Why Is It Hard to Create Jobs?

In November, American officials cleared the sale of 106 Airbus jets to Iran, the latest such license allowing business with the Islamic Republic following last year’s nuclear deal. 

The news came as the country’s economy is finally taking off. Boosted by sanctions relief, GDP is set to grow about 4.5% this year, up from 0.4% in 2015. Yet, few ordinary Iranians have felt the benefits. 

Unemployment actually went up in the first half of this year, from 10.7% to 12.2%. Underemployment is also rife, at about 9.5%. 

Why is Iran’s rebound failing to create jobs? This is the opening of an article recently published by The Economist.  Below is the full text.

External factors loom large. Most of Iran’s recovery can be attributed to a boom in oil output, which grew some 30% in the first 10 months of 2016. No longer shackled by an embargo imposed by the European Union in 2012, exports soared to 2.4 million barrels per day in October, their highest level in at least seven years. While this has allowed foreign currency to flow in, it has done little to create jobs in the oil sector, which is capital-rich rather than labor-intensive. And the increase in production was achieved largely by soaking up existing capacity, using slack created under the embargo. Other big contributors to the national economy, such as petrochemicals and the carmaking industry, have been slow to recover, partly owing to remaining sanctions. 

With restrictions still in place on dollar trades passing through America, many businesses in Iran still find it hard to pay for imports. Foreign direct investment has also proven elusive as the threat of hefty fines for breaking the rules puts off potential newcomers. 

Donald Trump’s suggestion (though he has contradicted himself on the issue) that he may tear up the nuclear deal once in the White House has further muddied the picture.

Domestic issues are a further obstacle for employment. The Iranian economy remains dominated by public and semi-public enterprises, which further entrenched their position during the isolation enforced by years of sanctions. 

Small and medium businesses, the traditional engine of job creation, have struggled to emerge. The country ranks 120 out of 190 in the World Bank’s ease of doing business index. Nor is there much financing to go around. 

Some 12% of the loans on the books of Iranian banks are non-performing—though the true figure is probably higher. As a result, banks can only lend at steep prices; real interest rates currently stand at about 9%. Moreover, a disproportionate share of the financing goes to the public sector.

Iran’s job market will face more headwinds, at least in the medium term. The Islamic Republic’s labor force is expected to grow by 2.5% annually in the five years to 2020, equivalent to about 3 million new job seekers. The problem is thorniest for young people and women, for whom unemployment stands at 25.2% and 19.7% respectively. 

With presidential elections due in May 2017, Hassan Rouhani, the reformist incumbent, will be keen to address voters’ concerns. His government has so far prioritized macroeconomic stability, cutting inflation from 45% in June 2013 to single digits, thanks to some prudent fiscal and monetary policies. That is a good start.  However, Iran’s problems run deeper: despite being more diversified than many oil-rich countries, its economy has long generated less employment per unit of growth than other emerging markets such as Brazil and Lebanon.  To get the job market off the tarmac, the president will need to pull more levers.