By: Dr. M. Saeid Noori Naeini, Faculty Member of Iran's Shahid Beheshti University

In spite of rich natural and human resources, Iran’s economy is facing poverty and economic inequality. There is a common understanding among scholars that paradox of abundance and poverty is a direct result of high rate of inflation and unemployment.

According to the latest statistics issued by Labor Ministry, unemployment rate is exceeding12 percent. Some reports put the figure at 16 percent and some analysts maintain that the actual rate is currently 30 percent and the unemployed population expands by 700,000 people per year.

Reports by the Central Bank of Islamic Republic of Iran indicate that, the price index of consumer goods and services increased 14.6 percent in September 2006 compared to the corresponding period of the preceding year. Most experts, however, believe that the actual figure is much higher and due to expansionism monetary policies leading to increase liquidity (which stands at about 800,000 billion rials), inflation rate is expected to be even higher in future.

Most economists believe that over reliance of government on oil revenues gives way to a phenomenon called "Dutch Disease", which dampens motives for investment in, exportable and creates inflation and unemployment. Other factors such as state control of main sectors of economy, excessive subsidies and inefficiency of the labor market add extra pressure on inflation and unemployment. On the supply side, developing economies are in dire need of competitive productive investment, especially in the form of new competitive technologies, inputs and management. This could best be achieved through an efficient financial and monetary system to collect small, large savings and allocate them to best productive opportunities. The increased supply will generate employment and will reduce inflation. In fact, increased inflation and unemployment result from insufficiency of productive investment more than other factors. All major economic development theories are unanimous that the Industrial Revolution occurred consequent to long-term accumulation of first financial and then technical capitals. Long-term accumulation of capital was the pre requisite to modern industrial development. Without that accumulation, there would be neither commercial investment, which led to unity of the markets and expansion of foreign trade, nor adequate investment in goods that made utilization of new agricultural and industrial methods possible.

The necessity of long-term accumulation of capital was first explained by classical economists. It was clear that firms need accumulated capital, which in turn, depended on more saving. Adam Smith has said economic development more than being a result of technical advances, was the outcome of saving and investment that pave the way for technical innovations and their use. In his book, The Wealth of Nations, he explains that total saving is the sum of saving by all firms and individuals and is the main source of capital accumulation.

With regard to accumulation of capital, Iranian experience has shown that success of private banks over the short period of their activities has been much superior to state-run banks, because the private sector’s approach to banking is a customer oriented investment approach while state-run banks, as financial agents of government, take a monetary distribution approach to banking affairs. Also, since their resources are directly or indirectly supplied through development, and to some extent, current budgets, they serve government’s policies and their services are provided along the same lines. On the other hand, due to abundant state capital, small capitals are of no importance to such banks.

Private banks have been established to cover these deficiencies and play an effective role in accumulation of capital as the main impetus behind national development. Since private banking is reliant on private and small savings, it avails of mechanisms that lead to collection, management, and use of small capitals.

As one example, Eghtesad Novin Bank (the first private bank of the Islamic Republic of Iran) has played its role as people’s depositary in the form of an effective institute in economic development and reduction of inflation and unemployment. Although, only five years have passed since the establishment of the bank, it has been able to improve its international ranking according, to the creditable Bankers Almanac by 336 points. At the national level, the number of branches has increased from 24 to110 in less than a year, its paid up capital has increased from USD 30 mln in 2002 to USD 220 mln in 2006. The volume of its deposits experienced a huge and sustained increase from USD 4 mln in March 2002 to USD 2,183 mln in November 2006 and the volume of outstanding loans increased from USD 3 mln in March 2002 to USD 1,821 mln in November 2006. This is a clear indication of the enormous opportunities for well planned and efficient private banking in the Iranian economy.

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