The Forum for Partners in Iran's Marketplace

January 2018, No. 86


Grand and Major Challenges
of Iran Economic Development

Grand challenges are those which play a very important national role in preparing and facilitating the path to the reform of Iranís economic development, and maybe they can be considered a prerequisite for solving the problems.

Dr. Mohammad Hossein Sharifzadegan, Economist

Experience has shown that in the second round of presidency, grounds are prepared for economic achievements due to the preparations made in the first round; in the meantime, it seems that in the Persian calendar year 1396 (2017/18), the challenges in the way of Iranís economic   will continue to persist. Although some indicators show improvement, the necessary institutional backgrounds needed to improve Iranís economic development have not yet been provided. The institutional barriers to improvement can be cited as major challenges. It seems that the following main challenges are the major obstacles affecting the current economic development of Iran. There are 13 challenges but 7 of them are considered more challenging or grand challenges which play a more important and key role. The projection of these challenges on the eve of the start of the 12th government could lead to economic reforms in the country.

The main challenges or obstacles in the way of Iranís economic development have not been established overnight, but have gradually developed through policy making, international conditions, political causes, and political economy. Some of these indicators have also been intensified in periods such as 1384-1392 (2005/6 Ė 2013/14). The economy has a long-term memory and the current situation is the product of decision makings in the past years.

Grand challenges are those which play a very important national role in preparing and facilitating the path to the reform of Iranís economic development, and maybe they can be considered a prerequisite for solving the problems. Among these 13 major challenges of Iranís economic development, 7 are grand challenges, namely environment, water resource reduction, unemployment, corruption, decision-making and decision-taking system, banks, and political solidarity and national dialogue.

As a matter of fact, most of these challenges were not major in the past, and have been turned into main challenges in the course of time and for political reasons or external conditions as well as continued inattention of policymakers. In this regard, policies such as corruption, due to lack of attention of governments, have become a major challenge and then to a grand challenge for decade-long negligence. Iranís economy at present suffers from a chronic recession. Although there are cracks on the economy and despite the efforts by the incumbent government to improve the situation, the inefficiency of industrial production due to closure of the factories, the decline in industrial production, the unprofitable start-ups and continued industrial production in Iran as well as the delay in productivity of production factors due to the operation of industrial units below actual capacities still continue.

The banking system instead of supporting production, has entered the economic field and allocates part of the banking resources to itself. The rate of banking costs is higher than the return on capital, which contributes to the inefficiency and non-profitability of mobilizing production resources. The high rate of 25% to 30% of banking costs has rendered any investment and industrial and agricultural production uneconomical due to the low rate of return on investment in industrial and agricultural sectors. Iranís economy has become bank-oriented long before the stage required for economic growth, and that too not in modern form within modern activities of financial and banking management, but in a primitive and inefficient manner, so that in practice the banks even are not profitable and in order to show positive balances they use window dressing or money transaction methods in interbank operations.

The banking system instead of supporting production, has entered the economic field and allocates part of the banking resources to itself.

Unemployment is one of the main effects of a decline in economic prosperity in the country, which has economic, social and of course political aspects. The unemployment of educated forces in the country is a very important problem in reducing the economic growth and development of technology in society. On the other hand, the excessive expansion of higher education without due regard to the labor market has exacerbated this problem. The economic growth of over 7% in 1395 (2016/17) was mainly due to an increase in oil sales and its overflow to the economic sectors. Nonetheless, the forecast for 1396 (2017/18), if other activities of the economy would not be reduced, would not include an increase caused by extra oil sales; therefore, it is predicted that economic growth in 1396 will decline.

The liquidity growth to more than 1,000 billion USD and its flow into unproductive sectors such as construction and housing, and its mismatch with the effective demand of the society for housing has caused the number of vacant residential units in the country to amount to 2.4 million, of which 490,000 are in Tehran alone (according to statistics released by Statistics Center of Iran for 2016/17).

The challenges of the Iranian economy as barriers in the way of economic development, are national issues and beyond the political conflicts. They are related to the development of the Iranian territory and national interests, I also raise these issues due to my interest in Iranís economic and social development because they are national and non-partisan issues related to the national interests of our land. 

