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June 2020, No. 94


Economy

Great Danger!


Certainly, if our country also had stronger trading partners with a broader level of trade, it would be far more difficult to sanction it by a bully like America.


One of the most important roles often accepted for the state in the economy is the supply of public goods. Goods that if consumed by one person do not limit access by others, and often the market fails to make them or at least fails to provide them. One of the most important of these commodities is ‘security’, which has various dimensions and is, in every respect, a primary socio-economic necessity. As the life security of a person is the first condition for many choices, including the choice of vehicle, place of residence, travel destination, etc., the primary requirement for economic activities including investment, whether on a micro or macro level, it will be “economic security” with different dimensions.

As a provider of public goods, the government is also responsible for providing economic security, as it is responsible for providing social security to citizens. An issue that can have a dual role in the economy; security affects economic conditions and economic conditions play a role in providing security. In other words, since markets are an appropriate space for reflecting the economic dimensions of social relations, the economic status of individuals will be closely linked to social security, as the recent unrest in the country confirms this claim.

Economic security means the creation of a viable platform for economic activities whose lack of practice actually impedes the optimal allocation of resources and removes economic activity from its healthy form. The context should be such that different businesses can make long-term planning without worrying about environmental risks.

In other words, economic security means providing a legal, social and political environment in which economic activities are least threatened by the business environment. In the Business Environment Assessment Index, which is reported annually by the World Bank and some international institutions, micro-investor support is one of the key pillars that considers investment security as part of economic security in countries.

The degree of protection of shareholder rights, the guarantee of performance and the enforceability of contracts are among the characteristics that are defined for this type of security. Until the investor is assured that the outcome and output of his business will not be materially and spiritually violated (such as copyright) and until he is certain that no breach will be made of his contracts and agreements, even with the expectation of profits above, there will be no interest in investing.

Just like offering someone a cheap trip with the best accommodation and facilities but with an unsafe vehicle. Naturally, the appeal of such a proposal would be too small for many. Of course, economic security is not limited to property rights and capital security. High inflation rates, in turn, create uncertainty and insecurity. If a commodity producer or service provider fails to correctly predict the cost of their future production inputs that means their investment security is at risk. The likelihood of a ban on imports or exports is a major insecurity.

The concept of business planning may be questioned if production entities are suddenly not allowed to import and raw materials cannot be used at the desired quality or on the other side export of finished products is suddenly banned and initial targeting is disrupted. Pricing itself is literally an insecurity for the investor. Commitment to supplying the product at an orderly price that is undoubtedly below market price means disrupting the profitability of the firm and reducing its economic security.

Stability in peaceful foreign policy and positive international relations also clearly have an impact on economic security. With current industries and businesses in various forms requiring international communication, the result of any international sanctions or restrictions would be to endanger economic security. An investor is confident that as soon as he can meet the needs of global markets and that international constraints are not likely for his business, an important factor is the lack of economic insecurity.

This is even the case for the other party. A broader business relationship with other countries means increasing economic and even political security, because when countries’ financial interests are intertwined, threatening the security of a country will mean threatening the economic security of a large number of countries, which will naturally get united. A country that has invested heavily in another country or has a high level of trade with it will not only risk it, but will also stand against potential risks from others.

Certainly, if our country also had stronger trading partners with a broader level of trade, it would be far more difficult to sanction it by a bully like America. If Europe had suffered a significant economic loss by cutting off its ties with Iran, it would not have easily passed it and would not have endangered its own economic security. Therefore, there is also a bilateral relationship between security and foreign investment, and if it is strengthened by the comprehensive security of foreign investment, its domestic security will also be strengthened.

In addition, the likelihood of lack of access to the Internet is also a form of economic insecurity. The role of the Internet is not only in the software-based businesses of the Internet or start-ups, but today even in the simplest manufacturing jobs, it is very important and disconnecting them from the global information network is a serious threat. It may be unthinkable for a foreign investor that for some days there may be no way to connect with international sources. Therefore, even the possibility of such an event can severely affect the economic security and consequently the decision to invest.

Various internal and external studies have more or less agreed that rule-of-law, economic-political stability, security of persons and assets, the predictability of litigation in contractual disputes, as well as other security-related factors (especially economic security) all affect investment and as a result economic growth.

In other words, the necessary condition for the realization of an investment is the security of all aspects related to it. In the absence of the necessary security, capital and labor will leave the economy. Conversely, if the current economic context and future prospects indicate capital security and economic-political stability, long-term investment will be strengthened and economic growth will follow. Especially for developing countries and transition economies, attracting foreign investors will be difficult if investment security is not guaranteed.

Given that the Iranian economy is facing more external constraints and internal deficiencies than ever before, reducing the various dimensions of socio-economic security is considered a major risk and a serious threat to the country’s long-term investment and growth. However, the variable changes in the “formation of gross fixed capital” in national accounts also reflect this worrying trend, especially in recent years.

How can one expect a foreign investor to consider investing in Iran, given the international pressures, the security of businesses and domestic investors in various forms, such as the imposition of bans and restrictions, changing attitudes, and in this recent experience with the outage of the Internet? Iran’s damaged economy needs more than ever to provide economic security to domestic and foreign investors so that it can provide the conditions for economic growth by strengthening capital formation.     

 

By: Mohammad Kosari

 

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  June 2020
No. 94