Entrepreneurship in Iraq: Understanding the Constraints

Sameeksha Desai

Across countries, entrepreneurship is shown to support wealth and income generation, job creation and innovations in product and process. The precise role of entrepreneurship in any specific country depends on the institutional context. Much of our understanding of institutions and entrepreneurship is based either on empirical studies from countries at relative peace, or on theoretical models assuming peaceful conditions. We have little understanding of how an institutional context characterized by armed conflict affects entrepreneurship, and how entrepreneurship can best be promoted in post-conflict situations. This article, based on a paper presented at the UNU-WIDER workshop on Entrepreneurship and Conflict, held in Londonderry, Northern Ireland in March 2009, addresses this lacuna by discussing the case of entrepreneurship in Iraq. It provides an overview of entrepreneurship in Iraq, focusing primarily on the importance of accurately understanding what is going on, and identifying four key sets of constraints.

Iraq: Emerging from Conflict

For decades, the power of government overshadowed everything else in Iraq through the entrenchment of welfare and state capture. As a result pervasive corruption, tribal or religious power exclusion and other such types of state abuse levied a heavy tax on business activities. The effects were two-fold: Other occupations (government work) were more attractive than business ownership, thereby slowing the formation of new businesses. State capture of visible business revenues and expansion effectively stripped away the incentive for firm growth among existing entrepreneurs. One example is the willingness to formalize business activities: Whereas business owners in many developing countries tend to seek formalization to meet firm growth and export market aspirations, small business owners in Iraq risk state capture by doing so. The low-proportion of businesses actually serving foreign markets (two per cent in a six city survey) is likely reflective of penalties to scaling and lack of competitiveness to some extent.

For decades, networks and distribution systems were captured by the state or destroyed and most activities in non-oil industries were pushed into welfare. This combination undermined basic foundations for productivity and growth, hindering growth-oriented private sector activities. However, prior sanctions also limited the ability of government to grow, pushing people into a massive informal sector comprising various levels of self-employment activities (this informal sector was estimated up to 65 per cent in 2006). This resulted in low-growth, subsistence, unevenly distributed economic activities outside of oil-related industry.

In light of this background, it is significant that more recent (generally after 2003) policies aimed at recovery and post-conflict reconstruction have specifically targeted private sector and entrepreneurial strengthening, and range from efforts to create regional or international trading partnerships to a large provincial-level growth program. By mid-2009, small business development centers (SBDCs) were established in key cities, usually in partnership with local chambers of commerce. These include Baghdad, Basra, Erbil, Karbala, Najaf, Nasiriyah and Ramadi. In addition, ambitious efforts were undertaken by Iraqi and American stakeholders to attract large-scale foreign investment, largely in manufacturing and production industries. Efforts to strengthen private sector farming were also instituted, including the creation of small markets, production facilities and supportive transportation.

The success of such programs remains unclear. It is too early to evaluate the success of SBDCs, though early feedback appears to be emerging in some cities. Much money has been spent on wooing foreign investors, and significant capital has been committed in some areas as a result – however, there still appears to be trouble operationalizing these commitments. In addition, foreign investment interests vary tremendously by region, and $2 billion in Al-Najaf province may have little effect in Maysan province. In addition, many efforts at strengthening private sector farming are undermined by inappropriate irrigation practices, subsequent damage and the majority of land associated with unclean titles.

Although recovery from conflict takes time, sometimes decades, it is already clear that entrepreneurs have and can play an important role in Iraq’s recovery. However, pressing challenges and constraints will determine the outcomes of the abovementioned programs and the efforts of entrepreneurs. As such it is important to understand the constraints facing entrepreneurship in Iraq.

Understanding Entrepreneurship in Iraq

It is not easy to understand the nature of entrepreneurship in a conflict or post-conflict country, and Iraq is a good case in point. Generation of basic information requires surveys, which face serious difficulties. These include the following.

First, the security environment is not generally conducive to data collection. It means survey responses will be biased if they come from certain areas. For example, respondents from areas deemed secure enough for surveys are also more likely to provide answers reflecting stable microcosms of institutions for business activities.

Second, some respondents cooperate with surveys because of underlying interest in business opportunities or contracting, thereby biasing results.

Third, there is also a problem of interpretation. Aggregating data from multiple locations cannot provide the most accurate picture of Iraq. Survey work and interpretation must be done at the local level because of significant differences in environments between and within provinces. This is expensive and labor-intensive, but important. Findings from surveys in two cities reflect major differences in institutional conditions ranging from personal and family security, legal protections, access and mechanisms for obtaining financing, human capital and transportation infrastructure. In addition, industry breakdown varies substantially between the two cities, as does the size, founding dates and investment decisions of respondents.

Fourth, surveys among business owners, already difficult to manage and hard to find, are reflective only of immediate problems related to business activities. This means they do not adequately reflect the effects of new policies and cannot offer immediate insight into the institutional lag between policy implementation and effects. However, surveys conducted over time can be reflective of the actual effects of new policies. A complication for interpretation, however, is that the true length of any institutional lag is unknown, and the identification of changes from specific policies is not possible.

