Islamic Social State: the Case Study of Iran

1. 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

2. 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

3. 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

4. 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

5. 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

6. 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

7. Iran's State Expenditure as Percent of GDP (1959-2005) 7 Source: National Accounts, Central Bank of Iran

8. Iran's State Expenditure as Percent of GDP and Crude Oil Price Fluctuations (1959-2005) 2nd oil shock Iran-Iraq War 3rd FYDP 1st oil shock Source: National Accounts, Central Bank of Iran and http://inflationdata.com/Inflation/Inflation_Rate/Historical_Oil_Prices_Table.asp for crude oil price. 8

9. 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 Organization 9

10. Government Budget and its Functions as Percent of GDP Source: Total Budget Laws of the Islamic Republic of Iran 1382-83 (2003/04-2004/05). Management and Planning Organization. 10

11. 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

12. 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

13. 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

14. 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 systems ii)-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

15. “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

16. Subsidies • Explicit subsidies: 5% of GDP for 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 GDP These arise from the differential between domestic and border prices. 16

17. 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

18. 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

19. 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

20. Thank you