Published on November 6th, 2015 | by Guest0
Transforming Iran’s Economy in the Post-Deal Era
by Himan Hosseini and Leila Piran
Since Iran and the P5+1 powers (Britain, China, France, Germany, Russia, and the U.S.) reached a comprehensive nuclear agreement on July 14, 2015, prominent Iranian economists and commentators have begun building a strong case for reforming Iran’s stagnant economy. Many Iranians who have suffered the negative implications of the international sanctions imposed on their country have viewed the deal very positively. At the same time, many economists have remained realistic, advocating for profound structural reforms aimed at making Iran’s economy more competitive in the global economy. Despite their divergent views, these economists unanimously agree that the country’s economy has to undergo a wide array of reforms once Iran’s foreign assets are freed and the sanctions are gradually lifted layer by layer as part of the nuclear deal.
Recently, the leading economic journal, Tejarat-e Farda, organized a series of interviews with leading Iranian economists, asking their views on managing Iran’s economy in the aftermath of the nuclear agreement. The journal editors interviewed Farhad Nili, the former head of the Monetary and Banking Research Institute of Iran’s Central Bank and its current representative at the World Bank. Through Iran’s cooperation with the Bank, Nili believes that Iran can gain both knowledge and recognition, which are more vital assets than financial resources. Moreover, Nili aims to use the Bank’s leverage to strengthen the Iranian economy’s relationship with universities abroad. He cites Turkey as a good example of tapping into the expertise of foreign-based Iranian specialists. Although the uniqueness of some issues related to the Iranian economy could provide international academic centers with worthwhile research topics, Nili believes that Iran also would employ the “academic curiosity” of foreign universities to its own benefit.
When asked to comment on protecting Iran’s sovereignty vis-à-vis international organizations, Nili emphasizes the positive role of these organizations in areas including collective decision-making, global governance, and screening functions. He does not see any conflict between joining various international organizations and the national pride of independent nations. Instead, he traces a direct causal relationship between cooperating with international organizations and national development.
Therefore, Nili thinks that Iran should translate its recent success in the diplomatic arena to the economic one as well. As in the diplomatic realm, he believes, strong negotiation teams in the economic sphere should be formed. He also stresses the need for adopting a more transparent attitude toward the international community: Iran urgently needs to provide reports on its economic status and convey them in an internationally understandable jargon. Without the evaluation and measurement of all probable risks—related to currency exchange rate, taxes, and so on—no foreign investor would dare to invest in a country regardless of whatever positive signs of reform they detect.
Another prominent expert, Mohammad Tabibian believes that if Iran bolsters its financial sector and applies the unfrozen assets to long-term infrastructure projects, it could reach economic growth during the post-sanctions period. In order to avoid making the same mistakes again, the government should assign infrastructure renewal projects to the private sector. Moreover, Tabibian does not advocate the idea of injecting the freed assets into the National Development Fund since it would only promote patronage. If the government gains significant financial resources, it should determine the most urgent infrastructure to modernize such as highways, high-speed trains, and public transportation. In another words, the free assets should be used to strengthen the private sector’s role in the Iranian economy.
In addition, Tabibian suggests that the government should remove high tariffs on foreign manufacturers in order to motivate domestic ones who have yet to increase the quality of their products thanks to the monopoly they have enjoyed so far. Furthermore, domestic manufacturers should review their current production cycle and devise new ways to improve the quality of their products, which would be beneficial to consumers as well.
Mostafa Nemati, another prominent economist, believes that “the whole economic structure of a country is like a train whose speed is the same with that of its slowest wagon no matter how strong and up-to-date the other wagons’ engines are.” Therefore, economy and politics are interdependent. As a result, political decisions play a key role in creating or neutralizing economic crises. Furthermore, he thinks that Iran’s economic problems have already been diagnosed and what matters now is the political will to address them. Low growth rate, high inflation, widespread unemployment, lack of stability, poor technological and management knowledge, and lack of a transparent legal system still pose significant obstacles to Iran’s economy. Therefore, Nemati calls for an end to clientalism and patronage.
In order to achieve economic development, Nemati urges political and cultural institutions to reach a consensus regarding Iran’s development. The government should ban monopolies and Iran’s market should open its doors to international markets during a controlled process. Moreover, the government should reform property rights and introduce more liberal tax laws to attract foreign investors. Ultimately, Iran should minimize its dependency on oil and adopt free market reforms.
