Iran is in a Stagflationary
What Public Investment Rule should the New
Government Follow to Ensure
Gdp Growth and Employment Generation, Especially for Lower Income Groups
Mohammad Ali Farzin (PhD)
Iran's economy is in a stagflationary trap: zero/low GDP growth; 12%
unemployment; chronic inflation. How can the new Government get us out? How
to ensure growth with full employment, help lower income groups, and meet
the 5th Five-Year Development Plan's goal: Decade of Progress and Justice.
Seemingly challenging, but possible. What investment rule should it follow?
Public investment solutions, with some institutional restructuring,
programming around labour-intensive approaches at the District (shahrestan)
level provide a feasible solution.
Current 5th Plan Solution: "Pro GDP Growth"
The 5th Plan intends to resolve through pro-GDP-growth strategies. Aimed at
improving performance, through funding, pricing and private sector
mechanisms, it gives weight to national GDP growth per se. It is expected to
raise GDP growth from average 3.5% to annual 8%, thereby raising employment
growth from 3% to about 5% and reducing income inequality Gini from average
0.42 to 0.35. This should improve productivity, reduce unemployment (from
12% to 7%) and inequality.
Instruments foreseen include: price reform-liberalization; funding
mechanisms (National Development Fund; insurance systems; improved banking);
higher savings (40% GDP - raising investment possibilities); support to
private business (raising profitability; Article 44 mechanisms) and
small-and-medium-sized enterprises (SME's); new "results based management"
practices complementing institutional development; Regional and District
targeting modes (the Plan suggests that District -shahrestan-becomes the
future unit-scale for five-year development planning). Inequality reduction
is through allocations to under-developed areas and income groups, by
distributing nationalized wealth/cash through "justice shares", "cash
transfers" and "deprived area development".
However, the emphasis on improving productivity through financial mechanisms
(price adjustments) misses out on another necessary requirement: quantity
adjustment. This is the investment dynamics: without initial "capacity
development" (investment) getting out of low activity/output trap conditions
is difficult. The solution below takes such an approach.
A Complementary Solution: "Inclusive GDP Growth"
The 5th Plan's objectives should be complemented by "inclusive growth"
targeting: giving equal weight to GDP growth, full employment and inequality
reduction; based on District level unit-scale. To ensure this, a combined
multi-pronged, targeted, medium and short term investment strategy is
required, over a four year period: the concept being that only appropriate
public investment in capacity development will raise us out of the economic
Why planning for "inclusive growth" at the "District" (shahrestan) level?
With around 400 Districts, the 5th Plan mandates them to produce five-year
development plans; programming for combined efficiency, equity and
sustainability is easier there as problems-solutions are better identified:
current national administrative system has the District Governor (farmandar)
and Planning Committee (shorayeh barnamehrizi) in place; etc.
The instrument for achieving results is public investments in the District:
the development indicators being inequality adjusted GDP/capita and local
What this means as a public investment planning rule is that
appropriate/sufficient investment in various capacity be made first, before
price adjustments can become effective2.
Further, the time-wealth-income (i.e. stock-flow) relationships, their
inter-actions, multipliers and adverse-conflicting trade-offs and outcomes
are more easily identified beforehand3.
Utilizing such approaches, the consequence of District public investment
outcomes on local GDP (value added) growth, equality and employment
(efficiency, equity and sustainability) can be identified/calculated/planned
to ensure local "sustainable development paths".
Public Investment in the District
The public investment approach would require combining medium and short term
targeting. It also builds upon previous Government's "pro-poor"
socio-economic transfer efforts in distributing resources to lower income
groups, poorer areas, poorer skills and poorer sectors.
The medium-term District public works strategy aims to develop future
supply-side growth capacity (general infrastructure and/or strategic
manufacturing). The short-term strategy aims specifically at joint
employment generation and poverty alleviation (i.e. improved income
distribution) by focusing on labour intensive practices, for example
"social-mobilisation and micro-credit" techniques.
work, the District strategy requires: identifying how much capacity-to-work
could be generated over a specific/sequenced period to achieve specific
amounts of "inclusive growth"; good design and implementation quality; new
institutional mechanisms (laws/regulations enabling employment generation);
new technical practices (clean energy technologies, improved functionality
of cooperatives system, etc); participatory planning (budgeting); enabling
conditions for community-based SME type growth; and involvement of poorer
groups, especially, in SME development (e.g. utilizing "social-mobilisation
and micro-credit" techniques).
