Iran has received much attention from a geopolitical and regional standpoint, but its economic challenges have not attracted a similar degree of interest. With a population of 69 million, considerable hydrocarbon resources, a dynamic and entrepreneurial middle class, and a relatively well-educated labor force, Iran's economic potential is considerable. This volume takes stock of critical developments in the Iranian economy in recent years. The study reviews the key issues and policy responses, highlights the nature of the challenges ahead, and draws implications for the next phase of reforms. The authors conclude that major challenges remain, although significant advances have been made in recent years in opening up the economy to international trade and foreign direct investment, encouraging the private sector, removing exchange restrictions, reforming the tax system, and enhancing macroeconomic management.
Iran faces the challenge of increasing its growth rate to reduce unemployment and improve the living standards of its population over the medium term. Growth performance in recent years (6 percent during 2000–03) has been satisfactory and has been driven by major economic reforms as well as transitory factors such as high oil prices and expansionary fiscal and monetary policies. However, questions arise about the determinants of growth in Iran and the long-term sustainability of relatively high growth rates. Because past experience shows that the Iranian economy can grow at relatively high rates over an extended period, the first step is to examine the historical sources of growth and discuss the relevance of various contributing factors for the medium term. The second step is to provide an analytical framework for the formulation of growth-enhancing policies.
The Iranian financial system has evolved through a number of stages since the 1979 revolution. After widespread nationalization in the 1980s, reform of the financial system in the 1990s and 2000s focused on improving the regulatory environment and streamlining controls to enhance efficiency, while more limited steps were taken to open the system to private sector participation and foster competition. These efforts, however, have not significantly altered the structure of the financial system, which remains underdeveloped and exhibits several weaknesses that are typical of countries in transition to a market economy. These weaknesses include ownership of and dominance over financial institutions by the public sector (even though a number of private banks have started operations in recent years), widespread use of administrative controls on credit allocation and rates of return (equivalent to interest rates), a lack of competition among banks, relatively weak bank supervision, shallow and weakly regulated capital markets, and an underdeveloped insurance industry (Table 7). Financial system reform must continue in line with the gradual opening up of the economy to foreign trade and capital inflows, the increasing role of the private sector in economic activity, and the need to enhance bank supervision and improve monetary policymaking.
Following a long period of multiple and unstable exchange rates in Iran, the exchange rate was successfully unified in March 2002. Since then, Iran has adopted a managed float exchange rate regime and eliminated most exchange restrictions for current account transactions, culminating with the acceptance in August 2004 of obligations under Article VIII, Sections 2, 3, and 4 of the IMF’s Articles of Agreement. Like many other developing countries with managed floats (Hinkle and Monteil, 1999; and Ishii, 2003), the Iranian authorities continue to pay close attention to the nominal exchange rate. This raises theoretical and practical questions about how to determine the appropriate level of the exchange rate and how to initiate corrections if misalignments are detected.
—lower than that currently observed in many other countries.
Unemployment Crisis in the Southern African Customs Union Compared with Other Regions
Sources: InternationalLaborOrganizationdatabase; and country labor force surveys.
Note: Data for 2010 for countries in the Southern African Customs Union; all other countries 2008 estimates.
How did SACU’s unemployment situation become so dire, given that, by and large, its member countries have registered reasonably strong GDP growth in recent decades? What are the characteristics of labor markets
Reform of the monetary policy framework in Iran is needed in connection with the efforts to liberalize the financial system (Chapter 2) and the authorities’ objective of reducing the inflation rate to single digits. Drawing on academic research and the experience of other countries, as well as lessons learned from monetary policy management in Iran over the past 14 years, this chapter sketches a transition path from a system characterized by administrative controls and fiscal dominance toward one based on market incentives and signals. The chapter outlines a set of options for moving toward this objective by increasingly relying on indirect instruments of liquidity management consistent with Islamic finance principles.
Under the Third Five-Year Development Plan (2000/01–2004/05), Iran introduced a number of important fiscal reforms aimed at reducing the dependency of public finances on oil revenue and containing expenditure growth. These included a tax reform to strengthen the non-hydrocarbon revenue base, the establishment of the Oil Stabilization Fund (Appendix 3) to cushion the impact of fluctuations in oil prices on expenditure, and actions to improve expenditure management and transparency.
The stylized fact that strong economic growth is usually accompanied with strong export growth leads many people to conclude that the export sector is the main driving force behind those episodes. The model in this paper, however, shows that the non-tradable sector may also generate high economic growth together with high export growth. Evidence shows that out of 71 "so-called" export-led growth episodes, only 37 of them are consistent with the "exports driving growth" hypothesis. Most of the remaining episodes (24 cases) experienced significant real exchange rate depreciation and are more likely to be characterized by "growth driving exports".
Mr. Tidiane Kinda, Mr. Montfort Mlachila, and Rasmané Ouedraogo
This paper investigates the impact of commodity price shocks on financial sector fragility. Using a large sample of 71 commodity exporters among emerging and developing economies, it shows that negative shocks to commodity prices tend to weaken the financial sector, with larger shocks having more pronounced impacts. More specifically, negative commodity price shocks are associated with higher non-performing loans, bank costs and banking crises, while they reduce bank profits, liquidity, and provisions to nonperforming loans. These adverse effects tend to occur in countries with poor quality of governance, weak fiscal space, as well as those that do not have a sovereign wealth fund, do not implement macro-prudential policies and do not have a diversified export base. These findings are robust to a battery of robustness checks.
Ronald James, Jemma Lafeuillee, Mike Xin Li, Mr. Gonzalo Salinas, and Yevgeniya Savchenko
In recent years, unemployment rates in some ECCU countries have been among the highest globally. This paper evaluates several factors that could explain them, finding that high unit labor costs, in a context of strong unionization, are significantly associated with high structural unemployment, while the global crisis added a cyclical component. Our analysis also suggests that high-paid jobs in the public and tourism sectors, which have been growing considerably in recent decades, could have increased the reservation wage and lowered labor force participation. We find no indication that high structural unemployment is related to the phase out of EU preferences on bananas/sugar exports or to a skills mismatch. As expected, unemployment has been substantially, but only temporarily fueled by large natural disasters.