Win - win game in economy

As a crucial factor, efficient interaction with the world economy and taking advantage of active presence in international markets is currently being felt more than ever. That explains why president Rouhani attended the world economic forum, spoke of abundant potentials in Iran and invited foreign investors. He talked about open-door policy and numerated Iran investment attractions, so that technology and modern management culture would be imported along with capital.
The question is whether tiring red-tape, high tariffs, non-tariff obstacles, high inflation, and low productivity would leave any incentive for global market except to export consumer products to Iran. Iran is not the one and only country which tries to untie its transactions with international economy and pave its way towards an economic leap. Not far in time and place, countries such as India, South Korea, and emerging economies have already pursued their own policies to realize such a goal. In the following round-table, Dr. Javad Shirazi, high representative of the World Bank to draw India out of crisis and into world economy, as well as Dr. Djavad Salehi Isfahani, professor at Virginia Tech University, discuss the same trend for Iran and mention its requirements and merits. They both emphasize real rates for foreign currency and maintain that foreign investment should be directed towards productivity.



Mehrnameh: Economy in undoubtedly the main issue in Iran. Reorganizing the economy, improving its conditions and interaction with global economy are among main priorities. Due to direct impact of economic indices on everyday life of people, they are really anxious to be aware of future economic trends. The president spoke of open-door policy and compared Iran with emerging economies. In your opinion, how practical is this policy and what merits or demerits can be attributed to it? What lessons can we learn from the experience of other countries such as India, South Korea, and China? The second issue is what implications this policy can have for Iranian economy and how it can help improvements.
Shirazi: First of all we need to determine where the new administration started its reorganization of economy. Their main consensus concerns macroeconomic stability as the main prerequisite for growth and structural adjustments. I believe this is the most important lesson which can be learnt from the experience of other developing countries in the last decade. I want to highlight the significance of the events which occurred in Iran in the last 5-6 months. The authorities have proved highly efficient in restoring macroeconomic stability. The government has performed well in two main issues of inflation and foreign exchange rates. Take India for example. It has an inflation rate of 10%. The target is 4% while a range of 5 or 6 percent can also be tolerated. However, all economic policies unite to contain inflation when it surges to 8 to 10 percent. The Indians have unpleasant memories of 10 to 12 per cent inflation. They started buying gold to secure the value of their savings when they realized their Rupee was depreciating. Therefore, the new governor of the central bank of India focused on lowering the inflation rate and took a decisive approach towards unleashed depreciation of Rupee. The Iranian authorities have taken a really plausible measure and focused on curbing inflation. This can be the beginning and the required ground for future operations.
Salehi: I want to include that in the last 30-35 years not a single country managed to gain a growth rate higher than 5% without reliance on global markets. We observed that nations such as China, India, Turkey, and Brazil could eventually save millions of people from poverty by taking advantage of global market opportunities. Another fact is that these four countries are totally different. It means there is no single solution which points to the global market and shows the right path. The lesson that I take from their experience is this; "Saying that we intend to grow through global market is merely a general assertion and no specific model can be drawn out of it."
Shirazi: I totally agree. There is no single prescription with to-the-point recommendations. Details of a reform plan for economic structure vary from one country to other. There are some basic rules but it is the very conditions of each country with regard to its resources, human capital, political system, and social restraints which determine how structural economic reforms can be devised. We should also take Iran's conditions into consideration while deciding about a comprehensive reform plan.
Inflation however, is out of question. As long as inflation rate remains high, no structural economic reform can be successful. Reduction of inflation should be the main priority. Iranian authorities have demonstrated a good performance in this regard and they need to stay decisive. The inflation rate is still very high. The other step towards structural economic reforms includes promotion of competition. The best starting point is domestic market where monopolies and restrictions should be identified and obstacles should be removed. India did a great job in 1991 when it removed the system of granting licenses for private sector almost overnight. The restrictions remained only for some strategic sectors and the government stopped dictating the private sector where to invest and how much to produce. These measures had a great influence on stability of macro economy since the investors noticed the government was serious and determined to facilitate business. In the light of transparent rules they found better incentive to make investments. Meanwhile the doors flung open. Tariffs were reduced and foreign investment was encouraged. The positive results appeared shortly afterwards. Domestic private sector cannot compete in global market unless it has full access to international prices in which there is no tariff. The Indians accepted this fact and reaped the desired harvest in a short time. You may say that South Korea had a different experience and took a less travelled road. That is true but I maintain that her experience cannot be replicated in any part of the world. Besides, international law and WTO will not allow any country to impose so much discrimination in tariffs and export subsidies. In my opinion, restructuring is not complicated and should be initiated from within. We need to eliminate rents and the system of licensing. Tariffs should decrease and stay at about 10-15 percent. However, such reduction requires time and, of course, foreign exchange rate should be real.

