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June 2018, No. 87


Investment

Business Boom in Iran Depends on Int'l Relations


We have problems in both areas. We do not have smooth relations with our trading partners and foreign banks. Therefore, the capital owners have no interest in penetrating into our country.


"Economic activities in any country without any connection with the outside world are doomed to destruction.”

Dr. Mohammad Mehdi Behkish, Secretary General of the Iranian Committee of the International Chamber of Commerce (ICC) emphasizing the importance of extroversion in the economic activities of countries, states: “In recent decades, no developing country has been able to grow properly without attracting foreign investment.”

The senior economist nevertheless believes that despite the importance of exploiting foreign investment in Iran, it has practically become very difficult to absorb foreign capital in the current international context. “As long as the current insecure conditions persist, it becomes impossible to attract foreign capital up to a level that it could result in growth,” he warns. “The lack of smooth relationships with our neighbors and the countries supplying our requirements create two major problems. On the one hand, the cost of production goes up and products lose their competitive power so that the country turns to more imports, one result of which is widespread unemployment. On the other hand, corruption penetrates into each and every layer of activities and spreads all over the country like cancer.”

Behkish believes that if our foreign relations are organized, the domestic business environment too will begin to rebuild and reinvigorate.  

In many of your analyses, you offer extroversion as an ultimate solution for the Iranian economy to come out of the status quo. Why extroversion is so important to you?

For a completely clear reason! The reason is that economic activities in any country, without having to deal with the outside world, are doomed to destruction. The Soviet Union annexed the satellite states because a country cannot meet all its needs all alone. However, although the Soviet Union brought many countries under its domain and control, it eventually disintegrated (1991) due to limited economic relations and lack of competition. Our country is no exception to the rule. We have to have smooth and continuous business relations with other countries and use our resources to provide the opportunity for development of our people and provide them with the most important need - that is, the possibility of getting an appropriate job.


Now Iranian firms cannot make easy purchases from abroad because dozens of types of controls are applied and they practically cannot use any type of financing.


In the absence of smooth trade relations with different countries, our economic life will be jeopardized. Few examples in the economic sector will shed light on the subject.

Number one requirement for a society is growth and development. We need investment in order to realize economic growth. Investments are provided through three courses: government (in the form of development budget), private sector investment, and foreign investment.

If we look at the process of growth in our neighboring countries, in some of them, all the three sources of investment have been realized, and in some of them foreign investment has become more prominent. But no developing country has achieved decent growth in recent decades without attracting foreign investment. China, South Korea, Malaysia and Turkey are good examples.

Our country too ought to take advantage of foreign investment, especially since the country’s development budget is very limited. But under the current international conditions, absorption of foreign capital has actually become very difficult. As long as the current state of insecurity persists, it will be impossible to attract foreign capital up to a level that it could result in growth. 

It seems that in the past, only one aspect of extroversion which is related to imports has been heeded, but today, analyses are focused on the issue that to achieve a high and stable growth Iranian goods must be exported. Apart from this, what are the requirements for extroversion?

Apart from that, in the business sector we are in dire need of engagement in international relations. Purchase of goods from foreign markets is commonplace in international affairs, but when the risk is high costs are also rising extremely. Furthermore, when foreign banks do not maintain normal relations with our country, in addition to high costs, uncertainty is also added to the transaction process.

If, in addition to these two factors, foreign banks could pay us the oil money whenever and through whatever means they want they will impose a great deal of uncertainty and costs on our country. Even worse than that, normal procedures turn unusual and all types of corruption are generated (such as the use of exchange shops instead of banks). Under such circumstances, only individuals and organizations have the power to work who have become experts in handling unusual practices. In this way telling between good and bad and monitoring implementation of the rules and regulations make no sense. This happens under conditions that according to the international rules we are required to prove our compliance with international laws.

In the export sector, the situation becomes more complicated. Because, on the one hand, we are unable to manufacture low cost and high quality competitive goods; on the other hand access to export markets is very costly or impossible. For the same reason, many domestic producers have to export their goods to a third-party market, replace package tags at the same place and export the products to the target market under the name of another country. It is a commodity with a high cost due to expenses imposed and can only be exported with government subsidies.

