Iran has received much attention from a geopolitical and regional standpoint, but its economic challenges have not attracted a similar degree of interest. With a population of 69 million, considerable hydrocarbon resources, a dynamic and entrepreneurial middle class, and a relatively well-educated labor force, Iran's economic potential is considerable. This volume takes stock of critical developments in the Iranian economy in recent years. The study reviews the key issues and policy responses, highlights the nature of the challenges ahead, and draws implications for the next phase of reforms. The authors conclude that major challenges remain, although significant advances have been made in recent years in opening up the economy to international trade and foreign direct investment, encouraging the private sector, removing exchange restrictions, reforming the tax system, and enhancing macroeconomic management.
to reflect a larger role for productivity growth than factor accumulation in driving potential growth in India.
Figure 4. India: Potential Growth 1/
1/ Following WEO (2006) assumption: TFP growth of 3.2 percent, capital share 0.35, labor growth 1.9 percent, human capital growth 0.83 percent, and capitalstockdepreciationrate of 4 percent. Demographic gains assume 0.5 percentage points GDP gains in saving and investment ratio based on UN projection of 10% decline in dependency ratio from 2005 to 2025. Actual growth rate of real GDP at
With India's GDP expanding at a rate above 8 percent in recent years, the debate about whether India is overheating revolves mainly about whether growth is above potential-that is, whether the economy is exceeding its "speed limit." This paper attempts to shed light on this debate by providing up-to-date projections of India's potential growth, including by clarifying differences in underlying assumptions used by various researchers that lead to a range of estimates. Estimates of potential growth on this basis range from 7.4 percent to 8.1 percent for 2006/07, and about 8 percent for the medium term. The medium-term potential estimates have risks on both sides: productivity gains and investment could be volatile, but determined reforms could sustain strong productivity growth.
APPENDIX I D ata S ources and M ethodology
25. The source for real GDP and investment data for Iran is the latest Central Bank of Iran database, and for the rest of the countries is the IFS database. The source for employment data for 1960–90 is the ILO database—1956, 1966, 1976, and 1986 census, and the source for employment data after 1990 is the Central Statistical Office of Iran annual census. The growth accounting exercise follows the methodology described in Barro and Sala-i-Martin’s Economic Growth, Chapter 10 (1995). The capitalstockdepreciationrate is 4
others (2013). If no country specific information is available, the average for countries at similar income levels could be used. 11 To isolate the demographic effects, the generosity of healthcare package (historical data) and the α coefficient are kept constant across scenarios, implying no policy measures.
Assumptions Underpinning Estimates
The capitalstockdepreciationrate, which is used for the historical growth accounting exercise, is set at 5.9 percent per year in line with Nadiri and Prucha (1993) .
Long-term non-age expenditure elasticity to
the health spending per person aged 65 and above relative to the rest of the population are set by default but can be modified at the user’s discretion.
The capitalstockdepreciationrate, which is used for the historical growth-accounting exercise, is set at 5.9 percent per year in line with Nadiri and Prucha (1993) .
Long-term revenue and non-age-related expenditure elasticities are set at one.
Long-term interest rates are set at 2.6 percent in line with Giglio and others (2015) . Alternatively, real discount rates suggested by the US Office of Budget
Over the next few decades, the world will experience significant demographic shifts, with material fiscal implications. In many advanced and emerging market economies, aging populations will lead to higher spending on pensions and health care. Moreover, projected population dynamics will adversely affect growth and government revenues. Building on and extending a 2015 IMF Staff Discussion Note by Clements and others, this note presents a simple framework that can assist researchers in quantifying the effects of demographic changes resulting from population aging on government fiscal balances. It includes two country applications of the framework and an associated template. The note addresses several key questions: What are channels through which demographic changes could affect public finances? How can we quantify the fiscal impact of demographic changes? How can we tailor the assessment to country-specific circumstances?
Daniel Gurara, Mr. Giovanni Melina, Luis-Felipe Zanna, Mr. Johannes Wiegand, Mr. Chris Papageorgiou, and Ms. Valerie Cerra
years, allowing the tax rate to fall, stimulating private demand even further.
Figure 19: The Effects of Governance Reforms.
Sources: IMF (2018).
I. Operations and Maintenance.
Adam and Bevan (2014) extended the DIG model by explicitly accounting for public spending in operations and maintenance (O&M) over and above new public investment and studied the implications of financing it through a variety of fiscal instruments. In this extension, deficient maintenance expenditures could lead to higher capitalstockdepreciationrates, while deficient
International Monetary Fund. Asia and Pacific Dept
6. The frontloaded public investment scaling up plan could build-up capital stock rapidly but runs the risk of public capital erosion in the long term due to the high-level of resources needed for maintenance . At the current level of public investment efficiency of 50 percent and assuming a public capitalstockdepreciationrate of 5 percent, the long-term investment level would need to be significantly higher than the historical average capital spending level of about 11 percent of GDP to protect the public capital stock from deterioration. As it is
Daniel Gurara, Mr. Giovanni Melina, and Luis-Felipe Zanna
Over the past seven years, the DIG and DIGNAR models have complemented the IMF and World Bank debt sustainability framework (DSF) analysis, over 65 country applications. They have provided useful insights in the context of program and surveillance work, based on qualitative and quantitative analysis of the macroeconomic effects of public investment scaling-ups. This paper takes stock of the model applications and extensions, and extract five common policy lessons from the universe of country cases. First, improving public investment efficiency and/or raising the rate of return of public projects raises growth and lowers the risks associated with debt sustainability. Second, prudent and gradual investment scaling-ups are preferable to aggressive front-loaded ones, in terms of private sector crowding-out effects, absorptive capacity constraints, and debt sustainability risks. Third, domestic revenue mobilization helps create fiscal space for investment scaling-ups, by effectively containing public debt surges and their later-on repayments. Fourth, aid smoothens fiscal adjustments associated with public investment increases and may lower the risks of unsustainable debt. Fifth, external savings mitigate Dutch disease macroeconomic effects and serve as fiscal buffers. The paper also discusses how these models were used to estimate the quantitative macro economic effects associated with these lessons.