How to enter global economy?
An economic review of other countries in the past ۳۵ years highlights the importance of structural economic reforms on which economists, intellectuals and decision makers reached consensus.
An economic review of other countries in the past 35 years highlights the importance of structural economic reforms on which economists, intellectuals and decision makers reached consensus. Fifty years ago, while considering the ways to boost growth and eradicate poverty, it was believed that economic growth could be expedited by supplying international aid to those developing countries facing foreign currency shortages.
At the time, "Two-Gap Analysis" which is comprised of "Foreign Exchange Gap" and "Saving Gap" gained significant attention. In general, developing countries did not have savings gap but foreign exchange gap. Therefore, economic policies pursued by India and Latin America were based on the same foundation. Since early 1980s, this economic theory went through fundamental changes, inspired by "Ian Little" and international organizations such as WB and IMF, leading to two major results: firstly, foreign exchange shortage is not real and arises from anti-export bias.
The second point that gained consensus and is relevant to Iran is that macro-economic stability is essential to growth and structural reform. In other words, desirable outcomes in the area of investment, foreign trade and financial sector is subject to economic stability. This is the most valuable lesson that can be drawn from developing countries in the past few decades.
As the stepping-stone for economic structural reforms, Iran needs to boost and intensify competition and the best place to practice competitiveness is within the domestic market. In other words, all monopolies and restrictions in the domestic market acting as impediments to competition must be identified and removed. An important measure taken by India in 1991 was to remove prior permission requirements for industrial sector almost overnight while maintaining some of the strategic restrictions in place, for example in the area of safety and environment. Before the decision, the import of a screw for an already-imported machine was not allowed and the applicant had to first search the local market for the item. The measure, in fact, annulled the role of government in deciding for the private sector where to invest and left a noticeable impact on economic stability because the investors realized that the government was determined to improve the business environment transparency and so developed more interest to make investment. In addition, the government of India opened the doors and encouraged foreign investment by reducing tariffs. When the project started in 1991, import tariffs on intermediate and capital goods, initially above 100%, dropped to 30 to 35%.
South Korea has a different story to tell on how to enter global markets. In 1960s to 1970s, South Korea encouraged exports together with high tariffs. However, they exempted exporters from tariffs for those goods needed to produce export commodities. South Korea succeeded but it is very unlikely to repeat the same experience at this rate. Besides, international regulations and WTO do not any more allow the countries to set discriminatory tariffs and export subsidies to the extent exercised by South Korea.
Although South Korea finally faced certain difficulties in 1997, they made some changes in their trade system in order to join the global economy. Generally speaking, reform is not complicated. Efforts to join the global economy should start at home. Rent-seeking and permission system should be eradicated. It is natural for Iran to be somehow afraid of entering the global markets but the policy makers should start preparing for smart management of economic policies. It should be borne in mind that the world is not limited to the West. Asian countries have also made significant progress and Iran can expand cooperation with India and Malaysia for example.
It is true that there are some weak industries unable to compete in the world markets but entering free trade and connecting to the global economy does not happen overnight. It will take years but all these issues can be prudently managed. India recorded a better and higher economic growth using the same management style.
Generally, bankruptcy to the point where industry is broken never happened in none of these countries: India, South Korea, Indonesia, Malaysia. However, they faced challenges in stabilizing macro-economy for decades. For instance, a glance at Latin America trade during 1970s-1980s and that of Turkey until before 1991 indicates that the main problem they faced was the very high rate of inflation impeding their full participation and competition in the global markets. They succeeded to address the problem and today there are few states with double-digit inflation. In other words, many countries have adopted policies to help their industries grow and at the same time, benefit from global markets.
Naturally, some industries that are maintained by using subsidies or enjoying full or half exclusivity in the market will be affected. In the meantime, the fact that in the past few years, oil revenues were spent on consumer goods import should not be neglected. In fact, the import of consumer goods using cheap foreign exchange damaged the domestic industries and limited their economic activities. Now, reformation of industries should happen in order to improve their competitiveness against imported goods. In the course of globalization, manufacturing market should rapidly adapt to the world. This can be achieved relatively fast but what remains challenging is how to interact with the financial market. To fulfill this, certain questions must be answered: will foreigners be allowed to invest in the domestic stock exchange market? How fast will this happen? When the government issues bonds to compensate for budget deficit, can foreigners also buy them? Is it economically feasible for foreigners to buy the bonds with 20% interest rate while back home the rate is only 2-3%?
Any hasty and reckless interaction between Iran's financial market and the global market is very hazardous at this rate. Progress in free economy theory recommends the countries to take cautious steps when dealing with capital and financial markets. In case of Iran, it is vital to lighten the weight of manufacturing and trade regulations, bureaucratic controls and permissions and to go for more reasonable relative prices.
International trade and investment currently play an important role in implementation of Open Door policy. Foreign investors should be encouraged to roll in not only for injecting money to the economy but also for their positive impacts on increasing productivity, upgrading management standards, technology and marketing as well as paving the ground for non-oil exports to find their ways to the global markets. In the meantime, banking system should not be neglected as it plays a crucial role in welcoming and supervising investments.
In this respect, it is necessary to avoid following the experiences of Southeast Asian countries namely Thailand, Malaysia or Indonesia. From 1980s until mid-1990s, these countries were very successful in exports but fell apart in mid-1990s due to banking system weaknesses. They allowed their domestic enterprises to borrow huge amounts from abroad. So they finally ended up with accumulated debts.
The big market and the bright prospect of long-lasting 7-8% economic growth in the future make Iran an attractive destination for foreign investors.