Islamic Social State: the Case Study of Iran

Armineh Manookian Anush Begoyan

CRRC-DAAD Conference on “Social State: Concept, Armenian Reality and Perspectives“,

February 24-26, Tsakhkadzor

The Content:

i)-Iranian Economy in the Context of Islamic Economy Principles of Islamic Economy Iran’s Macroeconomic Conditions after the Islamic Revolution State Share in the Economy Privatization debate

ii)-Iran’s Social State Education Health Welfare Subsidies

iii)-Conclusions

2

Principals of Islamic Economy:

i)-the prohibition of the charging and collection of interest,

ii)-a system of taxation and redistribution known as ‘zakat’ or ‘sadaqat’,

iii)-accordance of economic decisions to Islam’s moral principles

3

Iran’s Macroeconomic Conditions after Revolution

Islamic revolution of 1979 redefined all institutions based on Islamic norms and principles

Centralized economy during Iran-Iraq war (1980-88)

Approve and implementation of five year development plans (FYDP)

Significant structural reforms in the 3rd FYDP (2000-2004) ambitious privatization program , granting the licenses to private banks and insurance companies establishment of the Oil Stabilization Fund (OSF), …..

4

Challenges that Iran’s Economy Still Facing

Highly dominated by oil export (about 60 % of government budget)

Large size of the public sector

Low rate of tax revenue in the government budget (about 25 % of government’s general revenue)

High rate of liquidity (30.2 %)

High rate of inflation (15 %)

High rate of unemployment (10.9 %)

Unsuccessful privatization program of state owned enterprises

5

State Share in the Economy-Constitution

Article 44 of Constitution of IRI:Three Sectors in Iranian Economy:i)-state,ii)-cooperative, iii)-private.

State Sector is to include: “all large-scale and mother industries, foreign trade, major minerals,

banking, insurance, power generation, dams, and large-scale irrigation networks, radio and television, post, telegraph and telephone services, aviation, shipping, roads, railroads and the like; all these will be publicly owned and administered by the State.”

6

0

10

20

30

40

50

60

(Per

cen

t)

Revolution Government expenditures as percent of GDP

Source: National Accounts, Central Bank of Iran

Iran's State Expenditure as Percent of GDP(1959-2005)

7

Source: National Accounts, Central Bank of Iran and http://inflationdata.com/Inflation/Inflation_Rate/Historical_Oil_Prices_Table.asp for crude oil price.

Iran's State Expenditure as Percent of GDP and Crude Oil Price Fluctuations

(1959-2005)

0

10

20

30

40

50

60

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

(Per

cen

t)

0

10

20

30

40

50

60

(Do

llar

per

Bar

rel)

Revolution Government expenditures as percent of GDP Crude oil price

3rd FYDP

1st oil shock

2nd oil shockIran-Iraq War

8

2003 2004 2005

General Government Budget 411,425 474,643 527,788

Banks, State Owned Enterprises and Other Organizations dependent to Government 554,337 688,921 1,055,969

Less: Duplicated Figures 22,099 23,428 35,817

Total Budget of Iran 943,663 1,140,135 1,547,941

GDP at current prices 1,109,532 1,406,031 NA

As percent of GDP

General Government 37.1 33.8 … Expenditures of Banks, State Owned Enterprises and Other Organizations Dependent on Government 50.0 49.0 …

Total Budget 85 81 …

Total Approved Budget of Iran and Its Subsections

(In billion of Iranian Rials)

Source: Total Budget Laws of the Islamic Republic of Iran 1382-84 (2003/04-2005/06). Management and Planning Organization9

Government Budget and its Functions as Percent of GDP

2004

Other * 14%

Other66%

General Government

34%Economic Affairs

3%

Natioanl Defence 2%

General Affairs 2%

Social Affairs 13%

2003

Social Affairs 13%

General Affairs 2%

Natioanl Defence 2%

Economic Affairs 4%

General Government

37%

Other63%

Other * 16%

Source: Total Budget Laws of the Islamic Republic of Iran 1382-83 (2003/04-2004/05). Management and Planning Organization.

