March 2004 / No. 28

Global Economy

Going Global

To identify regional opportunities and threats, the first step is to identify the main industries of the regional countries and the structure of industrial trade in the regional markets. 

Global opportunities and threats: During the past 50 years, the global economy has been something of an opportunity for some countries leading to their welfare and advancement, while it has been a menace for other states which has stymied their economic growth and welfare. The global economy provides more opportunities for various countries by developing various aspects of trade and economy. With regard to the demand side, as a big market, it provides the opportunity for establishment of an economic scale and the subsequent lower cost and competitive power. With regard to supply, it provides technology, capital, coordination and management. Since intensification of the international competition and decline in marginal profits from exports, will increase the role of transportation costs in the final cost of goods, our country, due to its situation, is capable of finding an appropriate place in regional markets through attraction of foreign direct investment (FDI).

If the introspective mood of the Iranian economy continued, the relatively high speed of industrial growth of Turkey and its active connection with the developed countries, even without considering a situation in which extensive investments would be made in Iraq, would leave us with a weak economy and industry. Meanwhile, the over-rapid industrial growth in China has even put pressure on other countries that have already been industrialized and India is moving swiftly toward global markets.

The global trend in industrial productions has shown that advanced industrial countries with innovations in the industrial sector are producers of high-tech industrial goods. When the number of industrial producers increases and marginal profits of primary producers reduce, the said industry will continue to survive under supervision of parent countries in other countries, which carry on with the second-generation products. Also, some production activities such as production of metal parts, textile products and consumer electronic parts have been mainly left to developing countries and it is expected that this trend would continue for years to come. At present, the profit margin for part of the industrial activities of the developing countries has reached a minimum.

Therefore, moving in the correct direction for providing a suitable environment for foreign investment will be the first industrial priority of the country.

Regional Opportunities and Threats: To identify regional opportunities and threats, the first step is to identify the main industries of the regional countries and the structure of industrial trade in the regional markets. A glance at the industrial products of regional countries would reveal that the most important industry active in the region is textile. Such countries as Pakistan, Turkey, China and India have made extensive investments in this industry. In view of the applications of this industry and inexpensive manpower usually found in these countries, as well as the abundance of natural resources, all the above countries enjoy good relative advantages for producing textile products such as garments. Another industry that is worthy of mention is industries producing chemicals and petrochemicals. Since our country is located in an oil-rich region, naturally, one of the main industrial activities in the region, in view of its vast natural resources, would be industries related to the oil sector. The Persian Gulf littoral states and Saudi Arabia have made hefty investments in exploration and production of oil products. Also, following independence of Central Asian states and discovery of huge oil resources in those countries, the oil sector is expected to become the pivot of their industrial development. The rush of foreign investments to Central Asia will soon trigger large-scale production by downstream oil products.

After textile, chemical and petrochemical industries, other major industrial products in the regional countries include foodstuff, steel, cement and automobiles. It should be noted that China is almost the sole important producer of electrical appliances and electronic equipment in the region and is expected to capture a remarkable share of the global trade of such products in the coming years.

A study of the composition of imports to regional countries shows that electrical appliances and electronic equipment make up the biggest portion of imports to regional countries with total imports of electrical appliances and electronic equipment to regional states standing at about $76 billion per year.

Meanwhile, China has turned into a major producer of such goods in the world. Exports from China have tripled during the past four years and reached a well-nigh inaccessible figure of $60 billion per year. Therefore, the prospects for our country’s presence in regional markets of this industry are bleak unless Iran could produce goods enjoying state-of-the-art technology through attracting and transfer of cutting-edge technology.

Following electrical and electronic equipment, industrial machinery accounts for the most important group of imported goods to these countries and in most of them, this category ranks the first or second in terms of value of imports.

With regard to industrial machinery, China is gradually emerging as a rival for the industrial states enjoying $11 billion of exports. Industrial exports of the country more than doubled during the past four years. Turkey and India are other regional rivals of Iran enjoying more than one billion dollars of the industrial exports.

Chemical and mineral industries account for an annual $36 billion of imports to regional countries. A product of these industries is medicines, whose production needs advanced technology and complicated technical know-how. The regional market of these products is almost completely dominated by the developed countries. Some regional states, however, are trying to become major producers of these goods by attracting foreign investment and transfer of technology needed for development of chemical and mineral industries. China and India are among those countries. Since these countries are far from the Middle East, if Iran could attract foreign capital and know-how in this field and focus strategically on production of chemical products as one of the final links in the chain of products related to oil, gas and mineral sectors (of which the country possesses huge resources) it could capture a considerable share of the market in neighboring countries.

