Sanctions are not to blame for a rise in unemployment

A 121^st issue of Hamshahri Mah Monthly dedicated its economy pages to a long report on the status of employment during the government of President Rouhani. The 20-page report featured the views and analyses of 10 university professors, economists and executive officials. The following is an excerpt of the viewpoints of nine of the interviewees and an abridged Q and A with Saeed Laylaz, an economic researcher and a university professor.

Hassan Taei, Deputy Minister of Cooperatives, Labor and Social Welfare: A decline in economic growth, improper foreign policy and a rise in non-productive, speculative activities are to blame for the unemployment hike in the country.

Ahmad Rousta, Shahid Beheshti University professor: The first mechanism to defuse the crisis goes through creation of a good entrepreneurial atmosphere and creation of interest among investors to put their money in productive businesses. To that end, giving professional counseling to families, steering the workforce toward fairly sustainable jobs, and paying more attention to housing and tourism can be effective. We need to have long-term management when it comes to employment.

Hossein Raghfar, Economist and Al-Zahra University professor: A lack of bright prospects when it comes to development of financial and credit institutes is one of the problems the country’s economy is wrestling with. We are in a crisis triggered by unemployment and this could have social and psychological ramifications.

Bahman Arman, Economist: Ties between our banking sector and the rest of the world are very limited. We have missed out on many opportunities and are unable to secure the inflow of foreign investment. Because of tensions, our technological interaction with industrialized countries is very limited. Concentration of focus on infrastructure by developing the railway and irrigation systems and building hospitals and dams and entrusting such projects to private local contractors can be very useful.

Jafar Nikkhahan, Head of the Social Welfare Department at the Ministry of Cooperatives, Labor and Social Welfare: As long as oil money is directly linked to government spending, employment and production won’t get the attention they deserve. But when that source of revenue is taken away from the government, it will be forced to rely on tax, a process that involves focus on production. Only then will the government become a real supporter of manufacturing.

Ali Ghanbari, University professor: What should be done is to pay more attention to social capital. Ties between the public and the government should improve so that the former could be more hopeful about the future. The government needs to stand up for our national interests and pursue a hands-off approach to economy. We need to wean our economy off oil and pave the way for more private investment in the country. In the meantime, the government needs to turn up the heat on corruption.

Kamal Athari, University professor: The policies of the previous government, especially in the housing sector, were a major contributor to unemployment in the country. Housing creates unsustainable employment. The amount of capital the housing sector draws is three to four times as much as the industry. To defuse the country’s economic crisis and ease the strain of unemployment, a knowledge-based economy should be introduced. Recognition of intellectual rights is the first requirement for the new system.

Kamran Nadri, Imam Sadegh University professor: The most important thing the government can do is to inject stability into the pricing system which has nothing to do with sanctions and is directly related to local fiscal policies.

Zahra Karimi, Mazandaran University economics professor: Sanctions have dealt a blow to business. For the economy to post growth, sanctions need to be lifted. But that is not all. Another problem has to do with inflation. In the past, inflation and unemployment used to counteract each other. A rise in one would result in a decline in the other. But our economy is suffering from inflationary recession in which high inflation is coupled with high unemployment. We should not move toward zero inflation – rather we need to incorporate anti-recessionary policies and low inflation.

Disruption to the country’s economic growth began in 2007. That came two years after the inflow of capital took a hit. It was in the same year (2005) that industrial investment began to nose-dive. Back then it was clear that unemployment would soon skyrocket. In other words, the country’s unemployment woes have nothing to do with sanctions and speculations that sanctions are to blame for those problems are a big lie.

And now an excerpt of the interview with Laylaz, who believes the country’s employment prospects will remain bleak at least for a couple of years and says the only way out of the unemployment crisis goes through investment in manufacturing. He blames unemployment on a decline in investment and productivity which in turn stems from wrong economic policies. He also urges the government to “increase its share of development investment in order to urge the private sector to follow suit”. This renowned researcher says suggestions that sanctions are to blame for the country’s high unemployment rate are “a big lie”. He also predicts that the economy will go through a difficult period over the course of the next two years. The following is an excerpt of the monthly publication’s interview with Laylaz:

Can we blame a decrease in the ranks of the youth for a decline in the employment rate?

Economically speaking, it doesn’t make any difference who is and who is not inside the employment cycle. What is important is that some are in the ranks of consumers but play no role in production.

How are the economic prospects of the country over the next two years?