1st: Environment

Environmental challenge which is caused by climate change or periodical droughts and a decline in supply of water resources is 47 years old on average. The drying of lakes like Hamoon and Urmia and the spread of dust and sandstorms in Khuzestan and other cities are its obvious examples. There is a difference between the two approaches to climate change and periodic droughts. But the majority is tilted towards climate change. If this is the case, considering that all development activities take place in the context of the environment and environmental capability, all plans and development activities should be reviewed. 

2nd: Water Scarcity

The fact is that rainfalls and water supply in Iran have fallen from the past 40 years, and water supply has been faced with numerous difficulties. Providing agricultural and drinking water is facing serious challenges day after day. Establishment of dams despite its great efficiency in providing water has failed to solve the problems due to lack of environmental and climate studies and not going under EIA (Environmental Impact Assessment) and SEA (Sea Environmental Assessment) processes. Natural areas and aquifers have encountered serious problems and rangelands and natural springs have been dried up.

In areas such as Hamedan and cities like Tehran, land subsidence has occurred. This serious and important challenge is coupled with the consumer and inefficient system of water usage: 92% in the agricultural sector, 6% in household sector, and 2% in industry sector. Although much has been said about optimized use of water in agriculture and household sectors, little policy measures have been taken in practice. Conventional (flooding) agriculture and producing vegetables in arid areas still continues and pipe-laying with big size pipes is still common in buildings. 

3rd: Banking

Iranís economy has become bank-oriented and strongly threatens the economy that at this stage must be production-oriented. This type of economy would practically hurt the real economy through its functions because of interest rates above the rate of return on investment in the manufacturing sector. Of course, in Iranís economy, there is always a need to develop the unreal economic sector in advanced banking and finance, but the current bank-oriented policy is speculative and destructive. Profitability of the banks has been severely questioned and their financial mechanisms face serious controversy. Banksí interference in the economic sectors is still ongoing. 

Unemployment is one of the main effects of a decline in economic prosperity in the country, which has economic, social and of course political aspects.

Banks are unable to circulate between 50 and 80% of their resources (which are a main source of liquidity in the country) into jobs and capital. The reasons for this situation are as follows:

- Repayment of loans not returned to the banks

- Governmentís debts to the banks

- Investment by banks in the stagnant housing and construction sector (the imprisonment of banksí capital in the construction and housing sector)

4th: Social Insurance Funds Crisis

Social security funds that guarantee the social security of employees and their families in future plays an intergenerational role and function. Due to economic crises and mismanagement, these funds have suffered a fate that practically except for the Social Security Organization the other funds have come out of the state of social security fund. The second largest fund after the Social Security Organization, namely the Pension Fund, is no longer a fund, and more than 80% of its annual resources are provided by the government. The Social Security Organization, from its establishment untill 1384 (2005/6) had 1.2 million pensioners, but over the eight years under the 9th and 10th governments the figure doubled and reached 2.4 million. This was in contradiction with the technical principles of social security. The organization, with 13.5 million insured people, covers 42.3 million people (by taking into account the members of the family), which constitutes 53% of the population. At present, six people pay insurance premiums for each pensioner. In financial terms, the organization in 2007/8 crossed the excess in cost to income point. The emergence of any problem for this organization would create huge problems for the community. A solution to these problems is not within the financial power of the governments and is a matter of social security in the country. But improving the organizationís financial situation in the future depends precisely on the economic prosperity of the country, increasing employment and balance in the receipts of the organization. 

