Naim Hamid Mahoud

Dhi Qar University/ College of

Administration and Economics

M . M Mahdi Alwan Rahima

Wasit University/ College of Administration and Economics

M . M . Aseel Mahmoud Lafta

Wasit University/ College of Administration and Economics




The research dealt with the study of the concept of the informal economy and its characteristics, the reasons for its growth, and its effects. It includes all the economic activities practised by individuals and the facility, which are not legally registered and are not included in the national income accounts, which leads to more misinformation and statistics and does not give a true picture of the country’s capabilities and thus leads to the misdistribution of resources, which is a manifestation of underdevelopment. The research was concerned with studying the informal economy in the Iraqi economy, its manifestations, the reasons for its growth and the effects that resulted from it because of its great role in wasting many of the country’s wealth and resources and seeking the possibility of measuring it in the country despite the limited information and its inaccuracy, and finally setting appropriate frameworks for the possibility of reducing its percentage.

الاقتصاد غير الرسمي في العراق بين النظرية والتحليل

م . م . اسيل محمود لفته

جامعة واسط / كلية الادارة والاقتصاد

م . م . مهدي علوان رحيمة

جامعة واسط / كلية الادارة والاقتصاد

نعيم حميد ماهود

جامعة ذي قار / كلية الادرة والاقتصاد


تناول البحث مفهوم الاقتصاد الغير رسمي وخصائصه ، وأسباب نموه ، وآثاره ، فهو يشمل الانشطة الاقتصادية كافة التي يمارسها الافراد والمنشأة ولم يتم تسجيلها بشكل قانوني ولا تدخل ضمن حسابات الدخل القومي مما يؤدي الى مزيد من التضليل في المعلومات والاحصاءات كما لا تعطي  صورة حقيقية لإمكانيات البلد وبالتالي تؤدي الى سوء توزيع الموارد وهو يعد مظهر من مظاهر التخلف  . كما وقد أهتم البحث بدراسة الاقتصاد الغير رسمي في الاقتصاد العراقي ومظاهره وأسباب نموه والأثار التي ترتبت عليه لما لها من دور كبير في هدر العديد من ثروات وموارد البلد والسعي لإمكانية قياسه في البلد بالرغم من محدودية المعلومات وعدم دقتها وأخيراً وضع أطرا مناسبة لإمكانية تخفيض نسبه.

Research problem :

Despite the wealth and resources that Iraq possesses, it cannot achieve good growth rates, because it is located at high levels in the informal economy, so it is scientifically honest as researchers to address this economy and try to develop the necessary frameworks to mitigate it.

Search objective:

  The research aims to shed light on the informal economy and its concepts and characteristics and to know the level of the Iraqi economy from the informal economy and the reasons for its growth and manifestations.

Research hypothesis:

The research stems from the hypothesis that the state follows a clear strategy in the optimal and efficient exploitation of the available resources and wealth and its activation within the official economy would raise the level of Iraq’s economy internationally.

Research Methodology:

 First  The concept of the informal economy, its characteristics and ways to measure it

Second  Estimating the size of the informal economy in Iraq

Third  The economic effects of the informal economy, its manifestations, and the necessary frameworks for dealing with it

the introduction :

 Economic literature indicates that the activity of the informal economy exists in different degrees and forms, varying according to the degree of growth and progress of the country. The extent of corruption in it and the intertwining of its episodes at a time when the country is going through a series of multiple changes called for the need to talk about the informal economy, in addition to the unregulated trade openness to the outside world without relying on programmed economic foundations and principles, the impact of this on all aspects of society at the level Social The informal economy contributes to creating social disparities and poor distribution of wealth and resources among members of society, and the expansion of shadow economies contributes to creating negative secretions on society, and the high rates of work that are conducted in secret and away from state regulations and oversight contributes to an increase in irregularities and the revival of informal systems Resulting in the extensive destruction of the building and structure of the state.

