The Forum for Partners in Iran's Marketplace

September 2004 / No. 31

Cover Story

How Can Iran Go Global?

There is strong objective evidence denoting the relationship between economic liberalization and economic growth and they argue that economic liberalization is a key factor for realization of economic growth.

Globalization is a phenomenon whose economic consequences include increased volume of commercial transactions, speed of dealings, exchange of capital and information as well as increased transport of people across geographical borders. International economic developments in late 1990s and early 2000s were greatly affected by a new atmosphere governing the modern economic order and globalization.

The Iranian economy has been increasingly affected by the global economic trend during recent years. Also the Iranian economy has been in touch with the global economy due to its dependence on oil, whose price is determined by factors which are not controlled by the Iranian economy. Developments of global economy have affected Iranian economy as a result of changes in global oil market, developments in foreign financial markets and competition in the field of goods and services. Integration into a global economy will need establishment of a freer atmosphere for trade and investment and requires a secure environment for domestic and foreign economic agents and more importantly, adopting an active foreign policy toward other countries. Availing of advantages and reducing cost of interaction of every economic system with a global economy depends on expanding coordination between economic reforms in those countries and the new capitalistic economic system. Therefore, the approach of those countries to the globalization of economy will be different.

Some countries use their high negotiating power to dictate their own scenarios. For example, China first entered the scene with the goal of attuning itself with the outside world and then became so powerful that made other countries attune to it and today we are witnessing its increasing share of the economy.

Another major challenge of the globalization of the Iranian economy is a lame private sector. In fact, to join the WTO we would need an efficient private sector in addition to the state-run sector.

There is strong objective evidence denoting the relationship between economic liberalization and economic growth and they argue that economic liberalization is a key factor for realization of economic growth. During the 1980s, a third of the countries whose trade outgrew their revenues were lumped in globalized group. Average tariff rate has reduced 34% in those countries and, as a result, ratio of trade volume to revenues has increased 104%. In those countries, per capita revenue increased 3.5% during 1980s and 50% in the 1990s. On the opposite, developing countries, which are known as non-globalized counties, tariff rates fell 11% and they did not experience any growth in per capita domestic gross product during 1980s. This difference in policies indicates importance of convergence of economic policies in a liberalized global atmosphere. Experimental observations show that promoting economic liberalization and its management through powerful economic policies will lead to the growth of domestic economy.

In view of the above facts, membership of about 148 countries in the World Trade Organization and efforts made by many other countries to join the world body, means that Iran will have to become a member too because if we intend to get along with globalization or at least be able to compete with other countries, we would have to make changes. Otherwise, other countries will be telling us what to do and what not to do. It is clear that under a new globalized atmosphere, adopting an internalized policy on the pretext of heading off regional and international crises will not be a successful policy for meeting increasing economic and political needs of the modern age. We must not imagine that in our absence, other countries will not be able to progress. Now that the rules of the game are being formulated, we would stand a better chance of defending our national interests if we were a member of the global community.

Despite the fact that globalization would entail heavy economic and political risks for countries, it must be noted that under new conditions, staying outside the World Trade Organization would mean economic isolation as well as an implicit economic embargo. In fact, the cost of isolation will not be less than the costs of globalization. Therefore, WTO membership is not an option for Iran, but an inevitable requisite for economic survival in an increasingly globalized world. Therefore, both hurried and delayed decisions will be both hazardous, but research and reflection on the concepts regarding the global economy and the Iranian economic system will be saving.

Challenges, Opportunities & Reforms: Here, we discuss the most important challenges and opportunities for globalization of the Iranian economy and needed reforms.

Iranian economy is one of the closest economic systems of the world. Based on a report by the World Bank, Iran is among top 10 closest countries of the world. Iran only accounts for 0.35% of the global economy; that is, its share of the global economy is not as much as its 1% share of the world population. Since 1996, and during a period which can be called a period of internationalization of the Iranian economy, the index for openness of the Iranian economy increased from 0.38% to 0.41% in 2003 and the figure is projected to hit 0.49% by the end of the Fourth Economic Development Plan (2009).

Based on a report issued by the World Bank, average import tariff for goods in Iran is about 30%, while corresponding figure for developing nations is 13.8% and 4.9% for advanced industrial states. The figure is as low as only 2% in some member states of the World Trade Organization. These figures show that trade policies of our country are far from free while a major index for economic development in the world is having a liberalized, open economy. On the basis of that index, Iran ranked 147 among 158 countries during a study carried out in 2003. In another study that was implemented by Frazer Institute, Iran ranked 107th among 109 countries. Also based on another study carried out by the Heritage Institute, Iran ranked 151st in terms of economic openness among 156 countries in 2002. In view of WTO membership we must reduce import tariffs and come closer to the world average. Of course, certain steps have been taken in this regard; so that, import tariffs for cars are to decrease to 20% over seven years.

