Abstract:
One of the measures taken by the 1979 Revolutionary Government of Iran was to denounce the mixed public-private ownership of the banking system of the pre-revolutionary era and implement a full scale banking nationalization and merging scheme. Since then the banking system has been operating under close supervision and scrutiny of the government - exercising its power to impose a variety of restrictions and interferences, including: restrictions on branch expansion, interest rate repression and discretionary credit allocation. This paper is intended to evaluate the impact of the government restrictive and regulatory policies on financial savings, investment, efficiency and economic growth in Iran. The analysis is carried in terms of a model similar to the model implemented by Ketkar (1993). This model is essentially derived from combining McKinnon-Shaw hypothesis with Harrod-Domar growth model via the dynamic adjustment mechanism formulated by Molho. The findings indicate that branch restrictions and also credit ceilings had a negative relationship to economic growth, while the increase in credit to priority sectors (agriculture, industry and construction) had a positive relationship. The effect of interest rate reduction on economic growth in Iran was, however, inconclusive.
Machine summary:
"On the other hand, proponents of new structuralism, such as Moore (1986 & 1989), believe that the effect of interest rate on savings is ambiguous and the effect of financial liberalization on economic growth depends on income effects and also the degree of substitutability between bank deposits and non- productive assets such as cash or gold held in household asset portfolios.
The main objective of this paper is to analyze the effect of the Iranian government’s banking policies (acting mostly to repress this sector) on financial savings, investment productivity and economic growth in Iran.
Referring to Fig 5 and 6 we can notice the relative increase in the share of agriculture in the balance of financial facilities extended by banks and a relative decrease in the share of services and commerce which can be attributed to the post-revolutionary policy of government to extend more credit to priority economic sectors, particularly agriculture.
Therefore an increase in the number of bank branches in different regions of the country will likely increase effective rates of return on banking deposits and this increase has a positive substitution and a negative income effect and also diverts savings from non-formal credit markets to the organized financial sector.
See also a paper by the same authors on supervised credit program of The Agricultural Bank of Iran References 1- Amini, Alireza & Others, “An estimate of time series on employment and capital stock In Iranian economic sectors”, The Plan and Budget Magazine: Scientific & Extension, Nos. 31 and 32( Aban and Azar 1377or November and December 1988),The Management and Plan Organization, Tehran, Iran."