First: The concept of the informal economy, its characteristics and ways to measure it.The concept of the informal economy

To have an accurate and clear definition of the informal economy, it is necessary to identify the many terms that it expressed and the various expressions, including the hidden economy, the shadow economy, the submerged economy, the back door economy, or the black economy. ) Black Economy or Subterranean Economy or Subterranean Economy and all these terms refer to this type of economy, ITodefTorate and clear definition of the informal economy, it is necessary to identify the many terms that it expressed and the various expressions, including the hidden economy, the shadow economy, the submerged economy, the back door economy, or the black economy. ) Black Economy or Subterranean Economy or Subterranean Economy and all these terms refer to this type of economy, The multiplicity of these terms indicate the complexity and intertwining of this phenomenon that extends to all joints of society, and it can be defined, as defined by the International Monetary Fund and the World Bank, as “the exchange of goods and services that are not considered registered in official accounts.” The informal economy mostly escapes taxes, and its activities are usually carried out on the black market” (Mughniyeh, 2018: 178). It is that part of the GNP that should have been included in the GNP accounts, but for one reason or another it was not included in those accounts” (Guttmann, 1977:24).

The names of the informal economy can be divided according to the type of economic activities in the following formulas (Malak and Sharabi, 2009:9)

1- Economic activities that take place in the hidden economy, i.e., goods that are prohibited to deal with and use, including (drug trade, smuggling, arms trade, antiquities smuggling, and others).

  Which is the black economy (crime)

  • Economic activities that are carried out by fraud, counterfeiting, trademark counterfeiting, and bribery. Any transaction is prohibited, but goods are permitted (such as private lessons, unlicensed shops, taxi businesses, etc.), i.e.grey grey formula in the informal economy.

Second : Estimating the size of the informal economy in Iraq.

To estimate the size of the informal economy locally in (Iraq), it is necessary to identify the reasons for its growth, and then the possibility of measuring it can be reached.

1- Reasons for the growth of the informal economy in Iraq:

Economic studies indicate that the main reason for the growth of the informal economy is due to many socio-economic, political and administrative factors, including the social represented by poverty and the high percentage of the surplus labour force for displacement and migration from the countryside to the city or the high percentage of illegal activities from the social and economic perspective. As for the political side, It is represented in the weak management of government institutions and the spread of administrative and financial corruption, so corruption played a major role in the redistribution of wealth. On the international level, Western countries have been able to plunder the natural resources of developing countries through colonialism. Iraq has suffered from many wars and tendencies that it has been exposed to, which made it an arena for rising operations Which takes place outside the legal framework, and consequently, the rates of corruption in the country increased, and due to the difficulty of counting corruption in all countries, the United Nations set up an organization called Transparency International and was concerned with monitoring the development and progress of countries in implementing the law and achieving social justice. Among (10) countries that are classified as clean and (0) countries in which it is spread Because corruption is hidden, it depends on different sources (Farha et al., 2013: 69). The 2010 Transparency Report for the following countries can be shown.

Table (1)

 Rankings of different countries in Transparency International


Rank          Class

Singapore v New Zealand – Denmark

The first one.


Finland – Sweden

4th 9.2





7:00. 8.8

Australia – Switzerland




10:00 8.6

Iceland – Luxembourg

Eleventh 8.5
Hong Kong Thirteenth





Austria – Germany 5th



7:00. 7.8
Qatar Nineteenth



20. 7.6
Uae 28th



48th 4.9
Kuwait Fifty-four.



Fifty-nine. 4.3
Morocco Eighty-five.



Ninety-eight. 3.1
Syria-Lebanon One hundred and twenty-seven.



One hundred and seventy-five. 1.75
Somalia One hundred and seventy-eight.



Source: Transparency Report 2010 of the United Nations

It is noted from Table (1) that Singapore, New Zealand and Denmark are the countries that topped the list, reaching 9.3 out of 10. Somalia, Iraq, Syria and Lebanon are among the countries that occupied the last ranks in the above table. Somalia reached 1.1 out of 10, Iraq preceded it with 1.75, and Syria and Lebanon got a percentage 2.5 We also note that Qatar ranked first among the Arab countries with a rate of 7.7. It topped Britain, followed by the Emirates, Kuwait and Bahrain. The report indicates that many countries have improved their position from 1995, while we note other countries have declined, especially countries experiencing turmoil in political conditions and multiple wars It suffers from high rates of corruption, as is evident in Iraq. Many researchers believe that administrative and financial corruption in Iraq since the eighties of the last century and then increased dramatically in the nineties after the imposition of the economic embargo and the Food-for-Oil Agreement and the many and varied corruption operations that accompanied it. But after 2003, the phenomenon of corruption became widespread in all parts of the country it increased significantly in the following years, and this was evident in the Transparency Organization report for the year 2010.

