By: Tytti Nahi

Demography, rapid urbanization and a shift in the country's economic structures are the main causes of growing unemployment in Iran. While government plans and policies are focused on dealing with this problem, analysts agree that high unemployment is a phenomenon that will not go away for at least one decade, until the pressures caused by demography are reduced substantially. Having said that, the question is whether high unemployment will lead to social and economic tensions that will undermine the country's development over the next few years. The following article discusses the various initiatives that the government has taken to deal with the challenge of unemployment. 

Background

High unemployment and the associated social and economic phenomena have impeded the economic development of Iran for decades. The unemployment rate has not dropped below 9 since mid 1960s and peaked at 14 percent in mid 1980s. Today, official estimates range between 13.5 and 16 percent.

Over the decades lack of employment has contributed to a variety of alarming trends such as a brisk rural-urban migration - the urban population grew from 32.9% to 64% in 1959-2000, and one of the worlds' highest brain-drains - IMF estimates that one in four Iranians with college degrees work outside Iran.

Rapid population growth and women's low workforce participation have added to the dependency of out-of-work population on the employed. Iran's current workforce is 19 million, out of which 16% are unemployed. This leaves 17.7 million people to earn the livelihood of 63 million, a ratio of 1 to 3.6. High dependency ratios and dwindling welfare of the population restricts the expansion of housing markets and reduces saving, thus obstructing investment.

The most damaging consequences of a continuing high unemployment are structural. Sohrab Behdad has studied the occupational stratification of Iranian work force in 1976 - 1986 and found that small manufacturing enterprises with less than 10 workers increased by 100 per cent, wage workers' share of the total workforce fell from 34.9% to 17.1% while self-employment - sometimes simply a reservoir for unemployed workers - rose from 31.9% to 40%.

Such a structural involution reflects increase in trading, traditional services and speculative activities at the expense of productive economic activities.

As an increasing number of youth, born during the 1980s baby boom, is reaching economically active age, the unemployment concern is quickly developing into an acute crisis. While 692,750 job seekers entered the labor market each year in 1996 - 2000, only 296,250 jobs were created annually. 

For the next 15 years, some 750,000 to 800,000 new jobs will be needed per annum while even the strong overall growth during the last two years (March 2000 - 2002) has seen annual employment creation of only 400,000 - 450,000.

Creation of 750,000 to 800,000 jobs per annum would require a minimum real GDP growth of 6 percent, which, in turn, can only be sustained through an investment ratio of some 30 to 35 percent of the GDP. The recent history has seen the investment level linger at 14 - 21 percent of GDP (see Table 1). 

Table 1: Investment, 1995 - 1999

Government Policies

The Third Five-Year development Plan pledges to create an gradually growing number of jobs every year, from 504,000 in the first year (year ending on 20 March 2001) to 800,000 in the last year (ending 20 March 2005).

The government budget allocated for employment generation rose from Rls670 billion ($84 m) in 1379 to Rls1420 billion ($177.5 m) in 1380. For 1381 the Council of Ministers has approved expenditure of Rls835 billion ($104.4 m) or 0.13% of the whole budget for job creation. Also, Rls4.5 trillion ($562.5 m) will be allocated to the banking system for investment in job creating projects.

In addition to these funds allocated from the government budget, a notable sum has been directed from the Oil Stabilization Fund for lending to employment and export generating private sector projects. 

The Third Plan chapter on employment (articles 48 to 57) suggests the following policies: 

· Foreigners without work permits to be deported
· Export of competent workforce abroad to be encouraged
· Lending for private projects to be facilitated by granting earmarked funds to Bank of Agriculture, Bank of Housing and Bank of Industries & Mines
· Investment in employment creating and small-scale industrial projects to be supported
· Individuals unable to afford the equipment necessary in their occupation to be granted financial support
· Private sector employment to be encouraged through reduction in employer's share of premiums and elimination of salary tax from newly-employed staff
· Employment creation in deprived regions to be encouraged by targeting government employment creation funds to those regions and granting regional investment exemption from duties and interest rate subsidies 
· Infrastructure utilities in industrial production to be granted preferential subscription charges
· Establishment of training centres to be encouraged through interest rate subsidisation
· Information on small-scale occupations with low capital requirements to be spread through national media, especially broadcasting.

