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
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
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
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
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
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.