Comparative Analysis of the Economic Performance of Italy and Iran - Essay Example

Macroeconomics Analysis of Comparative Analysis of the Economic Performance of Italy and Iran Italy and Iran haveboth been facing difficult economic conditions in the period 2011 to 2015.The deteriorated economic performance was as a result of different contributing factors. While some of the factors that contributed to the downward performance of the two countries are unique to each one of them, they also share some common contributing factors. This paper intends to explore the factors that contributed to the poor economic performance of each of the countries and make a comparative analysis of the economic performance of both Italy and Iran. GROSS DOMESTIC PRODUCT (GDP) Italy’s GDP Way before it was hit by recession Italy was already experiencing poor economic performance of an average real GDP growth of only 1% per annum (Morsy and Sgherri, 2010, p.3). This was the period between 2001 and 2007. This growth rate was almost half the euro area growth rate. After the onset of recession in 2008, Italy faced a 7% decline in the GDP. In the first quarter of 2010 the economy started to recover from the poor performance. The recovery was halted in 2011 when the country reentered recession for the second time. The GDP fell by 0.2 % by the second quarter of 201l. By the end of the last quarter the GDP had declined further by 7%. This condition persisted in the first quarter of 2012 and then there was a little improvement although the GDP still remained negative. After the long contraction of the economic performance the GDP started improving in 2014 but it was still negative. The GDP is expected to become positive in the current year. Although a positive GDP is being anticipated the level expected will still below the euro average GDP. Iran on the other hand started facing a contraction in its business cycle in 2011. At the beginning of 2011, the country was facing a constant GDP growth rate of around 6% to 8% per annum. This increasing GDP was halted in mid 2011 when the GDP faced a significant drop. The GDP growth rate fell below 5% and the downward trend continued until July 2012. At this time the GDP had fallen greatly and was on the negative side. The growth rate at mid- year 2012 was estimated to be -10%. This was the lowest level achieved during the period. After the 2012 drop in GDP it started increasing at a constant rate until early 2013 a downward movement. The drop was short term and by mid 2013 the GDP growth rate had started rising again. By mid-year 2014 the GDP growth rate was positive again at a level of around 5%. Iran’s GDP annual growth rate One of the main reasons for the downward economic growth in Italy was the high public debt. The shrinking GDP in the second quarter of 2011 was mainly caused by the huge public debt that the government owed. The existence of the huge public debt meant the government needed to find a way of servicing it and reducing it substantially. The only available options were to service the loan through tax revenues and reduce the public debt by cutting the spending of the government. Due to this, the tax rates were increased on labor and capital. The increased tax rates put pressure on the private sector and led to reduced spending by the sector. The result of this was a drop in the internal demand. The high public debt also led to a financial crisis that ended up affecting the banks’ lending capacity. This resulted in high interests’ rates being charged on loan funding to the private sector. This further increased the drop in the internal demand by reducing the investment spending of the private sector. The consumption of the country also reduced considerably due to the high taxes that affected the disposable incomes and the high prices due to reduced production. The falling demand was reflected in the GDP, which reduced significantly. Another contributing factor to the poor Italy economic growth is its poor level of competitiveness (Cencig, 2012, p.7). The declining competitiveness of Italy has been due to the poor performance of its total factor productivity. Italy has a poor product specialization. Most of the products, which it exports, are dependent on low technology and intensive labor. This only results in low and slow productivity. Its market is majorly made up of small firms, which lack competitive power. The country’s stiff regulations and the high administrative costs needed to start up a business have placed a hindrance on new companies that would like to join the market. The cost of labor per unit, which has also been on the rise, drives firms away and contributes to further deterioration of the country’s competitiveness. This has a negative impact on the country’s exports, which have not improved since the country was hit by recession. The poor economic performance of Iran was majorly contributed by the large relative price change that it experienced in late 2010. The price change was due to the subsidy reform, which was launched in December 2010. The reform lifted subsidies off the production prices. The economic activities in the country declined considerably due to the high cost of production that resulted. The investments in the private sector declined considerably due to this price change as a result there was a significant drop in the