Iran: Economic Structure and Policy Changes

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Table of Contents

Introduction
Economic Structure
Political changes
Potential economic problems of Iran
The government control on the economy
Economic Policies and USA and UN sanctions
Economic crisis in Iran
Economic Reforms
Conclusion
Reference List

Introduction

Iran is a country in the Middle East found between the Caspian Sea to its north and the Persian Gulf to its south. Until in the 1930s the country had possessed the name Persia which was later changed to the current name of Iran. It is an Islamic nation having been declared so in the year 1979. This was after the Shah of Iran had been forced into exile leading to the country’s declaration as an Islamic Republic (Ghasemi, 2011, p.1). The country’s size is 1.6 million square km and the population is about 66.4 million people with Persians forming the largest ethnic group.

Iran takes pride in its very unique cultural and political heritages in the whole region. Being made up of terrains and deserts the country is not a good agricultural producer which therefore calls for extra effort in order to stabilise the economy (MacGuieneas and Peuquet, 2010, p.1). The country is a large producer of petroleum products although it does not have adequate refineries to undertake the processing. Because of this the needs of the economy are not well catered for hence the current position of the economy. This paper therefore looks at the economic structure of Iran with a review of its economic policy changes along with the political changes (Ghasemi, 2011, p.1).

Economic Structure

The economic structure of Iran is controlled by both the government sector and the private sector. However, the government sector is the one that dominates the economy with oil sector being the biggest source of revenue to the Iranian government (Ghasemi, 2011, p.1). This is because the private sector is responsible for the small scale industries and the farming services which attract little revenue. The Gross Domestic Product (GDP) growth rate of Iran was at 2.6% as per the 2009 data.

This is an indication that it is not doing well economically. Iran is not among the very top GDP producers in the world. It is in the nineteenth position.. Generally, the country does not have a stable GDP growth path because it fluctuated from 7.8% in 2007 to 2.5% in 2008. A break up of the GDPs sector wise shows that 10.9% is held by the Agricultural sector, 45.2% being held by the Industry sector and lastly the Services sector taking up 43.9 %( MacGuieneas and Peuquet, 2010, p.1). The figure below shows the projected production of Iran by sector in the year 2010.

From the above figure it can be deduced that the economy of Iran is highly dependent on the energy production as well as the manufacturing sector. However, future projections on Iran’s economy indicate that the country is targeting to improve the manufacturing sector and reduce its overreliance on the oil industry. This way it will be able to control the economy since industry is more flexible than the oil industry which is prone to depletion and international influence. This is because of the non-renewable sources of energy including oil, gas and coal produced in Iran.

Iran: Projected Production by Sector, 2010

Iran is a highly populated nation with an estimate of 25.02 million workers thus being position 22 globally in terms of the labour force. Out of these, 25% work in the agricultural sector, 31% in the industry and 45% in the services sector. Despite the large work force, the unemployment rate according to the Iranian government was 11.8% in the year 2009(Gheissari, 2009, p.102). This therefore means that country is not in a position to employ the whole population it holds. A big portion of the un-employed youths from Iran seek employment in other countries leading to a situation of brain drain in Iran. This is very unhealthy to the economy as its most talented workers try to leave the country.

The industrial sector is the most developed sector in Iran. This sector deals with commodities such as petroleum and petrochemicals which are the biggest foreign exchange earners of the government. Other commodities include; metals, food processing, textiles and building materials just to mention but a few. The agricultural sector follows suit although the country is more of a desert. This sector has minimal products including; nuts, cotton, rice, wheat and sugarcane among others (Ilias, 2010, p.2). Tourism is also an important source of income to Iran mainly because of the archaeological sites it has. The tourism sector takes up 1.8% of the total employment of the nation.

Political changes

The economy of a nation is affected by the political situation of the country itself, neighbouring countries and the whole world at times. Iran is no exception as the political changes have had a major part to play in the economic position of the nation (Gheissari, 2009, p.102). A major political change that took place was the war between Iraq and Iran. The war drained off most of the government’s money by channelling all the funds to the military that participated in the war. In addition to this, most of the population was recruited in the military hence reducing the work force for production (Ward, 2009, p. 39).

The political situation created an unfriendly environment for trade with other nations. Another consequence of the war was an increase in population as a result of the baby boom that came along with the war. This high population is the partial cause of the high unemployment rate being faced currently. All these factors had a great impact on the economy hence lowering the GDP (Barry, 2010, p.1). The economy of Iran begun to improve after the Iraq-Iran war since the country had regained its peace.

In addition to the Iran-Iraq war was the Iranian revolution which was also a major political change. This revolution was responsible for the transformation of Iran from authoritarian Monarchy type of ruling to an Islamic form of government. Earlier on in 1968, strikes were organised to demonstrate against the monarchy rule which was headed by the Shah. These strikes became very rampant that they led to the paralysis of the government.