5th: Unemployment

Employment is apparently one of the most important economic indicators, but its function also has a social, cultural and human role in the society, and goes back to individual identity and social and cultural base of the society. Due to economic inefficiencies, inappropriate business environment, production cuts, international sanctions, state economy, closure of factories and small and medium enterprises and especially the governmentsí neglect in Iran about the essential role of micro, small and medium sized units as the engine for generating employment in the community, employment has dropped significantly. The balance of job creation and unemployment between 1384 (2005/6) and 1392 (2013/14) under the 9th and 10th governments was 60 thousand jobs as the average annual labor force by autumn 1393 (2014). Although in recent years, the recovery has been slow and only 500 thousand people were employed in 1394 (2015/16) and 700 thousand in 1395 (2016/17), there were 1.07 million and 1.2 million job applicants in the two years, respectively. In other words, 700 thousand people were jobless in 1394 and 500 thousand in 1395. There is disagreement about the number of unemployed, but they are estimated to stand at 3 million to 7 million. Unemployment is one of the most important challenges facing the Iranian society and its rate among the educated people has more than doubled. All Iranian households can feel this. Precisely the decline in unemployment is directly linked to the decline in national income, investment, productivity of the labor and capital, and, ultimately, economic growth. If we consider Iranís national income in 1394 (2015/16) at about $400 billion, with the current national production technology and the labor productivity and capital-technology system three to seven million people have been excluded from the production circle. If we extend the technology in all economic sectors and with the comprehensive definition of UNIDO to management, human resources, hardware, and take into account technical knowledge and the vacant capacity of production in different sectors, we can say that under the current conditions more investment should be made and productivity should increase to improve the efficiency of the economy. Therefore, under these conditions, the liquidity and wealth of the country will be converted into productive capital and the social and political conditions for national investment will be prepared. The investments made in non-productive sectors such as housing and unnecessary construction of malls, which has led to 2.4 million vacant housing units outside the effective demand for housing, go back to the productive part of the economy, such as agriculture, industry and services. Therefore, it is crystal clear that this volume of national income and the economy cannot solve the problem of unemployment; we must increase the share of national and international investment by removing institutional barriers in the way of production.

6th: Economic Recession

A GDP of $400 billion cannot solve the economic problems of the country and the figure should gradually rise to double at least. An economic growth of 8%, and the removal of institutional barriers plus production and employment in the country, which are achieved through national, transnational and international investments is a requirement of this change. A real evidence of the change is the improvement and reform in business environment indicators. Eliminating international sanctions and participation in transnational and international economies are essential for economic growth. The closure of factories, the inefficiency of the banking system, and the lack of attention to small and medium sized enterprises, have weakened the power of Iranís economy to produce and create economic growth.

7th: Inefficiency of State Administration System

The state apparatus in Iran does not possess the required power of expertise, mobility, innovation, and agility. Given that the Iranian economy is state owned which itself is the main barrier in the way of economic prosperity even the body of expertise and its organization cannot direct the state economy and bring it to its minimum expected efficiency. The Iranian administrative system should be reorganized. The Plan and Budget Organization needs to be reorganized to work, and top organizations, such as the Central Bank and the Ministry of Economic Affairs and Finance, should define a new agenda for leading economic development in Iran.    

8th: Political Incoherence

One of the requirements for development and economic growth in the country is the existence of a unified approach among all the actors and stakeholders of development, including people, government and civil society institutions and, of course, political factions. Unfortunately, for many reasons, mainly in the field of political development, political parties and factions instead of creating positive and effective inertia are in hostility with one another. The result of this situation is outbreak of commotion in the society, instability in the idea of ​​territorial development and the approach to understanding Iranís economic development. This challenge, of course, also extends to social groups. Artists, academics, physicians, employees, guilds, tradesmen and shopkeepers all are subject to a decrease in social cohesion, which results in lack of readiness to create conceptual sharing in the development of Iran. In the meantime, the lack of a national dialogue between the stakeholders and the players of development is evident and has weakened the evolving society of Iran like a deadly poison. Reducing national dialogue leads to a reduction in social capital and undermining the trust between social groups, lack of coherence among social groups, and endangering the social capital that is necessary for all forms of political, social, cultural and economic development.

9th: Impact of Decision Making and Decision Taking in Different Spheres of Economic and Social Development

Environmental challenge which is caused by climate change or periodical droughts and a decline in supply of water resources is 47 years old on average.

