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M Jamsaz, Ph D, Consultant Economist
M Jamsaz, Ph D, Consultant Economist

Illustration

Let the Nation Beware

Iran is highly dependent on its crude oil exports whose price in the international market fluctuates according to regional and worldwide developments, and events that are entirely out of the control of Iranians.

Therefore, Iranian authorities have been trying for many years now, to free the country's economy from reliance on oil exports, specially during the last decade when Iran found itself faced with the globalization trend and the new developments in WTO which many countries of the world have joined and we have not.

A simple comparison between per capita income in Iran (1,600 USD) and the average per capita income worldwide (5,000 USD) indicates that to catch up with the world average we must increase our GNP by more than 200% (to more than three fold).

In 2002, Iran's total exports reached about 28.2b dollars, a considerably higher figure than the previous years because of the rises in oil prices. Of this amount only 5.4b or so, i.e. less than one-fifth, came from non-oil exports.

Yet this showed an excellent growth in non-oil exports, being 31% above the previous year. In the following year, 2003, non-oil exports rose even higher, to 6.98 b. Even so, without oil exports our trade balance would be alarmingly negative.

We should never forget what happened to our economy in 1996 and 1997 when the price of oil dropped below 10 dollars causing economic, social and even political shocks, and this can always happen again.

Illustration This is why the Third Socio-Economic and Cultural Development Plan put its target for non-oil exports during the five-years of the Plan period at a total of 34b dollars, 100% over the total non-oil export earnings during the five year period of the Second Development Plan.

Unfortunately the trend during the past four years (out of the five years of the Third Plan period) shows that the nation has not succeeded to realize this target. Even so in the Fourth Plan - which was passed at a critical time when there were clashes and disagreements between the 6th and 7th Parliaments - a non-oil exports growth rate of 10.7% per annum has been envisaged, total non-oil exports thus amounting to about 52.9b dollars during the five years of the Fourth Plan.

Some analyst consider this figure to be unrealistic. Yet, with the potentials and resources our country possesses, this would be easily attainable if the right management methods were employed. But this has never come about and our country remains a traditionally importing nation.

The Fourth Plan, which has been drawn up with a view to the new world economy and competitiveness, envisages total imports to be 350% more than non-oil exports and to end in a negative trade balance of 12.5 billion dollars, oil export earnings included.

Certain points should be highlighted here:

  1. After the Revolution, export earnings were used up to import consumer goods and to cover current expenditures rather than developing the production sector by consolidating its infrastructures.
  2. In 1973 and the years before it, when the price of oil was quite low, our nation could not afford to import even 3-4 billion dollars worth of goods because of the low price of oil. But in 1974, the oil price rose sharply and Iran suddenly faced a surplus of eight billion dollars.
  3. Up to 1977 Iran enjoyed increasingly high export earnings which were used up to import goods, especially what was needed to build up the economic infrastructure, as well as arms and weapons.
  4. After the Revolution, Iran turned to a policy of self-sufficiency, and industrial units were aimed at substituting imports. During the years of war with Iraq, and the years that followed it, despite the low price of Iranian goods, non-oil exports declined because the quality of the goods had declined, and wrong management policies were employed.

But imports expanded through credits and usance transactions, such that according to the World Bank records and statistics, the country's exchange debts in 1994 and 1995 amounted to 23.4, 22.7 and 21.9 billion dollars the highest levels of foreign debt ever, before or after the Revolution.

The major reason why our exports are now stagnant is that we have not yet learned how to export industrial goods and remain basically exporters of rugs, pistachios, gum tragacanth and such like commodities. In exporting industrial goods, first we have to ensure that the quality is of the highest standard and the price is right.

Illustration Then we have to teach ourselves proper publicity and marketing; then we have to ensure we can provide adequate after sales services and follow effective competitive rules and most important of all SUSTAIN the level of all these and many other services we shall have to provide, and not to rest on our laurels once we have penetrated a market; something we have shamefully done in the past.

To give an example; in 1996 we penetrated the Central Asian market with our pasta products, "macaroni" as they are all known in Iran. But in an unreasonable and miscalculated competition among our own producers or suppliers the price fell considerably and unnecessarily and therefore the quality declined in line with the price. Meanwhile we had completely forgotten our competitors who ultimately took over the market and replaced us forever. But without adequate growth in production and improvement in quality, no effort to expand non-oil exports can succeed.

Our industries must be revitalized and expanded and this needs heavy investment which is difficult to realize due to the following reasons:

  • The rate of interest charged by Iranian banks is unbelievably high, almost four times what it is in the developed countries.
  • The rate of exchange has been kept almost the same for many years now.
  • Iran has still not joined the WTO so it is denied many privileges that many other countries enjoy, and consequently it is facing serious problems in competing with other nations
  • There is a lack of proper understanding of the world market and real comparative advantages which has led us to going for the automotive industry at a time when many strong automotive producers that have been in the market successfully for years are facing severe competitions.
  • Lack of access to up-to-date technology and the age of the existing plants, machinery and equipment is another problem though much attention has been paid to this issue in the recent years.
  • The low productivity of the work force is yet another reason: In India, Pakistan and Malaysia productivity rose from 25 to 50% from 1985-95, while in Iran, during the same period, productivity grew by 3% only. Even so, basic wage increases are disproportionately high.
  • Use of exchange reserves to cover budget deficits has declined resources for investment.

All the facts briefly reviewed here, indicate that hard times are ahead if proper actions are not taken. Let the nation beware!

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