These strikes on the other hand had great impacts on the economic situation of Iran as the nation was not at peace. The citizens protested because the shah had put in place a strict regime that was full of dictatorship. The series of strikes forced the shah to flee from Iran. This gave room to the citizens and especially the anti-Shah group to invite Ayatollah Khomeini who led them in the revolution to an Islamic republic by way of voting. It was also in the same year that Khomeini launched “The Islamic Revolution Guard Corps” (Ward, 2009, p. 39).

Potential economic problems of Iran

As discussed above, the economic situation in Iran is not that bad but there are some problems that need to be properly addressed. To begin with is the inflation rate which very high at a rate of 16.8% in 2009. The outcome of such a high rate is that it affects the standard of living of most people especially those that do not have an increase in their income.

Such people in economic terms purchase a smaller quantity of commodities with the same income hence leading to lack or inadequacy of the essential commodities. This is the reason as to why most of the Iranian population is composed of poor people. Data collected in the year 2007, showed that 18% of the total population live below the poverty line. As a result the income per capita for the three years running from 2007, 2008 to 2009 was $12200, $12400 and $12500 respectively (Ilias, 2010, p.3).

Fig. Showing inflation rates of Iran from the year 2000 to 20007 (Ilias, 2010, p.3).

Secondly, poverty is a fundamental issue affecting the economy (MacGuieneas and Peuquet, 2010, p.1). The high population is what is causing the poverty levels to be high since the nation is not in a position to sustain it. Therefore, this has made the country focus more on curbing the poverty problem instead of progressing ahead economically to attain the standards set by other developed nations like the United States of America.

Iran is currently facing fragile political conditions after the disputed presidential elections held in 2009. Other than this, the political situation of Iran has not been conducive since time immemorial. Political conditions of a nation have great impact in determining the future of a country’s economy (Ilias, 2010, p.3). In the case of Iran, the unstable political climate will influence the economy negatively by for example by hindering relations with other potential countries.

The government control on the economy

Just like any other government would do, the Iranian government has also come in to rescue the declining economic situation. The government before controlled the prices by giving subsidies to the manufactures and producers. The government does this to reduce the cost of living given the high inflation rate in the country (MacGuieneas and Peuquet, 2010, p.1).

The government is said to have imposed subsidies on products such as food, housing and gasoline. However, in the recent past, efforts have been put in place to phase out the subsidies. The main reason being the fact the subsidies are taking up a big percentage of Iran’s GDP up to the rate of 25%. This became a fiscal burden to the government (MacGuieneas and Peuquet, 2010, p.1).

It has also been noticed that the change of government system has had a great influence on the economy. For example during the regime of Ahmadinejad the country had a poor record of the economic position (MacGuieneas and Peuquet, 2010, p.1). This was particularly because of his style of administration which was not aimed at working on the economic reforms. However, after his election on a second term Ahmadinejad is currently working hard in a bid to improve the country’s status both economically and politically.

Economic Policies and USA and UN sanctions

Iran’s economic reforms have faced counteracting forces from the United States of America and the United Nations. Iran has been a major sore spot for United States of America because of its nuclear weapons development program. This could make the country a super power in the Middle East region. The United States of America on the other hand has for a long time believed that no country can overtake it in almost everything including the economy status and military power (Barry, 2010, p.1).

The change in Iran become a world’s threat has been a big blow to the United States of America. It is for this reason that United States of America has put sanctions on Iran to eliminate them from the world’s trade market. The UN and USA have enforced economic sanctions on Iran majorly because of its nuclear program. This punishment has great impacts on the economy since the USA and UN are influential in most of the world’s economy (Cleveland, 2004, p.78). This was confirmed when the current president of Iran, Ahmadinejad declared a replacement of the U.S dollar with the Euro in the foreign exchange of oil leading to a significant fall in the value of the Iranian rial.

Despite the fact that United states of America has put sanctions to Iran on investment and trade, Iran has continued to develop economically mainly because of the wealth of oil it has. Sanctions on the other hand are not the appropriate way of altering set policies. For them to be effective they have to be blended with incentives as it was in the case of Libya.

Economic crisis in Iran

Iran is currently facing economic crisis majorly because of its poor relationship with the United States of America. Even if Iran pretends to try and solely work its economic situation, the United States of America has taken advantage of the little discrepancy to impact Iran’s economy (Barry, 2010, p.1). This situation has spread all over the world with other nations having the same perception on Iran. As a result the following issues have arisen;

Bad banking practices in Iran

Most banks especially those with high reputation have stopped doing business with the Iranian banks. This is because Iranian banks do not conform to the international standards of banking. Therefore this situation has led to less supervision of country’s money with most of it being laundered everywhere (MacGuieneas and Peuquet, 2010, p.1).

If this trend is to continue, then Iran will definitely be omitted from the International banking standards. Furthermore, the country has also failed to comply with the International insurance and transportation standards which may lead to its exclusion as well hence in the long run face domestic political imbalance (Friedman, 2008, p.1). Such moves will be a big blow to Iran and more on the economy.

