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Iran's Free Trade Zones: Back Doors to the International Economy?

Published online by Cambridge University Press:  01 January 2022

Hassan Hakimian
Hassan Hakimian*
Affiliation:
Economics Department at SOAS, University of London
*
(H.Hakimian@soas.ac.uk).
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Abstract

Since the late 1980s, Iran has pursued a policy of attracting foreign investment and fostering regional trade by granting favored status to the so-called “Free Trade-Industrial Zones” (FTZs) and “Special Economic Zones” (SEZs). To date six FTZs and sixteen SEZs have been set up throughout Iran. The FTZs are strategically positioned for their potential international links and have their eyes on markets beyond Iran, and the SEZs for their value in serving main industries and for improving the country's distribution system and supply network. This paper examines the experience of these zones in Iran in the context of Iran's contradictory and ambivalent approach to international economic integration in general. It is shown that liberal policies pursued in the free zones have been in marked contrast to the approach in the mainland, which has been generally inward-looking in much of the post-revolutionary period. We examine first the rise of free zones as a global phenomenon followed by an overview of Iran's zones and their characteristics. It is argued that serving mainly as “back doors” to the international economy, Iran's free zones have stalled mainly because their promotion has been decoupled from, if not at odds with, official attitudes to the international economy at large. As a result, the zones' ability to attract investment has been limited by both adverse external perceptions of Iran as an investment destination and internal complexities discouraging such investment.

Type
Articles
Information
Iranian Studies , Volume 44 , Issue 6 , November 2011 , pp. 851 - 874
Copyright
Copyright © The International Society for Iranian Studies 2011

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Footnotes

This work draws from earlier work prepared for the World Bank's Middle East and North Africa Region, Social and Economic Development Group (MNSED). Earlier versions were presented at two Iranian Economy Conferences in the University of Illinois, Urbana-Champaign (December 2008), and at USC (September 2009).

I would like to thank the organizers and participants of these conferences for their helpful comments and suggestions. Thanks are also due to Anton Dobronogov of the World Bank for his advice and support. The views expressed here and any errors or shortcomings are clearly my own responsibility and not of any other individuals or institutions mentioned.

References

1 ILO, “Database on Export Processing Zones—(Revised),” International Labor Office, Sectoral Activities Programme, Working Paper No. 251 (Geneva, 2007).

2 For a typology of different types of free trade zones, see Akinci, G. and Crittle, J., “Special Economic Zones: Performance, Lessons Learned, and Implications for Zone Development,” World Bank, (Washington, DC, 2008), 10–11.Google Scholar

3 Miyagiwa, K., “The Locational Choice for Free-Trade Zones, Rural versus Urban Options,” Journal of Development Economics, 40 (1993): 187;CrossRefGoogle Scholar Madani, D., “A Review of the Role and Impact of Export Processing Zones,” World Bank Development Research Group, Policy Research Working Paper 2238 (Washington, DC, 1999).Google Scholar

4 Akinci and Crittle, “Special Economic Zones,” 34.

5 According to the ILO, the following countries had the highest proportion of female employment in their EPZ operations in 2006: Jamaica 90 percent, Nicaragua 90 percent, Bangladesh 85 percent, El Salvador 85 percent; Sri Lanka 78 percent, Honduras 75 percent, the Philippines 74 percent; Madagascar 71 percent, Republic of Korea 70 percent (see ILO, “Database on Export Processing Zones”).

6 Egypt, Syria, Israel and Jordan, for instance, established government-run zones at about the same time that zones were first set up in the Philippines, the Dominican Republic, the Republic of Korea, and Taiwan (see Akinci and Crittle, “Special Economic Zones,” 28).

7 Dubai has also pioneered the development of specialized zones, such as “Internet City”, “Knowledge Village” and “Media City” (see Akinci and Crittle, “Special Economic Zones,” 28–29).

8 Quoted in Graham, E. M., “Do Export Processing Zones Attract FDI and its Benefits? The Experience from China,” International Economics and Economic Policy, 1 (2004): 100.CrossRefGoogle Scholar

9 Akinci and Crittle, “Special Economic Zones,” 12; and Madani, “A Review of the Role and Impact of Export Processing Zones,” 16–17.

10 Details are available from: http://www.freezones.ir/Default.aspx?tabid=230.

11 “The Authority and its affiliates and subsidiaries shall be exempt from the laws and regulations governing state-owned companies and from other general regulations decreed by the government… these companies shall be subject to the Commercial Code” (Article 5).

12 Membership is as follows: Ministers for Economic Affairs and Finance, Commerce, Interior, Labor and Social Affairs, Industries and Mines, Roads and Transportation, Petroleum, Energy, Housing and Urban Development, Culture and Islamic Guidance, the Head of Management and Plan Organization, the Governor of the Central Bank of the Islamic Republic of Iran, head of the Environment Protection Organization and the Secretary of the High Council of Free Trade-Industrial Zones.

13 For instance, Article 27 clearly enshrines the executive powers of relevant departments to the chairpersons and managing directors of these zones. This means that both in principle and in practice the heads, chiefs and the acting directors of all government departments in the zone are appointed with the joint recommendation of the Chairperson and Managing Director of the free zone and ordinance of the highest official of the relevant government executive department.

14 A Farsi version of this law is available from: http://www.seez.ir/upload\Establishment%20and%20Management%20of%20....pdf. For an English version, see: http://amirabadport.pmo.ir/specialeconomiczone-page5249-page5251-en.html.