In addition to the above, it is possible to show the global classification of Iraq for the Corruption Perceptions Index for the period from 2003 to 2017, due to the lack of access to data and information before 2003, as is evident in Table (2) below. The general administration of the state and the high rates of corruption in it. The highest value of the index was recorded in 2003 and 2005, i.e. by 22, and the sequence occupied 113 out of 132 in 2003. In 2005, the sequence rose to 170 out of 185 participating countries. The lowest level appeared in the period From 2007-2010, the value of the index is (15), then the index value rose to 18 for the years 2011 and 2012 and decreased in the following years to 16, and then rose in 2017 to reach 18. It occupies the last field among the participating countries, meaning that it is the most corrupt country in those countries. Period.

Table (2) Iraq Corruption Perceptions Index for World Countries for the period 2003-2017


The number of participating countries Iraq Iraq sequence pointer pointer value year The number of participating countries Iraq sequence pointer value
2003 132 113 22 2012 183 169



145 129 21 2013 174 174 16
2005 158 170 22 2014 174 174



163 160 19 2015 161 161 16
2007 180 178 15 2016* 176 166



180 178 15 2017* 180 169 18
2009 183 179 15 * 2018 180 168



183 175 15 * 2019 180 162 16
2011 183 175 18 * 2020 180 160 21

Source: Hussein Hadi Hamza The role of public expenditures in poverty alleviation in Iraq from 2003-2015 Master’s thesis \ Wasit University 2018, p. 81

* Kuwait Transparency International Association, a press release issued by Transparency International (Corruption Perceptions Index 2017) on February 21, 2018, pg 4

* Corruption Perceptions Indicators Reports for 2018, 2019, 2020

As well as in 2018, but in 2020, it is the worst in modern history due to the spread of the global pandemic of Covid-19 and its devastating health, economic and social effects, so the high rates of corruption indicate an increase in illegal acts and consequently the spread of the informal economy widely, and the factors or reasons can be indicated Which contributed to the creation of this phenomenon are:

  • The high tax rate: the trend toward working in the informal economy has increased because the activities that take place within the formal economy are exposed to many taxes from time to time, so individuals participate in that economy for tax evasion (Shehan, 2013: 4).
  • The demographic factor and high population growth: Iraq is one of the countries that are characterized by a high rate of population growth, as the growth rate is estimated at 3.5%, and thus the proportion of numbers entering the labour market increases, especially from the youth group. The phenomenon of internal migration has emerged significantly, especially after the weakness of the agricultural sector and the decline in work In it and the entry of imported agricultural products at very low prices, which led to many farmers heading to the cities and trying to find job opportunities there, and that the flow of internal migration constantly to the cities exceeds their ability to employ this increase, which raises the unemployment rate among the city’s residents and immigrants, so individuals tend to create opportunities Work that does not require high technologies or large capital, which is what we find in the informal economy, such as the professions of repair, services, sewing … etc.
  • Poor level of education: university education does not match the needs of the labour market in terms of competence and required specializations, which contributes to creating a large gap between the inputs and outputs of educational institutions, i.e. between the supply of work and the demand for it, and this, in turn, leads to high rates of unemployment in the labour market and contributes to dedicating the orientation towards what It is called the informal economy (Rasheed, Bila, Publication year: 138)
  • Low level of income: The decrease in the real incomes of individuals motivates them to move towards the informal economy to reach an appropriate standard of living due to the stagnation of individuals’ incomes in exchange for an increase in the general level of prices
  • State budget deficit: The state’s general budget suffers from a continuous deficit, i.e. an increase in the proportion of public expenditures over public revenues, and this is one of the important factors for the emergence of the informal economy because the state seeks to cover its expenses from internal or external sources, and this results in raising the level of taxes or imposing new taxes, which It increases the tax burden on individuals and forces them to resort to a case of tax evasion
  • Small projects: The small project plays a major role in the growth of the informal economy because it relies on conducting its transactions in liquid money and this enables it to evade paying taxes, and any attempt to implement the tax system tightly causes the bankruptcy of these projects because many of these projects are carried out within the scope of the other economy Official (Al-Jilani, No. Publication year: 8).
  • Measuring the size of the informal economy in Iraq

