Putting Iran’s Demographic, Economic Growth Into Perspective

EghtesadOnline: Growth in population without concurrent economic growth cannot benefit the country from the so-called demographic “window of opportunity”—the period in which the working-age population is growing and the young cohort decreasing, while the old cohort is still small.

News ID: ۷۸۲۲۸۰

10 April 2018

Speaking at the University of Tehran’s Faculty of Social Sciences, Masoud Nili, president’s top economic advisor, said the demographic window of opportunity would open to production and employment, only if adequate investment is available. If not, population growth would, paradoxically, have severe repercussions.

The population growth rate, age and sex composition, and urban-rural distribution are demographic variables playing central roles in the economy, he was quoted as saying by the Persian daily Donya-e-Eqtesad.

Per Capita GDP

Iran’s economy contracted significantly between the fiscal 1977-78 and 1981-82 while it saw rapid population growth from 34 million to nearly 50 million, corresponding to an average annual growth rate of 3.9%, over the decade spanning 1977-86. In fact, two phenomena, one in the field of demography and the other of macroeconomic nature, created a unique situation for the country, Financial Tribune reported.

Over five years, Iran’s gross domestic product shrank by 45% while the per capita GDP—the total output of a country that takes GDP and divides it by the number of people—registered a 55% decline because of the dramatic population growth.

Nili believes the impact of this phenomenon can be felt for one century, as the collapse of welfare state would manifest itself though decrease in investment.

Iran’s GDP got a boost over the years following the end of the 1980-88 Iran-Iraq War, but per capita GDP has yet to recover to reach the 1977 levels. Last year’s (March 2016-17) GDP was about 1.8 times that of 1976-77, but per capita GDP was 76% of per capita GDP in March 1976-77.

Investment is the first casualty when per capita income takes a downtrend, according to the economist.

People’s level of consumption would decrease only when there is no other choice available. The typical victims of such circumstances are investments and savings.

The number of people per household has decreased since 1986-87. The average Iranian household consisted of 3.3 people last fiscal year compared with 5.1 people in 1986-87. The most recent census showed the number of one-person households saw an explosive rise last year compared to five years ago. On the other hand, the number of households increased to 24 million last year compared with 6.7 million in 1976-77.

As evidenced by figures, the outcome of such developments is the rise in the share of consumption from GDP.

Jobless Millennials

The share of personal consumption expenditures from the GDP has improved from 25% between 1959-60 and 1980-81 to 43% between 1981-82 and 2016-17, suggesting that the share of consumption from Iran’s economic pie grew bigger than that of investment over the years. In actuality, people favored today’s well-being over tomorrow’s welfare.

The first wave of the population of those born in the 1980s entered the labor market over the years ending 1996-97. The economy should have developed the capacity to embrace this wave of population, but as Nili says, investment was at record lows over these years and consequently the economy failed to create job opportunities at the right time. On top of that, greater investment was required to create a single job, thanks to the emergence of capital-intensive technologies.

Twenty-five million people were between 20 and 35 years last year (March 2016-17), while 12.5 million of the youth were men and 12.3 million were women.

Both men and women born in the 1990s have been more inclined to enter the labor market than people born in the 1980s. They were quicker to obtain education and land a job. Women’s participation rate has also accelerated in recent years.

The rise in working-age population on the one hand and the decline in investment due to the increase in the number of households on the other hand would explain the roots of one of the super challenges facing Iran’s economy: unemployment.

Demographic indexes are to blame for the crisis of pension funds as well. Population growth has changed the composition of population. It has led to scarcity of decent jobs for a number of millennials (those born in the 1980s) and in the meantime, slowed the inflow of resources to the funds.

The number of employed population was virtually steady between 2005-6 and 2012-13. With improvement in life expectancy in Iran, pension funds spending outweighed their resources, which in turn gave birth to yet another super challenge for the economy.

Exhaustion of Resources

According to Nili, the course taken by a city toward development affects the structure of government’s budget.

A city built upon development of industries is a productive city with advanced, modern services. The outputs of rural residents who have migrated to cities have shifted from agricultural to industrial products. But a city that is not backed by its industrial strength and has been created by the government is the center of consumption rather than production. Here, placement of rural population in cities is more of a transition of “producer population” to “consumer population”.

Urban development is synonymous with inflated expenses rather than revenues for governments in countries that go down that path, including Iran. Budget deficit is a direct byproduct of this model of urban development, as government expenditures outgrow its revenues.

From 1976-77 to 2016-17, the population of city dwellers rose tenfold while tax revenues increased three times. Providing public services without having a sustainable mechanism of generating resources would lead to a chronic budget deficit for the government.

Another aspect of population growth is the exhaustion of natural resources. Development of transportation, high consumption of energy and water, etc. all put considerable strain on the environment.

The top economist believes that the management of macroeconomy determines whether population growth is good or bad.

“Our future economic performance, whether we tap into the demographic window of opportunity is subject to uncertainty, since our past performance is hardly defensible. We failed to rise to the challenge of the population shock of the 1980s,” Nili said.

The economist stressed that the aspects of economy and population should be studied together.

“It is a strategic mistake to think of them as two separate issues,” he concluded.

According to the 2016 census, Iran’s population reached close to 80 million while its growth rate dropped to 1.2%—a rate similar to today’s world average but substantially lower than its peak a few decades earlier.