Investigation of the Effect of Economic Adjustment Policies on Iran's Economic Growth Fluctuations

اقتصاد پولی مالی

Article 1, Volume 28, Issue 21, November 2021, Pages 1-29   

Document Type: Original Article

DOI: 10.22067/mfe.2022.74515.1155

Authors

seyed reza pournaghi¹; Ahmad Jafari Samimi²; Farid Askari^{* 3}; Farzaneh Khalili³

¹Ph. D Candidate of Monetary Economics, Islamic Azad University, Abhar Branch, Zanjan, Iran

²Professor of Department of Economics, Mazandaran University, Mazandaran, Iran

³Assistant Professor of Department of Economics, Islamic Azad University, Abhar Branch, Zanjan, Iran

Abstract

Abstract Expanded
 
1- INTRODUCTION
Developments and fluctuations in economic growth will cause significant changes in the economy and its variables. Therefore, examination of the cause of fluctuations and instability in economic growth can eliminate or improve their impact. During the last 4 decades, economic adjustment policies - which have been proposed by the international community to various countries with the aim of stablization of the economy in the short run and changing the structures of the economy in the long run - have been implemented in Iran. This study was conducted to investigate the compatibility of economic adjustment policies in Iran.
 
2-THEORETICAL FRAMEWORK
Economic growth of a country is the change in production of a country compared to the previous year. Therefore, a change in any of the components of a country's GDP causes a change in economic growth and, consequently, causes fluctuation or instability in it.
Oil revenues as one of the most important export revenues from natural resources, depending on the type of use (in current consumption or investment) affect economic growth or instability. On the one hand, oil wealth can accelerate the pace of development due to the level of financial development and increase national income, on the other hand, long-term economic growth will be damaged due to imbalances in different sectors of the economy.
Financial liberalization on the one hand, citing neoclassical theories and the free flow of capital from high-capital economies to low-capital economies, life cycle models and increasing private savings and attracting investment in the portfolio, increases project returns. on the other hand, some countries were affected by the implementation of financial liberalization and faced severe financial crises, followed by economic instability.
Trade liberalization due to the transfer of knowledge and technology to a country can improve economic growth. Trade also allows producers to access larger markets. Improved productivity through the use of untapped resources, more distinctive products with higher quality and lower prices, and ultimately increased production and surplus consumer welfare. Despite the positive effects of trade liberalization, this policy will destabilize economic growth in developing countries that have few products to offer to the world market.
Privatization is a fundamental structural change of ownership, which is transferred from the public sector to the private sector, and this change of ownership leads to fundamental changes in the basic incentives and motivations of owners and managers of enterprises and the goals of those enterprises. the effect of privatization on economic growth can be demonstrated through microeconomics theories, the theory of new institutional economics, the theory of public choice and the theory of representation.
In the empirical literature, the importance of the role of government is how it can provide a stable environment for economic growth. Examination of the issue of government spending (as an indicator of its size) and GDP growth, there are conflicting results, and the relationship between government spending and economic growth depends on the sources of financing government spending and government performance. Thus, if government spending is financed through borrowing, the relationship between government spending and economic growth is negative, and if government spending is financed through taxes, the relationship between government spending and economic growth is positive.
 
3- METHODOLOGY
In this study by using the vector auto regressive model (VAR), the relationship between economic adjustment policies on fluctuations and instability of economic growth during the period 1981 to 2019 has been investigated. the annual fluctuations of economic growth were selected by using the exponential conditional variance (EGARCH) model with intervals 1 and 2 to show the variance inequality and the effects of the three policies of privatization, trade liberalization and financial liberalization were measured. The variables of trade intensity, volume of assets transferred to the private sector and the amount of foreign assets of the banking system are considered as indicators of trade liberalization, privatization and financial liberalization policies, respectively.
 
4- DISCUSSION
Out results showed that the variables of financial liberalization have the lowest (0.6%) and the variables of commercial liberalization have the highest (21%) share in the volatile changes of economic growth. Also, financial liberalization only increases in the short run and does not affect instability in the long run. The trade liberalization variable will reduce economic instability, while the surge in oil revenues will increase instability in economic growth. The government expenditure variable in this study has a dual behavior, so that in the short run will reduce instability and in the long run will increase the instability of economic growth. Privatization policies have the most short-term (0.0173) and long-term (0.0052) effects on economic growth instability and will increase economic growth instability.
 
5- CONCLUSION & SUGGESTIONS
Examination of the results of the instability response to various variables shows that not only economic adjustment policies incompatible in terms of their impact on growth fluctuations, but also not compatible with government policies. In the short and long term, privatization and financial liberalization policies will increase and trade liberalization policies will reduce instability. While the government's fiscal expansion policy (increase spending) will reduce instability in the short run and increase economic growth instability in the long run. Thus, the simultaneous implementation of trade liberalization policies and increased government spending (financial expansion) will reduce instability in the short and long term. Because both policies are compatible with each other and their results in the short-term and long-term will reduce the instability of economic growth. Therefore, it is recommended to adopt trade protection policies (both in terms of imports and exports) because these policies will not only improve the trade balance and increase the level of trade liberalization, but also the instability of economic growth. and will also reduce production.

Keywords

Volatility; Privatization; Financial liberalization; Trade liberalization; Economic growth

Supplementary Files

Extended abstract 21.pdf

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