As we explained previously, measuring the informal economy is done through two methods, a direct and an indirect one. Because of the lack of data, the direct method could not be used, so we will use the indirect method (the cash income method) to measure the size of the hidden economy in Iraq, and it assumes several assumptions:

– Choosing a base year in which there is no hidden economy, and the researcher relied on 1996 as a base year, due to the low ratio of circulating money to money supply for the rest of the years.

– The ratio of liquid money to demanding deposits is fixed, so we find that any increase in this rate must be reflected in the increase in demand for liquid money to finance transactions that take place in the hidden economy. And that the ratio is fixed between them.

As for transactions that take place in the informal economy, they are financed by liquid money. Therefore, the changes that take place in the declared economy can be calculated through changes in the rate of liquid money to demanding deposits. Therefore, the rate of change in the undeclared economy can be estimated from the rate of the declared economy Through changes in the ratio of liquid money to demand deposits. That is, it is represented by the difference between the ratio of the base year to the comparison year. If this ratio is higher, then this indicates the existence of the informal economy. This ratio can also be converted by using the estimated velocity of money circulation in the declared economy and to estimate the activity of the informal economy in the formal economy through what Previously, it is based on a set of equations, which are (Al-Jilani, 2008: 16 .).

K= C\M1×100

K means the currency in circulation c and the first money supply m1

RK  Kt-Kt-1        Rk Growth rate in the commission ratio in trading on the money supply m1

V               V is the velocity of money circulation

SE              SE Informal Economy and D Demand Deposits

SE        GDP NON OIL represents the gross domestic product without the contribution of the oil sector

Table (3) monetary indicators and gross domestic product in Iraq for the period from 2003-to 2015 (million dinars)

year concurrency currency currency currency

Currency in circulation  C Current deposits D View cash



GDP at current prices GDP Gross domestic product (revenues from oil exporting not included   GDP NO NOIL
1995 584398 120666 705064 6695482.9



88161 78887 960503 6500924.6 2790496.1
1997 929828 108269 1038097 15093144



1192530 159346 1351876 17125847.5 5379604.6
1999 1275220 208616 1483886 34464012.6



1474321 253685 1728006 50213699.9 8378787.9
2001 178691 376397 2159089 41314568.5



2563693 449907 301360 41022927.4 12001528.6
2003 4626794 1025664 5652458 29585788.6



7162945 2985681 10148687 53235358.7 22426817.1
2005 9112837 2286288 11399125 73533598.6



10968099 4491961 15460060 95587954.8 42736143.6
2007 14231700 7489467 21721167 111455813.4



18492502 9697432 28189934 157026061.6 78859660.4
2009 21775679 15524351 37300030 131275592.6



24342192 27401297 51743489 159607123.6 851165114
2011 28287361 34186568 62473929 211309950



30593647 33142224 63735871 245186418 116155918.5
2013 35022000 38835511 73830964 271092000



36072000 36598621 72087457 260610000 144408000
2015 34855000 30580000 65435000 196820000


Source: Ministry of Planning, Central Agency for Statistics and Information Technology, Directorate of National Accounts, Statistical totals for different years

