International economic sanctions and Iran: Are there positive side effects? – Part Three

December 25, 2012 in Analysis

Editor’s note: This is the third part of a three part mini-series by Iranian economist Radman Sam on the possible “positive side-effects” of international economic sanctions on Iran. Part three focuses on the ways in which sanctions may be creating greater impetus for domestic production in Iran.

Part one: www.iranpolitik.com/2012/12/17/analysis/international-economic-sanctions-iran-positive-side-effects/

Part two: www.iranpolitik.com/2012/12/20/analysis/international-economic-sanctions-iran-positive-side-effects-part-2/

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By Radman Sam

One of the strategies most often cited by Iranian officials to combat the negative side effects of sanctions is to support the national production. Nevertheless they have not presented any concrete and  transparent explanation for this concept. There appear to be different interpretations among government, private sector, and economists about what this actually means. Some government statements appear to the define national production as “self-sufficiency” and “localization” of the production, something akin but not the same as autarky. Both the private sector and economists consider this conception of national production as undermining domestic industries and pushing the economy backward in a fashion not unlike the North Korean economy.

In interviews private sector leaders view the expansion of national production as including a number of elements such as reform of economic structures, stable, transparent, and effective policies in the money and foreign exchange markets, administrative modifications, improvement of the business environment, and a crack-down against the widespread practice of smuggling. Only these conditions enable producers to make long-term plans and decisions instead of seeking rents and backings by government. They believe the concept of national production and “self-sufficiency” as it stands today is is baseless claim by the government. On the contrary, they think that creating a competitive business environment is indispensable for national production. According to them, it is impossible to force people to purchase the low-quality commodities with the excuse of protecting national production. To increase the quality of productions, transfer of expertise and technologies are required and this is in turn is only possible through interaction with the global economy. They also mention problems faced by key industries in Iran at the moment due to the sanctions, largely relating to the supply of raw materials and also money transfer for making and receiving payments abroad. According to private sector leaders, to improve the national production it is necessary for government to take steps toward detente in foreign policy in order to remove the international pressures on the Iranian economy.

According to Iranian economists the full economic independence is impossible. In this regard, a combination of trade policies (rather than closed-doors policies) are needed to fortify national production. They believe selecting and aiding some of the top industries that have competitive advantages in production is one of the most effective ways of supporting the national production, a strategy which very much diverges from that of self-sufficiency in all fields. Through this approach, the selected industries are supported by government through policies including tariffs, taxes, targeted subsidies, and infrastructure. In the policy of self-sufficiency the consumers’ interests are undermined in favor of few producers’ benefits. In contrast, a policy that targets top industries with competitive advantage will lead to increased productivity, innovation, and high quality These economists also mention that supporting the domestic economy is a strategy and not a tactic; it is a long-term policy and should not be thought of in the short term.

Although Iran considers expanded national production a solution against the pressures of the sanctions, it does not appear that government has any clear strategy for this goal. As a result, after months of raising the issue in public no major practical measures have been taken by the government. After all, supporting national production needs a national consensus t, something that does not seem to exist in Iran today, especially between key actors like the government, the private sector, and economists. This may extend to the other areas discussed in this troika of articles. While the government may want to set taxation as a major source of government revenue or improve governance of the currency, the pressure generated by sanctions may not be enough to create the momentum needed for these reforms, at least for the time being.

Radman Sam is an economist in Iran.

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