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September 2004 / No. 31


Cover Story

Combating Unemployment and Inflation

Countries that pursued a completely planned economy found that such an economic system is impractical since it does not produce the kind of information about the markets, products and technology that makes production competitive.

We are in the last year of the Third Development Plan. The First Development Plan marked the beginning of enforcing free market policies. The Second Development Plan was the beginning of a retreat from a free market economy, while the Third Development Plan was a return to it. What remains to be seen is whether the Iranian economy can be dynamic while following a free market model? What is certain is that the Iranian economy functions in relation to the outside world. Because of this, it has to be competitive in different fields as far as imports and exports are concerned. To a large extent this competitiveness depends on the availability of a trained workforce, selection of the appropriate technology, the appropriate economic structure in regard to the banking system, the information system and so on.

A market economy to a great extent allows the private sector to develop its creativity. At first the private sector will benefit from state assistance. After it has gained stability it will be able to, without government help, choose the best technology for its needs and identify the products that are in demand in different markets. In the next step, it adopts a system that enables it to produce the products it needs. In view of all this, it is clear that the private sector plays a very important role in the economy.

The former Soviet Union and other communist countries that pursued a completely planned economy found that such an economic system is impractical since it does not produce the kind of information about the markets, products and technology that makes production competitive. So, the production system is changing throughout the world. While a product is going through the stages of production in one part of the world, in another part a new method and a new technology may be discovered. It follows then, that creativity must always be given room to flourish and it is the private sector that plays this role in the different economies of the world.

Of course, the granting of such leeway to the private sector has certain consequences as well. In some investments the private sector lacks the capacity to enter at the very outset. In the case of very heavy investments it is necessary for the government to play a role in the initial stages. This is true, for example, in the case of the petrochemical industries, since the government has a monopoly over the raw materials and these raw materials are considered as national natural resources. Moreover, because of the need in this sector for highly advanced technology, the state should bring the private sector in when the industry has reached the processing phase. Thus, the private sector will participate in the processing phase with government assistance.

The global economic system is moving toward a free market system based on the private sector. Care must be taken, then, that Iranís economic institutions be so structured that they can make maximum use of the power of the free market economy and the private sector.

The First Plan was very important since it paved the way for a national economy. Of course, the Iranian economy faced very complex problems at the time. This was an economy that had endured a war and was faced with great demands for products and services, demands that had gone unmet for eight years. When an economy is faced with war, it moves from the state of consumption to that of war. It was necessary for this war economy to be gradually and carefully moved toward a free-market economy, and to a great extent this was accomplished, but some of these policies were impractical and were put into effect prematurely.

In other words, the rate at which the economy was opened, especially in regards to foreign exchange, was too rapid, and this led to tensions the result of which was a return to policies that promoted a closed economy. As if, the prevailing economic thinking seemed to suggest, the lack of success experienced with the open economic policies meant that closed economic policies would work! Unfortunately, this is not the case.

The global economic system is moving toward a free market system based on the private sector. Care must be taken, then, that Iranís economic institutions be so structured that they can make maximum use of the power of the free market economy and the private sector. It can be said, then, that the orientation of the First Development Plan was correct. However, it was executed too rapidly and in an uncalculated manner.

Combating Inflation and Unemployment: It is not possible to combat unemployment by relying only on one aspect and one approach. In economics, we say that in order to reach two goals we must have at least two independent devices. It is not possible to solve the maladies of inflation and unemployment by economic measures alone. One of them may possibly be solved. Thus, unemployment must be tackled in a comprehensive manner.

One significant aspect involves legal reform. That is, the laws governing work, taxes, and the establishment of workshops, etc, have to be reformed. In fact, the economic conditions have to be changed so as to encourage producers to set up new industries and workshops. What was said about the importance of Iranís commercial relations with the outside world and its contacts with other nations also help us, to some degree, to reduce unemployment. The two issues are not disconnected. It should be kept in mind that in order to solve the problem of unemployment we need sustainable growth, and this covers all economic issues.

The issue of unemployment does not concern only those who are seeking jobs; it also concerns all of those who are entering the job market. This causes more problems, since the more favorable employment conditions are, the more people will seek employment, especially expert women, who, under the present conditions, show no inclination to enter the job market. In any case, this is a consequence of economics, that at the same time that you are creating jobs you may also increase the number of those who seek employment. Therefore, unemployment will remain one of the most important problems in the Iranian economy and will not be easily solved for many years to come.

During the last decade Iran succeeded in reversing the declining trend that the Iranian economy had been experiencing, perhaps inevitably, and to a large extent because of, the effects of revolution and war, and put it on the path to development. However, a multiplicity of difficulties did not allow the economy to develop in a comprehensive manner. For example, although an effort has been made to improve matters in regard to banking, the tax system, unemployment and inflation, many major problems still exist. However, the very fact that Iran was able to reach average growth rates of 5-6% is a very significant accomplishment and should not be overlooked.

Unemployment will remain one of the most important problems in the Iranian economy and will not be easily solved for many years to come.

