The Forum for Partners in Iran's Marketplace

January 2020, No. 93

Cover Story

Iranís Economy Is Still Oil Dependent!

Sustainable economic growth is not the result of rising oil prices. Most of the Persian Gulf states have become rich this way.

When a substance is to be converted from solid to liquid or from liquid to gas, it must reach a certain temperature to allow the molecules to be separated from each other and create vibration and release the material from its rigid state. The same applies to the economy. In order to change from the oil to the non-oil state a transformation temperature is required: A situation in which not only the decision-makers and policymakers but also the people must accept that economic power does not depend on having or not having oil, but on production and productive work force.

Economist Javad Salehi Esfahani believes that getting out of the oil mold requires structural adjustment. A professor of economics at the University of Virginia Tech believes that sanctions  and the rise in the price of exchange rates have created an export advantage for Iranian commodities, but at the same time blocked export freedom and prevented domestic production technology from being updated. He insists that in order to transform the economy, on the day sanctions are lifted, people should demand freedom of export and a boom in production rather than ask for oil revenues and cheap imports. 

To what extent can the idea that we become an economic power by cutting off crude oil sales be true? When we have failed to achieve growth and development by having one advantage (oil) how can we make such accomplishment without it?

I recently wrote that after all oil too is not a complete advantage; in fact it has a positive and a negative aspect. Oil is a source of investment, but because it comes from outside the country as foreign exchange, it changes relative prices in Iran or reduces import costs to the country. Therefore, it puts pressure on the manufacturing and export sectors in Iran, especially the production of tradable goods.

We have seen this both in the 1970s and 2000s. These are the two decades that oil prices were high and led to appreciation of the Iranian rial and cheaper imported goods. In fact Iranians could buy expensive foreign goods at lower prices and pay more for domestic goods. On many occasions, the negative side of things predominate the positive side, that is, a source of investment.

Replacing domestic imports is less problematic, but it also requires technology upgrades, but cannot easily access the external market and make changes to the production process.

I think this was one of the reasons that employment did not rise during 2006 and 2011. Youíve probably heard that on average 14,000 jobs were created in those years, while a year earlier 800,000 jobs had been created when the economic situation was not much different. Therefore, it should be noted that oil has a significant impact on domestic production. But it is not right to abandon oil and automatically become an economic power. It must have defaults. Oil has turned the Iranian economy into a form that requires a structural adjustment to get out of it.

In the economy we call oil economy most of the things we buy are foreign, because they have a higher price advantage in the oil economy. Even the production of Iranian goods is dependent on foreign imports. Intermediate goods account for about 45 percent of Iranís total imports. In such circumstances, it is not easy to transform such an economy into one that can produce intermediate goods itself. And because in many cases it doesnít even have the economic justification, the private sector doesnít readily produce them. These changes will not be made by order of the government or, if they are it will have other damages. Of course, there are big and small producers who use expensive exchange rates and transform their production.

In the last year, the expensive foreign currency has created a good incentive for production, and we should seize the opportunity to shift the production process toward domestic production. For example, a company that may now import a significant portion of its raw materials from abroad should go back to the internal system and the system it used to have. I remember in the past there were sugar mills that used beets produced in domestic agriculture. But cheap foreign currency made it possible to import raw materials from abroad and convert it into sugar. To return to that stage is not easy because the jobs of the farmers have changed now and the land use has changed. The return of these farmers to farmland and sugar beet production is by no means an easy task.

There is another problem in the debate about exports and foreign trade. It is difficult to sell Iranian goods abroad now. Sanctions have made it difficult to buy Iranian goods in foreign markets. In addition, the international export market is very competitive and the buyer must be able to trade easily. The buyer should be able to buy Iranian goods as easily as buying Turkish or Indian goods. But we know this is not the case now, and Iím not sure the export sector is functioning properly.

Replacing domestic imports is less problematic, but it also requires technology upgrades, but cannot easily access the external market and make changes to the production process. Another problem is that companies need finance and facilities to rethink production and must borrow from the banking system. But the banking system is not doing well.

These are the problems that we will face in order to exit the oil economy. In short, the main benefit of lowering oil revenues for the Iranian economy is the exchange rate hike that drives some exports, which also requires access to finance and foreign markets. 

Are the oil-rich Persian Gulf states among economic powers?

Countries that are in good shape in terms of income or economic growth are not necessarily economic powers. Qatar, for example, is not an economic power, but a country that, thanks to its oil and gas resources and low population, is a wealthy country and it would vanish if gas prices go down. In contrast we have a country like Norway, where the standard of living depends on labor productivity rather than oil income. Comparing Qatar and Norway is like comparing a person who is the sole heir to wealth to an engineer whose income comes from his human capital. The engineer provides a level of prosperity through his work and effort, and differs greatly from one who has acquired a great deal of wealth solely through inheritance. Comparing Iran and Qatar is not right in this respect, and not only has no lessons for us, it even has a bad message.

