Why is Iran's Economic Growth Not Sustainable?

The International Monetary Fund (IMF) in its latest report on the global economic outlook for the current year (2017) predicts that global economic growth will increase by about four-tenths of a percent from 3.1% to 3.5%. However, this international body has reported that Iran's economic growth in 2016, corresponding to the year 1395 in the Persian calendar, was 6.5%, but it forecasts that this growth rate will be halved in 2017, dropping to 3.3%. While the increase in global economic growth should boost demand for oil and positively affect the economies of oil-exporting countries, the fluctuation in Iran's economic growth is not a new phenomenon. Analyzing the growth rate since the fall of the previous regime shows that it has always experienced severe fluctuations. Inflation is also on the rise again, expected to reach 11%. Despite such forecasts, some election candidates are claiming a 2.5-fold increase in Iran's income and the creation of 5 million jobs (over 1.25 million jobs per year), while others promise cash subsidies of 250,000 tomans. The volatility in economic growth indicates underlying shocks hidden behind economic factors. The IMF report indicates that unemployment in Iran will not decrease in the next two years and will remain at the officially announced level of 12.5%. Based on this forecast, inflation is also expected to rise again to 11%. Despite such predictions, some election candidates are touting a 2.5-fold increase in Iran's income (what does income refer to?), the creation of 5 million jobs (over 1.25 million jobs per year), and others promise cash subsidies of 250,000 tomans. Economic growth in Iran—both externally and internally driven—is not the product of the political will of this candidate or that government official; it is mainly due to factors tied to the global oil market. With the weakness of domestic growth drivers, these external factors determine the fate of the economy and economic variables such as growth, employment, foreign trade balance, inflation, and the value of the national currency. Therefore, while the impact of policymakers and policy-making on economic growth is important, it does not determine all developments. The fundamental question is why Iran's economic growth is not sustainable and declines with the slightest internal or external tension. Oil rent as the engine of Iran's economic growth is directly and indirectly, overtly or covertly, rent-based and mainly dependent on oil windfall revenues, and is realized with the government's central role. When oil revenues increase, government investment and subsequently private sector revenues increase, intensifying economic growth. Conversely, a decrease in oil revenues leads to a reduction in this rent-based and oil-driven growth. According to the IMF: "The increase in oil production and exports after the implementation of the Joint Comprehensive Plan of Action (JCPOA) prepared the ground for real GDP growth to reach 6.6% in 2016-2017. In the following year, growth in the non-oil sector will remain moderate, and economic growth in 2017-2018 will drop to 3.5%." Thus, the main reason for the IMF's reduced estimate of Iran's economic growth is the return of Iran's oil revenues to normal levels and the fading of the positive shock at the beginning of the post-JCPOA period. After this positive shock, long-term economic and managerial factors, along with internal and external political shocks, shape the path of economic developments. The vicious cycle of negative fixed investment rates in Iran and negative economic growth has seen a significant decline in the rate of fixed investment in recent years. Fixed gross capital formation has experienced a negative growth of 8.9% in just the past nine months. However, the decline in investment is not limited to last year and has been experienced in previous years as well. Two factors explain this decline in the rate of capital formation and its negative trend: one is the failure to realize development budgets, and the other is reduced investment in the construction sector. This is due to the skyrocketing current costs of the government, reduced foreign revenues, and the waste of budget credits within the framework of rent-seeking and non-economic goals. It is agreed that the negative growth of fixed gross capital formation will manifest as a reduction in economic growth in the coming years. The surge in oil revenues last year, however, prevented the emergence of the consequences of chronic negative investment rates, but if the government fails to implement necessary measures, this will lead to severe fluctuations in economic growth and its negative consequences. Economic growth is achieved through increased investment and also through optimal consumption and efficient resource utilization. Increasing investment and consumption and the efficient use of resources are contingent upon the existence of security, peace, and political and economic stability, in other words, reducing political risk and also access to financial and human resources. The relationship between economic growth and capital growth is reciprocal and forms a vicious cycle. With chronic declines in the economic growth rate, the investment rate has declined, and with the fall in the investment rate, the future of economic growth is at risk. Political risks and negative internal and external shocks, aside from economic factors such as investment or government budget deficits mentioned earlier, also affect the current year's economic growth. One element of political and economic risk is the "presidential election" scheduled for May 29 this year. Given the polarizing nature of factionalism within the government, if power shifts to the opposing faction, it could become an economic earthquake of sorts. The slogans of the government’s opponents are very populist and indicate the plundering of resources by the opposing faction and are centered on the distribution of budget resources. The fears and hopes that have dominated the political-economic atmosphere in Iran over the past two years—the 10th parliamentary elections and the U.S. presidential election—could, with a power shift to the opposing faction, darken the future political and economic outlook of Iran and lock decision-making regarding investments again. Especially now that it has been reported that U.S. President Donald Trump has ordered a review of the nuclear agreement with Iran and has asked his administration to reconsider the lifting of sanctions under the nuclear agreement with Iran, known as the JCPOA. In conclusion, the sustainability of economic growth and its durability is a prerequisite for solving problems such as widespread unemployment and poverty and economic-social marginalization. However, economic growth in Iran has historically suffered from instability. Generally, three categories of factors play a role in the instability of Iran's economic growth: the external and internal structure, which is a long-term factor of this instability; mismanagement and inappropriate policymaking; and finally, the issue of internal and international tensions, which are sources of internal and external political risks. In the near future, especially during the "presidential elections" or the death of the regime's leader, the role of political tensions and shocks will become more significant than other factors. Without a clear outlook for the future, capital formation and investment, which are currently not in a good state, will face new shocks. Assuming the current government remains at the helm of the executive branch and the stability of other regime components, the shadow of current economic constraints, especially the inadequacy of investment, will persist.