record keeping. Simple financial heuristics offered to micro-entrepreneurs in the Dominican Republic, for instance, has been shown to increase businesses’ financial reporting and its quality – especially for lower skilled entrepreneurs (Drexler et al, 2014). In Ecuador, simple courses also worked much better than classic accounting training programs and were found to increase profits over time (Arráiz et al, 2019). Promoting the use of digital tools through training is also essential, especially that the ISES shows that digital literacy is not high among workers. The use of digital tools has been shown to increase productivity and innovation (Gaglio et al, 2022, Boroweicki et al, 2021, Wilbur and Srinivasan, 2023). Combining this learning with soft (life) skills, coaching and mentoring can help owners and businesses thrive. Soft skills, which are sometimes part of entrepreneurship training, can include promoting the sense of self-worth and self-confidence, decision-making, creative thinking and learning to be proactive. This is especially important for women self-employed in Iraq (Moosa et al, 2022). These skills have been shown to have positive impacts on business practices in general, especially in anticipating problems and dealing with shocks (Glaub et al, 2014, Campus et al, 2017). Hard and soft skills training targeting women entrepreneurs were also found to positively impact their micro-businesses (Box 4), especially that women-owned businesses in Iraq tend to have less sales than men-owned ones. The GoI can leverage the role of non-government organizations (NGOs). In 2020, around 10,000 people benefited from business training provided by NGOs in Iraq. These courses were the most prevalent among NGO training courses. They include entrepreneurship information in general, but also financial literacy (Moosa et al, 2022). One way to expand informal workers access to them is to have a framework through which NGOs can provide this training with the support of the GoI through a strong collaboration. 41 Box 4 – Mujeres Moviendo Mexico Training: Hard and soft skills for women entrepreneurs in Mexico In 2014, a government-led program in Mexico was launched to provide women entrepreneurs with training that mixes different types of skills. The curriculum included 42 hours of “hard” skills, namely business literacy and business management skills such as pricing, marketing, dealing with suppliers, accounting, legal obligations and financial planning, and 18 hours of “soft” skills that include being proactive, future orientation, how to be persistent and resilient to shocks, and facing obstacles. Women entrepreneurs with existing businesses, regardless whether formal or informal, were invited to express interest in participating in the program. The rigorous impact evaluation shows that the training significantly improved the learning of women entrepreneurs across the various subjects (increased their knowledge), and significantly improved their business and managerial practices compared to non-participants. The training was shown to help professionalize the businesses, increasing their weekly sales and profits, hiring more paid workers and registering with the authorities and obtain a tax ID. Women entrepreneurs were also able to reduce their working time. Source: World Bank (2021) Owners must have better access to finance Informal sector owners have few financial options to kick-start or sustain their business. The ISES shows that owners often use their own savings, or borrowings from families and friends to start the business and to sustain it over time. While MOLSA runs a microfinancing institution, there are only a few thousand recipients a year and collateral, often in the form of a public sector employee guarantor, is difficult for poor and vulnerable groups. Outside of the Ministry, Iraq has few microfinancing institutions and they have dwindled over time (Moosa et al, 2022). The government must work on financial sector reforms and allow a thriving microfinancing sector. The GoI must reform the financing environment for small-scale businesses, including simplifying requirements for loans, promoting alternative financing instruments such as soft loans and credit guarantee schemes, among others (CSO-UNDP, 2021). Moreover, innovations in mobile money, which is yet to be appropriately regulated and commonly used, and e-wallets can undoubtedly facilitate business creation and growth, as the ISES shows that only 7% of surveyed businesses use mobile money at all. At the same time, the GoI can work with NGOs to play a bigger role in microfinancing. In 2019, data from NGOs in the country showed that they provided more than 16,000 individuals with business grants – be they in cash or in-kind (such as assets). Most of these grants were at least $1000 in value (Moosa et al, 2022), emphasizing the important role that NGOs play in the sustainable livelihoods of many Iraqis. The Government of Iraq should leverage the presence of these NGOs to further expand support to Iraqis, and work with them to draw key learning lessons. Productive inclusion programming can help owners and businesses most in-need For the