Sustainable improvement of households’ welfare
Considering Iran’s current economic condition with regard to its economic imbalances and the uncertainties in various markets, future structure and policies are unpredictable. Moreover the reaction of sanctioning countries in the coming years is equivocal.
Considering Iran's current economic condition with regard to its economic imbalances and the uncertainties in various markets, future structure and policies are unpredictable. Moreover the reaction of sanctioning countries in the coming years is equivocal. Having in mind the results of sanctions in other countries, it is obvious that reducing the effects of sanctions in the short-run is far from imagination. The future of the sanctions can only be demonstrated by a set of probable scenarios. The main determinants of these scenarios are the sanctions, in case of their either intensification or stabilization, and the second phase of Iran's subsidy reform plan. From a macroeconomic perspective there are four probable scenarios:
Sanction's stabilization, stopping the second phase of the subsidy reform plan
Sanction's intensification, stopping the second phase of the subsidy reform plan
Sanction's stabilization, implementing the second phase of the subsidy reform plan
Sanction's intensification, implementing the second phase of the subsidy reform plan
These scenarios contain some hypotheses regarding the structure, policies and models' exogenous variables. The hypotheses can be categorized into two sets. First, those hypotheses common to all scenarios and, second, those hypotheses specific to each scenario.
The first set of hypotheses is about policy making which consists of the following issues:
A. The government's budgetary policy
- The nominal quantity of current and construction expenditures
- The share of other revenues in the gross domestic product
- The assumptions regarding the governmental oil revenue: the accessible income out of oil export, the share of the Oil Company in the total oil revenue, the share of the National Development Fund in the national income
B. The government monetary policy
- Balanced interest rate
C. The trade balance
- The level of the trade balance
The specific assumptions of each scenario include the level of petroleum production, the price index of different forms of energy, the level of petroleum export and the subsidies allocated to the population.
The mid-run trend of economic variables of Iran's economy is extracted according to those scenarios and their relating hypotheses. The results show that Iran's economy will be facing several challenges. In this regard the low economic growth rate and the increasing unemployment rate are the two main challenges for Iran's economy which are predicted to play an enormous role in the coming years. The average economic growth and low investment growth together with high inflation, the liquidity growth rate and high unemployment rate accompanied by an increasing destabilization in the government's financial situation, will increase the gap between Iran's economy and other growing economies in the world market. In addition, from one hand, the disequilibrium in exchange, money, energy and production markets and on the other hand, the impact of the sanctions, exacerbate the difficulties of Iran's economy. The above forecasts call for fundamental changes in some economic variables. The suggestive reform policies are in line with decreasing the disequilibrium in the exchange, money, energy and production markets as well as the effects of sanctions. It is expected that by implementing the reform policies, the economic growth will increase and unemployment decreases. Therefore, two main challenges of Iran's economy in the near future may be improved.
The presumption of reforms
The most important goal of a reform approach is creating a sustainable welfare level for the households. However, in order to achieve this goal, the economic growth variables such as unemployment, inflation and uncertainty must be improved. It is important to note that there are always households that are in need of direct governmental protection due to physical or mental disabilities or an extreme poverty level. Therefore, an enhancement of living conditions must consider those individuals unable of working and earning and provide them with at least a minimum standard of living. Moreover, those individuals capable of working must get employed with adequate revenues in a stabilized economy. In general, the welfare level needs to improve by decreasing the inflation and increasing the economic growth. In this way, altering the disequilibrium in various markets (the exchange market, money market, production market, energy market and so on) is necessary. Monetary, financial, commercial and protectionist policies, as well as institutional reforms are the required tools to overcome the imbalance in these various markets. Hence, the aim of policies must be the creation of equilibrium in these markets.
In order to set up planning for protectionist policies, it is crucial first to identify the target group. Based on investigations, poor households can be divided into two categories according to the age of heads of household who are either young or old. Normally, young heads of household have a higher level of education with no residence; as a result, rents for housing constitute a considerable share of their total expenses. These people are either unemployed or have low income jobs which make them incapable of making adequate investments in the health and education of their children. This group lacks financial assets and is in need of small consumer loans. Unfortunately, mainly due to a lack of access of children to education, poverty will be bequeathed to the next generation in such households. The suggestive solution for this category is improving the working condition, reforming the labor laws and providing a better access to credits (especially microcredits). In the second category, that is, those with older heads of households, those heads usually show low literacy rates or are by fact illiterate. They typically own houses and have savings bank accounts. Seemingly, this group does not have the ability to cover their health insurance costs and they are not protected by suitable insurance and social security schemes. Increasing the social security is a justifiable solution to eradicate poverty from the members of this category. This is viable by providing them with a better interest rate as well as direct governmental protection. Therefore, regarding the protectionism policies, it is necessary that subsidies are accrued only to target groups. The target groups are identifiable as individuals protected by the social security system and the retired groups. Additionally, unemployed labors can have access to subsidies under the title of unemployment insurance. In short, it is crucial to pay attention to a typology of the poor when implementing protectionist policies. The additional revenue earned out of the second phase of the subsidy reform plan must be allocated to health insurance and activities as such.
Concluding Remarks on the Reformation Scenario
The performance of Iran's economy is far from its potential capacities. Even though reforming policies can lower the imbalances in various markets, as proved by the results of macro-econometric models, the Islamic Republic's economic performance in indices like economic growth, unemployment rate, poverty, inequality and inflation will nonetheless be lower than those of comparable countries. The prerequisites for Iran's economy to get closer to its capacities are as follows. First, making policies based on scientific reasoning and conducting overall researches on the appropriate condition of Iran's economy in the long-run (and not mid-term). Second, some structural reforms in Iran's economy must be investigated thoroughly. Creating stable approaches and economic rules as well as having sustainable frameworks for resource allocation are absolute necessities resulting in Iran's economic boom.
*this text by Dr. Masoud Nili under the topic of "analyzing the influential factors on the mid-term performance of Iran's economy" is a summary of a book which will be published in near future.