Under these circumstances, exports which are the cornerstone of economic growth, start declining. This trend of declining exports has persisted over the recent years and the decline is projected to be higher this year. Let’s not forget that export of goods can increase the incentive for production and boost output, which in turn would lead to increased employment. To draw a comparison, export of goods (except for petrochemicals and condensates) last calendar year was less than $20 billion, while Turkey with a population almost equal to Iran exported more than $150 billion during the period.

Here, we can clearly see the impact of good international relations on the export of Iran and Turkey. Another area is the purchase of technology. The purchase of machinery and technology from other countries requires extensive banking relations. In the absence of such interaction, the possibility of financing for purchases is lost. In the meantime, they (West) would refuse to sell us technology under various pretexts. Failure to buy aircraft is a good indication of these restrictions.

¯Even a small firm cannot keep up with its work in the absence of smooth international relations. Most small or medium-sized entities are forced to procure their needed machinery and raw materials from other markets. Even when the domestic product is available, some prefer to buy from another place to increase competition. In addition, small and medium-sized enterprises do not just buy in cash but most of them use a kind of financing.

Now Iranian firms cannot make easy purchases from abroad because dozens of types of controls (for example, dual use) are applied and they practically cannot use any type of financing. Worse, they cannot open LCs to provide the necessary guarantees. If we measure the risks of such units, we would definitely advise them not to do the business; or the risk is so high that would make any purchases uneconomical.

Our economy has survived under these conditions in the hope that the sanctions will be lifted. Ever since we signed the Joint Comprehensive Plan of Action (better known as Iran Nuclear Deal), all the hopes were that our (foreign) trade ties would be normalized but these expectations have not been realized. 

Who prevented realization of these hopes and expectations?

Looking for someone to blame will not solve any problem, but we know that continuation of these conditions will not bring us growth and development. Instead, the army of the jobless will become bigger and bigger each and every day. It seems that before discussing economic practices, it is better to focus on how we can change our foreign relations. As long as we fail to change international relations in line with our trade and industrial needs there would be no boom in businesses and production and trade will become more restricted every day.

The potential danger of public protests threatens the stability of the country. In a study conducted by a government research institute, significant results have been obtained. Many may be convinced that the recent protests were motivated by poverty and inequality, while according to the research conducted by the state-owned agency, the main reason for the protests was the unemployment of educated youth. Educated young people who sell the carpet under the feet of their parents and spend the money on their education, with great hopes, expect the country’s officials to provide them with job opportunities, and this is the least need of a society. The same thing happened in Egypt, and the young unemployed people played the most important role in the uprising in that country.

The problem is very simple. We need high and sustainable economic growth to cut unemployment. Sustained economic growth also requires capital. A significant portion of this capital must be supplied from abroad, and we need to have good relationship with the world in order to attract this capital.

A few years ago in an article I emphasized that the strategic advantage of our country is trade, and therefore Iranians are more known to be good businessmen than artisans. Therefore, if we want to use the country’s strategic position for greater prosperity, we should expand the flow of goods from the country, which requires development of ports, roads and equipment that make transit easy and feasible. Development of transit requires confidence building with our neighbors. This trust is shaky for the time being. The power of diplomacy in the future will prove to what extent it can meet the need for community development. 

What types are the current obstacles in the way of domestic and foreign investment in the Iranian economy? Are they more of political nature or structural?

Usually capital will flow into a place where security is maintained in the first place. In the second place, investors would rather get involved in activities that are profitable. The type of our relationship with foreign countries and sources of capital supply defines investment security. If there is no default on the liabilities and the withdrawal of capital and related profits can easily be relocated, security is provided for moving capital. But the profitability of activities depends on the business environment inside the country. If the business environment does not provide enough space for healthy competition or the barriers to production are such that capital productivity is insignificant, the investor would not come to that country.

We have problems in both areas. We do not have smooth relations with our trading partners and foreign banks. Therefore, the capital owners have no interest in penetrating into our country. In addition, the business environment is not favorable in our country, and so the activities cannot be profitable unless they use rent.

I am convinced that if our foreign relations are organized, the domestic business environment too will begin to rebuild and reinvigorate.

 

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