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Iran
International
The World’s Window into Iran
Policies advocated in the Washington Consensus, even if one accepts their
ultimate desirability, can do more harm than good if thrust upon countries
without due regard to their unique socio-economic circumstances.
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By: Sajjad Khoshroo
LL.M.
from Harvard Law School in International Finance, former Assistant Editor at
Iran International, currently an attorney with White & Case LLP’s Project
Finance and Energy practice in New York.
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Iran
International; no better name could have been selected for the magazine that
has dedicated itself to promoting Iran’s standing in the international arena
since its inception ten years ago. Through the insightful vision of its
Editor-in-Chief, Hussein Sanai, and the tireless efforts of its editorial
staff,
Iran International has elevated itself to the position of the preeminent
publication on issues of international trade and finance, not only in Iran,
but the entire Middle East. Today, it truly lives up to its motto of being
“The Forum for Partners in Iran’s Marketplace.”
The international finance
architecture is of profound importance to integrating resource-rich developing
countries (RDCs), like Iran, into the global economy. Recognizing this,
Iran International has offered commentary on the key reforms that need to
be implemented in the financial sector of RDCs. The many articles published
over these past ten years exploring the three interconnected areas of
international finance—namely, international borrowing practices,
privatization, and emerging capital markets—can be cited in this regard.
Moreover, while realizing the benefits of international trade, Iran
International has been aware of the fact that WTO rules can also act as a
constraint on the policies of RDCs. Therefore, it has closely examined the
world trade system as set up by the WTO, with specific focus on trade in
services, intellectual property, and trade related investment measures.
Finally, another main area of focus for Iran International has been
international political economy. It has examined the interrelation between
global institutions, cartels, RDCs and developed and developing countries; and
how RDCs can use their resources to leverage themselves to a better position
in the international economic order, and how they can utilize international
organizations in this regard.
Mission:
Global institutions governing the world economy have consistently advocated a
set of virtually identical economic policies to the governments of developing
countries. These policies, known as the Washington Consensus, favor an
outward-oriented export economy organized through markets with minimal state
regulation, privatization, trade liberalization and limited budget deficits.
These neoliberal economic policies are, however, promoted by global
institutions regardless of national circumstances, such as cultural and social
structure, or previous experiences in the political economy of development.
For their proponents, neoliberal
policies produce a rapidly growing, market-oriented, profit-driven economy
that generates sufficient jobs and taxes to rectify any social problems that
might occur along the way. For their opponents, neoliberal policies ruin
whatever ability Keynesian state intervention once had to produce capitalist
economies complemented by social justice. These are now the polar opposite
views on neoliberalism: the conventional view, that neoliberal policy is the
best economic science has to offer; and the dissident belief, that
neoliberalism is a recipe for global economic, social and environmental
disaster.
There is, however, a middle ground
between these extreme positions. It recognizes that policies advocated in the
Washington Consensus, even if one accepts their ultimate desirability, can do
more harm than good if thrust upon countries without due regard to their
unique socio-economic circumstances.
Thus, in assuming that the best
approach towards development is a tailored—rather than a
one-size-fits-all—policy, the question becomes what are the choices with which
resource-rich developing countries are confronted with when striving to
achieve greater economic development? A key difference between developing
countries in general and RDCs is that the latter can generate revenue in hard
currency, and unlike most developing countries, especially the poorest, they
need not rely exclusively on loans or foreign investment to finance their
development. The case of RDCs, when not entirely excluded, is given short
shrift in current literature examining the issues of the developing world.
This is because the struggle of RDCs to attract foreign investment is unique,
since there is no shortage of interest on the part of foreign firms to exploit
their resources. Thus, RDCs must consciously decide how much foreign
investment they are willing to allow, under what conditions, and at what cost.
It is clear that for these countries their abundant resources are key to their
development, but it is a key that can turn both ways, either locking or
opening the door to development and progress.
During its decade of publication,
Iran International has sought to address issues like these. It has
focused on the oil and gas sector of Iran and other energy-rich RDCs and has
explored why they have not been able to translate their incredible advantage
into greater economic development. It has called for promoting transparency—by
reforming key institutions and enterprises within RDCs and reducing reliance
on—but promoting partnership with—foreign companies. Iran International
has asked, if the policy space were created, what steps can RDCs take to
better benefit from existing international trade and finance systems?
