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October 2019, No. 92


Editorial

Iran Changing Development Approaches


The perspective on seeking solutions further east has gained significant weight in governance circles.


Challenges Ahead

Following unilateral US with-drawl from the JCPOA and imposition of hard sanctions, with significant adverse socio-economic outcomes for ordinary Iranian’s, the country’s growth and development are now threatened. New investment possibilities (foreign and domestic; economic and development type) have also become limited.

Iran’s development approach has conventionally been based on sole economic led growth and, given oil, with an international trade orientation – along with a social welfare system; while Government continues to play a large role in the economy through public and semi-public enterprises dominating the manufacturing, commercial and services sectors. The new Government development strategy, however, aims at improving social and economic resilience: through domestic led investments and also attempting to encompass market-based reforms and social welfare improvement – reflected in 6th Five-Year Development Plan (2016-2021) targets. The Resilient Economy approach, in its narrative, indicates pro-employment generation through SME development investment, participatory and community-based initiatives, area and regional programmes to complement individual projects, etc. An inclusive growth approach: solutions for domestic led employment generation rather than solutions based on the conventional international trade model approach. The 6th FYDP and 1398 Budget are also indicative of increased nominal allocations for domestic-led fiscal stimulus: the proposed increase in annual 1398 budget – of about 4,500 Trillion Rials – is equivalent to circa 40% of GNI1.

However, the new programmatic aspects per se of Resilient Economy are still not too clear in practice – business as usual approaches dominate (e.g. in the manner that credit is provided through the banking system, in project selection, etc). Given Iran’s need for factoring in new principles in its own development programming framework, the investment priority areas complementing Resilient Economy frameworks now need be clearly identified and funded. With more policy coherence and planning integration in existing institutional frameworks.

The above mentioned sanctions, macro-economic shock and change in policy approach have, obviously, challenged development objectives and funding frameworks and are leading to even more thinking on changes in policy orientation all together. Prompting i) more change towards the domestic led growth approach, and ii) a look towards the East.

This eastward look, and away from dollar based trade, is an altogether different order of magnitude.


Iran’s position between Central Asia, South Asia and the Arabian Peninsula is a critical strategic east-west and north-south factor including the corridor from the Indian Ocean to the Caucasus.


Looking Eastwards

The perspective on seeking solutions further east has gained significant weight in governance circles. A country with an historical pro-west global trade culture, it will be a fundamental shift in perspective for Iran If realized. Regional developments (the Belt and Road Initiative, China-Russia relations, BRICS, Shanghai Organisation) are tempting, and providing new enabling space and incentive for moving away from dollar-based trading frameworks. Iran’s position between Central Asia, South Asia and the Arabian Peninsula is a critical strategic east-west and north-south factor including the corridor from the Indian Ocean to the Caucasus.

In this regard, the significance of economic ties with China comes to fore. As Iran’s budget constraints and sanctions effects limit investment, China may be a big source of capital needed for financing investment, especially in infrastructure; now especially in the absence of global banking and finance intimidated by US sanctions and weak local investment initiative. Given this, the China Belt and Road Initiative (BRI), which itself will require significant investments, would also prompt/require Iran’s participation. As there are real demands in Iran for investments in infrastructure, agriculture, water, electric power, communications, transport, industry and resources development the BRI provides a useful development facilitation and political framework.

In general, Iran’s Government is quite positive towards the BRI, and there is not much concern about the possible negative aspects – apart from normal considerations of sustainability in capital costs and returns. China could then become Iran’s biggest source of capital needed to finance infrastructure projects in the absence of global banks. The requirement of a possible 3,300 Trillion Rials in ideal expected investments annually, to ensure long term sustainable development in Iran, would be equivalent to circa $33 Billion (using a semi-formal exchange rate of 100,000 Rials per dollar) – a small amount for China BRI compared to the envisaged $10 Trillion China will be financing expenditures in future years. The BRI is, therefore, seen by governance circles as an opportunity to deepen economic ties between China and Iran. The geopolitical realities are, therefore, pushing Iran further “eastwards” considering the two countries’ political and economic agendas and interests.

Possibilities and perspectives on BRI related trade and development include: increased trade and tourism opportunities; two countries are complementary to each other in terms of energy; in June 2017, Iran’s Financial Tribune estimated that new Iran-China relations would become atailwindof long-term bilateral trade of as much as $600 billion per year; China is giving Iran financial aid to build the nation’s high-speed train system; a credit line of $10 billion from CITIC Group to finance water, energy and transport projects; the China Development Bank has signed preliminary deals with Iran worth $15 billion for infrastructure and production projects; the Export-Import Bank of China intends to finalize a $10-billion letter of credit; etc. All this has also prompted other initiatives. India has a trilateral agreement with Iran and Afghanistan known as the Chabahar Agreement - to invest US$500 million to develop the strategically important Chabahar port.

Given Iran’s apparent need for factoring in new principles and criteria into its own development programming framework, the investment priority areas complementing resilient economy (and perhaps sustainable development frameworks) now need be identified and also funded. There is, therefore, a need for new programme based investments, and to be undertaken through developing policy coherence and socio-economic planning integration in existing institutional frameworks. The likelihood then exists that a BRI partnership could prompt the integration. China itself has been pro-active in seeking integrated, programme based solutions with macro-meso-micro characteristics (and for resolving both economic growth problems and natural resource problems); the complementing article in this issue on Water Basin Development indicates how China has done so.


1 ) See Iran International Magazine “The 1398 Budget Development Impact”

 

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