Monetary and Capital Market Exclusive, March 2004

Monetary and Capital Market in Iran

The Macroeconomy:
What Have We Done?

Non-realization of high economic growth during the past three decades is rooted in two phenomena, which continue to jointly impress the country’s macroeconomic management.

Dr. Masoud Nili, Senior Economist

The current report discusses long-term trends of the country’s macroeconomy along with major variables of the industrial sector on a large-scale level. This will help, through a comparative analysis with the industrial economies and newly industrialized countries of East Asia, answer the question that whether the current structure of the country’s macroeconomy enjoys adequate conditions needed for a high economic growth and sustainable industrial development. In this regard, performance of such indexes as economic growth, investment, employment and unemployment as well as monetary, financial, forex and commercial indexes are being studied first. Then, two main challenges facing the Iranian economy are being considered. The first challenge is related to an economic structure based on abundant natural resources (predominantly oil and gas), which so far have acted as an impediment to high economic growth and the industrial development and the second challenge is related to structure of the population, which has led to high unemployment rate due to increasing trend of manpower supply and non-creation of suitable jobs. In the last section, the Iranian economy would be analyzed in a 10-year prospect (2001-2011) with regard to the variant of persistence of the status quo. Studying this variant will reveal the results of continuation of performance of economic policies and will guide policymakers to the necessity of amending those policies.

Performance of Macroeconomic Indexes: Developments in the growth rate of Iran’s gross domestic product (GDP) during the past four decades (1961-2001), indicate slow progression of this variable. The average 10.6% annual growth of 1960s decreased to 2.7%, 4.2% and 3.8% in 1970s, 1980s and 1990s, respectively.

Non-realization of high economic growth during the past three decades is rooted in two phenomena, which took shape since the 1970s, but have continued to jointly impress the country’s macroeconomic management in the direction of less competitiveness. The first phenomenon, which is economic, was a result of the oil shock in 1974 and increase in forex revenues from oil exports, consequent to which the structure of Iran’s economic growth was based on abundant oil resources. Thereafter, due to the lack of need for forex earned through industrial exports and provision of the country’s needed hard currency through oil exports, in contrast to the industrial strategy of East Asian countries that fared from a stage of replacing imports to developing exports, the Iranian economy continued with import replacement policy. The important point is that the oil shock and the resultant forex revenues from oil exports occurred at a time that the Iranian economy had not experienced industrialization. Making growth of the national economy dependent on oil resources not only failed to help Iran’s industrial development process, but also acted as an anti-development factor through developing the non-commercial section of the economy and underdevelopment of the commercial sector, especially industrial exports.

The second phenomenon after the revolution, which impressed the country’s economic management from the viewpoint of political and social attitudes, was the dominant role of the government in the economic system and allocating less role to market mechanism for allocating resources. As a result, a major part of investments were made by the state-run sector without the need for developing job-creating private sector and without attention to a competitive, export-oriented industrial development process. Ownership of production units by the government and its presence in economic affairs to create a balance in people’s livelihood under war and crisis conditions according to Article 44 of the Constitution, led to increase in government’s role in the economy at the cost of lower efficiency of allocation of resources.

The important point is that both the above economic phenomena acted as anti-development factors against competitiveness. The most important characteristic of economic growth based on natural resources, which would be discussed in the next section, is development of the non-commercial sector and reduced competitiveness. On the other hand, inattention to the role of the market in efficient allocation of resources and government’s dominance over most economic activities along with the adoption of economic policies compatible with these powers, such as the interventionist and supportive policies of the government, prevented establishment of economic competition processes in the country. The price control policy at various markets has eliminated economic motivation for competition through production of goods and services at a lower price and a higher quality. It has also given rise to monopolies in the Iranian economy for such reasons as the very high share of the government and the public sector from general revenues, government’s ownership of major economic corporations, adoption of economic policies which restrict price mechanism and foreign trade, as well as the lack of clear legal grounds for private ownership.

Simultaneous with the slow trend of the country’s economic growth during the past four decades, East Asian economies grew considerably so that countries like South Korea and China registered a 6-10 percent figure while economies of Malaysia, Thailand and Indonesia grew by 6-8 percent.

The low economic growth of Iran, along with population developments, caused the country’s per capita revenues to be seriously below that of countries with developing industries. According to figures on national accounts, Iran’s per capita revenue for 2001 was 9.5 million rials at the current price and 298,000 rials at the fixed price of 1983. Global development indexes for 2002 show Iran’s per capita income in dollars and on the basis of the parity rate and PPP method, at $1,680 and $5,910, respectively. Corresponding figures for South Korea were $8,910 and $17,300 and for Malaysia stood at $3,380 and $8,330. The fluctuating trend of Iran’s real per capita income during the past decades shows that the said figure for 2001 is similar to that of 1972 and 1979, which indicates no growth in people’s purchasing power during the studied period. The trend of investment developments in the Iranian economy during 1961-2001 also shows severe fluctuations, especially during two decades of 1970s and 1980s. Annual average investment growth in 1960s equaled 12.4% while it was 24.7% during 1972-1976 due to the first oil shock, about -7% during 1977-1988 which coincided with the revolution and the imposed war, and about 7.9% during 1989-2001.

Several points are noteworthy in relation to investment trend. Firstly, fluctuations accompanying severe plummeting of investment in some years kept down the long-term temporal trend. Secondly, share of investment in gross domestic product experienced a relatively stable, but slow trend. This share was 15.1% in 2001 on the basis of investment and production figures of the national accounts at the price of 1982. The corresponding figure for East Asian countries such as the South Korea, Malaysia, Singapore and Thailand has been reported at 35%. Thirdly, fluctuations of private and governmental investments at the fixed price were compatible with each other until the end of the 1980s and convergence of the two variables has been remarkable. Meanwhile, governmental investment has remained relatively constant during the 1990s and private investments have been relatively on the rise. Combination of private and governmental investments shows that during the 1970s, governmental investment has accounted for a bigger share of total investment. Although share of private investments has increased to 60% in the 1990s, it is not remarkable in comparison to corresponding figures in other parts of the world (see table 1).

Table 1: Share of Private sector’s investments of total investments in various regions of the world

 Source: IFC Discussion Paper No. 34; Statistics for 1970-1996