The Statistical Center of Iran has put the economic growth of the fiscal 2022-23 at 4.8%, the same figure as the year before, while the Central Bank of Iran reported that the economy expanded by 4% last year. That’s a decent figure compared with the average growth of 0.9% between the fiscal 2011-12 and 2020-21.
Now can we hope to see the repeat of these rates and even the targeted levels envisioned in the seventh five-year development plan (March 2023-24 to March 2027-28), despite sanctions and the current adverse conditions?
To answer this question, we need to review the combination of economic growth and fundamental factors influencing economic growth, Sajjad Ebrahimi, an economist, prefaced an editorial for the Persian daily Donya-e-Eqtesad with this note. A translation of the text follows:
Two Substantial Changes in National Accounts
Two substantial changes have occurred in the composition of national accounts over the decade ending March 2021:
1. A sharp decrease in investment, especially in machinery and equipment, has led to a decrease in capital and production capacity. As such, investment in machinery in 2021-22 was only 48% of that of 2011-12.
2. With sanctions, Iran’s economy is moving fast toward a closed economy. Total exports and imports in the fiscal 2021-22 was only 33% of the fiscal 2011-12. On the other hand, the average annual growth of the industrial sector (which represents the production sector) was -2.4%.
These two changes are more important than other developments, because they have undermined the potential for production and pushed down economic growth.
Industrial Growth Under Magnifier
The composition of growth registered in the fiscal 2022-23 shows that the investment in machinery increased by 7.3% compared with the previous year and the growth of industrial sector was 7.7%. Overall, exports and imports improved by 21%. These changes were contrary to the destructive trends of the last decade.
These changes, however, won’t be stable enough to revive the limited production capacity. One plausible explanation regarding the growth of industrial sector in the last two years is the change in trade policies and the imposition of import restrictions.
Further restrictions on the import of all kinds of machinery, electrical appliances and vehicles have boosted production in these industries. In other words, import-substitution industries have driven industrial production.
Unofficial statistics show that the significant increase in the manufacture of automotive and household appliances is the most important generator of growth in the industrial sector. The experience of different countries in the last decades indicates that import restriction policies and extension of support for import-substitution industries only have a short-term effect on the growth of these sectors. Such policies have anti-welfare effects and adversely impact the quality of life of households, hence import restriction policies cannot be a long-term driver of economic growth.
Uncertainty Prevails
Uncertainty and the high risk in the economic environment was the main reason behind the sharp decrease in investment in the last decade. This uncertainty is mainly to blame on sanctions and the unpredictability of Iran’s political relations with other countries.
Some of these uncertainties are also caused by the unjustified government intervention in pricing and overnight changes in foreign exchange and commercial policies. In any case, we cannot hope to see the improvement of capital accumulation as long as uncertainty and risk remain.
Human Capital, Technology and Innovation
Human capital, technology and innovation are other factors that lead to economic growth along with the accumulation of physical capital.
Research shows that in recent years, not only have these variables not changed in a positive direction, but also encouraged the migration of elites and startups, while disrupting the use of innovations in production.
Due to commercial restrictions, the introduction of new technologies through imports has become difficult. Note that the economic growth of more than 7% in machinery investment and more than 20% in the total exports and imports in the fiscal 2022-23 is insignificant compared to the ensuing decline. For example, despite these growths, total exports and imports in 2022-23 is still 40% of 2011-12 and the investment in machinery last year is 51% of 2011-12.
In closing, changes in economic growth are at times caused by changes in the trend of economic growth while at other times, it stems from fluctuations around a specific trend. The decline in economic growth in the last decade marks a change of trend, but the variations in economic growth in the past two years cannot be considered a change of trend.
It is obvious that the fundamental reduction of risks in Iran’s economy and the establishment of stable relations with the global economy can be an effective step for restoring the upward trend.