However, it is believed that oil revenues have caused this economic growth. In other words, if the price of oil declines, such growth cannot be sustained. Iranian economy cannot be separated from oil. Much of this economic success is owed to oil, but do not forget that during this same period the price of oil reached $12. There were times when Iranís foreign exchange income was no more than $9-10 billion. One should calculate the average income. During the last decade the price of oil has stayed on a reasonable level, and if Iran has been able to use this oil to develop its economy and increase its non-petroleum exports, this is quite an accomplishment.

Of course, it is true that if tomorrow we returned to ten years ago and Iran had no oil, perhaps it would have had a destiny like that of Afghanistan. However, this is not the appropriate way to analyze the situation and does not help us understand Iranís economic problems. Iran is none other than the country we know it to be. It has oil, gas, natural resources (like copper) and human resources. Moreover, it occupies an extremely important strategic location. You can not strip Iran of all these things and ask, for example, what would have happened if Iran had a population of ten million instead of its present population. This is the same as if we ask what would have occurred if Iran had no oil. In economics, we do not deal with hypothetical situations, because such discussions are fruitless and do not yield a useful analysis.

The question we must address is whether, in the light of the trend in oil prices, we have made the best use of our oil revenues or not, and the answer is: perhaps to a degree, but not entirely.

The most important challenges we face concern the political situation of the region, and they are inseparably linked to each other. Assuming that Iran can continue to maintain its political and economic stability to a degree in the coming decade, it can be said that the structural foundations are strong enough to make continued growth possible. Sustained growth is very important. Then, with improving conditions, it is also possible to have increasing growth.

It is unlikely for Iran to be able to achieve 8-9% growth, as some have forecasted. Chinaís laws are appropriate in regard to the use of labor, infrastructure growth, population and market, but we do not have such laws in Iran. China is a part of the world market. Unlike Iran, it has never been hemmed in by political limitations in its dealings with foreign countries because of confrontation with America, and it has the power to push forward an economic plan backed by vast human resources.

The comparison some individuals make between Iran and China is false: Iran should be compared to Turkey. Although Turkey has been beset by extremely high inflation, it has been able to show very good growth and has overtaken us economically over the last 20 years. Before the revolution, Iran was ahead of South Korea, but South Korea has made great advances since those days. This shows that though resources do indeed exist, one cannot ignore political problems and the issue of economic stability.

It is not enough to have oil and human resources. Taking all this into consideration, its is believed that the challenge facing Iran in the future consists of political and economic stability and especially unemployment, which is not amenable to simple solutions. It is hoped that Iran can adapt itself to the new conditions that prevail in the world today by changing its monetary and fiscal policies. Unemployment, however, is a much more complex problem, since, as I indicated before, not only do we have to have twice as much growth to have half as much reduction in unemployment, but improvement in the job market attracts more people to the market. Of course, such improvement is welcome and ultimately positive, since greater manpower enters the market, but, on the other hand, it exerts more pressure on the economy as well.

The CBI and Privatization: The percentage of the banks that have been privatized is low and there is no expectation that it will increase in the future. The problem facing the Iranian banking system is that 80% of the national income still comes from oil and 60% of government revenues depend on it as well. Because of the major role petroleum plays in the national economy the Central Bank of Iran (CBI) cannot play as effective a role as it should in the economic system.

It is unlikely for Iran to be able to achieve 8-9% growth, as some have forecasted. Chinaís laws are appropriate in regard to the use of labor, infrastructure growth, population and market, but we do not have such laws in Iran.

The central banks of the world perform three main functions: they grant loans to the government, adjust the national monetary and exchange system, and oversee the operations of commercial and specialized banks. At present, in Iran these three roles have been collected in an institution called the Central Bank. These three duties are in conflict with each other, but these conflicts are not clearly understood and solutions to them have not yet been found. For example, if the government decides to increase its budget because of political considerations, it goes to the Central Bank or issues participation bonds to cover the deficit. If this happens at a time when the Central Bank is trying to control inflation it will be faced with a dilemma.

The second role is that of overseeing the operations of the banks. If a private bank is not operating correctly it may face the threat of bankruptcy. At this point the Central Bank, because of its supervisory role and the fact that it grants charters to private banks, steps in to save the troubled bank from bankruptcy. When private banks, or even government banks, feel assured that the Central Bank will rush to their rescue if they are ever threatened by bankruptcy, they will naturally not exercise the kind of care and caution they should in their operations and credit policies.

It is thought that the Central Bank cannot continue to shoulder these three responsibilities if it becomes independent. That is why the issue is raised by economists. As long as the issue of these three roles of the Central Bank in the Iranian economy is not discussed and a solution for it is not found, policies set forth to change the banking system will not be successful. Perhaps the bank oversight function and the role of a bank for the government should be totally separated from the Central Bank.

In sum, the clarification of these three roles is a must if the Central Bank is to be independent. If the Central Bank is the governmentís bank and has to make up for its budget deficit then it would be meaningless to speak of its independence. All the heads of the Central Bank must have faced this dilemma. Perhaps, because of political aspects of the issue they prefer not to talk about it, but they shall undoubtedly express the same views if they were asked. So, what is being said isnít anything new. However, the issue of whether setting up private banks is right or wrong goes back to deeper problems that must be addressed first.

 

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  Sep.  2004 / No. 31