The Forum for Partners in Iran's Marketplace

October 2018, No. 89

Cover Story

We believe that without making a conscious and fundamental change in the patterns of thought, structures and political and economic institutions, the way out of the current crisis is unthinkable.

Behrouz Hadi Zonouz, Economist

Nearly 40 years have passed since the establishment of the Islamic Republic of Iran. During this time, the country with widespread national support has left behind heavy threats, especially the Iraqi imposed war. In addition, important steps have been taken in line with general and academic education, health improvement, adjustment of social inequalities and promotion of some technologies and scientific advances. The high turnout of the people in the presidential and parliamentary elections, despite the economic problems, has been a major backbone for the stability of the establishment.

Unfortunately, today, the country is faced with huge political, economic, social and cultural challenges concurrently. If these issues are ignored this could result in further escalation of the economic crisis and could spark popular protests.

It goes without saying that the coincidence of this situation with the current international coalition of Iranís enemies could lead to large and irreversible economic, social and political losses for the country. The bitter reality is that these challenges have not been imposed on us only by the enemies of the establishment; part of them is the product of the decisions taken by the state managers as a whole. Although some of these decisions have been focused on securing the interests of the powerful stakeholders, unfortunately, many institutions and wrong policies have also caused this situation. These institutions might have had good intentions but misconceptions about good governance principles and public administration have added fuel to the fire.

Therefore, we believe that without making a conscious and fundamental change in the patterns of thought, structures and political and economic institutions, the way out of the current crisis is unthinkable. To achieve this task is difficult because on the one hand it requires a new and scientific approach for analyzing the domestic and international situation in terms of national interests and adopting appropriate policies in every field, and on the other hand, there is a need for constructive interaction between the state officials and civil and public institutions.

In the past, a number of economists, sociologists and politicians have provided advice to the state officials at critical points by writing collective and individual letters and scientific articles, but the insistence of officials on continuing the false policies has caused tremendous damage to the country... Despite the ignorance of these recommendations, I believe that the current silence of scientific circles and trade associations is not permissible. The state of the economy and the society has made this author who has been working as a consultant of the Research Center of the Majlis and various governmental agencies since the 2000s, to remind points for the information of the public and the officials. 

Brief Glance at Performance of Economy and Its Major Challenges  

Over the past four decades (1976-2016), the population of the country has risen 2.37 times, but the average GDP growth at the same time grew only 1.82 times. Thus, the countryís per capita production at fixed prices fell and for the same reason, the peopleís level of welfare has declined in this period. Also, our economic status in global production and trade has dropped. Only in the last decade the average household expenditures has fallen 17 percent at fixed prices.

Unfortunately, under the prevailing conditions, the prospects for economic growth are not very promising, and it is certain that during the Sixth Development Plan (2017/18-2021/22) we will not achieve the goals set for economic growth, improvement of productivity of production factors and reduction of unemployment. All evidence suggests that, at the end of the projected period in the Vision Plan (2025/26), the country will not only fail to surpass its regional rivals, but also our gap in terms of per capita production and technology advancement will increase from Turkey, Saudi Arabia and the United Arab Emirates.

During these long years, instead of paving the way for economic growth we have put the emphasis on the policy of population growth and economic self-sufficiency. As a result, population growth has taken over economic growth and this has created serious challenges in the labor market. Although the labor force participation rate in Iran was about 39% in 1395 (2016/17), one of the lowest rates in the world, in this very year, the unemployment rate and hidden unemployment rate in Iranís labor market are two digits.

Iran is a country with potentially large political, cultural and economic capabilities that can be actualized.

The high unemployment rate among educated young people and women and in the less developed regions of the country and the mismatch of education with labor demand is another aspect of the challenges facing the labor market. In the Iranian economy, in an optimal situation, the active population could range from 55 to 60 percent, and the open and hidden unemployment rate could be less than 10 percent. Given the experience of the past forty years, our economic and social system has not been able to benefit from the demographic window for promoting national production, and evidence suggests that it would not be ready to take advantage of the opportunity in the near future.

The banking system in the Iranian economy plays a central role in mobilizing short-term financial resources and facilitating capital accumulation. At the same time, securities markets, which should be the main driving force in turning the savings to investments, draw little attention. In the meantime, unfortunately the banking system due to adhering to misguided policies and weak supervision of the Central Bank is in a critical state. In most of the banks, the ratio of capital to assets is negligible, arrears high, and a significant portion of the bank assets are confined in real estate and business.

