Tuesday, June 04, 2013

The Problem is the Same: Economy

Another piece I wrote for IranOpinion.com on the economic challenges ahead and the significance of the economy in the upcoming election:

As Iran’s presidential election approaches an increasing number of analysts and observers comment on the state of Iran’s economy. The last reports indicate that some segments of Iran’s labor force are experiencing high unemployment rate while the economy is experiencing an increasing inflation rate. The next president faces economic challenges some might consider unprecedented.

Last month Statistical Center of Iran (SCI) announced employment data for the last Iranian calendar year from April 2012 to March 2013, reporting the unemployment rate to be at 12.2 percent, which is almost at the same level with the unemployment rate in the preceding 12 months. According to this report, Iranian youth experience higher than average unemployment rate, 28% for males aged 20 to 24 years old. The youth unemployment varies widely across the country and in some provinces it is reported as high as 50%. The SCI puts the number of the unemployed at 2.9 million, 100,000 more than its last annual report. However several websites report the unemployment numbers to be much bigger, referring to discouraged workers’ effect.

One source of discrepancy comes from the definition of employment, which has changed during the current administration and now it includes individuals who work for at least one hour during the week. Many believe that this definition, which is also used by several other countries, underestimate the unemployment in Iran while overestimating the size of employed population. They argue that given the increasing inflation and reports of business closures and the slowdown in manufacturing, it is logical to see an increase in unemployment rate and not a decrease. However in offering an analysis one has to rely on the available data and observations. The increase in the size of unemployment is evident. Although one might argue the unemployment rate has not increased. One thing can thus be said with certainty: more Iranians need jobs.

According to reports by SCI and Central Bank of Iran (CBI) inflation rate has been increasing at a faster pace in the past two years (read here). A recent report by Majlis Research Center (MRC) warns that the economic growth might fall to -4%. In other words Iran’s economy has begun to shrink. When an economic contraction begins, in the presence of inflation, the only logical conclusion is that the volume of economic activities is declining within the society. This means less investment, less business enterprises and eventually less jobs and employment opportunities. The American and European consumers are only too familiar with this phenomenon; many lost their jobs and even their homes following the global financial crisis of 2007-08. It seems as prices are on the rise the ability of Iran’s economy to create jobs is declining.

Increasing unemployment and increasing inflation rate increase the possibility of hyperinflation in Iran’s economy. This increases the uncertainty investors and businesses face daily in marketplace. Under these circumstances any modest drop or price change could alarm consumers and producers prompting them to become irrational in the marketplace. Consumers will try to buy commodities because they expect them to be more expensive later, producers will be reluctant to sell because they do not know how much the same product will cost them in the immediate future. The outcome will be a vicious cycle of inflation which would discourage manufacturing even further. That means slower job creation and even higher unemployment. In order to prevent this, any administration’s first task is to battle the uncertainty while promoting entrepreneurial endeavors.

A large portion of Iran’s population are younger than 35 years, they require jobs and market stability to make individual decisions in pursuit of their happiness. To provide them with such stability government needs to change course. Its first step could be to adopt higher standards in fiscal and monetary responsibility. The second step should be defining a viable economic target. According to MRC the current administration has been slow in addressing its budget deficit, while increasing money supply via banking system and accepting commitments it cannot fulfill.

When Mr. Ahmadinejad came to power 8 years ago he promised a zero unemployment rate by creating 2.5 million jobs in 2-3 years. Last month in a live program Dr. Nili, an Iranian economist, shared some of SCI reports with the viewers which showed the net job creation from 2006 to 2011 to have been an average of 14,200 jobs per year. The government side produced reports backing its claim, but many agree that unemployment in Iran is on the rise. With the current reports on negative economic growth, it seems the government’s means to address this issue are diminishing as well.  However it still can face its challenges by defining a viable economic target. Reducing inflation could be such a target. First it is doable and creates credibility for the government and second it reduces the economic volatility encouraging investment and rational behavior. Iran’s economy can benefit from both significantly.

The question these days is not who will be president, but if anyone could face these challenges and succeed despite sanctions and public mismanagement and structural deficiencies embedded in Iran’s economy?  It seems whoever comes to office needs to know his economics 101 pretty well

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