During the first quarter of this year, $8 million worth of goods were imported and the figure is expected to reach $42.1 billion worth of imports in return for $13 billion worth of non-oil exports

Having rich oil resources is the most important economic advantage of Iran in the face of the global economy. However, extreme dependence on petrodollars is disconcerting and some experts believe that under such circumstances giving in to economic liberalization will be dangerous and will push the country to a weaker position. However, the answer is that since the Iranian economy was awash with petrodollars over many years, we have felt no need to join the WTO and be part of the global community. We must know that oil is a political commodity now and the same countries that are major consumers of this valuable substance are also specialists on its production and exploitation and give it back to us in other forms at several times the price of crude oil while preventing an oil price hike through various methods.

Under such circumstances, attention to the following points is necessary for getting rid of current challenges. Firstly, statistics show that the bargaining power of developing countries that mainly export raw materials will decrease over time. For example, during 1988-98, total export index for agricultural products reduced from 111% to 99% while that of minerals fell from 118% to 78%. The index for foodstuff decreased from 110% to 106%. In view of the dominant role of oil in Iranian exports, Iran’s bargaining power will similarly diminish. Secondly, we must not be happy with increase in oil revenues, because such an increase will be temporary and will make domestic economy more dependent on the Black Gold and will curb advancement of structural reforms needed to make domestic economy healthier. Thirdly, we must use increased revenues to get rid of an oil-dependent economy, just in the same way that Norway and Mexico managed to relatively wean their economies from oil by taking advantage of a sudden spurt in oil revenues. However, OPEC still lags behind.

To get rid of the current situation, we must get rid of the mentality that the country will go bust in the absence of oil. Just in the same way that when oil price fell below $10 per barrel during 1980-86, we neither died of hunger nor the country’s situation became too critical. Other countries have sensed the danger and took measures to wean the economy from oil. For example, Malaysia managed to reduce oil dependence by 5-7% and Saudi Arabia has also followed suit. Our economic planners, likewise, must sense the danger and come up with an effective plan to reduce the country’s dependence on oil revenues while being sure that due to potentials of our country, they would easily find a substitute for oil revenues. To do this, the government is trying to give more transparency to its financial relations with the Ministry of Oil by considering an oil royalty for the Fourth Economic Development Plan. Subsequent profits have been estimated at about $75.633 billion. In this way, the National Iranian Oil Company (NIOC) will move along commercial and economic lines; a method which has already been used by oil giants elsewhere in the world. Now that the Guardian Council has rejected this part of the Fourth Economic Development Plan bill, we ask the Expediency Council to pay more attention to present and future situation in the world and approve the government’s bill to promote all-out development of the company.

As said before, crude oil exports are not to the country’s benefit. On the one hand, crude sales only account for 7% of the job creation inside the country and, on the other hand, the higher the oil price we will be more at loss as a major gasoline importer. Therefore, continuation of production on the basis of this natural relative advantage is one of the most important challenges facing the Iranian economy at the present juncture. Under a globalized economic system, every country will produce goods for which it enjoys relative advantages. To overcome this challenge we must switch our economic structure from one based on natural relative advantages to one based on creating relative advantages. We can choose a number of domestic industries and create advantages by supporting them. Based on studies, our country enjoys most advantages needed for entering a globalized economic sphere in three basic fields of producing basic metals, non-metal minerals as well as chemicals. Logical, limited and conditional support for such industries aimed at boosting their exports to international markets will give Iran a good standing at an international level.

A major challenge facing the Iranian economy is meager exports in return for high imports. Iran’s imports outsize its exports by 5 or 6 times. That is; we create no jobs in return for $25 billion spent inside the country. During the first seven months of the current Iranian year (March to September 2004), Iran imported $33 dollars of goods in return for every dollar of non-oil commodity exports. During the first quarter of the same year, $8 million worth of goods were imported and the figure is expected to reach $42.1 billion worth of imports in return for $13 billion worth of non-oil exports by the end of the Fourth Economic Development Plan. These figures are disconcerting enough even ignoring the issue of WTO membership. The main reasons for reduction of non-oil exports are low production and low quality. Historical inattention to quality has led to remarkable increase in deficit of balance of payments after our borders were opened to foreign goods as a consequence of globalization. Changing non-tariff barriers to tariff barriers and creating a competitive ground for production will make domestic producers give more thought to competitive and export-oriented production.

Another major challenge of the globalization of the Iranian economy is a lame private sector. In fact, to join the WTO we would need an efficient private sector in addition to the state-run sector. The government has been the pivot of globalization in Iran which is monopolistic by nature and not capable of creating a competitive market, while countries depend on their private sectors for improving their economic status. We must feel the need for privatization and consider it a major step toward changing the state-run structure of the economy while preparing legal, social and political institutions needed for privatization. In the absence of those institutions, privatization will generally end in nationalization and the state-run economy will gradually turn into a socialistic economic system, which already failed in East Bloc countries, especially the former Union of Soviet Socialist Republics.

Tendency toward privatization should be reflected in attitudes and executive methods as well as behavioral models of the whole system including organizations, directors and staff. In this way, private sector could shoulder the main responsibility of the country’s economy and pave the way for acceptance of the country’s economic activists in the world. It must be noted that part of existing problems are legal ones; that is, the Constitution has given the government full authority over trade and commerce. Although some legal hurdles have been removed by decision-making bodies, the Iranian economy has been slow with regard to privatization and elimination of state monopolies.