With regard to cars and other vehicles, most imports were made by member countries of the (Persian) Gulf Cooperation Council, Turkey, and China. Imports by other countries were negligible. On the whole, total export of vehicles in the region has been about $23 billion. China has made great investments with regard to products in this category, so that the country’s exports grew by about 250% during past four years to hit $6 billion. After China, Turkey has accepted investments from several authentic international companies and is expected to become a major exporter of vehicles to regional markets before long. The Persian Gulf littoral states, which are considered as big auto importers to the region, establish a unique market in this regard importing about $5 billion per year. If Iran failed to attract investments by authentic world automakers and export their products to the Persian Gulf littoral states, products coming from China and Turkey would leave no place for it in the near future.

As for the petrochemical products, China, India and Turkey are major importers with their average petrochemical imports growing by more than 7% per year during the past four years. Considering huge investments made by these countries in industrial goods, which has made them progressively dependent on petrochemical products, it seems that petrochemical imports to these countries will continue to soar in the coming years. Iran’s rivals in this field are currently the Persian Gulf littoral states and will soon include the Central Asian states.

With regard to metal production, although most regional countries have paid attention to such products, due to enjoying enormous inexpensive energy and mineral resources, Iran enjoys extensive potentials to grow in the sector and can become one of the biggest exporters of metal products in the world.

As for the textile industry, most regional countries have powerful textile industries and are exporters of textile products.

With regard to foodstuff industries, China, India, Turkey and Pakistan are Iran’s rivals with the markets in the Persian Gulf littoral states and Egypt being suitable outlets for the export of such goods. On the whole, foodstuff imports to the region have been estimated at about $20 billion.

Although the smallest market in the region is that of the construction materials, Iran can export them to the Persian Gulf littoral states and can count on $1.1 billion market of the region.

Potentialities of the Industrial Sector: After identification of regional threats and opportunities in view of the domestic capabilities of the country, we can delineate a picture of the country’s desirable industrial outlook. Iran’s industrial potentialities can be enumerated as: geographical situation, manpower, natural resources, existence of industrial experience and having a large domestic market in comparison to other regional states.

One of the potentialities of our country is being located in the Middle East region, which is a very important region in geopolitical terms. Also, in view of Iran’s adjacency to the Central Asian states, the country can act as a connecting bridge between those countries and the free waters of the Persian Gulf. Our country can also take advantage of potentials for developing regional trade because of being located along the historical Silk Road. In terms of number of neighboring countries, we are among countries with the largest number of neighbors.

As for the manpower situation, in view of the prevalence of education in the country, the active manpower enjoys suitable training with regard to the industrial science and technology. Since some of these people participate in the industrial production processes, they enjoy relative skills for taking part in industrial activities.

Another important advantage of our country for becoming an industrial nation is abundance of huge natural resources in the country. Few countries have access to such rich and valuable resources. Therefore, by relying on these resources, we can develop upstream industries related to natural resources, in the first stage, and develop downstream industries, in the second stage.

Oil and gas are major natural resources in our country. By investing in oil and gas fields, our country could be capable of becoming one of the biggest exporters of these products in the world. Also, in view of the existing experiences in the sector, in case of establishing suitable contacts with global companies and promotion of knowledge and skills, we would be capable of achieving favorable competitive power in this field.

Another advantage in the country is relatively long experience with regard to industrialization compared to other regional states. Iran is one of few regional countries, which has adopted a policy of industrialization since 40 years ago. Although this policy has practically failed due to various reasons and did not achieve the preplanned goals, this degree of industrial experience has been considered as a relative advantage in comparison to countries lacking it.

Another advantage of the industrial sector is Iran’s considerable population and potential demand for the industrial goods in the country. In fact, some countries with small populations have invested in one or several industrial branches and have become big exporters in the same fields while importing other industrial goods. However, since Iran enjoys a considerable population and natural resources, it has the potential for establishment of varied, big industries.

Therefore, the country’s industrial sector must take advantage of all its capabilities as well as global and regional opportunities to find a correct future course for its various fields of activity.