We canít tell the engineer to learn from the person who inherited the property. Sustainable economic growth is not the result of rising oil prices. Most of the Persian Gulf states have become rich this way. These countries are mostly buyers and they buy because the important thing is for them to buy not produce. What they produce at home is largely by foreign workers, which solution is not possible for Iran. 

Can we say that the Persian Gulf states have made better use of oil revenues?

No, their oil reserves are much higher. Oil production and sales in the Persian Gulf are far higher than ours. Our oil per capita is about $500, while in Saudi Arabia it is about $2,000 and in Qatar $30,000-40,000. If a country is an economic power, its wealth will not be lost by changing world politics. Not all countries that we think are advanced have their power from oil, even Norway as one of the largest oil producers. Rather, their power comes from the productivity and creativity of economic forces. There are strong economic and social structures in these countries.

In this regard, instead of the Persian Gulf states, it is better to look at Turkey. In the Persian Gulf countries, all production is mostly done by foreign workers. The Qataris themselves and the people in these countries cannot do the production. 

What is the difference between an oil country like Norway and other oil rich states?

Before having access to oil, Norway was a developed country with all the necessary economic, social and political structures. As soon as we decided to shape the society, oil came and influenced our structures. Norway is not a captive of oil, it is like a well-paid engineer who has also inherited some wealth but he does not rely on his inheritance. Only his level of income increases. The main problem of oil rich countries is investing in production and investing in individuals. Now Saudi Arabia has announced a Vision 2030 plan that Iím not very optimistic about it because its products have not yet been in the competitive world market. Nothing that Saudi Arabia produces other than petrochemicals is of world class quality and it is unclear what they produce that will benefit the world. For about a year and a half, we have been trying to launch a new experience in domestic production. But the sanctions are blocking the way. Sanctions, on the one hand, have made it difficult to transform the economy and, on the other hand, have helped to boost exports and created an export advantage for domestically produced goods by increasing the foreign exchange rate. If the situation is not good, it is because exports are closed. Iím not too optimistic about a change in this status in the short term. 

Is oil the problem of Iranís economy?

I do not mean to say that having oil is a problem in our country. But the people of those countries first produce and then consume and therefore are in a better position. But in Iran we always consume first. We always sell oil first, then go shopping with the oil income and then think of production. We must reverse this order now. See Turkey; being productive, having a job and consuming come together. In developed countries, production arises first, then sales and then consumption. But this is not the case in Iran, as production has started with oil, not labor productivity. 

Do you believe that the transformation of the economy from oil to productivity should start from the people?

Look, since the foreign exchange price has grown, domestic producers, such as footwear and apparel, have been boosted and their products have grown. People have to see the economy work this way. Of course, this insight is not easy to create because not everyone can see the positive effect of the exchange rate jump in their lives. I understand that the growth of the exchange rate has put a lot of pressure on people. For example, the students studying abroad and earning money from their families inside Iran have been cut off since the forex price jump, and many families have not been able to buy US dollar at 120,000 rials (for one USD) to send their children abroad.

But people need to know that rising exchange rates are driving home production, and their children, for example, have a better chance of getting employed for the cause of domestic production rather than getting money and going abroad to study. This insight does not come easily; people now see the hardship expensive foreign currency has caused them but the other side of this hardship is the easiness growth in production generates. This issue has to be repeatedly addressed on the podium by economists and elites. Of course, this is not just a matter of words, and it must happen in practice, and people have a tangible experience in their lives. This requires a national consensus. It means that people trust the government and believe that not all government actions are to confuse them and that there are good intentions. 

If the sanctions are lifted is the Iranian economy more likely to move back to oil or move toward export development?

Unfortunately we will probably be moving towards oil. This needs a change in economic strategy which is a very difficult task. In oil rich countries, it is easier to bring oil money into peopleís homes and enjoy cheap electricity and gas and water and be satisfied rather than the economy progresses in production and employment. This is not a good solution for communities. Ordinary people may also be reluctant to lose cheap imported goods in the hope that they may later employ their sons or daughters. In fact, they are unaware of the exchange that if they lose the oil benefits, they can get a job later. Would people agree if the government says there is no foreign product but you can look for jobs in the market instead?

Under very good conditions, these changes take a long time. Some of these are related to the decision-making system in the private sector, and some to the government sector, and itís not easy to change them.

My feeling is that nowadays, many people think that if we reach agreement with Europe and America and enter into negotiations with them, we can buy from abroad again. In fact, people do not seek the lifting of the sanctions could lead to production and export. Even so many times, people are encouraging the government to stop export of some goods, because we have not been an export country with a strong lobby in the community, saying that exports are important. If we have transaction with the world, we should be able to expand our exports first. Understanding this issue and its repetition from the podiums of society or elites are very important. Without it, in a society demanding consumption, the lifting of sanctions would not change the economic path.


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  January 2020
No. 93