Some of the more specific government initiatives evolve around the following:

I) Private Sector Funding

Lending for private projects has been facilitated from budgetary government allocations and the Oil Stabilization Fund (OSF). In the current Iranian year the government plans to channel a total of Rls2,940 billion ($367.5) to these loans. CBI will also be granting loans of up to Rls100 billion ($12.5 million) in order to create jobs for professional University graduates. It should be noted that 50 per cent of the OSF reserves are earmarked for employment and non-oil export promotion.

The loans are administered by the Bank of Agriculture, Bank of Housing and Bank of Industries and Mines, mentioned in the Third Plan, but also by the commercial state banks. It is the banks' responsibility to check the feasibility of lenders' projects and set the loan within the maximum of Rls30 million ($3,750).

In the meanwhile the gradual reduction of banks' legal reserves from 21% to 16% between April 2001 and March 2002 released a fresh $1.4 billion of the commercial banks' resources to circulation. The government also raised the overall ceiling for fresh bank loans to Rls4.2 trillion ($525 million) and instructed state banks to allocate 75% of their loan facilities to private players. 

In addition, the government has discussed granting foreign exchange loans to foreign investors' job creating activities and the establishment of an Employment Development Bank that would only allocate funds to job creation.

II) Support for SMEs

The Third Plan also pledges government support for investment in employment creating small-scale industrial projects. This measure is very much in line with the latest international research and practices.
 
The government stopped short of proposing any specific policies but has lately raised the issue in the Direct Taxation Law (in force from March 2002), which offers a four year 80 percent profit tax holiday to all cooperative and private production and mining units. All industries also enjoy a moderate and transparent flat profit tax rate of 25%.
 
Iran Small Industries Organisation has also commissioned feasibility studies for 700 investment projects in small-scale industries and sold them to applicants against the payment of Rls100,000 ($12.5). The Organization reported in December 2001 that 4,000 requests had been received for these feasibility studies.

Closely related to small enterprise development, the Third Plan period has seen the spread of small loan programmes throughout the country. These micro-credit schemes are designed to offer financial support to entrepreneurs with the motivation to start small scale profitable activities, such as carpet weaving or retail trading, but who lack the collateral required for bank lending.

However, the greatest methodological challenge for the micro-credit programmes in today's Iran is the definition of a target population. That the current schemes focus on low-skilled lenders, has been criticized by some Iranian development researchers who point to the high education levels of the Iranian unemployed (40 percent high school or university graduates) and call for the extension of the programmes to cover for example small IT and internet initiatives.

III) Tax Reform 

The new Direct Taxation Law encourages employment creation by nearly tripling the ceiling of tax exempt incomes from Rls520,000 ($65) to Rls1.45 million ($181.25). The across the board reduction in real persons' income tax rates will also facilitate employment creation. In addition, the new Tax Code has reduced the burden of corporate and dividends' tax considerably in order to attract further investment in economic activity.

The exact proposal made in the Third Plan, a law to reduce in employer's share of premiums and to eliminate newly-employed staff from salary tax, is yet to be realized. 

While the tax reform has been very constructive, it is important to note that instead of the tax regulations, it is the labor law that employers in Iran commonly highlight as the most obstructive employment related state intervention. 

Some decision makers have recognised this issue and have taken initiatives to amend the labor law, however, to no avail. Analysts agree that a full amendment of the labour law and the introduction of a balance between employees' and employers' rights will be imperative for the employment as well as the productivity needs of the economy. 

Meanwhile, recently the Majlis rejected the general outlines of the bill to grant remuneration to the unemployed. Out of 184 votes cast, 90 were against the plan, 87 in favor and 7 abstained. The proponents of the plan argued that the fund could help the jobless make ends meet until they can find a permanent job. The opponents however, maintained that if the bill is approved, there will be a sharp rise in inflation rate and this would lead to an increase in the cost of living. A government representative attending the parliamentary session put the total cost of implementing the plan at about $1.57 billion annually. This is while funds allocated for development purposes stand at about $3.75 billion, he said, adding that it would not be fair to allocate such huge amount to the unemployed.