internal demand of Iran. The productivity fell as well. The end result of this was a decline in the GDP. Another reason for the downward economic performance of Iran could be directed to the international trade and financial sanctions that it was forced to face (Hsieh, Ziemba and Dubowitz, 2015, p. 2-6). These sanctions restrict it from carrying out various activities such as exporting oil and access to the supply chain of key sectors like automobiles. There are also restrictions on the transactions between international banks and the domestic banks in Iran. These sanctions only brought further damage to the poor economic performance that was already being experienced in Iran from 2011. Iran’s ability to take part in the international trade of capital and current goods was reduced significantly. This resulted in a major drop in the oil production consequently the expected revenues from oil production decreased significantly. Other key sectors of the economy were also affected by the sanctions. An example is the automobile sector, which was not able to receive the necessary parts required for production. This led to the disruption of production and together with the already price policies that were in place the conditions were made worse. The overall result of the sanctions was a worse economic performance with a decline in the GDP of about 6% in the period 2012 and 2013. This GDP further dropped to by 2.5% in the first half of the 2013/2014 period. Both Italy and Iran faced a decline in the GDP during the period 2011 to 2015. The factors that contributed to this downward trend were unique to each country. Inflation Italy inflation rate is based on the consumer price index. The level of inflation rate in Italy was at 1.5% in the early months of 2010. The rate increased gradually in the consecutive months up to December. As from December 2010 into 2011, there was an accelerating increase in the inflation rate. The inflation rate rose up to around 4% by December 2011. The inflation rate was accelerated by the onset of recession in 2011. The inflation rate remained stagnant at 4% and only started decreasing in the summer of 2012. By December 2012 it had dropped to almost 1% and decline in the inflation rate continued gradually. By the end of 2014 the inflation rate had dropped to zero which was a good indicator for the performance of the economy. Italy’s Inflation Rate Iran inflation rate was already high in the beginning of 2011 compared to that of Italy at the time. The inflation rate was around 16%. It continued increasing gradually from Jan 2011 to mid-year 2012. At this point the inflation rate was at about at a high level of 25%. From mid 2012 to Jan 2013, the inflation rate shot up to a level of 37%. This level of increase was very high compared to the increase that was experienced in the previous period. It continued increasing up to mid year 2013. At this point the level of inflation rate was at 45%. This was the highest rate that was faced in the period 2011 2015 when Iran was facing economic problems. After hitting 45% the inflation rate declined at an increasing rate and was able to return to 15% by mid 2014. From mid 2014 the inflation rate has been stagnant at 15%. Inflation in Italy was relatively high in the 2011 and 2011. This is because as the country entered recession for the second time its productivity fell significantly. The reason for this fall was the impact of the huge public debt on the private sector spending. The debt reduced the investment into the private sector by resulting in huge lending rates from the bank. This consequently led to low production that made the prices of commodities to shoot up due to excess demand. Inflation rate in Italy is currently low due to the improved economic conditions in the country. Productivity has improved from its previous condition in the period 2011/2012. This has been able to considerably cater for the excess demand. Italy is still in recession and experiencing recession, which is not good for the economic activities. Due to this, it still faces a risk of inflation. Iran was already experiencing high inflation problems before 2011 unlike Italy’s case, which was caused by recession (Rahmani, 2013, p.1). One of the factors contributing to the high inflation rate that has been experienced in the period starting 2011 was the subsidy reform that was launched by the government in 2010. The subsidy reform failed to take inflation stabilization into consideration. The subsidy reform advocated for removal of subsidies on production. This led to high production cost and consequently high relative prices. The high relative prices contributed to the rising inflation (Kafaie, 2013, p.100) The international trade and financial sanctions placed on Iran in 2012 led to a further increase on the inflation rate (Rahmani, 2013, p.7). Due to the export restriction the oil production was reduced greatly. This led to increased oil prices in the country that resulted from excess demand. Other sectors that also depended on the international market for either supply of their materials or sales of their end products were also affected. They had to reduce their production as well. Access to financial resources was denied and private companies ended up lacking the finances required for expanding their businesses and increasing supply. The