Another economic challenge facing Iran en route to privatization is the situation of subsidies. Billions of dollars are allocated directly or indirectly to subsidies in Iran every year, and as long as the situation has not changed, it would be hard to think about getting in line with a globalized economy. Measures have been taken to rationalize subsidies. For example, according to the Fourth Economic Development Plan, energy carriers will be sold to the domestic market at the same price as Persian Gulf markets. This issue and the challenge of paying subsidies on essential goods have always given rise to tensions in society and have led to repetition of this riddle that whether “economic growth is better or social justice.” Similar resistance was made against the country’s industrial development strategy. We need accurate information in this regard. Experts and academicians must make people aware of such facts and build a suitable culture for promoting economic reforms.

Another problem with the Iranian economy is vulnerability of domestic industries in the course of integration into the global economy. Some believe that joining the WTO will do away with the domestic industry. However, it must be noted that the new atmosphere will only exterminate those industries that enjoy irrational supports. Under the new competitive situation and after elimination of non-tariff barriers, the country’s economic atmosphere will become transparent and more room will be given to efficient industries. Irrational support for inefficient industries is illogical and must be abandoned. Joining the WTO will be a bounty for domestic industry and give it an opportunity to improve their presence in international markets due to low tariffs considered by the government.

For example, the Oil Minister as a staunch supporter of WTO membership believes that reducing barriers to export of Iran’s petrochemical products to global markets will increase competitiveness of the Iranian petrochemical industry. It must be noted that tariffs should be phased out and through that gradual process we will be able to assess possible consequences and act accordingly. Under those conditions, the way will be paved for competition in production and domestic producers will have to produce high-quality products capable of competing with foreign counterparts in order to retain their presence in global markets.

Another important issue regarding globalization of the Iranian economy is a clear gap existing between domestic policies and international macroeconomic policies of the country. As if decisions in those two fields are taken on two separate islands! It must be noted that WTO is no place for conflicting decisions and if we accede to the world body under present conditions, the result would be clear in advance. Taking contradictory policies has constantly reduced Iran’s share of global trade. Therefore taking a unified stance by officials with regard to global economic issues is a prerequisite for entering into negotiations with such international organizations as WTO. We must promote détente with other countries; especially those countries that sway international and regional economic power through common diplomacy to expand economic cooperation and engage more and more in international trade. In fact, economic stability will not be possible in the absence of a suitable atmosphere for investment.

Some say that after accession to the WTO, Iran will be given a time to mend its policies. However, we must not count on it. We must implement domestic reforms in the country’s economic structure as soon as possible. If not, it is not clear whether there will be any domestic trade left after those reforms or not. Of course, the reforms need not be aimed at joining WTO, but it will happen as a natural consequence of reforms. A reason for unification of foreign exchange rate is bringing more competition to economic activities with the goal of removing monopolies and all members of WTO have moved in that direction. This has been done in Iran, though not for the purpose of accession to WTO.

Insurance, banking and customs play a great role in the economy of every country. A big economic challenge for Iran is the government’s monopoly in those fields. Of course, private insurance firms have been established, but they have a long way to go before attaining the desired status. Iran’s presence in a global economy must be preceded by reforms in the above domains. Plans are being drawn up to privatize state-run banks and, on the other hand, Article 12 of the Fourth Economic Development Plan bill pertained to allowing activities of foreign banks and insurance firms in the country within the framework of Iran’s insurance and banking laws. However, the ad hoc commission formed by Majlis to study the plan rejected that article. What we expect from people’s deputies and members of the Expediency Council is to approve such articles with an eye on the new economic system in the world. With regard to customs, it must be noted that customs plays a determining part in trade relations and is of utmost importance for balancing international transactions.

There is an unstable economy in Iran with many organizations claiming various parts of it and customs administration only carrying out their policies while for a country moving toward globalization, restricting customs within state policies will have negative consequences. Iranian customs should undergo structural overhaul in view of new economic developments in the world to play its desired role in increasing exports. Although measures have been taken in this regard, we are still very far from the target. Such measures as automation of customs, using suitable laboratory equipment, establishing a data bank, building standard warehouses as well as loading and offloading equipment and so on could upgrade Iranian customs as the main body regulating economic and commercial behavior of Iran in preparation for WTO accession.

Finally it must be noted that the theory saying developing countries can change through technology has changed and today, manpower is considered to be a axis of development. Under new circumstances, the world is moving toward converting knowledge into capital and by capital they mean brains. Only those economies could prosper that provide the best grounds for their educated manpower. Unfortunately Iran does not fare appropriately in this regard and our country ranks high in terms of brain drain. A study on economic aftermath of this phenomenon showed that Iran has lost $2 trillion in brain drain. This figure is tantamount to 100 years of oil revenues or equal to 20 years of gross domestic product. In fact, the country is paying the price of an inefficient economic system and lack of a correct developmental strategy. Therefore, we must find a solution for this phenomenon which is inflicting irreparable damages to the country and prevent brain drain by providing domestic motives.


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  Sep.  2004 / No. 31