Several important monetary indicators for measuring the size of the informal economy can be clarified through the following table (3). According to this method, the year 1996 was relied upon as a base year because the percentage of money circulating in it is lower than the rest of the other years and reached 88,161 through table (3). We note an increase Continuous in the currency circulated during the study period. The previous equations were relied on to estimate the size of the informal economy as well as calc calculate the percentage of its contribution to the GDP without oil. We note from Table (4) that the velocity of money circulation (v) was high in 1995, it reached 3.5 and this The rise in inflation that the Iraqi economy was suffering from, which led to an increase in the percentage of the informal economy due to the weakness of the regulatory agencies until it reached in 2001 (4.9), after which the rates continued to fluctuate between rising and fall until 2003 the rates decreased, and then started to decline and rise from 2004- 2009, and the ratios fluctuated until 2014 and 2015 at a rate of (2), and this rise is due to two reasons: the increase in the value of the gross domestic product (GDP) of the Iraqi economy, due to the rise in global oil prices, on the one hand, and the increase in the proportion of national exports, On the other hand, the return of confidence in the Iraqi dinar as a store of value. As for the fluctuation in the speed of money circulation, it is due to the high marginal propensity to save for individuals, especially in periods of wars and crises that the country suffered from, and the weak confidence of individuals in the value of the dinar as a store of value. Accordingly, the informal economy rose in 1995 Then it decreased in 1996, amounting to 228,772 million dinars. Therefore, we find that the informal economy is generally low in the first years of the study from 1995, but it rose significantly in 2004, reaching 6568498 million dinars, and continued to rise increasing until 2013, when it reached 73788400, which is the highest percentage The increase in the size of the gross domestic product by 271092000 million dinars, according to the data of Table (3).

The ratio of SE to the decrease in the amount of GDP decreased from the previous year, as it reached i014 by 260610000 and in 2015 it amounted to 196820000, while the amount of SE for the two years amounted to 73240000 and 61160000 million dinars, respectively, as for the size of the informal economy from the size of the GDP except for oil It was fluctuating until 2004, rising by 29.2%, after which it fluctuated between rising and fall until 2011 when it reached 53.5%, and then decreased from the previous years for the period from 2012-2015, but it remains high percentages of GDP, and this fluctuation is due to the absence of political stability and many crises that the country suffers from and the slowness in dealing with it creates the appropriate climate for the spread of a culture of corruption and the emergence of negative values ​​at the expense of positive values. Therefore, we find that the ratios of the informal economy to the gross domestic product are always present and in constant fluctuation betweerisingse and fall, as shown in Table (4).

Accordingly, the previous table can be clarified in the graph. It is noted that the SE ratio has clearly increased from 2003 until it reached its highest point in 2013, which amounted to 73788400, and then continued to rise, but at low rates as a result of the decrease in the size of the GDP from 203.

Table (4) estimates the size of the informal economy and its ratio to the gross domestic product (except for oil) in Iraq for the period from (1990-2to 015) million dinars




K % RK






1995 3.5 82.9 73.7 422331



2.9 9.2 0 228772 8.2
1997 3.8 89.6 80.4 411422



3.9 88.2 79 621449 11.5
1999 5.1 85.9 76.7 1063942



4.8 85.3 76.1 1217688 14.5
2001 4.9 82.6 73.4 1844350



4 85.1 75.4 1799630 14.9
2003 1.62 81.8 71 1830091



2.20 70.5 61.4 6568498 29.2
2005 2.72 79.9 70.7 6172978



2.74 70.9 61.4 12577491 29.4
2007 2.28 65.5 56.3 17974721



2.39 65.5 56.4 27152810 34.4
2009 2.56 58.3 49.2 31048702



1.42 47 37.8 43842075 51.5
2011 1.37 45.3 36.1 51279852



1.9 48 38.8 59656003 51.3
2013 1.19 47.4 38.2 73788400



2 49.6 40.4 73240000 50.7
2015 2 53.3 44.1 61160000


Source: From the researcher’s work based on the data in Table (3).

Third: The necessary frameworks to deal with the informal economy

Combating and limiting the informal economy is a very complex matter, as many developing and even developed countries suffer from it. A unified strategy to eliminate this phenomenon now. Addressing the root causes of creating this phenomenon contributes to reducing its rates, such as improving access to labour markets, providing suitable working conditions for individuals, providing low credit guarantees, and contributing to enhancing opportunities for using advanced scientific and technological methods to be registered in the official economy and exempting small companies from Taxes until they reach a certain level of growth (Ibn Auf, Taha, 2019: 46) and that the high tax burden is one of the main reasons for the informal economy, so certain rules must be established to reform the tax system, reduce tax evasion rates, and take strict penalties for those who fail to pay taxes (Gnawi, 2017: 116) Since tax evasion plays an important role in raising the levels of the informal economy, therefore, it is necessary to follow T: (Shehan, 2013: 20

1- Reform and organize the tax system

2- Review the level of severity of the penalty imposed for tax evasion

3- Reviewing the bases of the tax rate and calculating taxes and the progressive tax