overall impact of the sanctions was increased production cost and reduced productivity, which consequentially led to the increased prices. The inflation rate increased to 45%. Another contributing factor to the high inflation in Iran is the devaluation of its currency. The rial lost about 80% of its value in the parallel market during the period. This meant that one could exchange a dollar for many rials. This in turn resulted in increased money in circulation. With the increased money supply, banks expanded their credit supply to the private sectors and this resulted in domestic interest rates falling significantly. These lose monetary conditions assisted the inflation rate to rise up to the 45% level (Moayedi, 2013, p.137). The current fall in inflation rate in Iran is due to a rise in production of goods and services in the private sector. This rise has encouraged investment into the sector and expanding it further. The increased production has led to reduced prices of the commodities and consequently a fall in the inflation rate. The inflation rates of both countries are dependent on the production levels. During the period, both countries experienced low production, which gave rise to the inflation rates. The factors that contributed to the low production were different in each of the countries. Unemployment Italy’s unemployment rate Italy’s unemployment rate was at 8% at the onset of recession in 2011. The rate compared to the unemployment rate in other European countries was a little bit high. The unemployment rate continued to increase but at a constant rate. By November 2012, the unemployment rate had reached 12%. The unemployment rate was maintained at this level until July 2013 when it increased by a small proportion. Italy’s unemployment rate peaked in November 2014 at 13.20%. This amount reduced in December to 12.70%. The current unemployment rate is at 12.70%. Iran’s Unemployment rate The increasing unemployment rate in Italy has been because of low labor demand in the country. One of the causes of the low labor demand is the reduced production. The private sector was forced to cut down on its production due to the high lending rates that was fixed by the bank making it difficult to get loans to expand the production. Another reason for the drop is the large public budget deficit in the country discouraged investors from joining the private sectors (Tridico, 2013, p.10-11). As a results there ware little jobs created to serve the growing labor force. Increased government taxes negatively affected the existing firms in the industry and together with the low production, a number of firms were forced to drop out of the industry. This led to the loss of employment. Italy labor is faced by rigidity, which encourages unemployment levels to increase. The labor system offers employment protection for the older members who are already in employment (Baglioni, 2013, p.325). The older members are under permanent contracts that ensure they do not lose their employment position (Cencig, 2012, p.11). The strong protection discourages hiring on a permanent contract. This makes it difficult for the unemployed to secure jobs in the system. The youths are offered flexible contracts which make it easy for them to be laid off (Cencig, 2012, p.11-12). The result of this rigid system is a segmented labor market with high levels youth unemployment. Another contributor of the low labor demand is the reduced public sector spending. The government reduced the public sector spending in order to decrease the budget deficit. This resulted in the pay cut of the public sector and a general reduction in funding which led to loss of employment opportunities in this sector. Iran has been facing a high unemployment with minimal movements through the different years. The highest unemployment rate was recorded in the first quarter of 2011. It was at 15%. After that, the unemployment rate dropped to 12% in the second quarter. It dropped further in the 3rd quarter and rose back to 12% in the last quarter of 2011. The rise proceeded into the first quarter of 2012 whereby the unemployment rate was at 14%. After that, the unemployment rate kept declining until the first quarter of 2013 where it rose to about 12.3% but soon after the unemployment rate declined once more. By the last quarter of 2014 the unemployment rate in Iran was at 10.50% Unemployment in Iran was contributed by the previous government mismanagement. Presidents Mahmoud Ahmadinejad had very little regard for the mainstream economic views. Due to this, he failed to see that excess liquidity would affect the economy negatively and result in unemployment and inflation (Habib, 2015, p.306). He managed to reduce price subsidies, which resulted in high commodity prices in Iran. The high prices led to reduced consumption of the goods and consequently production fell which led to low labor demand. The low demand resulted in unemployment. The international trade and financial sanctions also contributed to the high levels of unemployment in Iran. The sanctions led to the fall in production of oil and other products that depended on the international market. A consequence of this was reduced demand of labor, which gave rise to unemployment levels as those who had jobs could not be employed while some of the employed were laid off. Lack of