For decades, Iran’s economic performance has been far from satisfactory. While headline figures like average economic growth rate might have looked acceptable between 1989 and 2017, a closer look reveals a troubling reality – a lack of productivity improvement. This fundamental weakness has severe consequences, turning economic underperformance into a ticking time bomb.

Iran’s economic growth has been heavily reliant on capital account inflows. Periods with strong capital inflows saw sluggish growth, highlighting an unsustainable dependence on external factors. This vulnerability is particularly concerning considering Iran’s vast natural resources, talented population, and strategic geographical location. These advantages haven’t translated into stable, long-term growth. Instead, as capital inflows waned, Iran’s fragile growth sputtered and went into freefall.

The situation is further compounded by the deteriorating state of Iran’s various forms of capital. In the area of physical capital, encompassing machinery and infrastructure, negative growth rates exceeding 40% during the 2000s paint a bleak picture. International observers view Iran’s economy as having very low potential for maintaining its physical capital stock.

Environmental mismanagement poses another significant threat. Policymakers seem unwilling to prioritize environmental sustainability. This neglect has resulted in a “deadly intensity” of environmental degradation over the past two decades. Shrinking forests, vanishing wetlands, and drying water bodies are just some of the consequences. This ecological crisis directly impacts Iran’s food security, liveability, and even public health with the rise of cancer rates.

The extent of environmental damage is staggering. Iran ranks among the worst in the world for wetland destruction, habitat loss, and land degradation. This deterioration significantly reduces Iran’s environmental capital, jeopardizing the very foundation of long-term economic viability. Water scarcity and land subsidence further exacerbate the problem, creating a high-risk environment for investment.

Financial capital is another area facing immense strain. The capital market struggles to attract domestic and foreign investment. The banking system suffers from significant disarray, and the budget deficit has ballooned from 5% to 30%. Additionally, insurance companies face financial difficulties, and pension funds are on the brink of collapse. These issues highlight the erosion of the infrastructure needed to maintain a healthy financial system.

Currency fluctuations, persistent inflation exceeding 40% for seven years, and a sharp rise in capital flight ($15 billion in 2023 alone) further complicate the financial landscape. Businesses struggle to secure financing both domestically and internationally, adding another layer to the crisis.

The social fabric of Iran is also under stress. Trust has eroded, leading to increased emigration, a rise in divorce rates, and widespread social problems. The sense of collective responsibility and social cohesion is weakening, making it increasingly difficult to resolve societal challenges. Public trust in both institutions and fellow citizens has declined dramatically.

Political capital has also plummeted since 2017. Public confidence in official government statistics is at an all-time low. The declining voter turnout since 2017 is a clear indication of the government’s struggle to engage the population.

Iran’s economic situation presents a complex and multifaceted challenge. Resource dependence, mismanagement of capital assets, and a declining social contract all contribute to a deeply concerning outlook. Addressing these issues will require a multi-pronged approach that prioritizes sustainable development, fosters public trust, and encourages responsible environmental stewardship. Only then can Iran unlock its true economic potential and build a more secure future for its people.

Source » irannewsupdate