Industrial, Trade, and Employment Policies in Iran

This introductory chapter of the volume starts out by discussing how increasing oil export revenues in the late 1960s and early 1970s allowed the Iranian government to embark on an industrialization drive through both facilitation of private-sector activities and direct initiatives. This strategy associated economic development above all with rapid growth in physical capital formation. Calling it an investment-oriented industrialization framework, the chapter discusses its limits and shortcomings. It further contends that the basic elements of the investment-oriented industrialization framework were not altered by the 1979 Revolution and through the postrevolutionary political economic shifts. Rather, they were deepened by intensifying the inward orientation of the economy both under a rubric of indigenization and due to international and domestic political economic circumstances. Significant investments have nonetheless been made in Iran’s manufacturing sector through five postrevolutionary national development plans, and there have been some achievements in certain capital-intensive industries, which have created an industrial base in the country. Iran’s manufacturing sector however remains underdeveloped and problem-laden with important implications for the country’s economic development trajectory. The chapter calls for the adoption of a capability approach to industrial development in Iran, which requires active government involvement to nurture the manufacturing sector with the aim to realize sustained and more equitable per capita income growth and create adequate employment for the country’s growing, young, and increasingly educated population. It further provides an overview of the chapters in the volume in its final section.

This chapter examines industrial development in Iran during the past four decades. It looks at both external and internal challenges. Economic and industrial trends exhibit erratic patterns of high growth followed by growth collapse. This is due to the injection of oil revenues into the economy resulting in inflationary pressures, overvaluation of domestic currency, soaring imports, price controls, and pro-cyclical fiscal policies. Such a process gradually leads to foreign exchange shortages, sudden devaluations, and growth collapse. The share of industry in Iran’s GDP has been gradually rising in real terms (constant prices). Whereas in a high-inflation economy imports check the price of manufactured tradables, the price of non-tradables increases substantially. As a result, the share of industry in GDP has decreased in current prices. In addition, there has been a major change in the mix of industries. Consumer goods as well as engineering- and labor-intensive industries have lost share by 50% in terms of most indicators. In contrast, resource-based, capital- and energy-intensive industries have doubled their shares. Thus there has been a clear shift in the production specialization of the country. This is reflected in the Iranian export specialization as well, since close to 90% of the country’s manufacturing exports are either directly derived from oil and gas or are highly energy-intensive—defying diversification goals. In addition, investment priorities for industrial development have been based on a “comparative advantage” logic, whereas major delays and policy challenges have emerged in moving along the value chains into downstream industries and/or diversifying into new, more knowledge- and technology-intensive industries.

Following a discussion of Iran’s employment and non-oil export aspirations, we are prompted in this chapter to estimate a set of translog cost and production functions for the country’s four-digit ISIC manufacturing subsectors to derive economies of scale and total factor productivity. We also extract subsector efficiencies using a stochastic frontier production function. We then assess the impacts of these factors as well as human capital on total employment of the manufacturing sector and on each subsector’s employment and exports. Our results indicate that economies of scale have a positive and strong influence on employment as well as manufacturing exports. However, the effects on exports are asymmetrical—that is, there are some subsectors for which exports are reduced. We further identify manufacturing subsectors whose exports exhibit a positive response to economies of scale, which may be targeted by government initiatives. We additionally show that human capital has positive and significant effects on both exports and employment. Our findings suggest that the government should pursue an active role in boosting economies of scale, efficiency, and productivity in the manufacturing sector and invest in enhancing human capital.

This chapter treats the development of Iran’s auto industry. Through cooperation with European and Asian multinational corporations (MNCs) and a vigorous localization drive, the Iranian auto industry has in the past two decades increased its production severalfold. Whereas reliance on imported complete knockdowns (CKDs) has remained extensive in the upper segments of the market, the main achievement has been the formation of a domestic parts-suppliers network and high levels of localization in the lower segments. Yet, the industry’s growth has been associated with the domestic market rather than exports—a situation exacerbated by international sanctions imposed on the Iranian economy. The chapter suggests that the recent domestic economic reforms together with opportunities offered by sanctions relief are likely to place the industry on a new trajectory. Since the removal of part of the international sanctions placed on the Iranian economy, the two large Iranian auto assemblers have concluded a number of joint venture agreements—in particular toward producing new models with the help of Peugeot-Citroen and Renault—which emphasize, at least on paper, exports and transfer of technology. Cooperation of small private-sector assemblers with VW, Renault, Hyundai, and various Chinese firms are additional developments in the Iranian auto industry during the recent period. The chapter examines the prospects for the Iranian auto industry against the background of these developments together with state policies.

This chapter investigates the relationship between trade policy and industrial development in Iran with an emphasis on the postrevolutionary period through 2014. It suggests that Iran’s trade policy has been principally under the influence of oil shocks and government’s reactions to it through fiscal and exchange rate policies. The country’s trade regime has as a result experienced periodic shifts between import substitution and de facto import promotion. Furthermore, with the prevalence of significant energy subsidies, Iran’s largely unintentional industrial orientation has been toward large-scale and energy-intensive production such as petrochemicals, basic metals, and minerals. These same industries have become Iran’s main exporters. In the initial stages of an oil boom, domestic industry tends to benefit from the availability of inexpensive foreign exchange that eases access to imported machinery and intermediate goods. However, as significant amounts of oil money are circulated in the domestic economy, expansionary fiscal and monetary policies give rise to mounting inflation. Yet, the government and the central bank attempt to check inflation by anchoring the nominal exchange rate and rushing in imports with devastating results for the competitiveness of domestic producers. The government deals with negative oil shocks by devaluating the domestic currency and preventing balance of payments crises through raising tariffs and nontariff barriers to imports. These initiatives give rise to an important substitution regime that features unproductive rent-seeking activities and technological stagnation, as government protection provided to domestic producers is neither selective, nor contingent, nor time-bound. The chapter offers a set of recommendations as minimum requirements to place Iran’s economy on a more solid development and industrialization track.