Iran’s dependency on imported gasoline

As mentioned above, Iran is big producer of crude oil. Even with such big oil deposits, Iran still imports most of its petroleum products from other countries such as Switzerland, India, France and Britain (Barry, 2010, p.1). The reason is that they lack oil refineries. The import of this oil takes up almost 40% of the domestic needs. Therefore, instead of Iran enjoying its foreign income it spends so much to benefit other countries. The poor relation with United States of America is also a threat in this case, because USA can request the importing countries to stop selling gasoline to Iran. If these countries respond to the request of united sates of America then that will be the end of Iran.

Subsidy of domestic oil prices

The energy consumption of Iran has increased tremendously in the recent past. The cheap petroleum products not only have an impact on the economy but also on the environment. This is because it is not up to the right standard hence leading to environmental pollution and decay as well traffic clog mostly in urban centres (Friedman, 2008, p.1).

Cheap imports

Iran are famous for importing outdated equipments among other second hand commodities. The industries of Iran hence face great challenge and competition from these commodities. They have to deal with the high cost of labour as well as the resulting exchange rates that have been overvalued. This way the economy is challenged since instead of building its own, it is favouring the economy of other nations from whom they import.

Economic Reforms

The major economic reforms aimed at converting the Iranian economy from being a government dominated economy to a market oriented economy and more so an oil-reliant economy. These reforms were initiated during president Khatami era. The government increased the access to education for most people (MacGuieneas and Peuquet, 2010, p.1). It also through liberalisation that Iranian business people could avoid rigid procedures of the government required to run a business. They were thus freed from things such as licences among others.

Through liberalisation, foreign investors were attracted into the country hence making the economy to grow. The government also made reforms on the economic sector through privatisation of most of the industries. This meant that there was a change of ownership from government to the public mostly through the sale of shares (Friedman, 2008, p.1). The benefit of this is because the private sector is always quick to making decisions and taking actions unlike the government which is bureaucratic.

President Sayed Mohammad Khatami was an important reformist in Iran. His economic policy was aimed at making reforms to the poor economy of that time. First and foremost, he allocated $5 billion to the private sector in a bid to promote privatisation in the country. In addition, he gave contracts worth $10 billion to the private sector. As part of his government policy goal, Khatami supported industrialisation in his country and when he realised how poor the economy was.

Currently, the economic position of Iran is not badly off especially because of the high prices of oil in the world. This has led to increased foreign exchange to the tune of $100 billion. Another current change is the decline in inflation which was noted to be 11.5% as at the month of February 2010 (Barry, 2010, p.1). A decline in inflation rate is a positive move towards economic reform as the standards of living will now go up in the country.

Last but not least, the Iranian government has a five year socio-economic development plan whose aim is to improve the current economic situation in Iran (MacGuieneas and Peuquet, 2010, p.1). The major targets of this plan are to make reforms in the banking, taxation, productivity and infrastructural sectors of the economy (Cleveland, 2004, p.78). Through this Iran will achieve efficiency in the industries hence becoming more competitive in the world thus expands in international relations. This plan aims at making Iran’s economy to be in twelfth position globally.

Conclusion

From the discussion above it can be concluded that the economy of Iran has been developing over many years. The current position is not good but with the focus and vision the government has, it will achieve its goals if at all the pace is properly set (Ward, 2009, p. 39). As seen, Iran is struggling economically because of its overreliance in the oil-sector and the inefficient sectors of the economy.

Despite all these, the country still has important trade partners including; United Arab Emirates, China, South Korea and Germany among other import partners (Gheissari, 2009, p.102). A recent move by United States of America and the United Nations to declare economic punishments will prove futile despite the fact that they are the super powers of the world. Iran has still declared to move ahead with its plans of economic reforms.

Reform alone is not the solution to the economic crisis facing Iran. The government has to chip in some assistance to rescue it. First and foremost, the government should aim at rejuvenating the earlier good relationship it had with the United States of America (Cleveland, 2004, p.78).

By doing this, it will eliminate the current state fear it has about the United States of America hence making it trade comfortably with it and other nations as well. The other ways include structural changes and creation of market reforms to curb inefficiency in industries (MacGuieneas and Peuquet, 2010, p.1). Last but not least, the government will also have to come in and backup the key sectors of the economy and specifically those that depend on the state to protect them.

Reference List

Barry, P. (2010). Iran’s economy’s biggest vulnerability. Web.

Cleveland, W. A History the Modern Middle East. Westview Press, 2004.

Ghasemi, S. (2011). History of Iran. Web.

Gheissari, A. (2009), Contemporary Iran: Economy, Society, and Politics, New York, USA: Oxford University Press.

Friedman, R. (2008). The Predicate for Policy Change in Iran. Web.

Ilias, S. (2010). Iran’s Economic Conditions. Web.

MacGuieneas, M and Peuquet, J. (2010). Fiscal Reform and Poverty Reduction Are Mutually Reinforcing. Web.

Ward, S. (2009). Immortal: a military history of Iran and its armed forces. Georgetown University Press. p. 39.

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