Further, infrastructure/public works processes should ensure all local
unemployed persons are employed in the investment process, and new
institutional/legal systems should complement: a law may be passed to
guarantee that at least one unemployed person per household be employed by
District authorities for a specific period of time (e.g. one hundred days
per year) at a poverty-line wage or a legally-set minimum wage.
Such medium-short term composite investment targeting strategies will raise
both local demand (consumption) and local supply (capacity of poorer groups
to work, innovate and expand): prompting local economic multipliers and
dynamics to enable fast growth. Such an approach will raise local GDP
growth, reduce inequality/poverty, ensure full-employment, instill higher
productivity and lower local inflation. They also prevent migration.
Further, it mandates and disciplines shahrestan level authorities to think
and plan appropriately for full-employment oriented economic development.
What would remain is to ensure the overall stability of the economic system
by preventing conflicting investments/outcomes and holding down inflation.
Iran's National Accounts (and other information such as technical
input-output tables) inform exactly of the composition and percentage of
intermediate goods, labour and capital used up for producing goods/services:
this may easily be calibrated for the District-level context. Once
calibrated, District public investments could be targeted at goods/services
that generate combined efficiency, equity and sustainability (not just
financial gain or economic efficiency), to ensure full employment and good
GDP growth. They can also help in establishing the required District-level
and macro-economic linkages to ensure overall stability and sustainability4.
Initial Cost-Benefit Estimates
Such public investment targeting approaches, focusing on inclusive growth at
the District-level, help ensure full employment, are not costly, nor
difficult to implement. Given 400 or so Districts in Iran, the adding up
properties and benefits could be significant5.
An example may help.
Generally, in 2010, Iran's GDP was about $400 billion; population 75
million; employed persons 25 million; GDP/capita $5,300;
GDP/employed-person (i.e. productivity) $16,000. Investment in GDP was about
$70 billion: $1,000/capita or $3,000/employed-person. Unemployment was 4
million. With 400 Districts, therefore the average District has: $1 billion
GDP; about 190,000 population; about 65,000 employed-persons; the same
per-capita and per-employed-person data as nationally (above); and 10,000
Given our multi-objective public investment strategy, the initial estimated
direct cost is as follows:
1. Using the community-based "social-mobilisation and micro-credit"
capacity development technique: for enabling 5,000 persons to become
self-employed; will cost about $1,000/employed-person/ annum; total $5
2. The infrastructure-based (labour intensive) public works scheme:
employing 5,000 persons; utilising an employment guarantee scheme
(minimum-wage 4 million Rials/month at 2013 forex rate is about
$2,500/annum); an estimated total of $12.5 million/annum.
Using such strategies, the full cost to the District is $17.5 million per
annum. The cost/employed-person is on average $1,750 per annum: or $7,000
over a four year investment period. The total required budget for growth and
employment is: only 1.75% of the average District GDP (of $1 billion); only
60% of the national level investment/employed-person figure (of $3,000) and,
therefore, much less than the national average cost of making an investment.
Other projects in the District (private; cooperative; manufacturing; etc)
would supplement their public investment budget. Each different District in
Iran would follow a similar approach; allocate its resources relative to the
actual local data (unemployed, income and productivity) that are obtained
from National Accounts and made dynamic through participatory approaches.
As a whole, the cost of achieving such growth and full employment for a
wealthy country as Iran would be small: a total of $7 billion for all 400
Districts per annum; or less than 2% of annual GDP; much less than the
current annual $35 billion cash transfer compensation package; only 10% of
recent years' average total investment in GDP; and, a small percentage of
the Government annual budget. In other words, it is probably feasible. More
importantly, given such experiences, the package has a good chance of
success. It would probably result in an estimated 2% national GDP growth in
the first four years: plus secondary-tertiary multiplier affects that would
help Iran's growth go even higher, and help get it out of the
low-equilibrium stagflationary trap. Further, it would remain sustainable -
as communities are directly involved.