At the same time, the expansion of the activities of illegal financial institutions without respecting the banking principles and in the absence of supervision by the Central Bank has led to a betrayal of depositorsí rights and the loss of public confidence. The crisis has fueled an unhealthy competition among banks to attract deposits and raised the banking interest rates to an unprecedented level.

Obviously, in such a volatile financial situation, the provision of banking services to the real sector for investment and the long-term sustainability of banking activities will not be possible. If measures are not taken to correct the balance sheet status of banks, sooner or later the financial system of the country will be seriously damaged, and will take the real sector to a state of stagnation with itself. Long term drought that has been afflicting the country for almost a decade, along with impudence in natural resources management (including payment of heavy subsidies to agricultural inputs and water, and lack of supervision over the use of shared natural resources), has led to widespread destruction of renewable natural resources, including water and soil resources, forests and pastures, wetlands, lakes and important habitats.

The water crisis has reached a critical point with the land subsidence in most of the countryís important plains. In recent years, an increasing number of farmers and residents of warm and dry areas have left their villages to small and large cities. The shortage of water resources is so acute that food security in the country is in danger, and farmers and city dwellers in some areas for the first time after the Revolution have stood against the responsible bodies and officials.

Pessimism towards the mechanisms of the market economy at the beginning of the 1979 Revolution, led to the nationalization of the banks and large domestic and foreign banks and corporations. In addition, the scope of government interventions in the economy increased at an unprecedented level in the form of enacting rules and regulations, introduction of a system of financial incentives, pricing and quotation of goods and production inputs. Although after the Iran-Iraq war (1980-1988), important steps were taken towards privatization and reduction of government intervention in the economy, Iranís economy is still far from a free economy. The truth is that privatization in Iran took place in a way that very small shares of state-owned companies and banks were transferred to the private sector operating independent of the government.

Indeed, an important part of the state-owned corporations was handed over to the Social Security Organization and the civil servants and military personnel pension funds and another part was ceded to military and civilian organizations.

Thus, a new capitalist class was born in Iran, which had a close relationship with power centers. This capitalist class not only got rich through buying public assets at low prices but overtook the private sector by profiting from the rent derived from the surplus of land and urban real estate. This type of capitalism is referred to in political economy as relationship-based or friendship-based capitalism. Instead of using innovation rents in the production and distribution of goods and services, this group takes advantage of the economy at every opportune time.

The lack of proper institutional arrangements for establishing a market economy and the formation of islands of conflicting interests as state corporations, companies affiliated to non-governmental organizations, formal and informal private sectors and unfavorable business environment have been among the main causes of economic backwardness in the country. In 2017, from among 180 countries, the global ranking of Iran in terms of economic freedom was 155. While Turkey and Saudi Arabia ranked 60 and 64 respectively. In the report, Iranís privilege in terms of investment freedom, financial freedom, property rights, the effectiveness of laws and the veracity of government action is very low.

The negative consequences of the dependence of our economy on oil, including unproductive renting, weakening of the institutions that support development and financial corruption, and the destabilizing effects of oil revenue fluctuations, is another factor affecting the weak performance of the economy. In 2016, Iran ranked 131 in terms of corruption perceptions index among 176 countries. While the ranking of our neighboring Muslim country, Turkey in the same year was 75. The reflection of what was said above can be seen in the confused state of affairs in the business environment.

The experience of the last 40 years tells us; firstly, in the absence of the internal coherence of the sovereignty and clean bureaucracy, we cannot have a government independent of the exclusive interests and avoidance of harmful deals between the public and private sectors. Secondly, without the establishment of sustainable development institutions and policies, given the characteristics of the Iranian society, one cannot be hopeful about the success of the five-year development plans, the Vision Plan and the general policies of the Expediency Council.

Iran is a country with potentially large political, cultural and economic capabilities that can be actualized. Unfortunately, we have not been successful in this respect in the past years. Since we know that by implementing the said reforms, the interests of powerful groups within the country will be jeopardized their negative response to these recommendations is not unexpected.

Nevertheless, the Islamic Republic of Iran at this critical time should adopt one of the following two options: Continuing the policies of the past or accepting and implementing tough fundamental economic, social and ... reforms with the participation of the vigilant Iranian people. The adoption of the second option requires observance of the principle of priority of the interests of the society to individual interests and a fundamental shift in the worldview of the officials of the country. The government, in the sense of a set of governing powers, plays a central role in the dignity of the society.

Letís hope that this historic opportunity will not be lost due to ignorance and our society will not suffer more than this.


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  October 2018
No. 89