Limitations

Though the above policies are all responsive to the current challenges, analysts point to a number of short-comings. These include;

· Iran needs to concentrate more on the potential of foreign investment for two reasons: on the one side, productive foreign investment will create additional jobs and on the other, increasing levels of FDI will encourage the country's vast private sector engage more actively in investment activity. Clearly, without remarkable amounts of foreign investment, it will be impossible for Iran to close the gap between the current (17%) and the required level (30 - 35%) of investment - a shortfall of over $14 billion - and hence reach the required level of economic growth and demand for labor. 

· The implementation of employment policies for deprived regions has not proceeded at the necessary pace. The new direct tax law proposes to grant private and cooperative sector units in underdeveloped provinces more extensive tax holidays than for those in wealthier regions (all companies would be granted 80% tax holiday for four years, while those in underdeveloped provinces would receive a 100% relief for the same period). Besides this plan, very little has been done to alleviate the destabilizing regional disparities. The current regional employment record is gloomy. While 80 percent of new jobs during 1986-1996 were created in towns and cities, the urban population grew from 50 to 63 percent in 1980 to 1999. Provincial unemployment rates range from 8.75 and 8.8 percent in the east and west Azarbaijan to 30.49 percent in Lorestan. 

· When it comes to encouraging private investment, one needs to underline that Iran remains a very challenging environment for investors. Research indicates that shortage of capital and the labor law, already discussed above, are amongst the five most serious obstacles to production in Iran. Businesses have, however, ranked policy instability and a general antipathy towards production even higher. The implementation of laws and regulations has often been equally unpredictable in Iran. The highly regulated economy and centralized governance encourage clientelism, corruption and generally furtive business practices. Investors have often experienced the lack of transparency as unpredictable contract negotiations, long customs procedures and high tax bills. Clearly, if the employment crisis is to be alleviated, a holistic understanding of the Iranian investment environment must be complemented with measures targeting specifically the population segments most burdened by unemployment: the educated and skilled youth, women and population in disadvantaged rural areas. The regional needs have already been referred to above.


Conclusions

The above analysis, especially the quantitative gap between jobs needed and jobs created, underline that unemployment will not disappear from the Iranian economy for some time to come. 

Undoubtedly, the Third Plan has succeeded in identifying some of the necessary policies. However, despite all government efforts including encouraging reforms in the fields of banking, taxation and state domination, the level of investment activity will not fully respond to the need for employment until Iran overcomes the challenge posed by the country's demographic profile (expected by 2010).

The big question remains whether a high level of unemployment will lead to social phenomena that would undermine the economic potential of the country. The phenomena that are already obvious are:


· Brain drain (an estimated number of 200,000 graduates that leave the country every year to work outside Iran);

· Increased levels of urban crime (though the government has put major effort behind law enforcement);

· Sporadic social unrest (especially emerging from strikes by redundant workers) 


The Iranian government's response to the negative social phenomena has been to liberalize the country's social and cultural environment. This policy response is obviously targeting the youth who are the main new entrants into this tight job market. In fact a growth in diversity of cultural and leisure programs has not only opened up opportunities for job creation, but it has relaxed the social environment considerably. 

Another slight opening could be sought in the promotion of tourism which has enormous potential in Iran, but faces social and cultural restrictions. In any case, it is clear that Iran will have little choice but to increase its interaction with outside economies, both in the format of foreign investment as well as trade and tourism. An important signpost in this regard will be the final verdict on the new Foreign Investment Law which is currently being debated in the Expediency Council. 
Looking at the situation from the perspective of a foreign investor, there are a number of strategic elements that should be considered. These include:

· Foreign companies who intend to invest in Iran will be able to rely on a well-educated young population, despite the brain drain;
· It is foreseeable that the Iranian government will further concentrate to improve the country's business climate, though the overall process seems slow;
· Social risk factors such as crime and unrest will be on the rise, however, analysts believe that these risk factors are manageable, especially in the country's industrial sites.