Main Problems on Iran's Economy

Dr. Masoud Nili from Sharif University, Tehran, lists the main problems of Iran's Economy in Rastak (a website of Iranian Economists in Farsi). Find the complete paper here:

1) The size of government and its role in economy is huge and growing.
2) There is a huge amount of "hidden" subsidy in economy. The biggest one is the energy subsidy which reaches the amount of almost $50 billion per year.
3) There is a growing budget deficit that worsen by expansionary policies.
4) Inflation. An average of 18 percent per year for a long time.
5) Instability in government policies including its fiscal policy. It commits to things that can not afford.
6) Almost constant nominal exchange rate for a long time in presence of a considerable difference between domestic and foreign inflation rate.
7) No effective relationship with world economy (except in Oil section).
8) Lack of an efficient social security system. The poverty is worrisome.
9) A tendency towards price control policies especially when the inflation is high.
10) Small, weak and inefficient private sector. Government monopoly leaves a small area for private sector.
11) Dependency to oil revenue.
12) Lack of compatibility. The only products that can be exported are those who rely on natural resources, not on innovation.
13) Monopoly in wide areas of economy.

Each case needs reliable data and a vast amount of elaboration to be understood.

A paper on capital formation and oil in Iran

I found this paper by Sousan Badiei and Cyrus Bina in an online journal: Topics in Middle Eastern and North African Economies

The introduction (I dropped the references:()) follows. The paper is available here.

Introduction: The focus of this study is on the “rentier” character of state and economy in relation to capital accumulation during the period of 1960-1997 in Iran. The rentier character and structure of the Iranian State reflects the domination of the economy by the oil sector (). The rentier nature of the Iranian economy is also potentially recognized through a strand of literature in economic development, known as Dutch Disease (). Such domination has continually been the common denominator of both the Shah’s, as well as the Islamic Republic’s regimes in Iran. ... It is shown through a simple but decisive econometric model that oil revenues had a positive and significant relationship with the long-term trend of gross fixed domestic capital formation (GFDCF) during the latter part of Shah’s regime in Iran. However, it is also shown that such a positive and significant relationship had suddenly become negative after the legendary oil price hike of 1973-1974, despite the fact that it brought an enormous windfall to the Shah’s treasury by 1975 (). The situation under the Islamic regime has been somewhat different. Iran’s oil revenues have declined substantially, and were subject to much fluctuation during the period of 1980-1997 (). It is shown that econometrically there is no significant relationship between the extent of oil revenues and the gross fixed domestic capital formation (GFDCF) during the period of 1980-1997 in Iran. Moreover, the Islamic regime in Iran does not appear to have paid much attention to capital accumulation and long-term investment. Instead, the government seems to have allocated the revenues from oil rents to politically motivated consumption expenditures and unproductive activities, presumably, to contain and ameliorate the potential internal political upheavals and external threats during the period under study (). The analogue of these activities is the fact that the Government of the Islamic Republic has consistently engaged in the allocation of various sorts of (formal and informal) subsidies to those areas and interest groups that provided sustained ideological and material support for the fortification of the regime in Iran ().

Law and Economic Growth

It is widely acknowledged that law affects the economic growth. Good law improves it and bad law prevents growth. In an interesting talk in College of Law at UIUC, Bob Cooter from UC Berkeley elaborated more on this subject. He said in different stages of economic growth, similar to different stages of the growth of a firm, different resources provide the necessary investment. So the type of law differs in these stages.

In the early stages of growth, investment is based on the money of family and friends (relational, he calls). In this stage property law should be developed well to help the transactions. In the second stage the money comes form banks and other financial sources (a small group with ability to evaluate the profitability of a project; private according to the authors). So in this stage it is the contract law that fosters the growth. In the last stage, the money comes from the public through stock market and so. In this stage the business law should be developed to help financing the projects.

The talk covered a few chapters of a new book by Cooter and Schaefer. It should be interesting. The primary name is Law and Poverty of Nations.

The Rule of Law

I found this piece about the rule of law interesting. More is available in Legal Theory Blog.

Requirements on the Rule of Law (No. 1-5 from Rawls, No. 6 added by the author of Legal theory Blog):

1) Compliance be possible: You can not want people to climb the walls!
2) Regularity: Similar cases should be treated similarly. Any distinction should be justified by law.
3) Publicity: Law should be known and clearly defined and be available for public.
4) Generality: You can not pass a law that is only aimed to your cousins!
5) Due process: Procedures are important. They should be fair and orderly.
6) Government under the law: It is obvious what it means. It is almost implied by generality.