Mehrnameh: Did countries such as India, Brazil, South Korea, or Turkey face problems while attempting to join the world economy? There are some concerns that if the foreign trade policy gets open and tariffs are lowered, some part of industry may go bankrupt and unemployment may rise. How do you analyze it?
Salehi:Instead of merging, I would rather say we use the global market. We rely on it and take its advantages to actualize our goals. We are not going to merge and lose control. Those countries which you mentioned have never merged in the global market.
Shirazi:To the best of my knowledge, none of these important countries faced bankruptcy in their industries. They have been struggling with instability for decades. A simple glance at the economy in Latin America in 1970s and 1980s and that of Turkey in 1991 reveals that high inflation was their major problem. It would deny them competition in the global arena. They solved this catastrophic problem and rarely does exist a county with double digit inflation now. We are expected to follow the same trend. Various countries have managed to grow their industry while using global markets. When India reduced its tariffs in 1991-1993 and removed restrictions, there was absolutely no problem. The Iranian industrial system is superficial, meaning some industries are active thanks to subsidies or monopolies. It is quite natural that some negative effects would arise as soon as we change route. However, it should be kept in mind that we have already experienced a sort of massive liberalization in recent years. We consumed a substantial amount of oil revenues on consumer products lots of which were imported by cheap foreign currencies. What was the outcome? Domestic industry suffered the most. Now we do have to reform the process and provide conditions for our industries to compete against imported products.
India had another problem. Its huge state companies had a lot of redundant workforce. Those companies had to be restructured in order to be competitive. Therefore, emergency social security plans were implemented. After 20 years of 7 to 8 percent economic growth rates lots of new jobs were created and some old employees were retired, making room for the young to involve in economic activities. Such a progress would have been impossible had the old situation remained in place.

Mehrnameh: Dr. Salehi, what is your view about probable damages? Would the merits of open-door policy exceed its demerits?
Salehi:One important point that Dr. Shirazi referred to is the openness of Iranian economy. It is quite obvious that an oil-dependent economy cannot be closed since oil is an export commodity and requires trades with other countries. Sometimes there were reasonable trades while at other times the whole trade process was unleashed and we had an unbalanced free trade. Abundance of cheap dollar led to import of products which damage agriculture and industry. This is the main difference between Iran and other countries which export industrial products. In those countries other sectors including education, health, infrastructures, and productivity is being promoted. It means that domestic production improves in accordance with the increase of exports so that it can compete against imports. This is a sort of equilibrium. Comparing this trend with what happens in Iran shows that increase of oil prices does not improve productivity in our country. It merely reduces the price of foreign currencies and makes our production vulnerable in the global market. Iran needs its own unique measures to take. There must be some certain purposeful policies which aim at enhancement of education and productivity of the labor force.
Shirazi:If we delve into our economic catastrophe, we will immediately notice that we ourselves have struck the main blow. A broader historical view reveals that we made a superficial price for foreign currencies and increased consumption in the last 50 years. Investments also took the wrong road. I mean when a foreign product can be imported at a lower price, you would naturally seek for costly industries. On the other hand, the investment balance between tradable and non-tradable products is disturbed. We should ask ourselves why there are so many luxurious buildings in Iran or why Iranians purchased so much real estate abroad. The answer is simple: cheap foreign currency. The main lesson that we can learn concerning economic stability and competitiveness is rational management of foreign exchange rates. They should be competitive and free from severe fluctuations. The three relative rates of foreign currency, interest, and energy are vital in our country. Since government is the main source of foreign currency, there should be careful management on its rate. Another important experience of other countries is dealing with budget deficit. Substantial problems arise when it goes up. I believe a tax system in which rates are low but broader contribution exists can serve as an effective economic instrument. We should declare in advance that we intend to increase our revenues and direct oil revenues towards certain applications. We can also invest a part of oil revenues in the international markets. Just as Norway does.
Salehi:How to spend the funds remains another important issue for discussion. Spending oil revenues on consumption may increase welfare, but does not affect productivity. The very relationship between welfare and productivity is highly crucial. Developed economies have managed to create a balance between the two. For us, it is necessary to monitor how we spend our foreign currency. Oil revenues affect the economy; therefore, they should be directed towards productivity of the labor force via education. A part of these revenues should be spent on physical infrastructures as well as infrastructures such as education and health. In that case we can enter more money into the country without harming other economic sectors.
The other question that we had better ask ourselves concerns the reasons why foreign investor may be interested in Iran. As an oil-rich nation, we do not need foreign capital and look for technology as well as promotion of labor force productivity. There are some scenarios for incentives of a foreign investor. The first reason is cheap energy. For instance, a foreign investor can receive low-price natural gas in petrochemical industries and produce export commodities. Or they may invest in oil extraction. These investments have nothing to do with either productivity enhancement or health and education. History reveals that foreign investors have always been interested in sectors where less skill and fewer human workforces are required. Therefore, they have had little impact on productivity and development. The other motivating factor for foreign investors is the fact that Iran has a negligible foreign debt. While making investments in countries such as Egypt, foreigners are always concerned whether or not they can return their investments.
These are advantages which distinguishes Iran. However, we need those kinds of investments which are not limited to such purposes. Those which are interested to create desirable conditions for Iranian workforce to present their products in global markets. In my opinion, this is the sort of investment for which we can appreciate the world.