10

Privatization Debate

Ongoing debate between nationalization and privatization process

Considerable attempts during 3rd FYDP for socio-economic reforms: – Reforms aimed at reducing the state control over the economy. – Ambitious privatization programs of state owned Enterprises (SOE), banks and

insurance companies,

Current conditions:– SOE privatization has not been fully implemented. – privatization of existing banks and insurance companies has not yet occurred. – licensing of four new private banks and insurance companies

Main obstacle: – Current interpretation of Article 44 of the Constitution

11

Iran’s Social StateEducation

Article 30 of Constitution:

“The government must provide all citizens with free education up to secondary school, and must expand free higher education to the extent required by the country for attaining self-sufficiency.”

the largest share in the government spending (24%)

Three types of Institutions: public, nonprofit and private institutions

In 2003-04 academic year: 16 million students covered by Ministry of Education. 49 percent of the total 1.9 million university students are in the public universities university female students comprise 52 percent of the total students

12

Health

over 85 percent of the population has access to health services

currently the lowest share in the government spending (5%)

public health centers, private health network and insurance-company-based voluntary schemes

In 2004: beneficiaries of “Medical Services Insurance Organization”: 32.6 million persons

(approximately 50 percent of population). Out of the total number of beneficiaries, 73 percent are villagers

13

Welfare

Article 29 of Constitution refers to Social Security issue:“…the government must provide services and financial support for every individual citizen by using national revenues and funds obtained through public contributions.”

Two types of welfare system: i)-contributory social security systemsii)-noncontributory social assistance and relief institutions

Contributory System: in 2004: 2,000,000 pensioners covered by two major organizations. (60 % of population over

65 years old.)

Non Contributory System: strong organizations known as “bonyads”

14

“Bonyads”

involved in: -financial holdings, business and welfare and social affairs

Targeted at:-mainly “revolutionary movements” groups, veterans and families of martyrs.

Main Sources from:-net income of their asset holdings, -government transfers -charitable contributions including zakat,

All the bonyads are supervised directly by the Supreme, religious leader.

important issues:-control a large part of social-economic activities -non transparent operation and relations with the public sector -serious issues regarding their accountability-during 3rd FYDP some positive movements to make the activities of bonyads more transparent

and accountable.15

Subsidies

Explicit subsidies: 5% of GDPfor basic necessities including wheat, sugar, milk, cheese,

rice and vegetable oil, fertilizers, and foreign exchange losses generated from the 1993 and 2002 exchange rate unifications.

Implicit energy subsidies: 10.5 percent of GDPThese arise from the differential between domestic and border prices.

16

How are the Equity and Human Development Indices in Iran?

The Gini coefficient: 43 (UNDP report)

(range for 124 countries is between 24.7 and 70.7)

Iran’s Human Development index: 99 among 177 (UNDP report)

(Medium development group)

Population below poverty line: 21 % in 2002 (IMF country Report)

17

Large involvement of the state, but poor result. WHY?

Poor public administration – inefficient operation, centralization of the power in the hand of

selected group, incomplete and non transparent information, underdeveloped infrastructure

Political and religious dominated environment and Islamic charity organizations -bias distribution of resources

Non transparent operation -encourage the shadow economy

General, untargeted subsidiary system -benefits are distributed to all members of country equally

The small role of tax in the economy

18

Concluding General Remarks:

rich natural resources and the availability of large revenues through these sources not necessarily provide for the welfare and prosperity of society.

The importance of good governance, effective public administration and protecting citizens through targeted regulations and guarantees

The large provision of public services and some explicit subsidies for basic goods In Iranian economy can hardly have any direct and significant influence on the economy of Armenia

Some impacts on Armenian economy through Iran’s implicit energy subsidies which affect final prices of goods produced by Iranian industries, which requires a separate study focusing on the positive and negative effects of it

19

Thank you