Leading Iranian economists discussed the major challenges and opportunities facing the Iranian economy, helping to lay the intellectual groundwork for possible future economic and political transition. The conference covered three key issues: employment, specifically related to youth and gender; natural resources, particularly the petroleum sector and associated domestic and international political issues; and monetary policy, looking at the challenges facing the Iranian Central Bank. Experts on Turkey and Iraq also provided comparative perspectives in addressing these issues.

“Change can occur very unexpectedly – you can’t predict what will happen, look at the Arab Spring in 2011 or Iran in 2009 and even this recent election. This is why it is important to think about the future now.”
- Sharan Tabari, Legatum Institute Senior Advisor

[Video: Anne Applebaum interviews Bijan Khajehpour and Mohammad Jahan-Parvar on economic reform in Iran]

The Future of Work: Jobs, Youth and Political Transformation in Iran

Current economic conditions are marked by high unemployment, weak growth and increasing numbers of youth and women joining the job market.  The two clearest areas for potential improvement are in regard to quality of education and better utilisation of the female workforce potential.

Key considerations include:

Who wants to work?

  • Iran has experienced a huge influx into the labour market and a slow growth rate.
  • Currently for every woman in the workforce there are four men. This could change.
  • The labour force looks very different for unmarried women. Since 2006, in a faltering economy, this group has increased its percentage in the labour force, while over the same period the percentage of men in the labour pool has declined.
“Until recently, for a single retiree six new people joined the labour market. In comparison, when Korea was transitioning it had four people retiring for each new joiner, and with an 8% growth rate.”
- Djavad Salehi-Isfahani, Professor of Economics at Virginia Tech & Harvard Kennedy School

Labour market outcomes:

  • For the average 30 year old life worsened between 2006 and 2011, as opposed to a more resilient economy where opportunity increases with age. This may explain political shifts in Iran. 
  • There has been an increase in the quantity of education, though not in the quality. The rural population has seen the greatest increase in terms of access to education.
  • Urban women are the most educated social group. The average rural woman born in the 1980’s now goes beyond primary education. This has positively impacted gender equality and social equity. 
  • Iranian women, being relatively well educated but discouraged from working outside the home, are the most under-utilised talent pool in the world. This presents a clear opportunity.
  • However, Iran also has a high level of management deficiencies, with senior workers lacking the skills needed in a post-industrial age.

 

“Iran ranks first in having the largest unutilized talent pool… Even Turkey and Saudi Arabia do slightly better. In other words, Iran tops the list in wasting a large part of its skilled work force”
- Nadereh Chamlou, Senior Advisor at the World Bank 

Economy:

  • While the human talent and potential exists, current regulations and over-involvement of the state inhibit employment and growth. Iran’s private sector must be empowered to drive economic growth.
“There is a consensus over a critical issue; all the jobs that must be created will come from the private sector. That is new in Iran. We never have had that [consensus] under the Shah, we never had it under Rafsanjani or Khatami. We have a problem and that problem can only be solved by the private sector.”
- Djavad Salehi-Isfahani, Professor of Economics at Virginia Tech & Harvard Kennedy School

Currently, the state works hand-in-hand with parastatal organisations and puts a lid on real private sector growth. This was commented as being a ‘mafia economy’ which grew in strength under Ahmadinejad. For example, 75% of all banks are owned by the state.

  • Iran lacks a modern infrastructure, and what is referred to as a ‘Victorian’ legal structure. The market reforms that the state does implement are almost immediately outdated.

The Future of Natural Resources: Oil, Gas, and Political Transformation in Iran

Iran has the highest proven reserves of natural gas in the world. Resources and their exploitation will continue to be essential to Iran’s economy and future growth. The group discussed opportunities for greater downstream economic diversification, and the merits of import or export led growth and internal consumption. Also discussed were the adjoining political and geopolitical issues related to Iranian fossil fuels.

  • Iran has experienced a democratic deficit stemming from a reverse correlation between oil revenues and tax revenues.
  • This feeds into the government effectively buying political legitimacy through increased subsidies. Iran spends more on subsidies than any other country in the world.
  • Oil money also feeds into military spending, which was 40% under the Shah and 52% of the budget under Ahmadinejad.
"Our oil industry has been affected and polluted, by domestic and international politics, continuously for over a hundred years. I don't think any other oil producing country has a similar history of oil related coups, revolution and war".
- Hormoz Naficy, Managing Director at Petroventures Advisory Limited
  • There is a need to address future scenarios both under sanctions and with sanctions lifted; what would be the consequences?
  • Iran has the potential to invest heavily to feed growing demand centres in China, India and wider Asia.
  • It is important not to under-estimate the employment potential related to gas based industries; for every job created in the gas industry three jobs are created in the support sectors.
  • For Iran to maximise the benefit of its natural resources, it must change its approach to global relations.
  • Iran must safeguard oil wealth for future generations. It must also start thinking about management reforms and diversification.
"It is clear that the current crisis, due to sanctions and mismanagement, will compel the government to seriously engage the private sector. This will be an opening for private companies to demonstrate their ability to manage this resource more efficiently."
- Bijan Khajehpour, Managing Partner, Atieh Bahar International 
“Oil per se is not a problem for the economic growth in Iran. The main policy challenge is increasing transparency, flow of information by increasing freedom of the press, controlling political corruption and enhancing the rule of law.”
- Mohammad Reza Farzanegan, Junior Professor, Philipps-Universität Marburg, Center for Near and Middle Eastern Studies (CNMS), Germany

The Future of Money: Currency, Inflation and Political Transformation

Central to achieving economic stability is a capable Central Bank that is able to resist political influence and carry out its core mandate. Currently the Iranian Central Bank (CBI) in unable to fulfil its core mandate due to weak institutional capacity and low levels of influence on Iran’s political leaders. This session asked how the Iranian Central Bank should go about ensuring price stability, create stable monetary policy and build confidence.

  • The Iranian economy is currently characterised by high level of uncertainty, fluctuations in real GDP growth and a high level of overdue loans.
  • The central bank is currently under the control of the executive and must implement what is dictated from on-high, weakening its mandate.
  • Today the CBI has failed by not having maintained price stability. Monetary policy is influenced at different points in the chain of command, while sound economic policy from the Central Bank Governor has been ignored by successive governments.
  • A strong legal system capable of dealing with bank delinquencies and fraud in a serious manner is essential to the Central Bank’s success.
  • Inflation is a major challenge; currently the government directs funds to pet projects and favoured sectors.Iraq faces similar difficulties, particularly issues relating to corruption, deficiencies in institutional knowledge and capacity.
“Most important [to a functioning central bank] is to have a strong, reliable, unbiased legal system that is reliable and trustworthy”
- Sima Motamen-Samadian, Centre of the Study of Advanced and Emerging Markets (CSAEM) / University of Westminster

Previous events in the series have discussed transitional justice and judicial reform, and education reform.

Workshop papers are available here. The workshop programme is available for download here [PDF].

Below is a video interview with Bijan Khajehpour and Mohammad Jahan-Parvar.