Economic Diversification: Moving Away from Oil
In the past 40 years, before and after the Islamic Revolution, Iran has been trying to diversify its economy by investing in nonoil sectors and acquiring new technologies. There are signs that Iran has reached some success as it is today a high middle-income country with a significant industrial base, a relatively well-developed science and technology infrastructure, and adequate human development.1 The role of oil revenues in Iran’s economy has been gradually declining during the past decade (2003–2012) as the country has been focusing on nonoil sectors. Likewise, the share of nonoil exports in Iran’s economy has increased from 14 percent in 1992 to 24 percent in 2002 and 60 percent in 2012.2 Export of nonoil products rose by 28 percent in 2011 to 2012 compared to the previous years and reached USD 43.7 billion. The annual nonoil exports may reach USD 60 billion in the coming years.3 Hence, Iran may remain a middle-income country even without oil exports. According to Iran’s Customs Administration, the nonoil exports cover a wide range of products and services including automotive, cement, machinery, steel, chemicals and petrochemicals, food, construction materials, and carpets. The nonoil sectors are of paramount importance because unlike oil exports, the revenues resulted from nonoil exports do not go directly to the government but rather to private or semiprivate firms, which are more likely to attract investment, create jobs, and contribute to entrepreneurship and innovation.4 In 2012, 38.6 percent of nonoil export revenues were attributed to petrochemical, 32.2 percent to industrial, 13.1 percent to agricultural, 5.4 percent to mineral, and 3.3 percent to carpets and handicrafts.5 The main export destinations included China, UAE, Turkey, India, Japan, South Korea, Italy, Singapore, Afghanistan, and Iraq. The government intends to develop industrial zones on the borders with Turkey, Iraq, Turkmenistan, and Afghanistan in order to increase nonoil exports.6
Manufacturing
The domestic manufacturing accounts for 12 to 15 percent of Iran’s GDP and consists of several industries including automotive, cement, machinery and equipment, steel, pharmaceutical, and floor coverings.
Automotive
In the past decade, Iran’s automotive industry has shown an exceptionally high rate of growth. According to the International Organization of Motor Vehicle Manufacturers, in 2011, Iran produced more than 1.6 million cars and was ranked the 13th largest car producer in the world.7 The auto industry is the second largest after oil and gas and accounts for 10 percent of GDP and 4 percent of the active workforce.8 There are about 25 state-owned and private car makers in Iran of which two giants namely Iran Khodro, and Saipa are accounted for 94 percent of the total production.9 In addition to car makers, Iran’s automotive industry consists of approximately 1,200 companies, which are involved in production of auto parts for car makers or end users.10 The domestic car makers have formed joint ventures with international giants such as Peugeot, Renault, and Citroen (France), Volkswagen (Germany), Nissan (Japan), Toyota (Japan), Daewoo, Hyundai, and Kia Motors (South Korea), Proton (Malaysia), and Chery (China).11 They produce six different types of vehicles including passenger cars, four wheel drive vehicles, trucks, buses, minibuses, and pickup trucks. In 2011, around 1.6 million cars were produced and 55,000 cars were exported to other markets such as Iraq, Afghanistan, Syria, Latin America, and Ukraine. The country plans to produce at least 3 million cars and export 1 million cars by 2025.12 Despite its importance in Iran’s economy and its massive production, the export level still remains very low.13 The low level of export may be attributed to multiple reasons such as low competitiveness, high pricing, and inadequate business and marketing strategies. The domestic automotive sector is highly dependent on many foreign suppliers, especially the French and South Korean companies. More recently, due to international sanctions and withdrawal of many foreign companies from Iran, the car production has sharply declined. Furthermore, political turmoil and war in Iraq and Syria have resulted in the reduction of exports and associated revenues. As a consequence, Iran’s car makers are under rising pressure to implement effective business strategies and adopt competitive production methods.14
Cement and Construction Materials
Iran has a promising capacity in producing and exporting cement, stones, and construction materials. The country has a current cement output capacity of 66 to 75 million tons, making it the world’s fifth largest cement producer.15 In 2009, the country produced some 65 million tons of cement per year and exported to 40 countries including Iraq, Azerbaijan, Turkmenistan, Afghanistan, Russia, Kazakhstan, Kuwait, Pakistan, Qatar, Turkey, the UAE, