Application of the growth diagnostics approach in Iran: HRV decision tree

Introduction: In spite of the fact that Iran's socio-economic development plans and other effective documents emphasize achieving high, stable and sustainable economic growth rates, the average real GDP growth in the last four decades has been less than 1.3 percent. This low growth rate, along with its severe fluctuations, shows that the development plans and policies administrated by the government were not successful in achieving such economic growth rates. So, they seriously require comprehensive review and reforms. During a given period, many countries on the same level as Iran in terms of per capita income have experienced significant economic growth and have been able to bring the level of per capita income (and, as a result, economic welfare of the people) very close to the pioneer countries in development. But Iran’s per capita income still has a "big gap" despite its high and sometimes unique capacities in geographical, civilizational, cultural and economic diversities.  Therefore, it is needed to identify and explain the causes of the stunted growth of Iran's economy and, accordingly, to propose solutions to accelerate economic growth and convergence of per capita income and catch up with developed countries. For this purpose, a growth diagnostic approach leads to a defensible and systematic common understanding of the main causes of Iran's low economic growth.
Methodology: The growth diagnostics approach which was first proposed by Hausmann et al. (2005), is a framework for identifying the most important specific obstacles to the economic growth of a country. This approach is consistent with the logic of endogenous growth models but, unlike these models, it does not assume a fixed set of growth determinants for all countries. Instead, it lists all the potential factors, including economic and non-economic, that affect growth in a long list. This approach then makes a decision tree to identify a limited number of key factors. In addition to being more flexible than competing frameworks, this framework does not violate the principles and methodology of economics. The decision tree process begins with this question ‘What is the cause of the low level of private investment and entrepreneurship in the country?’ In response to this question, which can be "the low social efficiency of investment" or "the high cost of financing", each of these two paths is broken into narrower branches and, finally, it identifies the causes of low economic growth. The main function of growth diagnostics approach is to identify the causes of low economic growth in a country. In this research, however, we applied the HRV decision tree, which is because we believe this tree can lead us to the most important problems in the Iranian economic growth.
Results and Discussion: According to the HRV (2005), we classified our findings for the final causes of low economic growth of Iran into seven categories as reported in the table below.
 
Causes of the lag in Iran’s economic growth




No


Categories


Causes


Policy implications




1


Environment


• Drastic Increase in Pollution and Destruction of the Environment
• Continuous Reduction of Biological Capacity


ü  Environmental Protection




2


Human capital


• High Migration of Human Capital from the Country
• Little Arrival of Immigrants with High Human Capital
• Low-Quality Education System
• Inappropriate Access to The Internet in Schools
• Inadequate Development of Employee Training
• Low-Quality Management Schools


ü  Improve the Quality of Education and Skills Development
ü  Wage Based Growth




3


Infrastructures


• Roads Quality
• Quality of Electricity Supply
• Ports Quality
• Aviation Quality


ü  Improve Public-Private Partnerships
ü  Improve Social Capital




4


Micro risks


• Weakness in Property Rights
• Low Government Efficiency
• Heavy Burden of Government Regulations
• Inadequate Protection of the Interests of Small Shareholders
• Weak Support for Investors
• Lack of Transparency


ü  Good Governance




5


Macro risks


• Deficit of the Government's Operating Balance
• High Government Debts
• High and Fluctuating Inflation Rates


ü  Good Governance




6


Externalities of information and coordination


• Weakness of Competition in the Domestic Market
• Limited Market Dominance
• Expensive and Time-Consuming Customs Procedures
• High Trade Tariffs
• Severe Non-Tariff Barriers
• Low Capacity for Talents Saving
• Low Capacity for Talents Attraction
• The Negative Effect of Taxation On Labour Incentives


ü  Market-Oriented Policies
ü  Trade Liberalization




7


Financial intermediation


• Poor Financial Access
• Poor Life Insurance
• Poor International Financing
• Severe Financial Repression
• Arbitrary Sectoral Discrimination Without Plans


ü  Balanced Financial Development




 
Conclusion: In this article, applying growth diagnostics approach and HRV decision tree, several factors were identified as the obstacles to Iran's economic growth. They include the quality of human capital, the quality of infrastructures, and micro and macro risks both of which refer to the economic management policies of the country, namely good governance indicators and policies. In the financial sector, financial repression and arbitrary sectoral discriminations are the most important factors in the lack of balanced financial development to accelerate economic growth. This set of determinants has been formed under the severe lack of a correct and clear trend in policy making for economic growth and development.