Mehrnameh: Dr. Shirazi, as you know, a large number of oil investors are keen to enter Iran. Dr. Salehi believes such investments will not influence labor force productivity. Do you think we should welcome them or create conditions for investors to turn to other sectors?
Shirazi:We need investments in our hydro carbon sector as the volume of investment and imports of new technologies have been far from satisfactory in recent years. It is quite natural that we demand investments in our oil sector in the best manner. I totally agree with Dr. Salehi. Investments in oil industry will not help labor productivity but we need oil revenues for our economic infrastructures. They are essential both for domestic consumption and for access to foreign technology. We should encourage foreign investors to engage in other sectors not for their money, but because it has been proven that foreign capital can result in enhancement of productivity, management standards, technology, and marketing. Moreover, foreign investment is a way through which we can penetrate into foreign markets for our non-oil exports. At the same time, we can reduce red-tape and licensing process so that we can create a competitive environment enriched with proper regulations and prices.
Salehi:We need investments in our oil industry. It is a complicated technology and very few countries have access to it. We need their technology. We should invite foreign companies to introduce their complicated system together with investment.
We also need a closer relation between the education system and labor market. In developed countries, students and their families are totally aware of skills which are well-rewarded in the market. We should save our youth from degree-orientation. Approaching the global market can better assist us since skills are more valued than degrees there.
Shirazi:That is right. In the long term, investment on human capital is much more rewarding than investment on construction and roads, let alone oil. We need to increase the volume of foreign investment, but it is more important to promote its quality. We need to take advantage of the experience of other countries for this purpose. This is a kind of liberalization. We should not be ashamed of learning. At the same time, we can teach others.

Mehrnameh: To sum up, how do you analyze the process of Iran's joining the global market given that some people worry about Iranian industries being bankrupt or defeated in the competition field?
Shirazi:Before that, I would like to talk about banking system and finance. South-East Asian countries such as Thailand, Malaysia, or Indonesia demonstrated a remarkable performance in exports during 1980s to mid 1990s. However, they received a severe collapse due to weakness of their banking system. It is really vital to improve the banking system prior to entrance into international economy and global trade. Iran is an attractive destination for foreign capital since it has both a huge market and a potential for 7 to 8 percent of sustainable growth. We should be prepared to avoid problems like those which occurred in East Asian countries.
With regard to your last question, I should say it is quite natural to observe a sence of concern in Iran. However, we should equip ourselves with intellectual management and sound political policies if we intend to expand business, industrial, and cultural ties with the rest of the world. It may take some years. Prudence and futuristic views can assist. We saw India went through this process without feeling any severe pain. On the contrary, it turned into an economy with higher growth rate.
Salehi:I believe we should avoid pursuing household consumption as an objective in our interaction with the world economy. Rather, we need to enhance labor productivity and human capital. No country can reach ideal economic conditions via distribution of energy subsidies since energy is complementary to physical capital and not human capital. It marginalizes the workforce. Energy price should remain at a reasonable level so that human capital can release itself from pressure.
The other issue about absorption of human capital involves the internet. In today's world the internet plays the same role that roads and railways played a century ago. A typical foreign investor ignores countries where roads are bumpy. The same is true about internet in Iran. Just like Targeted Subsidy Reform, there ought to be a consensus on internet and solve the problem once and for all. Finally, I would like to emphasize that there are various, and sometimes contradictory, views on joining the global market. Iranian government is responsible to whole nation. Its view reflects the interests of every Iranian individual. By joining the world economy, an Iranian worker in Kerman, Sanandaj, or Bandar Abbass should gain the same productivity level as that of his Turkish or European counterpart. This is the view that we require.
Shirazi:I would like to add another point. It is easy to direct production towards global economy whereas orientation of fiscal market looks harder. For instance, it is highly profitable for foreign investors to purchase Iranian bonds with 20% yield instead of investing in their own countries with 2 to 3 percent return on investment. Interaction between Iranian and global fiscal markets can prove perilous at the time being. First of all, we need to rationalize prices and deregulate business. There is no need to dictate which industries are allowed to enter. Let the market itself decide based on a reasonable economic framework.