poor and vulnerable, including these informal businesses, productive inclusion programming can especially useful. Productive inclusion, also known as the “graduation” 42 approach, was pioneered by South Asian countries since the late 1990s, and have now expanded to hundreds of programs around the world – the largest of which are government-led. Recognize that vulnerable groups face multiple constraints along skills, financing, access to markets and others. Consequently, productive inclusion programs often provide a spectrum of practical and short-term skills training (technical skills, soft skills and business development), along with a one-time grant and continuous coaching and mentoring to help kick-start and sustain a self- employment opportunity (Box 5). This approach is now also tested and scaled up in Egypt. In Iraq, a new economic inclusion pilot will be launched in 2023, but these approaches can be further scaled up to benefit more Iraqis – and they are often not tied to registration. They can benefit existing informal businesses to help them improve and expand. Box 5 – Examples of productive inclusion: A bundled approach India’s government-funded Self-Employment Program (SEP) began in 2014 and continues today. It has provided over 116,700 beneficiaries in urban areas with three types of services: (1) Skills training, which included both sector-specific technical skills and business development skills; (2) Financial assistance by subsidizing interest payments on bank loans and credit cards for working capital; (3) Technology and marketing support to advance the use of modern tools to connect with supplier and customers. Its beneficiaries were selected from national survey data from among the poor, in consultation with urban local bodies. Around 30% are women and 15% are various minorities. Encouraged by positive impacts that showed an increase in consumption, savings, and higher financial inclusion especially for among the less poor, the program has scaled to 24 different states, and has increased the role of local authorities in implementation, especially with the creation of Self-Help groups that allow beneficiaries to communicate their obstacles and resolve them. Uganda’s Youth Opportunities Program (YOP) was implemented between 2008 and 2011 in partnership with the World Bank. It targeted youth, often poor and unemployed, in the Northern areas that have been affected by conflict. Youth were encouraged to submit group project applications. The selected groups, a total of 535, were provided with vocational and business training relevant for their start-up idea, along with cash to use for the business – which averaged around $7,500 per group. The results showed an increase the value of assets for the business, increase in earnings by 38% compared to non-participants, and increase in the hours worked. Many also formalized their businesses and hired additional workers. Source: Government of India SEP Guidelines (2013) and Blattman et al (2014) Broader private sector and governance reforms must be implemented While reforms on easing business registration and simplifying taxation have yielded mixed results, businesses in Iraq continue to suffer from administrative burden. Evidence from 92 countries around the world on the impact of small reforms in business registration, such as reducing costs, or simplifying processes, do not appear to have a significant impact on the creation of new businesses (Kapper and Love, 2010). Moreover, existing evidence from around the world on easing taxation shows that most of these reforms do not encourage informal businesses to formalize (Bruhn and McKenzie, 2013). However, around 40% of formal micro- enterprises in Iraq reported business licensing and permits as an obstacle to the establishment’s operation. Moreover, 53% of them reported tax administration as a major or very sever obstacle to their operation. 43 In some cases, creative solutions may be worth testing in Iraq. In 2015, Morocco adopted a self- employment law (“auto-entrepreneur”) that allowed the self-employed a special legal status, with the objective of encouraging informal workers to register their activities. The law allows these workers (and effectively their business activities) to obtain the “auto-entrepreneur” status through simple online forms – that yield a card valid for three years. The law requires record keeping through simple invoice templates, but have low taxes on sales (equivalent to 1% for the services sector and 0.5% for manufacturing, trade and artisanal sectors). These self-employed are also exempt from tax audits by the authorities. To be eligible, there is a cap on the value of sales per year. While there is not yet research on the impact of this law, neighboring country Tunisia has also introduced a similar one in 2020. They are modeled largely from the French auto-entrepreneur status. Iraq could pilot more specific business statuses for owners that ease their registration and the administrative burden. Increasing government transparency and accountability would encourage more trust in the system. As the ISES highlights, many informal businesses view bribes, taxation and being under the surveillance of government authorities as a deterrent to their registration. Even among formal micro-enterprises, two-thirds report corruption as a major or very severe obstacle affecting their operation. This erodes trust in the prosperity of the formal private sector and the opportunities it can provide to businesses and workers. The GoI must take concrete steps to punish and exclude civil servants who engage in bribes and favoritism and make all administrative processes related to the private sector streamlined and transparent, allowing for grievance redress mechanisms that the public can trust. 