Figures show that in the 12 months to March 21, 2013 out of an active population of 24 million 12.2 percent was unemployed. That means there were as many as 3 million jobless people in the country and the remaining 21 million provided for the entire population of less than 80 million. Those figures were worked out based on a standard which viewed one hour of work per week as employment. When an individual works only one hour a week, s/he cannot provide for himself/herself, let alone for a few people. That puts a lot of strain on the country’s wealth production system which manifests itself through a decline in investment as well as in gross fixed capital formation (GFCF). According to statistics, during the same 12-month period GFCF stood at around 161,000 billion tomans, that is 23.7 percent of the country’s GDP of 680,000 billion tomans. Three years earlier the same index stood at 26.5 percent of GDP. The declining trend started in 2005. In 2009 it was in negative territory and in the following year it stood at no more than 7 percent. In 2011 it was less than the rate of economic growth. In 2012 the economic growth and investment rates plunged to record lows, declining by 22 percent over the year before. That means the prospects of wealth production and employment are going to be bleak for at least two more years.

You talked about the problems. What do you think is slowing down economic growth and keeping unemployment high?

When economic growth and wealth production in a country are disrupted, unemployment becomes rampant. Growth is rooted in investment and productivity, two fronts we have problem with. In recent years, [annual] investment has been between $30 billion and $50 billion short of what it had to be. In other words, the capital shortage has amounted to between $350 billion and $400 billion. Unemployment is a natural end-result of such shortage. Coincidentally, if productivity had not declined at the same rate, unemployment would have been much higher. In fact, a major part of the country’s unemployment is glossed over by non-productive jobs. Considering the trend of capital formation, the unemployment rate could have been between 16 and 17 percent. By old standards, we have as many as 5 million jobless people. So if productivity and employment rates pick up, those who have stopped seeking employment will definitely return to the job market. For instance, Iranian women are both educated and motivated to have jobs, but in light of the fact that the stage is not set for their employment, they show little interest in seeking jobs. I believe a decline in investment and decreased productivity are the important factors affecting the country’s employment status.

Some view sanctions as another factor. What do you think?         

That is a big lie, because disruption to the Iranian economy began in earnest in early 2008, whereas sanctions were imposed in 2012. The adverse effects of sanctions on an economy manifest themselves in a year or so. Still if we had taken appropriate measures, we could have prevented those negative effects. Disruption to the country’s economic growth began in 2007. That came two years after the inflow of capital took a hit. It was in the same year (2005) that industrial investment began to nose-dive. Back then it was clear that unemployment would soon skyrocket. In other words, the country’s unemployment woes have nothing to do with sanctions and speculations that sanctions are to blame for those problems are a big lie.

What impact do you think too much dependence on oil has had on the rise in unemployment?

I don’t see dependence on oil revenues as a major factor here. Certainly, more investment and reliance on local production rather than on imports will boost employment. But evidence suggests that the decision to turn to the services sector and imports has not been the main culprit. Investment was disrupted in 2005, but thanks to previous inflow of capital, economic growth continued into late 2007. Only afterward did the decline in indices begin to become more and more apparent.

What is to blame for the considerable decline in investment?

In 2012 current expenditures registered a 100 percent increase over 2008, whereas development spending posted no change at all. That was a choice rather than a necessity, driven by promises to bring oil money to the tables of the people. In 2004, the government’s public expenditures stood at 22,000 billion tomans. The figure soared to 90,000 billion tomans in 2012. That means during an 8-year period, current expenditures rose 5-fold, whereas development expenditures grew only 2-fold. In 2012 the volume of development expenses was lower. Under such circumstances, economic growth and employment do slow down. If they don’t, economics should be written off as a branch of science.

How do you see the performance of the government over the past year, particularly as far as employment is concerned?

Under the new government, inflation which is one of the primary factors that prompts the private sector to avoid investment has been brought under control. That political stability has made a comeback, essential items are being priced and hasty decisions are avoided has pushed the economy into positive territory since the beginning of 2014. The fact that the economy has posted growth is promising. In 2012 the government’s development expenditures stood at 15,000 billion tomans. That figure is expected to rise to 40,000 billion in 2014. That means positive developments are on the horizon.

What do you suggest the government do to speed up growth, facilitate investment, and subsequently push down unemployment?

In order to facilitate investment and secure the return of the private sector to economic activities, we need to work on infrastructure. Maybe the government should increase its share of investment in development projects to encourage the private sector to follow suit. If the government decided to increase its investment, it would have to rely on its own revenues rather than on the money it receives from the Central Bank. There are indications, including a decline in inflation, that President Rouhani is serious in not using the Central Bank money. In that case, the only way to compensate for the government’s budget deficit is to increase energy prices. Of course, that is possible. Implementation of a second phase of the targeted subsidies proved wrong those who were concerned about the consequences of a rise in energy prices. If people knew that the revenues the government secured from such price hikes were used for the right purpose, and if the government were reliable, they would definitely assist the government. So the government can secure private investment in the energy sector over the next two years.