Data published by the Statistical Center of Iran and the Central Bank of Iran show that the economy expanded by more than 4% in the fiscal 2022-23.
This is neither an extraordinary achievement nor negligible and unimportant; it is a moderate growth for Iran’s economy and a good start to get out of a recession that has lasted for more than a decade, Hossein Abbasi, a lecturer in the Department of Economics of the University of Maryland, prefaced an editorial for the Persian daily Donya-e-Eqtesad with this note. A translation of the text follows:
If boosted with correct economic policies, this trend can gradually increase to compensate some of our long-term lag. In that case, last year’s growth will be a laudable turning point. But if misguided policies are applied, which is very common in our economy, this average growth will disappear and become an insignificant event.
According to SCI data, last year’s 4% economic growth includes 4.4% growth in the services sector (with a 55% share in the economy), 7% growth in oil and gas (with a 14% share), 7.7% growth in industries (with a share of 13%) and 7.8% growth in water, electricity and gas supply (with a share of 8%).
Agriculture, which accounts for 5% of the economy, registered negative growth. This growth was accompanied by a 7.3% growth in capital formation in machinery and a 2.3% contraction in construction.
CBI provides slightly different figures. Assuming the validity of the data, this growth has led to a growth of 6.7% in the consumption of the private sector, which is a matter of happiness but it does not amount to big changes in everyone’s life.
Emerging From Deep Recession
In the assessment of economic growth, we should keep in mind that part of the growth obtained after periods of recession is thanks to the return of economic activities to the normal state.
During a recession, people change their consumption behavior in favor of more essential items and are more cautious in their spending, especially if they expect the recession to continue. Some activities are also reduced due to the decline in demand.
Getting out of recession is associated with the return of these activities to a normal state, which is reflected in statistics in the form of economic growth. After these activities normalize, economic growth may stop or slow down.
The Covid-19 pandemic, along with sanctions and destructive policies, has pushed Iran’s economy into a deep recession since 2017, so it takes time to stabilize. Part of the current growth may be thanks to this return. This positive development does not question the desirability of this growth, but it should not make us ignore the main issue, which will help achieve high growth rates in the long run. The main topic of discussions should be to know the roots of this growth.
Roots of Sustainable Growth
With the little information at hand, it is not possible to have a correct assessment of the roots of economic growth and its details, except by asking relevant questions: How many jobs has this growth created? Is there a real increase in wages or not? Which sub-sectors of the economy have registered more growth and which have done less? Are the sectors with higher growth more modern or not? Has labor movement among economic sectors been significant? In which sectors of the economy have more investment been made and from which sectors have money fled? Which sectors have faced more obstacles to making investment? The answers to these questions will definitely lead us to the roots of sustainable growth.
Economic growth is the product of the activities of individuals who use their physical and human capital to produce a product that another person wants to buy. It seems evident that people use their physical and human capital [knowledge and skills] to supply a product that is in demand. If this does not happen and if a commodity is not supplied to the extent required, then one must necessarily think there are obstacles that have increased the costs of investment to an unbearable extent. Recognizing these obstacles is the first step.
Here, physical and human investments are only part of the story. The other part refers to the transfer of funds. Sustainable economic growth is only possible when people with better ideas continuously engage in new economic activities, or employ new methods so that both the people and the society benefit. Such a process requires both capital and labor to be withdrawn from some sectors of the economy and employed in other sectors. In simpler words, the bankruptcy of some producers and their replacement by other producers, as well as the temporary unemployment of a group of employees, is necessary for the health of any economy that intends to have sustainable growth. Any policy that upsets this movement of capital and manpower will eventually disrupt economic growth.
Therefore, economic growth comes to a halt when the use of physical and human assets, and the transfer of resources from sectors with low productivity to sectors with higher productivity are unbearably costly.
Economic Structure and Policymaking
To understand these conundrums, I must refer to two factors. The first factor is the structure of Iran’s economy, which can be described in one word: “monopoly”.
In every corner of the Iranian economy, a group of producers hold monopolistic power and they continue to operate without worrying about more efficient producers. Monopoly and preventing the entry of more efficient producers, except in few cases and under certain conditions, are synonymous with inefficiency and waste of resources.
Several markets can be named in support of this claim, but the best example of destructive monopolies is the country’s auto market; the economic consequences and political waves of which are known to everyone. Without removing these monopolies, achieving significant long-term growth is impossible.
The second factor is policymaking. “To understand failures, be aware of big mistakes,” they say.
Iran’s economy is full of non-economic shocks that are often exerted by politics. Some of these shocks, such as sanctions, are imposed from abroad. It may not be possible to prevent these shocks easily, but the extent of their impact on the economy is definitely contingent upon the reaction of economic and political decision-makers, a point correctly termed “self-imposed sanctions”. A large part of the shocks to Iran’s economy comes from domestic origins. Misguided policies that have created direct hurdles for production, or have made production unprofitable by increasing risks, are countless. For example, we can refer to foreign exchange policies which, although associated with different names, have always been aimed at stabilizing the nominal rate in practice. Destructive results have been produced following this policy. With the continuation of such policies, achieving a high growth rate would be a pipe dream.
Finally, to describe conditions that lead the economy to higher growth, I will quote John Howland Cochrane, senior fellow at the Hoover Institution at Stanford University.
What is the most important problem of the American economy? he was asked recently. He answered that he could blame many problems but the main problem was that the American economy has not expanded significantly in the past two decades.
In explaining its reasons, he referred to excessive government regulation and said: “Economic growth is created with people, their ideas and their capital. We have the people, the ideas and the funds. We are waiting for the government’s go-ahead.”
A 4% economic growth is not a high figure, but it is positive. If economic decision-makers aim for long-term economic growth, there is no other way but to identify the roots of growth and, accordingly, the obstacles to growth.
The compass of sustainable growth could be summarized as follows: Reduce monopolies and avoid big policymaking mistakes; sustainable growth will be created by people.