Even a cursory literature review
produces a wealth of scholarship critical of the policies of global
institutions like the World Bank, International Monetary Fund (IMF) and World
Trade Organization (WTO). However, an exclusive focus on these institutions is
unhelpful because they represent neither the whole problem nor the whole
solution. While these institutions and their policies are important, their
reform must complement, not substitute, reform within the developing countries
themselves. Moreover, despite the abundant criticism, these institutions have
yet to undertake any significant reform of their policies. Notwithstanding
these necessary reforms, it is becoming commonly accepted that developing
countries should be given more freedom to develop their own policy strategies
tailored to their own unique circumstances.
In the case of RDCs, natural
resources are inextricably linked to their history and socio-economic
development. Resources generally, and energy resources particularly, have
aroused the interest of foreign powers, leading to coups, corruption,
sanctions, and wars, but not to development and progress.
Since 11 September 2001 the
problems of developing countries are no longer seen in merely economic terms,
but also as part of a global security strategy. Not only because the hearts of
neglected and impoverished youth are fertile ground for sowing the seeds of
hatred, but also because this unrest could disrupt energy security and
potentially destabilize the entire global economy.
It is unclear whether these great
natural resources happen to be situated underneath unstable countries, or
whether these countries became unstable because of untoward outside interest
in their resources. “Resource curse” adherents argue for the latter. However,
what is clear is that the whole world, both consumers and producers, would
benefit from the greater energy security resulting from peaceful development
of RDC resources.
A principle cause of
underdevelopment in RDCs is their inability to access capital. Developed
countries have mobilized capital savings and investments over the course of
centuries, but this has not been the case in the developing world. In
particular, profits generally have not been reinvested in developing country
enterprises; instead, they are used to pay for imports and to service external
debt. This failure to reinvest profits in strategic sectors of the economy has
resulted in severe undercapitalization of developing country enterprises, and
has made capital accumulation very difficult for RDCs that export primary
products. Furthermore, an increase in export revenues can deindustrialize an
RDC’s economy by raising the exchange rate and making its manufacturing sector
less competitive.
Moreover, as early as the
mid-1960s, there were concerns that the world trade system discriminated
against developing countries. This discrimination was generally not in
violation of the WTO’s most-favored-nation principle. Rather, the policies of
the developed world erected the most serious barriers against these primary
products that the developing countries had a comparative advantage in
producing.
These concerns were to be addressed
in trade negotiations, but not only did the developing countries receive a
small share of the gains from the Uruguay Round, they also accepted a
remarkable array of obligations. New trade rules and domestic disciplines were
introduced, but they too reflected the priorities and needs of developed
countries more than developing countries. Many of the rules acted to constrain
the policy options of developing countries, in some cases prohibiting the use
of instruments that had been used by developed countries at comparable stages
of their development. This has caused great frustration in both the developed
and developing world, as exhibited by the collapse of trade talks and massive
protests against economic summits.
Even this brief review is enough to
show that there are many points of contention in this area. Iran
International has sought to contribute to this discourse by providing an
insight into the perspective and concerns of RDCs. Iran International
has reported on how governments have tried to promote transparency through
reforming internally while curbing foreign influence. Iran International
has provided its readers with the opportunity to see how the government’s
development policies are shaped and implemented and what obstacles must be
overcome along the way.
Free
Trade vs. Trade Cartels: The press often discusses RDCs with
respect to “cartels,” and cites the Organization of Petroleum Exporting
Countries (OPEC) as an example. The term cartel, however, is a highly
politically-charged term within oil-producing countries and OPEC members
object to its use. The press harshly criticizes trade cartels generally, and
OPEC specifically, often portraying it as a greedy and untrustworthy
organization “cynically manipulating the price of oil.” But many oil-rich OPEC
members are rich in very little else. Crude oil is their only export, making
them uniquely vulnerable to global oil prices.
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Resources generally, and energy resources particularly, have aroused the
interest of foreign powers, leading to coups, corruption, sanctions, and wars,
but not to development and progress.
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The principal aim of OPEC,
according to its statute, is the determination of the best means for
safeguarding its members interests, individually and collectively; devising
ways and means of ensuring the stability of prices in international oil
markets with a view to eliminating harmful and unnecessary fluctuations;
giving due regard at all times to the interests of the producing nations and
to the necessity of securing a steady income to the producing countries; an
efficient, economic and regular supply of petroleum to consuming nations, and
a fair return on capital to those investing in the petroleum industry.
