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Petrochemical Industry Key to Iran’s Economic Growth
by Leila Piran
On February 25 Iran’s President Hassan Rouhani travelled to the southern province of Hormozgan, situated on the shores of the Persian Gulf. In a speech he promised to allocate sufficient resources toward boosting the province’s petrochemical exports. He explained that “focusing on the principles of a resistant economy means facilitating exports of Iranian-made products, especially petrochemicals.” His administration intends to develop the petrochemical industry to curb Iran’s inflation rate and create jobs. The partial suspension of international sanctions on Iran as a result of the Geneva agreement has accordingly offered an opportunity to the current government, which has vowed to improve the country’s dismal economy and foreign relations.
According to the Geneva interim agreement, signed by Iran and the P5+1 (the U.S., Britain, France, China, and Russia plus Germany) on November 24, 2013, sanctions on Iran’s manufacturing and petrochemical industries are suspended for six months while Iran implements its part of the deal. Iran says it is committed to achieving a final comprehensive deal that will result in all sanctions being lifted. Meanwhile, one of its top priorities has become overhauling its petrochemical industry.
Recently, Dr. Masoud Nili, Rouhani’s economic advisor, called on the private sector to identify an industry or a group of industries with the highest potential for economic growth until the end of this year and generate 3 percent growth until the end of next year. Iran’s top five industries include auto manufacturing, construction, agriculture, petrochemicals, and tourism. Many economists and business leaders responded to his question in a series of articles published in the daily, Tejarat-e Farda. Since the Industrial Development & Renovation Organization of Iran (IDRO) has a prominent role in revamping Iranian industries, Tejarat-e Farda interviewed the IDRO’s CEO, Gholam Reza Shafei, for his opinion as to which industry has the highest potential for growth. Shafeie believes that Iran should focus on developing an industry that enjoys access to a highly professional and technical labor force, has the capacity for mass production, and contributes significantly to the Gross National Product (GNP). Toward that end, he names other critical factors such as market demand for products, existing infrastructure (the supply chain, facilities, and technology), potential for job creation, and providing supplies for other industries. Based on the above criteria, Shafei suggested that the government should pay more attention to the following industries: auto manufacturing, construction, energy, mining, oil and gas, and petrochemicals. He added that executing infrastructure building projects and exporting engineering and technical services can also contribute to economic growth.
The petrochemical industry, however, has the most potential for profits in the short run because of its up-to-date and highly adaptable technical structure that has enabled that sector to offer a variety of products to foreign customers. In contrast to the auto manufacturing industry, this industry possesses two key advantages: first, easy access to raw materials and second, abundance of petrochemical equipment manufacturers. Shafei explained that it costs between 80 million to 100 million dollars to build a petrochemical plant, but the profits exceed Iran’s annual oil and gas sales by 10 times. He emphasized that if “we accept that the future of oil as the source of energy is on the decline, then the only way to exploit the country’s oil and gas resources is through the petrochemical industry.”
When asked about his reluctance to recognize the auto manufacturing industry’s high potential for growth, Shafeie stated that the petrochemical industry enjoys wider access to natural and human resources and has more extensive experience in resource management. In contrast, the auto industry is too dependent on one or two foreign suppliers of auto parts that have profited handsomely from Iran’s desperation due to international sanctions. Relying on a limited number of foreign suppliers that had a hostile relationship with Iran in the past and exploited Iran’s financial resources has made the auto manufacturing industry very vulnerable. Although Iran’s auto industry aimed at manufacturing a national car, that dream has not yet come true. Instead, customers only have the option to purchase cars partly manufactured as a result of joint ventures with foreign firms or through foreign licenses. Indeed, because of the auto industry’s dependence on foreign firms for parts, productivity and profitability levels have declined alarmingly.
Shafei’s views are also shared by other prominent business figures such as Yahya Al-e Eshaagh, the head of the Tehran Chamber, Pedram Soltani, the deputy head of the Iran Chamber of Commerce, and Mohammad Ali Behkish, the secretary general of the Iranian Chapter of the international Chamber of Commerce. They believe that Iran possesses the necessary infrastructure and the technical expertise for its petrochemical industry to succeed. Opponents of Shafei’s view who prefer development of the auto industry include Saeed Leilaz, a professional expert in the auto industry, and Ahmad Nemat Bakhsh, the secretary of the Auto Manufacturers Union. They emphasize that recent investments in the auto industry qualify it as the most robust choice.
This debate sheds light on the importance of prioritizing sanctions relief for Iran’s economy. According to the experts, the Iranian petrochemical industry holds the key to halting Iran’s recession and stimulating economic growth quickly, and there is clearly a strong consensus within the private sector to support the Rouhani administration’s drive to revive this industry, especially if current and future negotiations succeed.
— Leila Piran holds a Ph.D. in World Politics with focus on the Middle East from the Catholic University of America. She has taught courses in international affairs and political science at George Washington University. Prior to that, Dr. Piran served as a research fellow on Turkey at the Rethink Institute. Dr. Piran has lectured at American University and Catholic University. Her newly published book is titled, Institutional Change in Turkey: The Impact of EU Reforms on Human Rights and Policing