15 The special zones in Sirjan and Arg-e Jadid are of this category.

16 This was recently raised to twenty years, see: http://news.freezones.ir/images/13880609%20(2).jpg.

17 This applies only to the first thee FTZs (Kish, Qeshm and Chahbahar).

18 Available from http://www.alaviandassociates.com/documents/labourregulations1.pdf.

19 Islamic Republic of Iran, “Labor Code,” 20 November 1990, http://www.ilo.org/dyn/natlex/docs/WEBTEXT/21843/64830/E90IRN01.htm.

20 Article 21 of Iran's “Labor Code.”

21 Whether the dismissal of a worker is acceptable (if disputed) is judged by the Board of Settlement of Disputes in the zones. Moreover, both the Code and Regulations allow for open-ended and fixed-term labor contracts. However, whereas in the Labor Code the maximum duration of the fixed-term contracts is determined by the MoLSA, no such limits are mentioned in the Regulations.

22 If the termination of an employment contract is the result of total disability or retirement of the worker concerned, as well as of the completion of a fixed-term contract, the employer shall pay the worker an amount equal to the last monthly wage for each year of completed service (two monthly wages for each year of service if the disability is work related, and 1.5 monthly wages in case of unlawful dismissal; Articles 31, 32 and 165 of Iran's “Labor Code”).

23 Article 33 of the “Regulations.”

24 It has been estimated that in Iran, the total costs of employing a worker receiving the minimum wage are equal to 54 percent of average value-added per worker (of which 44 percentage points are a minimum wage, and 10 percentage points are non-wage costs). The World Bank contends that at this relatively high rate many private firms (especially those in low-tech activities) cannot afford to comply with the minimum-wage law, and as a result, the poor continue to work in informal activities for only a fraction of the mandated minimum wage (World Bank, “Islamic Republic of Iran—Employment and Labor Markets Study,” Social and Economic Development Group Middle East and North Africa Region (Washington, DC, 2007), 48.

25 It also stipulates that every worker is entitled to take one full month of paid leave and one month of unpaid leave once during his/her working life in order to perform the pilgrimage to Mecca (Article 67 of the “Labor Code”). The Regulations, in contrast, set the limit to an employee's annual paid leave as twenty days (Article 24 of the “Regulations”).

26 The code limits these to 44 hours per week (Article 51). The Regulations take a more flexible route by allowing 176 hours per four consecutive weeks (parties are free to negotiate the actual working hours per day or week within this limit; Article 16 of the “Regulations”).

27 Akinci and Crittle, “Special Economic Zones,” 32–33.

28 Akinci and Crittle, “Special Economic Zones,” 33.

29 R. Hedayati-Zadeh, “Maziyat-e Mantaghe Azad-e Aras dar Hedayat-e Tavan-mandihay-e Keshvar be Samt-e Saderat” [The Advantages of the Aras Free Zone in Export Promotion], paper presented at the “First Conference to Identify Investment Opportunities in Aras”, Aras Free Zone, 10–12 Aban 1385 [1–3 Nov., 2006].

30 Hakimian, H., “Iran's Free Trade Zones: Challenges and Opportunities,” the Social and Economic Development Group (MNSED), Middle East and North Africa Region, World Bank (Washington, DC, 2009), 16.Google Scholar

31 World Bank, “Islamic Republic of Iran—Employment and Labor Markets Study.” The ILO's EPZ database updates Iran's total free zone employment for 2005–06 at just under 70,000—still hardly a major achievement for the zones (ILO, “Database on Export Processing Zones,” 7).

32 Hakimian, “Iran's Free Trade Zones,” 15.

33 A. Zakeri, “Forsatha va Zarfiathay-e Sarmay-e Gozari dar Mantaghe Azad-e Aras”,[Opportunities and Capacities for Investment in the Aras Free Zone], paper presented at the “First Conference to Identify Investment Opportunities in Aras,” Aras Free Zone, 10–12 Aban 1385 [1–3 Nov., 2006]: 3–4.

34 See Hakimian, H., “Institutional Change, Policy Challenges and Macroeconomic Performance: Case Study of Iran (1979–2004),” Commission on Growth and Development, Working Paper No. 26 (Washington, DC, 2008)Google Scholar for a discussion of Iran's economic policies in this period. For a discussion of the obstacles to foreign investment in Iran, see E. Pesaran, “W(h)ither Economic Reform in Iran? An Evaluation of the 2002 Foreign Investment Act,” paper presented at the “Iranian Economy at a Crossroads: Domestic and Global Challenges” (USC, Los Angeles, September 2009).

35 These are: ease of doing business, dealing with licenses, employing workers, registering property, protecting investors, trading across borders and closing a business. Only in two areas (starting a business and enforcing contracts) does Iran make it into the top median. World Bank, Doing Business 2010—Iran, Islamic Republic (Washington, DC, 2009).

36 The so-called Iran–Libya Sanctions Act (ILSA) targeted all foreign companies that provide investments over $20 million for the development of petroleum resources in Iran. In 2006, the act was renamed as the Iran Sanctions Act (ISA), since it no longer applied to Libya, and extended until 2011; see Esfahani, Hadi Salehi and Pesaran, M. Hashem, “The Iranian Economy in the Twentieth Century: A Global Perspective,” Iranian Studies, 42 (2009): 207–11CrossRefGoogle Scholar for a discussion of the US trade sanctions and their effect on Iran's economic performance.

37 This is, for instance, the case of successful free zones in China, Mauritius and the Philippines; see Madani, “A Review of the Role and Impact of Export Processing Zones.”