OPEC decisions have considerable
influence on international oil prices. In 1975, OPEC nations joined coalitions
of primary producers to call for a new international economic order
characterized by “stable and just commodity prices, an international food and
agriculture program, technology transfer from North to South, and the
democratization of the economic system.”
Overall, OPEC’s actions have been
successful, causing the price of crude oil to rise to levels that had, at one
time, been reached only by refined products, while also increasing RDC’s rate
of return and share of equity. Moreover, OPEC serves as a platform for
coordinating policy, such as considering proposals to change the currency of
oil sales from dollars to euros to protect oil prices from dollar devaluations
and interference from U.S. regulators.
However, OPEC’s ability to raise
prices does have limits. An increase in oil price decreases consumption, and
could cause a net decrease in revenue. Furthermore, an extended rise in price
could encourage systematic behavior change, such as development of alternative
energy sources or increased energy efficiency.
Furthermore, OPEC faces the classic
problem of all cartels: overproduction and cheating by members. At the higher
cartel price, less oil is demanded. That is why OPEC assigns output quotas.
Each member has an incentive to produce more than its quota and “shave” this
price. The methods available to shave official OPEC prices are numerous.
Credit can be extended to buyers for periods longer than the standard thirty
days. Higher grades, or blends, of oil can be sold for prices applicable to
lower grades. Transportation credits can be given. Buyers can be offered side
payments or rebates. This situation is exacerbated by the fact that all OPEC
members do not necessarily share identical interests and often find it
difficult to reach consensus on strategy. Countries with relatively small oil
reserves or with large populations like Iran, Nigeria and Venezuela, are often
seen as pushing for higher prices. Meanwhile, producers like Saudi Arabia and
Kuwait, with massive reserves and small populations, fear that high prices
will accelerate technological change and the development of new deposits,
reducing the value of their untapped oil reserves.
But, despite these concerns, RDCs still
seem to prefer cartels. In April 2007, energy ministers gathered in Doha for
the Gas Exporting Countries Forum, discussed steps for creating an OPEC-style
organization for gas. The Forum’s members, who control 60% of world’s gas,
were adamant in rejecting the idea that producers intended to collaborate at
consumers’ expense. They described their efforts as steps “toward greater
cooperation to stabilize the market, to give confidence to our consumers.”
While gas does not lend itself well to a cartel system due to the long-term
nature of the contracts and limited spot markets, as well as not having a
“swing” producer like Saudi Arabia for oil, developments in this regard are
being observed with fear and fascination by both consumers and producers.
National vs. Multinational: When considering the development of
energy reserves, a key question is who should lead this effort, national or
multinational oil companies? Today, most RDCs have resolved this question by
opting for state-owned national oil companies (NOCs). While the RDCs share
many interests with international oil companies (IOCs), there are also key
areas where these interests are competing. But since RDCs, in most cases, lack
the capital and technological know-how to develop their own resources, and
IOCs no longer control their oil, they are unavoidable business partners. So
what key characteristics must an NOC adopt to be best suited for developing a
RDC’s resources? In addressing these issues Iran International has
explored the prevailing geopolitical and economic conditions, as well as the
bitter history of foreign exploitation, and the restricted legal frameworks
that have been adopted as a result. This background has served as a context in
which strategies for development have been considered.
In theory, the nationality of a
firm’s controlling owners should not have any bearing on issues of
development. In a perfectly competitive market there need be no “crowding out”
by one firm of another. The more foreign and national firms, the better
for employment, foreign exchange and income. But in markets that are
monopolistic, in which one firm may “crowd out” another due to limited demand
or a scarce input, as in the energy sector, ownership matters because
foreign-owned and nationally-owned companies make different contributions to
economic development.
The greatest contribution of IOCs
to economic development is capital. IOCs are in a privileged position to raise
it, and developing countries are not. Besides capital, IOCs are also reputed
to accelerate development by transferring technology. However there are
arguments that this reputation is exaggerated. Furthermore, it can no longer
be assumed that IOCs are the top-of-the-line in terms of quality. For example,
from 2004 to 2006 various disasters plagued British Petroleum, considered one
of the industry’s “super majors.”
In some areas NOCs can out-perform
IOCs. A giant multinational keeps its top managers and engineers at corporate
headquarters to oversee non-routine functions. This elite, of necessity, is in
short supply. Therefore, when a multinational opens subsidiaries overseas, it
substitutes top management’s know-how with bureaucratic rules, so even the
transfer of managerial know-how is limited. Additionally, IOCs keep major R&D
operations at home, or possibly in regional offices.
