Economy

The Economy of Iran

GDP real growth rate (2012) (average 3% in 2011 and 5.9% in 2010):     -1.9%

Inflation (2012):                                                                                         27.1%

Unemployment (% of total labour force) (2012):                                15.5%

GINI Index:                                                                                                44.5

% Population below poverty line (2007):                                            18.8

Standard of Living

The Islamic Republic of Iran is a lower-middle income country, which categorises Iran as an emerging and developing country, classically associated with a medium to low standard of living and insufficient industrialisation. This indicator provides a narrow classification of comparative development, demonstrating the average income per person, but does not recognise differences in the cost of living and of a person’s purchasing power in a given country. Therefore, by incorporating Purchasing Power Parity that assumes ‘one price’ for a given basket of goods,  Iran can be shown to have a much higher standard of living per person of $10,850, in income terms, than captured by the GNI per capita index. This indicator illustrates that $1 is worth more in Iran than elsewhere and that more goods can be bought for that $1. Iran’s GNI per capita (PPP) is also much higher than the regional average, suggesting a higher standard of living than its neighbouring economies.

Despite this indicator broadening the classification of the standard of living it still focuses on just one facet of well-being and does not reflect what Amartya Sen (1976) famously calls a person’s capabilities and entitlements. Hence, by using the more composite Human Development Index (HDI) we gain a more holistic measure of human development through three dimensions – living a long and healthy life (measured by life expectancy), being educated (measured by adult literacy and gross enrolment in education) and having a decent standard of living (measured by purchasing power parity, PPP, income). The HDI ranks Iran as a medium developed country and ranks it 88/142 countries with 0.782. Iran’s income per capita provides the preponderance of its position with the other indicators impeding its position.

The HDI on its own provides an indication of the total population; by incorporating the Gender Development Index (GDI) we can compare the performance of women against men across the HDI indicators to illustrate possible gender disparities. Iran’s GDI value is 0.770 which is 98.5% of its HDI value, ranking Iran 111/155 countries. A further gender empowerment measure (GEM) reveals whether women take an active part in economic and political life and exposes inequality in opportunities in selected areas. It tracks the share of seats in parliament held by women; of female legislators, senior officials and managers; and of female professional and technical workers – and the gender disparity in earned income, reflecting economic independence. The GEM ranks Iran 103/ 109 countries with a value of 0.331. One can surmise from the GDI and GEM that there are strong barriers for women in economic and political life indicating a lower standard of living for women compared to men.

Economic Performance

During the past decade Iran’s economy has performed well; with a GDP per capita growth rate of 5.9% (2000-08) compared to the regional average of 4.9%, suggesting that Iran is growing at a faster rate than its neighbouring economies. Despite Iran’s robust economic growth, there are several ailing elements that compound macroeconomic instability.

GDP growth, 1970-2007 (%)

GDP growth, 1970-2007 (%)

Source: World Development Indicators

The abolition of Iran’s family planning programme in the early 1980s led to an ephemeral shock in the fertility rate and population growth rate – prompting the population to double between 1979 and 1991 (31 million births). The net result of this policy has been a protuberant youth cohort that places a ponderous burden on the state as the youth cohort comes to working age and exerts prodigious pressure on employment. The forecast of a demographic dividend and demographic window to date has failed to materialise as unemployment levels remain high (10.5%) whilst the youth unemployment rate (15-24) is higher still at 22%. Taking this measure in conjunction with the employment-to-population ratio (15+) of 49% and 36% for the youth population (15-24) illustrates that Iran’s promising economic growth has failed to translate into job creation and reinforces the rhetoric that the demographic dividend has failed to materialise. Disseminating the figures presents a significant result, women aged 15-24 have an employment-to-population ratio of 25% compared to the male 47%, whilst for adult women it is 28% and for men 69%. One can infer that there are significant inherent bulwarks in society that impede women from obtaining jobs, demonstrated by the differences between the gender employment-to-population ratios.

Iran’s Employment-to-Population ratio, 15+ (%) | Iran’s Youth Employment-to-Population Ratio, 15-24
Iran’s Employment-to-Population ratio, 15+ (%) Iran's Youth Employment-to-Population Ratio, 15-24

Source: World Development Indicators

The foremost macroeconomic challenge is the high level of inflation experienced during the past three decades, averaging 19% per annum since the 1979 revolution. Inflation levels have reduced during the past decade to an annual average of 15.5% but remained high in 2008 at 25.5%. The IMF attributed Iran’s high levels of inflation to monetary factors – Government spending out of oil revenues leading to large liquidity injections by the Central Bank. Iran’s economic experience is reminiscent of King Midas’s ‘golden touch’, where Iran’s vast reserves of crude oil and gas have generated economic benefits over the last few decades. The ‘golden touch’ of King Midas nearly killed him and this experience can be observed in Iran where its resource wealth is having a degenerative effect on the country. This is analogous to Dutch disease, experienced by the Netherlands in the 1960s, Norway in the 1970s and Mexico in the 1970s and 1980s. The contagion effects of Iran’s dependence on oil has also been experienced by many oil exporters in the 2000s with the rise in oil prices such as Russia, Algeria, Venezuela and Azerbaijan, to name but a few. In 2008/09 crude oil and gas exports earned Iran an estimated 74 percent of foreign exchange receipts and constitute 82.6% of merchandise exports which translates to 43.8% of government revenue coming from Iran’s petroleum and gas exports. Iran’s concentrated economy leaves it susceptible to asymmetric shocks as the price of oil leads to macroeconomic instability that creates uncertainty for private firms and impedes private investment and job creation. The UN sanctions placed on Iran, although not economically crippling, further inhibit trade and macroeconomic stability.

Inflation in Iran 1961-2008 (%)

Inflation in Iran 1961-2008 (%)

Source: World Development Indicators

Sources:
International Monetary Fund (2007) Staff Report for the 2006 Article IV Consultation. IMF: Washington D.C.
Sen, A. (1976) Famines as failures of exchange entitlements. Economic and Political Weekly, Vol XI, Nos 31–33, pp. 1273–1280.
UNDP (2009) The Human Development Index: Iran Country Profile. Accessed 27/08/10
World Bank (2010) World Development Indicators 2010. World Bank: Washington D.C.

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