Dr. Massoud Nili, who has studied small enterprises in Iran’s industrial development strategy, has taken part in the following interview to discuss successful experiences of South Korea and Taiwan with regard to small and medium enterprises and maintains that this scenario will not be efficient in Iran.

In terms of industrial policies, since the unemployment rate in our country is high and we must create jobs the presumption is that small enterprises should develop to reduce unemployment. This presumption is not totally wrong, but is incomplete; those enterprises can be effective which produce intermediary goods, that is, products which are used in the course of production process like automobile part production workshops. However, when they want to produce end products, since they cannot do it on a large scale, it increases production cost and such enterprises will not be able to survive competition.

On the other hand, monetary debates surrounding such enterprises are that money should be disbursed among such production units by squeezing Central Bank reserves and making banks give them loans. Under these circumstances and since the interest rate is low, there would be too much pressure on the Central Bank of Iran and this will damage the whole economy. That is, industrial policy damages enterprises, but monetary policy puts pressure on the whole economy because the government is determining an interest rate for banks which is far from inflation rate. Therefore, banks cannot collect as much deposits as is needed to pay facilities and are faced with shortage of reserves. However, pressures from small enterprises have made the Central Bank of Iran to give in to that pressure and give them facilities. But resources of the Central Bank are limited to monetary basis and pressure on them will increase liquidity and inflation, which will cause problems for the whole economic system.

Countries which follow small and medium enterprises policy are those that have created a network of enterprises in which small and medium ones are driven along by big corporations as the main engine of economic prosperity. The big ones produce end products while small and medium enterprises produce commodities that are demanded by big corporation which are then sent to export markets by big corporations. In this scenario, small enterprises may play different roles. For example, there may be big companies demanding product of small and medium enterprises. In this state, the latter enterprises will grow as we see in South Korea. On the other hand, there may be small and medium enterprises connected to big corporations outside the country. For example, such enterprises produce parts for Iran Khodro carmaker or for Peugeot in France and the big company uses their products in its production process. This is the model we see in Taiwan. There were no big companies in Taiwan, but there were small and medium enterprises which produced commodities for a big company outside the country.

However, the fact that such enterprises are going to be established through bank facilities has no parallel experience in the world and they cannot be influential in creating new jobs. Of course, we have discussed this in detail when talking about industrial development strategy.

Many studies have been carried out in our country with regard to economic conditions and they show that when inflation is two digits, the normal relationship between inflation and unemployment will not be there and higher inflation will worsen unemployment. Increased prices only reduce unemployment when two basic conditions are met: that is, price hike should be short-term and inflation should be a single digit. However, increased liquidity is exacerbating inflation in our country right now and since this will reduce competitiveness and will also disturb financial balance of banks, it would damage production while creating no new jobs. As a result, as prices rise, unemployment rate will not fall and inflation will worsen.

When the rise in liquidity is much higher than increase in production, the result would be higher inflation. Under the most ideal conditions, our gross domestic product will grow at an annual rate of 9 percent while liquidity is currently growing at a rate of 40 percent without any proportion between production and inflation. The rise in liquidity, unfortunately, stems from expansion of monetary basis which is the most harmful policy on the demand side. However, if liquidity is due to expansion of banking system, banks would be able to reabsorb the facilities that they have injected into economy. Under present conditions, however, inflation is going up due to expansion of monetary basis which is due to financial policies adopted by the government. That is, the state budget has imposed these conditions on the national economy and since the Central Bank of Iran is powerless in controlling financial policies of the government, it is trying to control liquidity by manipulating a component of monetary basis which is under its control; that is, increase in monetary basis due to transfer of Central Bank resources to commercial banks. As a result, the banking system will not expand.