The central focus of the Kurdistan Regional Government’s (KRG’s) economic development strategy is to nurture and sustain an innovative private sector. Currently, the government employs a substantial number of people working in the Kurdistan Region—Iraq (KRI).¹ This feature of the labor force reflects the confluence of legal, institutional, and political developments in the modern history of Iraq. The KRG recognizes that a healthy and innovative private sector is essential for the long-term economic benefit of its citizens. Therefore, the goal of this monograph is to provide the KRG with a strategy to increase private-sector employment in the KRI. Given...

We sought documents on four broad topics: the KRI business climate; job creation in the private sector, privatization, and outsourcing; the efficient management of human resources (HR); and the KRI legal environment. For the business climate, we searched for publications or statements from multilateral organizations, consulting and accounting firms, U.S. government agencies, nongovernmental organizations (NGOs) and research institutes, regional entities, commercial firms, and the Arabic language press. Many of these sources did not have information specifically about the KRI but provided more general information about Iraq as a whole.

For the issues of job creation in the private sector and...

Figure 3.1 presents the distribution of jobs, by sector, held by workers in the KRI.¹ Thirty-nine percent of all jobs are nonwage jobs; individuals in these jobs are typically self-employed and receive irregular income, as opposed to a regular wage or salary, for the work they perform. The remaining jobs are wage jobs, where individuals receive cash or in-kind payments in return for labor. Approximately 35 percent of jobs are in the government; only 20 percent are wage jobs in the private sector. In contrast, the private-household sector and what is designated the “public sector” in the IHSES are a...

This monograph discusses the principles of and presents a strategy for reducing the size of the KRG civil service and rebalancing the economy away from the government sector to the private sector. One way to do this is tofoster private-sector development. Even if the KRG made no changes to the way in which it manages the civil service, rapid private-sector growth would help rebalance the economy away from the government. However, fostering private-sector development could also have a direct effect on the absolute size of the government sector by providing expanded opportunities in the private sector that could attract some...

As we discussed in the previous chapter, one method to improve private-sector employment is to identify sectors for which conditions are particularly favorable for private-sector growth and to provide a fertile environment in which new businesses can form and foreign businesses can expand into the region. Another method for achieving private-sector growth is to outsource or privatize some functions that the government currently performs. While some functions are inherently governmental, the private sector can perform others without compromising the ability of the KRG to serve its citizens. Furthermore, experience in other countries suggests that the private sector can often perform...

Expanding opportunities for private-sector growth, as discussed in the previous two chapters, does not guarantee that civil-service workers will leave government for private-sector employment or will be able to attain such employment. Private-sector employers will hire only individuals they believe will be productive employees. If civil-service workers do not have the qualifications necessary for private-sector employment, businesses may not be willing to hire them. Government employees may need significant training to better align their skills with those in demand in the private sector and might also require an incentive to invest in this training. In this chapter, we first discuss...

Despite having characteristics valued by private-sector employers, most civil-service employees have chosennotto work in the private sector. An important issue to consider, then, iswhyso many workers choose civil-service over private-sector employment. Economic theory predicts that when choosing a sector in which to work, individuals evaluate the expected rewards from working in each sector and their relative taste for the characteristics of each sector and then choose the sector with the highest expected benefit.¹ Therefore, civil-service employees will consider other employment opportunities only if the expected rewards of private-sector employment outweigh those of civil-service employment.

These rewards include wages...

Changing the civil-service compensation and personnel policies is one way to reduce the size of the civil service. Another option for altering the mix of civil-service and private-sector employment in the KRI is tooffer incentives that encourage voluntary separation. There are two primary advantages to this strategy. First, separations would be completely voluntary, minimizing the political costs associated with involuntary separations. Second, as we will discuss, these programs can be targeted to specific civil-service workers, helping to mitigate the adverse selection problem.

Despite these advantages, there are four main disadvantages. First, the actual response of civil-service workers to these...

In this monograph, we have outlined concrete steps and broader policy directions on which the KRG should embark to reform its civil service and to develop employment in the KRI’s private sector. As we have noted throughout our analysis, many of these changes might involve legal reform, and the interactions between the KRG and Iraqi legal systems are beyond the scope of our work. Nonetheless, having talked to hundreds of people in the KRI during 2010 and early 2011, we are convinced that the KRG has people with the creativity and the knowledge to navigate this legal environment.

Our analysis...