3. Enforce laws and regulations on the better-off As the GoI works on reforms to protect and promote informal workers and businesses, enforcement is crucial. Enforcement can be along the lines of registration, tax payments on business income and social security contributions for workers. For Iraq, this could mean expanding the role and capacity of the authorities to enforce the laws and regulations and fine those who do not comply. For this to be effective, however, the GoI must recognize several considerations. Firstly, enforcement should target the better off. The ISES shows that there is a significant share of business who earn meager income and are “survivalists”. However, there appears also be businesses who earn close to the sales of their formal peers and can compete with them without having to pay taxes. Enforcement, therefore, should target those businesses, who tend to be at the upper end of the sales distribution. Labor inspections can be useful here to ensure enforcement, but it has been shown to be effective when minimum wage is not high (Almeida and Carneiro, 2011). At the same time, evidence also shows that heavy-handedness of regulations and enforcement can reduce productivity and performance of micro-, small- and medium enterprises (Kitching et al, 2015). The GoI must hit a balance. Secondly, enforcement should come with significant reforms in the overall business environment that makes it conducive for people and businesses to thrive and to have confidence in the government. As informal workers and businesses register and abide by laws and regulations, it becomes important that the GoI improves the business environment. This mean that tackling the issue of informality for Iraq is inevitably intertwined with macroeconomic stability, the competitiveness of the private sector, and the transparency of the government overall. People need to have a trust in the system to abide by its laws and for this the GoI must show concrete reforms that have an impact on people’s daily lives. 44 Thirdly, enforcement should be gradual and with clear communication and engagement. Evidence from around the world shows that engagement with the private sector, formal and informal businesses and workers, can aid the design, implementation and enforcement of laws and regulations. While some countries have strong engagements with the private sector, the evidence shows that most other countries do not do so sufficiently (Arlet et al, 2022). The sequencing of reforms, therefore, is important. Before enforcement, the government must consider clarifying and easing the various rules, ensuring that they promote businesses and workers and that the public institutions are seen as transparent. Moreover, enforcement of existing laws should come with clear communication campaigns about the rights and obligations of businesses and workers and the ways to rectify uncompliant statuses. These campaigns can be in the form of online links, advertisements and information sessions with collective bodies such as the Chamber of Commerce, Industry unions and others. This also means that engagement with collective bodies is crucial. Bodies such as the Chamber of Commerce can play a key role in better informing businesses and workers about their rights and obligations and the repercussions of enforcement. The flow of information between these bodies and the government should be continuous, seeing them as partners in the process. Enforcement ultimately depends on the relationship between the government and the people. It is part of the social contract and is the reciprocal of the rights and facilitations that the government must offer to the people working in the informal sector who derive their welfare from it. 45 5. CONCLUDING REMARKS The ISES offers a unique view that can add value and complement the knowledge about informality in Iraq. While the ISES offers a detailed view of urban informal business units, it can be completed by the existing LFS, enterprise surveys and the upcoming Iraq Household Socio- Economic Survey (IHSES) of 2023-2024 to draw a full picture of the dimensions of informality – from both the employment and the business perspectives, both urban and rural. This, along with understanding the formal sector through the Micro-enterprise survey and the WBES, can greatly help the government and international organizations form a new jobs agenda for Iraq. 