  • Facilitate the procedures and reduce the required documents and procedures, especially for projects
  • Facilitate the tax system as a whole and review it in general

 Striving to facilitate the initiative of the private sector, encourage partnership between the public and private sector, emphasizing the role of official work, work to improve production matters, provide flexible work systems and combat commercial fraud, as well as work to improve salaries and wages for workers in the official sector, raise the standard of living for individuals, and work on preparing an investment map. agricultural, industrial, and commercial) and economically dealing with the country’s resources and optimizing them. The proportions of the labour force in the informal economy because the labour force does not match the requirements of the market, so it is necessary to provide qualification and training courses for the labour force and make it compatible with the requirements of the times and scientific progress and strive to increase the cultural awareness of the masses about the negative effects of the economy and society as a whole from the informal economy. I followed programs that seek to improve self-skill as a way to increase the persuasion of individuals to Choose the official environment that is commensurate with their scientific and cultural ability, as in the national education programs followed in Malaysia and South Korea.


1- The spread of the informal economy is due to the economic crises that the Iraqi economy suffers from, in addition to the complexity of government procedures and legislation and the high rates of corruption, and the high profitability of the business that takes place outside the law is a source of attraction for many individuals

2- The high rates of the informal economy are due to the high rates of unemployment in the Iraqi economy, due to the closure of many factories and laboratories, and the decline in the country’s infrastructure

3- Weakness of the state’s control and administrative bodies, which made it an arena for the entry of many goods and materials without little oversight and their availability at very cheap prices, and the inability of national goods to compete with them.

4 – High rates of crime and smuggling, due to the country’s turbulent political situation and lack of security.

  • – The spread of the informal economy is due to the stagnation of the official economy in Iraq, the loss of economic stability and the decline in its structures, meaning there is a direct relationship between the informal economy and indicators of internal economic stability.


1- Seeking to increase the volume of investment in the country to provide job opportunities and attract a larger number of manpower that would contribute to reducing individuals’ tendency to illegal businesses.

2- Reforming the tax systems, making them easier and easier, reducing the tax burden, and achieving justice when imposing taxes.

3- Activating the state’s regulatory bodies, especially at the borders and customs, controlling imports, limiting smuggling and supporting the national product

4- Laying down laws and procedures to limit random housing, which is the main factor in providing water, electricity, and infrastructure.

  • Establishing a new mechanism for financing projects, especially small and micro-projects, as the informal economy is spread in a large proportion, and setting the necessary conditions and duties for licensing these facilities, which contributes to reducing its percentage.


  • Mughniyeh, Mossos, 2018, Adjusting Algeria’s informal economy to increase public treasury revenues, Economics and Finance Magazine, Volume 4 Issue2-2018, The Journal of Economics and Finance (JEF).
  • – Malak and Al-Sharabi, Qara,Dr. Abdelaziz, 2009, (The Problem of The Informal Economy in Algeria with presentation and comparison of experiences: Mexico, Tunisia, Senegal), a dissertation in science in economics and financial economics, University of Menteri Constantinople.
  • Farha and others,2013  Kamal Mahmoud, Youssef Abdel Aziz, and Mohammed Khalaf, the role of the illegal economy in hindering development in developing countries (e.g. Syria), a thesis presented to Tishreen University School of Management and Economics department of economics and planning in Syria
  • Transparency 2010 report of the United Nations
  • Sheehan, Shihab Hamad, 2013, Shadow Economy between Causality and Neutralization (Iraq Study Case) Research published in Anbar University Journal of Economic and Administrative Sciences, Volume (5) Issue10
  • Rashid, Thamer Mahmoud, Corruption Economy and The Shadow Economy in Iraq’s Causes, Consequences and Ways to Confront It, Journal of Integrity and Transparency for Research and Studies, University of Baghdad, Published Research Without A Year Published
  • Jilani ‘Osama, 2006, the hidden economy in Libya because of its magnitude and economic effects, economic researcher of the Department of Research and Statistics, Central Bank of Libya
  • Kanawi, Nadia Khudhair, 2017, analysis and assessment of the size of the hidden economy and its impact on some indicators of economic stability in Iraq for the period (1990-2015(


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