1251 GMT September 26, 2018
Iran is currently in a sweet spot in geo-economics. The soon-to-be operational infrastructures, the North–South Transport Corridor and Chabahar Port, should give it easier access to the Eurasian Union markets, on one side, and India on the other. Both have a large consumer base and are in a stage of development where gross demand is high. However, the question now is: How can Iranians be better prepared to meet this opportunity, especially in non-oil exports?
Apart from consumption and investment, exports are a key driver of economic growth. As per IMF, the average growth of Iran’s exports, from 2011 to 2016, was 11 percent, higher than most emerging markets. But at the same time, gross exports comprised only ~23 percent of its GDP. In comparison, Mexico, Romania, Botswana and Thailand saw a much higher share of gross exports despite having a similar per-capita level as Iran. At the same time, the five-year compound annual growth rate (CAGR) in investment lagged. Since investment formed ~35-40 percent of GDP, its lag partly led to the seven percent CAGR drop in Iran’s GDP in this period. A one percent CAGR per capita, with a double-digit average inflation, meant consumption remained muted. This puts more pressure on exports to become an engine of Iran’s future growth. In its current non-oil exports, petrochemical-related products still comprise a large share. Given the inherent price volatility in oil/commodities, driving non-oil exports is an urgent imperative. Increased exports would only drive domestic incomes and consumption further.
Given this backdrop, while Iran is already taking steps towards diversification and export promotion, can anything be learned from India’s experience that may be useful for Iran for increasing its non-oil exports?
Taking trade information to the last mile
Export industries might be spread across the country, especially near the regions producing the resource. While the producers in urban clusters may be updated about the government’s schemes, promotions and the opportunities thereof, those in the interior of the country may not always receive timely updates. That means delayed opportunities. Iran’s non-oil exports comprise materials, food and metals, excluding petrochemical-related products. Are these producers, especially smaller ones in non-urban regions, updated in time? Is their lack of participation constraining growth?
Second, is a trade-analytics platform available publicly, so that producers can analyze which products are under-produced or which markets are under-served? Are the trade strategy documents available publicly, which the consultants can use while advising producers?
Third, do specific cities/clusters need to set up a customized export strategy and promotion for their region? In these three areas, India took awareness of export schemes up to the district industrial clusters, implemented a trade-analytics portal and made available all trade-documents. Hence, its exporters across the hinterland are now participating more, leading to rapid export growth since 2016.
Market-based export promotion
In today’s hyper-competition, understanding customer needs and delivering accordingly is the key to market share. This requires a shift to demand-based export. This would also necessitate doing value-addition so that products don’t become irrelevant in the market. Lack of value-addition is an issue which both India and Iran face in their exports. India has made efforts recently to invest in this. In the contemporary wave of production migration, it is imperative to look at global value-chains and identify where one can fit in. That opens new opportunities in demand-based exports. It also means identifying specific products for specific markets, and pitching them. Iran is the second most populous country in the Middle East and North Africa (MENA), with a 90 percent+ literacy rate. This demographic advantage is an opportunity to export to talent-deficit nations, assuming skills match demand. Skilling and capability-building is a challenge everywhere, a reason India ramped up its National Skill Development Corporation (NSDC). Iran’s demographic advantage, coupled with wage-arbitrage, can open up opportunities in the service sector to meet services outsourced from talent-deficit countries. India’s offshoring sector was built on this paradigm. In any case, the share of services in Iran’s GDP at ~54 percent is less than the average ~60 percent of large emerging economies.
Streamlining regulations and processes
The difference between exporting raw and processed food is the investment in a processing plant. This drives industrialization, jobs and incomes. Plus, a processed item fetches proportionately more income. Rwanda is a case in point that transformed exports with value-added processing. But this also entails streamlining regulations and bureaucracy. Iran is ranked 124th in the World Bank’s Ease of Doing Business, just ahead of Egypt and Lebanon from MENA. It ranks better in the MENA for starting a business, but ranks worse in electricity, property registration and paying taxes. So while it is building the capacity, it needs to make itself easier to do business in.
In the past two years alone, India improved its rank by 30 places, the fifth best improvement globally. This led to higher interest from foreign investors. Processes also include conducting trade road-shows to reach more prospective buyers, something India has also stepped up. Moving to a contract-style labor in the export sectors can also make small producers competitive.
Ultimately, the current mix of the drivers of Iran’s economic growth render non-oil exports an imperative. Some lessons from India can help its non-oil export growth at a time when new infrastructure would give it easier access to vast consumer markets. In the long term, it would also help Iran reach an ideal mix in its economic drivers!