An Expert’s View
Dr. Mohammad Mehdi Behkish, economist and university lecturer says: “If in the early years of Islamic Revolutions foreign companies had been allowed to make investment in western and southern provinces, Iraq would have never dared to trespass and invade the region. ” He believes that in today’s world, foreign direct investment(FDI) is the key to solidify the ties between Iran and the world’s economy. In the following interview, Behkish looks at possible developments in the world economy and considers “competitiveness” as the main ring in joining the chain of global economy.
Dr. Mohammad Mehdi Behkish, economist and university lecturer says: "If in the early years of Islamic Revolutions foreign companies had been allowed to make investment in western and southern provinces, Iraq would have never dared to trespass and invade the region." He believes that in today's world, foreign direct investment (FDI) is the key to solidify the ties between Iran and the world's economy. In the following interview, Behkish looks at possible developments in the world economy and considers "competitiveness" as the main ring in joining the chain of global economy. He believes in a not-too-distant future, Iran needs to rely on export revenues.
In his visit to Charmahal Bakhtiari province, President Rouhani, underpinned the importance of joining global economy. He noted that building strong ties with the global economy makes it impossible for the Western states to impose sanctions on Iran's economy or damage it in any ways. Do you think such connection secure our economy?
Yes, as mentioned by Mr. President, entering global economy makes us immune. Currently, Iran enjoys limited ties with the global economies: there are export-import ties with some countries. So partial connection exists but what the President emphasized on is the need to strengthen, solidify and deepen the ties even with those countries with which we have never had interacted. FDI is the key to ensure strong ties among economies. I have always said that if in early years of revolution, foreign investments had been allowed, Iraq would have never dared to invade Iran. The very foreign properties on the soil of a country can prevent aggression. Suppose such investments had been made in western and southern provinces. In that case, Iraq would have never thought of trespassing. I admit that, in some parts of the world, aggressions took place despite FDI but I believe today's world is based on economic interaction and partnership. That is why the President emphasized on joining this new economic trend and deisolate the economy which not only helps maintain national interests but also generates more wealth for the country. Bitter legacies from the past especially Qajar era discouraged the authorities to allow for foreign ownership and partnerships in early years after the Islamic Revolution. Under Foreign Investment Act, foreigners could acquire 100% ownership of an enterprise. The provisions, however, were not fully enforced except for few cases. In fact, the approach adopted by Foreign Investment Organization allowed for only 49% of ownership for foreigners. So the authorities took up a restrictive approach to prevent the repetition of bitter experiences in Qajar era.
You consider FDI as a requirement for joining global economy and markets. The 11th administration in general and the President in particular, have also highlighted the importance of improving economic ties. Apparently, foreign investors also received the positive signals from the Iranian government officials in early months and trade delegations flocked in. But it seems the initial craze for trade-focused visits to Iran has faded or the negotiations have not borne tangible results. Can we conclude that Iran is yet to be prepared for welcoming other economies?
The move by Iran and the West to resolve pending issues created a positive wave across the globe signaling that Iran is to open the doors to the world. Iran is a huge market and the target of interest for many. Investors rolled in to see for themselves what the trade, industrial and social situation was like in this market after so many years being away from it. They needed an initial assessment of Iran. I believe they are considering the situation to make decisions. Of course, existing sanctions make it impossible for them to make the final decision as they do not allow them to sign contracts with Iran publicly. Although certain MoUs have been signed, they cannot enter into force within the next four months. Even a partial agreement in nuclear talks will matter. If restrictions on money transfer through SWIFT and oil exports are removed, investors will come in and start their activity by export as it involves less risk. They will not bring in their capital right away. Propaganda against Iran has been so intense and extensive that no European citizen would buy a product bearing the name of Iran. I am in touch and met with plenty of businessmen whose wives decided not to accompany them to Iran at the last minute given the social situation here. They think it impossible to even walk in the streets of Iran. So it is natural if they are unwilling to bring in their money at this rate. For us, however, it is capital that matters because it brings in knowledge, technology and discipline helping to dominate new markets. They would like to know if the Iranian government can also interact with other countries just like the rest and if she stands up to her commitments. They need to be sure that the Iranians have acknowledged and embodied general trade culture.
From what is heard from various policymakers and officials, there is consensus on facilitating investment and joining global economy. The question is how to join the trend?
Any country wishing to win in international interactions needs to improve ties with the neighbors first. Cultural commonalities encourage ties between two neighbors facilitating knowledge, technology, capital and labor force transfer. Unfortunately, since 1974, oil revenue prevented Iran from paying enough attention to its neighbors. It spent all on buying expensive technology from the Europe. All these years, little importance was attached to exports. For instance, expensive technology was imported from Germany but nothing was exported to this country. Except for few cases, Iran-Europe relations were usually one-way. We used to buy goods and export some nuts. That is why technology base in Iran was European. After the Islamic revolutions, sanctions made Iran to improve ties with the neighbors especially with Iraq and Turkey. However, Iran may be the only country that has not joined any regional organization except ECO.
So can we attribute it to the vulnerability of Iran's economy against shocks? Some economists believe Iran's reluctance to join regional trade agreements and follow international foreign currency arrangements is the reason behind the easy influence of political, economic and international developments on its economy. What do you think?
