Signs of the economy slowing–anyone in charge?
The recently published unemployment data for spring 2009 (1388) indicate that economic slowdown continued in the second quarter of 2009. Without the national accounts data for 1387, due any day, it is difficult to be certain about the severity of the current economic slump, but unemployment and inflation data and the continuing political crisis in Tehran are reasons to be concerned about the economy.
Last spring unemployment registered 11.1 percent, which is lower than the winter (1387) unemployment rate of 12.5% but quite a bit higher than where it stood last spring (9.6%). Assuming that the size of the labor force has remained constant, this means that compared to last spring an additional 360,000 people joined the ranks of the unemployed in spring 2009.
The much lower inflation numbers for Tir 1388 (Jule/July 2009) released by the Central Bank are ordinarily good economic news but this time it may be further evidence of slowdown. During the month of Tir the CPI rose by only 0.1 percent, which is an annual inflation rate of 1.2 percent without seasonal adjustment. (Some prices, such as fruit and vegetables, are still rising fast, probably because of supply constraints, and as much fruit as Iranians eat average expenditures on fruits and vegetables are less than 10 percent of household expenditures). So the tight credit policy of the Central Bank for the past year or so has succeeded in containing inflation but at the cost of rising unemployment. Has the Central Bank pushed too hard on the brakes?
The crucial GDP figures for 1387 (2008/09) which can answer this question are yet to be released by the Central Bank. There is little doubt that economic growth in 1387 will be lower than the robust 6.9% for 1386, but how much lower we do not know. Whatever growth was in 1387, it will probably be still lower in 1388 (2009). The expansionary credit policies of the ninth government (quick returns projects) may not have been expansionary after all if the Central Bank cut credit to the public banks faster than they could lend to small and medium borrowers.
The cost of lower growth –recession?–in terms of lost output and lost jobs–especially for the young–is huge. To get a rough idea, consider the record of recent growth of output and employment. Between 1996 and 2006 the economy grew at a respectable rate of 5.4% per year, enabling it to add on average about 590,000 new jobs each year–an employment growth of about 3.5%. However, because the labor force (15-64 age group) was growing at a whopping 4.1% rate per year, these rates of growth of output and employment proved insufficient and unemployment climbed from 8.9% to 13.0% (census numbers). During the preceding five years, 1991-96, when the economy grew at a slower rate of 3.8% per year, employment grew at 2.2% per year with half as many jobs (295,000) created each year. Lower growth of the labor force (2.1% per year) allowed the unemployment rate to decline from 13.8% to 8.9%.
Based on these figures, roughly speaking the loss of one percentage point in growth, in addition to the loss of about $3 billion dollars in output, will result in about 100,000 fewer new jobs. So, if growth comes to a halt this year or the next, the loss to the nation in one year would be about $15 billion in terms of output and half a million jobs. Compared to charges of massive corruption, these losses are larger and not just based on rumors. Nevertheless they fail to stir the same degree of indignation and popular outcry that corruption seems to cause.
As the past record in Iran and other developing countries makes abundantly clear, economic growth is essential for job creation and poverty reduction. But, unfortunately economic and political discourse in Iran is primarily focused on issues related to corruption and redistribution. Lacking an effective political advocacy group, growth rarely commands the high ground in national debates that it deserves. The government is supposed to be the advocate for growth, so growth is in real danger when the government is all focused on redistribution. Don’t get me wrong, I am just as concerned about a fair distribution of income as the next guy. I believe that championing equity and eliminating poverty are the proper concerns for a government. After all, a more equal distribution is important and necessary for long run growth. But, as we all know, the fight over the cake can make it smaller but never bigger.
What can President Ahmadinejad do? Very little for the moment because it is busy just getting its cabinet in place. This week, the majlis will have a chance to hear the new ministers responsible for the economy discuss their plans to solve the country’s immense economic problems. With lower oil prices and considerable uncertainly about the political and economic future of the country, public and private investment must have fallen fast. The rial is highly over valued, discouraging production for exports, and the limited rebound in the oil market is insufficient to bring the economy back from the brink. Let us see what new trick the new Ahmadinejad administration has in its sleeves to turn the economy around.