The dissolution of the Plan and Budget Organization in the 9th and 10th governments and its revival and not giving it a pivotal role in Iranís development is one of the inefficiencies in decision making and decision taking. The PBO has proved its competency in coping with the problems under conditions of the state economy and the five-year development plans as well as in policy-making and helping the government in its decision makings in the transition to a non-state economy. Each time Iran is thrown into a boom by solving economic problems, the PBO has been the pivot for steering the economy. The implementation and dissemination of plan and budget by the government to the relevant ministries and to the economic and social sectors is a very complex and sensitive work that should be pursued through a participatory public policy with encouragement and incentives. This challenge is also related to the ineffectiveness of the administrative system. The coordinating role of the government is also faced with serious gaps so that it can increase the efficiency of policies and decisions in the interests of economic development by integration in decisions that are interrelated. This has been aggravated in the governments since 1384 (2005/6) onwards and its legacy continues in the 12th (incumbent) government. Although the present administration tries to solve the problem in one way or the other, it seems it has become a burden on the government. Increasing government spending also adds to this inefficiency. An interventionist government, with an inefficient administrative organization has imposed huge costs on Iranís economy. The governmentís budget intervention in various affairs is unnecessary and beyond the main duties of the administration. At the beginning of the 12th government, in addition to the Ministry of Economic Affairs and Finance and the PBO, vice-president for economic affairs and special economic assistant have been stationed at the Presidentís Office. Experience shows that if these institutions do not help boost the PBO in strategic terms they would disrupt economic decision-making at the top headquarters of the government.       

10th: Administrative Corruption

One of the most important challenges facing the Iranian society, which is considered to be the main obstacle to development, is corruption. Undoubtedly, one cannot vest hope on social and economic development in a society that is infected with corruption. Unfortunately, all sorts of corruption, including black corruption, which are condemned by elites and mass opinions, such as bribery; gray corruption, which is condemned by certain groups, such as the violation of the rules; and white corruption, which is apparently not condemned but is considered as corruption, as well as personal, executive and institutional corruption are being experienced in Iran. Structural or institutional corruption occurs when it prevails at various levels of the society, especially at high levels of administration, and is not obscene in the eyes of others. I believe that structural and institutional corruption is not common in Iran yet, but we are on the threshold of reaching it. This adds up to its importance and allows us to improve it. Favoritism (giving unfair preferential treatment to one person or group at the expense of another) is one example of corruption. Another example is nepotism, which is known in Iran as ďdaddyís sonĒ phenomenon. Unfortunately this has been common in our country for long years and its obscenity is declining little by little. The government itself should establish a strong code of conduct in the executive branch to fight corruption. Particular so it should prevent the activities of relatives of officials and their employment in government agencies associated with the responsible authority, even if there is no likelihood of corruption. This should be declared illegal and prohibited. The program for reduction of administrative corruption is an international protocol, and apparently Iran is a member of the world organization and its Asian unit. The anti-corruption program of the government should not be conditional on other forces. The government must do this independently, so that the outcome would be extended to other forces. 

11th: Subsidy Plan

The payment of subsidies was uniform before implementation of the governmentís targeted subsidy plan, and was unfairly distributed. For example, high-income groups used subsidized petrol 60 times more than low-income groups and used subsidized medicine three times more. Moreover, subsidies were paid secretly and not openly. To make the subsidies targeted meant that they would be completely cut off and paid merely to the needy temporarily until they get stronger. The revenues from reducing the subsidies were supposed to be spent on developing social security services for the empowerment of the society.  Unfortunately, under the 10th government, the subsidies were paid in cash and openly to all the people, creating the impression that it was part of oil money and the right of all members of the community. When the 11th government intended to reform the subsidy plan, some artists and social groups declared a voluntary waiver of subsidies provided that the money would be spent on building schools and public utilities. But the question was that first of all why they were receiving subsidies despite being in good economic conditions. Subsidies are a kind of social assistance that should not cover all the people. Secondly, the money did not belong to them to offer it to others. Unfortunately, this misconception was created that everyone was entitled to receive subsidies and that it was the oil money. In fact, the plan to pay subsidies had been derailed and had become a social right for everyone. Observations show that in some southern regions of the country, crowded households have abandoned their hazardous jobs, such as fishing or palm plantation and are happy with less monthly payments out of the subsidy plan. The current subsidies have been one of the worst welfare policies in Iran that have anti-cultural and anti-economic effects.