This is a reality that we did not let the enterprises operate in a competitive environment so little fluctuation in foreign currency or interest rates shakes the economy. If Iran had built strong regional links, Iran would have become more flexible when affected by shocks. In recent years, UAE almost closed the doors on Iran. If Iran had joined some strong regional agreements, such a move by UAE would not have created any concerns. A country with bigger markets ahead can maintain balance more easily. I think exports will receive more attention given the limitations on oil and gas sector.
Do you mean Iran will turn to exports because of the decline in oil revenue?
What is happening is that oil share in Iran's economy is shrinking because the economy is growing bigger and in the meantime, oil production and export have faltered. In other words, even if sanctions are removed, it seems that we can never restore oil production and export to the same level as in 1971 because oil supply in the world is increasing as well. Thus, oil and gas are losing luster in the Iranian economy feeding the hope that exports will find more space. Nonetheless, oil products account for the major part of export in Iran with low finished costs. To create employment, the number of productive and non-oil enterprises should multiply. I hope attentions are not shifted when oil revenue goes up again. We have to see which countries have the potential to establish enduring ties with. As a trade model specific to the pre-Revolution era, Iran has had a tendency to trade with Europe and the US. After the Islamic revolution, Iran entered war with Iraq and opportunities were limited and now China and some other neighbors are the main trade partners of Iran. A thaw in international relations may again push Iran towards the Europeans. But I believe we should choose trade partners with whom we can develop two-way relations: India is a good example as it desperately needs Iran's energy but it should be noted that increasing growth in oil and gas supply in the world within the next 10 years will limit Iran's chances for export. So it is necessary to enter a regional agreement with India to calibrate their refineries with Iranian oil. As any technical reform in refineries is costly, India and other trade partners can turn into long-term consumer of Iran's oil. Adopting such a strategy will garner security for Iran within the next five years in the undisciplined oil market ahead. India has also many products worthy of exports to Iran. In the future, Iran will not be able to buy expensive technology of limited local benefit from the Europeans. We should turn to technologies that create more employment. As an alternative, Iran can buy reasonable technologies from India, China or South European countries like Spain with lower prices. Thus, it is vital to form regional union with our neighbors and reduce trade tariffs for these countries to zero. In between, damage to some uncompetitive industries is possible. Under such circumstances, bankruptcy regulations should come in handy as it cleans the blood circulating in the economy. This will, in turn, prepare the country to join WTO.
What possible damages are expected when joining global markets?
In economy nothing comes for free. Any reforms in any parts of economy will incur certain costs and damages
Who will compensate?
It is evident that Iranian economy will have to bear with certain costs such as bankruptcy of enterprises. If the bankruptcy in the course of globalization arose from limitations placed by the government, it would be unfair and it has to be compensated for. But if the government removed the restrictions and opened the space for enterprises, the bankruptcy may happen as a result of lack of competitiveness on the side of enterprises. In this case, the enterprises in question have to shoulder the costs. Any country in the course of natural growth needs to build regional ties with its neighbors. Joining WTO entails reducing tariffs. Iran has never set preferred tariffs with any countries. Iran's economy has always relied on importing technology so that domestic market can produce. Policy makers always thought reducing tariffs might damage domestic production. We have always avoided competition while the very basic rule for interaction with the world is to compete. Production costs should decrease in order to pave the ground for competition. Iranian enterprises have both benefited from privileges and at the same time paid the costs arising from obtaining permissions, labor code and other restrictions. These privileges and costs had cohabited in a balanced manner throughout the history. But enterprises have now lost the revenue from the subsidies granted to them yet the costs are still there unchanged. Therefore, the situation of enterprises has worsened compared with 10 years ago. Now, we expect them to enter competition, which in this case, we have to first remove all the restrictions that increase their production costs. Unfortunately, common understanding is yet to be reached on making the economy competitive. It should be borne in mind that both building ties with other economies and making enterprises competitive should happen concurrently. There are provisions in the recent government stag-exit package that indicate government's determination to deregulate, create employment and pay less. I should add that if the economy does not become competitive, higher unemployment and cost of living is awaiting us in the future. We should create added value.
May be it is better to rephrase the question. If Iran plans to join the global economy without prior preparation, what will be the possible costs and damages to the economy?
Economically speaking, damage means costs. However, politically, it may have other implications. For sure, joining global economy will not be cost-free. But the cost is to make the economy competitive and interact with the world. Mutual and equal economic ties cannot be built with a country with which the diplomatic relation is sour. Iran used to be the largest exporter of food and canned food to Europe until negative campaigns against Iran influenced the judgment of European citizens and made them reluctant to buy Iranian products. Now, producers have no other choice but to export their products to Europe under the flag of Iraq or Turkey. We insult the Americans but at the same time we buy a product made in the US or welcome to obtain visa entry to this country. Thus, our interaction with the world should touch social and political areas as well. Future negotiations between Iran and G5+1 will fortunately lay the necessary ground for this purpose; otherwise we cannot rely on exports. While it is likely that in the future oil and gas revenue will decrease, in general, the benefits of joining the globalized world outweigh the costs. This will bring immunity to Iran socially and politically and will even improve our global presentation culturally.