Notwithstanding, several attempts at surveying business owners across cities have been undertaken (Center for International Private Enterprise (CIPE); Desai and LeCroy reports, 2009). In one study, more than 1,631 business owners across six cities were surveyed. A separate study was conducted in two cities using a mixed methods approach (survey and semi-structured interview) to understand local-level institutional conditions and firm behavior.

Constraints on Entrepreneurship

A number of pressure points on entrepreneurial activities can be discerned from these surveys. These pressure points or constraints will determine whether these activities will contribute to positive transformation or entrench activities with negative externalities.

First, the importance of bank financing for entrepreneurs is consistent with the majority of research in peaceful developing countries. Although strides have been made with restructuring and setting up banking activities, interest rates remain unfavorable for business owners. As of May 2009, local banks received the same 14 per cent rate for funds provided to the Central Bank and interest on loans to entrepreneurs. This had the effect of removing incentives for local banks to lend to entrepreneurs, a consistent problem reported by business owners in the same time period. Most entrepreneurs report accessing funds through personal and social networks or by recycling profits from existing business operations.

In addition, the prevalence of microfinance is consistently estimated at approximately 5 per cent of financing activities for businesses in 2009. This low figure is counterintuitive but makes more sense when the nature of microfinance operations is considered. Microfinance is cash-based and is typically intended for small or marginalized markets. At the very least, microfinance operations need three things as identified by the Microenterprises Best Practices Project: Demand (economic activity), political stability (for business operations of both lender groups and recipient populations, as well as security of cash payments and movement), and population stability (for repayment). Although demand is not problematic in Iraq, political stability and population stability vary by region. Political instability can prevent microfinance institutions from bringing cash into some communities; internally displaced people may not be viewed as reliable from a repayment perspective.

Second, access to reliable infrastructure remains a constraint. Entrepreneurs in Iraq not only face challenges obtaining financing to purchase inputs, but they also must move them. For manufacturing businesses, they may need to move them several times. Distribution networks are poor, particularly between cities. Although security conditions have improved enough to reduce the danger of moving products, the lack of effective transportation channels still creates inefficiencies. In addition, the lack of basic infrastructure can lead to significant waste and stunting of some industries. Storage units for food and perishables are hard to find, limiting the time and distance for them to be sold. In addition, the lack of reliable electricity is chronicled in almost every study of infrastructure in Iraq. Its effect on the individual entrepreneur is an increase in the marginal cost of production for each unit. For products easily imported from other countries in the region, this also reduces the ability of Iraqi entrepreneurs to compete.

A third constraint is the lack of a competitive culture, particularly in non-urban areas. The security context in Iraq may have led to policies that effectively contradict a culture of competition. For example, financing (as loan or grant) provided to businesses owned by a prominent community member can provide the short-term benefit of building support. However, it also means that among limited resources, more competitive businesses were possibly passed over in favor of a more politically-valuable business. In addition, it can support businesses that might not otherwise be competitive and at worse, alter the natural structure of business activities. Moreover, it can deepen the hold of economic entrenchment, particularly in areas already dominated by one family or social group. When this happens, access to resources remains inequitable and this does not alleviate other stressors of conflict. This is a particularly influential stressor for communities where strong social alliances also drive the majority of business activities. The effect of these policies is especially strong in Iraq because of its history with welfare.

A fourth constraint is corruption, but this should be placed in the context of the broader public/private institutional interface. Although corruption is endemic in some areas, it results from unclear and undefined regulations. For example, there are several levels of business registration in Iraq, including local, provincial and central government requirements, as well as additional environmental or health requirements by industry. This creates multiple points of public/private interface, thereby generating more opportunities for bribes. In extreme cases, bribes can reach 100 per cent of the actual cost of the business registration process. It is important to note that inadequacies in institutions make room for corruption, and the stress of corruption can be reduced by strengthening other institutions.

These constraints are important considerations for supporting future positive contributions from entrepreneurship in Iraq. The environment is promising – many of these stressors are already being addressed. Those stressors that cannot be directly addressed, such as corruption, can be targeted by focusing on their drivers. In addition, many next steps can actively lean on entrepreneurs not only as beneficiaries, but also for implementation. As has been the case in other recovering countries, entrepreneurs can deliver services more effectively, more cheaply, and more reliably than anyone else. The promise of entrepreneurship in Iraq is important, but it must be channeled with appropriate attention to generate the greatest gains.

About the author

Sameeksha Desai
Sameeksha Desai

Sameeksha Desai is a Visiting Scholar at the Kauffman Foundation and an Assistant Professor in Entrepreneurship and Innovation at the University of Missouri, Kansas City. Her research interests are in the political economy of entrepreneurship, institutions and economic development and postconflict recovery.

She is a participant in the UNU-WIDER research project on ‘Promoting Entrepreneurial Capacity’ in developing countries.

WIDER Angle newsletter, November 2009
ISSN 1238-9544