This chapter discusses the global structure of merchandise and services trade together with country-specific trade information to establish how a broad and multidimensional trade policy could contribute to Iran’s development objectives. It highlights the need for Iran to develop high value-added goods and services that meet quality standards. This entails a broader integrated policy mix with a focus on structural transformation that must be tailored to specific development needs and implemented coherently. Ensuring to harvest sustainable development benefits, it should include a set of macroeconomic, monetary, fiscal, labor, industrial, technology, trade, investment (public and private), services, infrastructure, regulatory, institutional, human resources, and social policies. Unilateral reform processes notwithstanding, bilateral, regional, and multilateral trade and cooperation agreements and frameworks are also required. Defying existing comparative advantages can support long-term development benefits, in particular, when it promotes higher value-added activities. Furthermore, the services sector has a key role in improving efficiency and competitiveness for all economic sectors as well as in structural transformation, diversification, and enhanced supply capacity and participation in the global and regional value chain. Services can further contribute to industrial policy, the financial sector, job creation, and competitiveness as well as to reducing poverty and improving access to health and education. The chapter’s recommendations for Iran include changing policy direction and establishing linkages and complementarities among its economic policies and sectors for inclusive and sustainable development and growth.

Iran became an observer to the World Trade Organization (WTO) in 2005. There have been heated internal debates ever since on the pros and cons of joining the multilateral trading system, with some exaggerated claims on both sides. Proponents rightly consider accession as an inevitable path toward Iran’s integration into the global economy but tend to underestimate the devilish details specific to each accession and their potential impact on development policies. Opponents often view Iran’s accession as a prelude to deindustrialization and to locking the economy in the lower end of the global value chains (GVCs). Yet, export-driven development in a GVC-dominated world economy is highly unlikely without joining the WTO. This chapter argues that Iran’s accession, if negotiated properly, has the potential to improve the country’s institutional quality in terms of trade/economic policy formulation and implementation. At the same time, due to longtime relative isolation from the global economy and presence of uncompetitive industrial and services sectors, WTO accession, if executed without a clear vision and policy precision, could involve high, if not prohibitive, adjustment costs. Therefore, on the technical level, various components of WTO accession policy should be regarded as potential tools for fostering and embedding Iran’s pre-existing but long overdue long-term economic reform plans. On the political level, Iran’s accession strategy must be considered by the leadership in a broader geopolitical context—as an important gateway for the country’s multilevel engagement with the global economy.

The Iranian economy has underperformed for decades due to a combination of distortionary economic policies, mismanagement, and periods of crippling international sanctions. The Sixth Five-Year Economic, Social, and Cultural Plan (2016–2021) aims to correct some of the past mistakes and tackle deep-rooted challenges across the public and private sectors to generate an average 8% GDP growth per annum that can create much-needed jobs and narrow the widening income inequality. Achieving these targets, or even more modest ones, requires significant and broad-based structural and institutional reforms that can be summed up as a new industrial policy. Recent cross-country empirical evidence demonstrates that tinkering with fiscal, monetary, or trade policies is not sufficient. The emerging literature suggests that realizing also women’s economic potential and capitalizing on the female talent pool can be a powerful policy lever to augment and generate growth, diversify the economy, and build a resilient middle class. This chapter argues that concurrent with structural reforms, Iran must address gender inequalities and barriers to women’s economic activities. Iran has one of the lowest female labor force participation rates in the world due to significant legal and social impediments and despite impressive female educational achievements. The chapter concludes that without addressing this oft-overlooked policy domain to remove gender-based barriers, Iran is unlikely to achieve its Five-Year Plan growth and income distribution targets.

This chapter probes labor market developments for those with tertiary-level education in Iran as well as challenges and prospects for their increased employment through the country’s Sixth Economic, Social, and Cultural Development Plan. Given the large supply of labor with college/university education in the next few years, the manufacturing sector should not face any problem in finding suitable candidates for its recruitment. Yet, this sector will be unlikely to accommodate the larger part of the highly educated labor supply. Furthermore, a set of strong initiatives are needed to ensure that the Plan’s targets are met or surpassed. Two-digit ISIC data for the period 1996–2013 are thus used to identify skill-intensive manufacturing activities whose further development may be targeted to generate employment for the highly educated labor force. Twelve manufacturing subsectors are highlighted for this purpose. Other suggestions include providing support for the expansion of manufacturing research and development, increasing the scale of manufacturing activities, and growing manufacturing exports. Finally, it is suggested that, to increase the capacity of Iran’s manufacturing sector aimed at absorbing a significantly greater part of the highly educated labor force, major shifts of industrial and trade policies are needed to move the economy from resource-based production toward export-oriented and knowledge-based activities that rely on continual capability and technological upgrading. This also requires a well-functioning labor market as well as an educational system in tune with its requirements.