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Sulaymaniyah 52 APPENDIX 2: CALCULATING SAMPLE WEIGHTS The aim of calculating sample weights is to make the data representative of the entire country acknowledging that the completed interviews might oversample some type of informal businesses.31 However, given the informal nature of the sampled businesses and sampling method, the survey is representative only of informal businesses in the respective cities and not necessarily of the entire province or country. In survey designs following standard random sampling (SRS), the selection probability of all units is known before the actual data collection. Hence, weights can be derived as the inverse of selection probability. A similar process is followed for Adaptive Cluster Sampling (ACS), with the probability of selection (within stratum) adjusted to account for the adaptive selection process. Let denote the total number of starting blocks (primary sampling units - PSUs) selected by stratum h. Within stratum, starting PSUs are selected using SRS without replacement. Whenever the number of informal businesses in a given starting block is above a pre-defined threshold, all surrounding blocks are enumerated as long as they are not inaccessible or market centers (market centers are selected by SRS and are not eligible for expansion). The pre-defined threshold varies for the 4 cities of Iraq; it is 16 for Basrah, 13 for Baghdad and 2 for Sulaymaniyah and Najaf. The enumeration of surrounding blocks continues until no block meets the pre- defined threshold requirement. This process produces a set of networks, which are formed by a group of contiguous blocks that all meet the expansion threshold. Thompson (1990, 1991) defines a network as any group of blocks where the enumeration of one block would lead to the enumeration of all blocks in the network. This definition helps show how, within a network, the probability of selection can be estimated. Specifically, let denote the total number of blocks in a network .32 In the case that a starting block does not meet the threshold, it is considered as a network with a size of Let index the stratum. Then, the inclusion probability of a block in network is defined as and given by33: The inverse of provides the first-stage weight for each block . 31. Iraq 2021, Informal Sector Enterprise Survey Implementation Report 32. Note that within a network, all blocks are treated as the same, and so some ACS literature indexes by network rather than block. 33. Note that with networks of size , all blocks will be within one stratum and the probability of selection simplifies to the same probability of the initial SRS selection (within the stratum). 53 In providing population estimates using ACS (with stratification), Thompson (1990, 1991) has shown that these weights produce unbiased estimators; however, in many cases there will be informal businesses that are enumerated in blocks that are not part of the starting selection and do not meet the expansion threshold. These blocks are called edge units, and the unbiased estimators call for omitting these blocks. The reason for this is that for edge units, there are neighboring, surrounding blocks that have not been enumerated, and so the actual probability of selection for edge units cannot be known. Due to the expense of fieldwork and the fact that there are often interviews obtained in edge units, the choice has been made to calculate weights for edge units as well. These weights are estimated according to the formula for above, however, for all blocks that have not been enumerated, the assumption is made that there is an identically sized network in the blocks that have not been enumerated. Weights are produced by multiplying the first-stage (block-level) weight by an adjustment factor, which is given by the inverse of the ratio of the number of interviews completed to the total number of informal businesses found in the block. Since within blocks, there typically are both refusals to the enumeration exercise and informal businesses that cannot be reached (and are recorded by observation), assumptions may be needed to calculate this adjustment factor. Specifically, three versions of the second-stage weights are provided based on different assumptions that are used in estimating the total number of informal businesses found in a block, with varying ways of handling refusals and unavailable businesses, as follows: Assumption Variable Name Condition of Inclusion Strict wstrict All confirmed informal businesses only All confirmed informal businesses and refusals that don’t have Median wmedian signage/ permits on display Weak wweak All confirmed informal businesses and all refusals The strict assumption calculates the total number of informal businesses found in a block by including only businesses that are confirmed to be informal. The median assumption assumes that businesses that refused to participate in the survey and do not have signage and permits on display are part of the informal sector of the economy; these businesses are added to those confirmed to be informal. The weak assumption treats all refusals, regardless of signage and permits, as part of the informal economy. Therefore, by definition: In this report, as in all Enterprise Survey reports, is used. 54