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.
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.
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.
to reflect a larger role for productivity growth than factor accumulation in driving potential growth in India.
Figure 4. India: Potential Growth 1/
1/ Following WEO (2006) assumption: TFP growth of 3.2 percent, capital share 0.35, labor growth 1.9 percent, human capital growth 0.83 percent, and capitalstockdepreciationrate of 4 percent. Demographic gains assume 0.5 percentage points GDP gains in saving and investment ratio based on UN projection of 10% decline in dependency ratio from 2005 to 2025. Actual growth rate of real GDP at
With India's GDP expanding at a rate above 8 percent in recent years, the debate about whether India is overheating revolves mainly about whether growth is above potential-that is, whether the economy is exceeding its "speed limit." This paper attempts to shed light on this debate by providing up-to-date projections of India's potential growth, including by clarifying differences in underlying assumptions used by various researchers that lead to a range of estimates. Estimates of potential growth on this basis range from 7.4 percent to 8.1 percent for 2006/07, and about 8 percent for the medium term. The medium-term potential estimates have risks on both sides: productivity gains and investment could be volatile, but determined reforms could sustain strong productivity growth.
APPENDIX I D ata S ources and M ethodology
25. The source for real GDP and investment data for Iran is the latest Central Bank of Iran database, and for the rest of the countries is the IFS database. The source for employment data for 1960–90 is the ILO database—1956, 1966, 1976, and 1986 census, and the source for employment data after 1990 is the Central Statistical Office of Iran annual census. The growth accounting exercise follows the methodology described in Barro and Sala-i-Martin’s Economic Growth, Chapter 10 (1995). The capitalstockdepreciationrate is 4
others (2013). If no country specific information is available, the average for countries at similar income levels could be used. 11 To isolate the demographic effects, the generosity of healthcare package (historical data) and the α coefficient are kept constant across scenarios, implying no policy measures.
Assumptions Underpinning Estimates
The capitalstockdepreciationrate, which is used for the historical growth accounting exercise, is set at 5.9 percent per year in line with Nadiri and Prucha (1993) .
Long-term non-age expenditure elasticity to