Another influential economist, Bemanjan Nadimi expresses deep concerns about the ramifications of sanctions. As the sanctions intensified in recent years, some businesses emerged to facilitate foreign trade and circumvent the sanctions. A black market emerged whose sole focus was smuggling activities. Although this is not a new phenomenon, illegal smuggling has served as a significant threat to the country’s economy during this era. Therefore, restoring Iran’s economy to its past level of transparency remains the most difficult task in the post-sanctions era. Achieving this goal requires commitment from both the private sector and the government.
In Nadimi’s view, the introduction of an electronic banking system could help increase transparency in the Iranian post-sanctions economy. The Internet and informational technology play a vital role in the world’s big economies. In order to achieve economic development, economic transparency should become a top priority for both the government and the private sector.
Similarly, Pedram Soltani, vice president of the Iran Chamber of Commerce, Industries, and Mines (ICCIM), believes that some businesses have been created in recent years to circumvent sanctions, which has eroded Iran’s economic transparency. However, he is optimistic about coming up with a 18-month timeline for restoring the country’s transparency to previous levels. According to Soltani, sanctions-related businesses can be categorized into two groups. The first group of businesses adopts the changes and begins to engage in legal manufacturing activities. The second type resumes its previous activities, which are least transparent and consist of brokerage activities.
According to Soltani, although the Iranian economy has never been fully transparent, lack of transparency reached a peak under the sanctions. The main step in the post sanctions era is therefore to reform the banking structure and engender more transparency in the overall system. The taxation authority, the Statistics Center, the General Inspection Office, the Supreme Audit Court of Iran, and the judiciary are all required to increase their transparency. This goal could be achieved through launching information systems in the above-mentioned organizations.
Soltani views the lack of information-sharing as one of the key attributes of the business sector’s opacity. Although ameliorating Iran’s economy remains a hierarchical process, business owners and entrepreneurs should demand that state organizations maintain accountability and remain committed to transparent rules (e.g. publishing accurate information regularly).
Connecting to the International Market
Hadi Salehi Esfahani, a renowned economic expert, states that the gradual lifting of the international sanctions would provide Iran with an unprecedented economic opportunity that could lead to development in the long run. Iran’s young and well-educated population could gain access to capital, technology, and opportunities provided by the market. However, foreign trade policies would play a vital role in facilitating Iran’s access to international market opportunities and ultimate development. Nevertheless, an increase in oil income and access to frozen assets could increase the national currency’s value, which could pave the way for more imports and thus ultimately weaken domestic manufacturing
To become a competitive export-based global economy, Salehi Esfahani suggests that Iran should create more jobs to curb its high unemployment rate. In fact, the Iranian government should focus on diversifying exports and employing the country’s young and educated workforce in these sectors. If the government manages to invest a portion of the freed assets outside Iran, it could prevent a sharp depreciation of the U.S. dollar. The government also needs to improve its public services.
Overall, Iranian economists seem to have come to a genuine consensus on the need to reform and transform the country’s economy to make it more competitive in a global economy. Yet there is no unanimous consensus on where to start or what sector the government should focus on reforming first. Although each of these leading economists has diagnosed Iran’s economic problems, none of them has proposed an action plan to reform and manage Iran’s economy in the post-sanctions era. Perhaps, this stems from the monumental size of the Iranian state’s share of the country’s economy, which has contributed to a weak private sector that only owns 20 percent of the economy and exercises limited influence. Therefore, all the economists and commentators interviewed here subtly hint that the government should initiate reforms directed at accountability, transparency, and market reform mechanisms. Regardless, any kind of reform requires a wider consensus that would lead to collective action based on both the private sector and the government’s determination to address these problems through a solid and long-term partnership.
Photo: Outside the Grand Bazaar in Tehran (courtesy of Kamyar Adl via Flickr)
Himan Hosseini, a recent Kurdish/Iranian graduate with an MA in Global Studies from Missouri State University, is the translator into Persian of The Kurdish Nationalist Movement by David Romano. Leila Piran, who holds a Ph.D. in World Politics with a focus on the Middle East from the Catholic University of America, is a policy fellow at the School of Public and International Policy at George Mason University where she conducts research on entrepreneurship and social entrepreneurship in Iran. In 2013, Palgrave Macmillian published her book Institutional Change in Turkey: The Impact of EU Reforms on Human Rights and Policing.