An annual subsidy of 430 thousand billion rials is paid by the Ministry of Economic Affairs and Finance and the Ministry of Oil under great tension. The Ministry of Oil, whose task is developing and selling oil, has been assigned treasury job. This is while, the development expenditures in the Persian calendar years 1392 (2013/14), 1393 (2014/15), and1394 (2015/16) were 136, 250 and 259 thousand billion rials respectively, but the subsidy cost, paid mainly to people who do not deserve it, is 430 thousand billion rials. One of the reasons for proposing the targeted subsidy plan was the failure of governments to pay subsidies in the previous form, which gradually exceeded the governmentís general budget.

Of course, this confusion in payment of subsidies is due to the lack of a coherent welfare policy to establish a relationship between social welfare and economic power with the efficiency and productivity of welfare policies. The Ministry of Welfare and Social Security, which was legally capable of accomplishing this important job, was dissolved and merged into a small ministry, and this uncertainty continues. 

12th: Poverty and Inequality

According to a 1979 World Bank report, 40% of Iranian households lived under absolute poverty line. The figure reached 19.8% in 1376 (1997/8) due to the economic and social policies applied after the 1979 Revolution, especially in the villages, and stood at 10.5% in 1384 (2005/6). But in 1392 (2013/14) and 1393 (2014/15), it reached 33.6% in cities and 40.1% in rural areas, which indicates a high increase in poverty in Iranian society despite the payment of subsidies. Moreover, multidimensional poverty index (which complements monetary measures of poverty by considering overlapping deprivations suffered by individuals at the same time), was 17% in urban areas and 40% in rural areas, in 1391 (2012/13). In some provinces, such as Sistan and Baluchestan, it was 45% in cities and 82% in rural areas. Or in the North Khorasan Province, it was 31% in cities and 58% in villages. Undoubtedly, poverty is a major factor in reducing the quality of life and social and economic participation, leading to a class division and a sharp decline in social capital and an increase in the gap between the state and the nation. Poverty reduction policies are among the most important tasks of the modern government. Along with welfare policy, the government should exercise an effective policy of reducing poverty. Although there are scattered poverty reduction policies in the country, there is clearly no targeted cumulative policy. Of course, due to policies of the 11th government, the poverty line has dropped from 33.6%  to 31% in cities and from 40.1% to 30% in rural areas, which is promising, especially that the President has announced that he intends to reduce it by the end of his second term. This requires coherent and well-executed policy-making. 

13th: Foreign Policy Discord

Today, economic and social development in countries requires a certain level of harmonious foreign policy and the use of international capacities and facilities. Technological, financial and monetary conditions and international trade require Iran to benefit from international capacities in favor of economic and social development which is a prerequisite of such development. For various reasons due to foreign policy management of the governments in Iran, the longstanding hostility of the big powers since the 1979 Revolution to date and the sanctions Iran has not been able to use the international facilities in favor of economic and social development to the extent necessary.

The Joint Comprehensive Plan of Action (better known as the Iran Nuclear Deal) is a great opportunity to open this door and use, as far as possible, its capacities to benefit from the technological resources of the world, financial and monetary relations, and international trade. Addressing the problem of grand challenges and then major challenges is relative. Moving towards the improvement of each of the grand challenges and major challenges, even in relative terms, leaves its impacts on the development of the country. It is important to take a positive move to solve them. Undoubtedly, under the current conditions of the 12th government, the relative resolution of these challenges can be a good promise for the countryís development prospects and economy. To move towards the solution of the grand challenges and major challenges, the participation of stakeholders in development should take place at various levels and requires national dialogue among all levels of the society. This is imperative to forge national understanding and reach general consensus on the goals and strategies for economic and social development in Iran. This cannot be done by advice and propaganda, and it only requires national dialogue at various levels of social groups. The product of this national dialogue can contribute to the solidarity and unity of Iran and its achievement would benefit economic and social development as well as national interests at political and national security levels. Ultimately, governments and politicians are successful who could identify the problems in their technical and scientific framework, turning them into politics and implement them in the macro and micro sectors of the economy and at various levels of society.


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  January 2018
No. 86