Local content tends to be much
higher for NOCs than for IOCs—which import most of their inputs. RDCs try to
combat this with trade barriers, but are prohibited by the WTO. The incentives
for utilizing local content are also different for nationals and
multinationals. It often makes sense for IOCs to import project components
with greater economies of scale from a single internal source, outside the
country of production. It also makes sense for NOCs to build their supply
chains locally. Thus it is common for IOCs and RDCs to fight constantly over
the origin of parts—IOCs wanting to import them from their own overseas
subsidiaries, while RDCs want to produce them domestically. A deadlock is
reached when IOCs object to the quality of domestically-produced goods, while
refusing to transfer the technology for improvement. RDCs believe local
content requirements for labor and goods are of utmost importance as it
creates employment and protects local—and sometimes infant—industries.
However, these policies violate WTO obligations, which mandate that infant
industries be nurtured through capital markets or “green-light” subsidies
rather than government protection. RDCs argue that capital markets have
inherent imperfections that make protection desirable over subsidies, which
the government cannot afford or correctly target.
Taking these factors into
consideration, within the framework of the various restrictions set by the WTO,
Iran International has explored how RDCs can either boost their NOCs or
bring IOCs in line with their development targets. Which path ultimately
proves to be more suitable for a given country will depend on the initial
conditions of its industry, skill and experience of its workforce, legal
structures, as well as its technological and financial capabilities.
Nationalization vs. Privatization: Another key question faced by
RDCs is whether the NOC should be a state-owned or private-owned entity? Can
there be any private ownership of NOC shares? Can there be any foreign
ownership? To better understand the current condition one must first examine
its historical backdrop.
Nationalization is often associated
with the ideological fervor and idealistic optimism of the developing world’s
independence movements in the 1950s and 1970s. Post-independence
nationalization movements were often fueled by heady reactions to decades of
foreign domination. Privatization, on the other hand, tends to follow a period
of disillusionment with nationalistic ideals, and it typically leads to a
retreat to the private pursuit of material gain. Nationalization often leads
to the adoption of inward-looking policies, designed to foster the growth of
nascent industries in order to ensure self-sufficiency. This argument is
undermined by the fact that the small size of developing economies makes
achievement of self-sufficiency unlikely in even the most essential sectors.
Apart from ideological or
sentimental reasons for nationalization, there were also more practical
considerations. In the aftermath of the post-independence era, there may have
been no real choice but to nationalize critical export industries and
industrial sectors of national importance. The domestic private sector may
have been too weak, or even non-existent, in many developing countries; thus,
the state may have been the only national actor capable of borrowing from
international sources, engaging in international trade and commerce on a broad
enough basis to meet national import/export needs, and undertaking large
capital infrastructure projects in critical sectors.
Iran International has
looked at the experience of countries that have recently privatized their NOCs.
Norway’s decision to privatize its NOC, Statoil, is interesting in this
regard, as Statoil executives themselves initiated the idea of privatizing the
company as a way of re-invigorating it. In terms of both clout and
profitability, the company had fallen behind its publicly-traded rivals, Royal
Dutch Shell, BP Amoco and Exxon Mobil. Statoil believed that partial
privatization would give it better access to capital markets, add discipline
and reduce political interference. Could this logic also be extended to NOCs
in developing countries?
In most RDCs the state is a major
supporter of the NOC and hopes that by strengthening the NOC and other
national companies they can “crowd out” foreign investors and lead a
grass-roots struggle for growth. Thus, Washington and Wall Street have not
looked favorably upon NOCs. Washington associates government intervention to
promote national enterprises with corruption, protectionism, and import
substitution.
Through its reports, Iran
International has identified the influence of the privatization process on
capital market development as one of the factors RDCs should consider when
making the hard choice between nationalization and privatization.
Transfer of Technology vs. R&D: Contrary to common belief, the
amount of technology transferred from IOCs to NOCs is miniscule, so the
importance of IOCs to economic development is somewhat inflated. Typically the
mature IOC does not transfer its proprietary knowledge to the nascent NOC.