employment opportunities is also a contributor of the high unemployment levels. The poor economic performance in Iran discouraged any new entrance into the private sector. With now new firms joining the market, no new job opportunities came up and as a result, unemployment levels persisted. Low labor demand was the factor that led to increased unemployment rates in both countries. This low demand was contributed by different factors in both countries. Economic Policies During the recession, Italy undertook fiscal policies to enable it to reduce the public sector budget deficit. The fiscal policy that was employed involved cutting of the government spending to reduce the public debt (Quirico, 2012, p.8). The cuts were mainly on public sector spending and public sector pay. This was considered an unfair move because while the spending and pay were reduced, the structure and the responsibilities of the public sector were maintained. Another measure that was undertaken by the Italian government was supporting banks and large firms (Quirico, 2012, p.8). This was aimed to prevent the banks from failing and enable the large firma maintain their employees. Unfortunately, the measure failed to produce positive results because there was lack of transparency in the support of banks the financial support that was provided to the large firms was inefficient to support productivity. The policies, which were employed in Iran during President Rouhani’s term, involved the separation of fiscal policies and monetary policies (Komijani, 2006, p.186). The government took control of the fiscal policies. The government advocated for temporal and partial easing of the sanctions placed on it. It initiated the Joint Plan of action that led to increase in oil exports. The central bank of Iran was granted control on the monetary policies. It implemented tighter control over base money. This was meant to reduce and stabilize inflation. The rial was also appreciated to curb inflation. This led to depreciation in the real exchange rate, which consequently improved competiveness of its private sector in the international market (Komijani, 2006, p.186). As seen from the above discussion, Italy and Iran experienced economic downward economic performance during the same period. The economies were affected in terms of inflation, unemployment and the GDP. The factors that led to the poor economic performance were mostly unique to each country. The two countries implemented different policies in attempt to regain economic growth. References Aldieri, L., 2009. The Effects of Unemployment Experiences on Subsequent Wages in Italy. Brussels Economic Review/Cahiers Economiques De Bruxelles, 52 (2), pp. 109-119. Baglioni, S., & Mota, L., 2013. Alike but not alike: Welfare state and unemployment policies in Southern Europe. Italy and Portugal compared. International Journal of Social Welfare, 22 (3), pp. 319-327. Cencig, E., 2012. Italy’s economy in the euro zone crisis and Monti’s reform agenda. Working Paper Research Division EU Integration Stiftung Wissenschaft und Politik German Institute for International and Security Affairs. Fritzer, F., 2011. Inflation Differentials between Austria, the Euro Area, Germany and Italy. Monetary Policy and the Economy, pp. 31-42. Habibi, N., 2015. How Ahmadinejad Changed Irans Economy. Journal of Developing Areas, 49 (1), pp. 305-312. Hadizadeh, A., Samimi, A., & Elmi, Z 2013. An Estimation of Seasonal GDP Gap in Iran: Application of Adaptive Least Squares Method. Iranian Economic Review, 17 (1), pp. 157-177. Hsieh, J., Ziemba, R., and Dubowitz, M.. 2015. Iran’s Economy Will Slow but Continue to Grow Under Cheaper Oil and Current Sanctions. Roubin Global Economics. Kafaie, MA, & Moshref, A.M., 2013. Inflation and Relative Price Dispersion: Evidence for Iran. Iranian Economic Review, 17 (1), pp. 93-104. Komijani, A., 2006. Macroeconomic Policies and Performance in Iran. Asian Economic Papers, 5 (1), pp. 177-186. Maes, I., & Quaglia, L., 2006. Germany and Italy: Conflicting Policy Paradigms towards European Monetary Integration?, Constitutional Political Economy, 17 (3), pp. 189-205. Moayedi, V., 2013. Reassessing the Effect of Fiscal and Monetary Policies in Iran: The St. Louis Equation Revisited. Journal Of Economic Development, 38, 4, pp. 123-141. Morsy, H., and Sgherri, S,. 2010. After the Crisis: Assessing the Damage in Italy. IMF Working Paper. Proietti, T., 2005. Convergence in Italian Regional per-capita GDP. Applied Economics, 37 (5), pp. 497-506. Quaglia, L., 2005. Civil Servants, Economic Ideas, and Economic Policies: Lessons from Italy. Governance, 18 (4), pp. 545-566. Quirico, R., 2012. Italy and the Global Economic Crisis. Bulletin of Italian Politics Rahmani, T., Dreger, C., & Fallahi, S., 2013. Inflation and Cost Push in Irans Economy. 17 (3), pp. 1-24. Rezai-Rashti, G., & Moghadam, V., 2011. Women and higher education in Iran: What are the implications for employment and the marriage market? International Review of Education / Internationale Zeitschrift Für Erziehungswissenschaft, 57, 3/4, pp. 419-441. Spaventa, L., 2013. Effects of inflation on the distribution of income in Italy, 1953-1962, 65, 266, pp. 255-265. Tridico, P., 2013. Italy: From Economic Decline to The Current Crisis. Working papers Dipartimento di Economia Università degli studi Roma Tre, (173). Read More