Instead, technology is transferred from sources outside the arena in which
firms are head-on competitors. In capital-intensive industries, technology
transfer comes mainly from overseas capital goods vendors in a different
industry from local capital goods buyers. The knowledge these vendors transfer
in the process of installing their equipment is bolstered by foreign
consultants, licensors, specialists, and retired managers and engineers. In
many instances technology transfer is “turnkey.” A turnkey project is one in
which to start production, all a buyer must do is turn the key and flick the
switch. Expensive turnkey transfers involve a consortium of firms, few if any
of which produce a product competitive with that of the buyer. Thus, the
technology needed to take control over ones own production will not come from
the IOCs, and must be achieved through local R&D.
R&D is becoming increasingly
important for economic development. IOCs do almost no R&D in developing
countries. According to Vernon’s product cycle, non-standard projects, and
their enactors, have to be kept at home as they require hands-on monitoring by
top management. Top scientists also want the best projects kept at
headquarters, and lobby against exporting frontier research to lower-wage
venues. But, in fact, some R&D has gone overseas to developing countries with
lower professional labor costs. This R&D is small in amount and modest in
complexity.
Some local and regional R&D labs in
developing countries may seem large—employing up to 600 people—but they are a
fraction of the size of the labs in developed countries, where 2,000-3,000
scientists in multiple intellectual disciplines collectively undertake
advanced research. Even in cases where there is some investment in more
complex applied research in RDCs, the incentive comes from the government, not
market forces or overseas corporate headquarters. If an RDC wants to do
cutting-edge research, it must involve nationally owned firms or
government/university research labs on a large scale, and not rely wholly on
foreign investments. Foreign investors do not—and probably cannot be expected
to—do state-of-the-art research outside their corporate labs.
In this regard, Iran
International has looked at international trade in services, as an
important part of the world trade system. It has examined why, despite cheaper
labor costs in developing countries, developed countries still derive greater
benefit from trade in services, and what reforms, such as in education and
research, would be required to change this situation.
VII.
Foreign Investment vs. Domestic Capital Mobilization:
The West promotes foreign direct investment (FDI) as a
“gift to economic development,”
although the countries that need it most are usually the ones that cannot get
it. A key question in this regard is whether FDI is indeed needed, and if so,
how much and with what conditions? What reforms must RDCs undertake to become
more attractive targets? What alternatives do they have if they decide not to
utilize FDI?
RDCs need large capital investments
to finance their energy projects, whose production they export to generate
hard currency earnings. Since indigenous capital mobilization is so difficult,
RDCs tend to seek capital investment from developed countries. RDCs have
several options for doing so, including: (1) negotiating for foreign aid; (2)
borrowing from international organizations, such as the World Bank and IMF;
(3) borrowing from bilateral lenders; (4) borrowing from private commercial
banks; (5) attracting foreign direct investment; (6) attracting foreign
portfolio investment; and (7) various contractual arrangements entered into
with IOCs, such as project finance.
In grappling with the issue of
attracting foreign investment, the policy in some RDCs has been to induce more
foreign capital, but to restrain FDI except where it is needed for the
introduction of advanced technology and know-how; and even then some still
prefer joint ventures, technical cooperation or royalty payments. Some RDCs
place restrictions on transferring profits, to make sure they are reinvested
domestically. Some RDCs, like Iran, which have been unsuccessful in attracting
FDI for political reasons, have started to look to their own domestic capital
markets.
Iran International has
closely examined the role international organizations play in financing the
development needs of RDCs. For example, the World Bank has been involved in at
least ten major energy projects in the past twenty years. Because the World
Bank is considered the banker’s guide to creditworthiness, its participation
not only promotes transparency, but also greatly improves the economics of
projects by encouraging private institutions to participate and provide more
financing and at more favorable rates in areas of the world where they are
unlikely to venture on their own. However, global institutions offer their
loans at commercial rates and also mandate hard economic reforms—a practice
called “conditionality”—which can have negative effects on economic growth.
Since its inception a decade ago, Iran International has sought to
raise and examine various questions. Questions like: How can RDCs better
structure their capital markets, so it becomes a source they can draw on for
their development projects? How should choices be made between encouraging
domestic savings mobilization and providing incentives for FDI? Are legal and
regulatory regimes in need of systemic reform in order to respond to the
development of new emerging capital markets? How can global institutions be
engaged in this process without causing adverse effects? It is with posing
these thought-provoking questions that it has helped businesspeople and
policymakers better understand the situation in which they operate, and guide
them to answers they are looking for, and will continue to do so in the
future, hopefully for decades more to come.
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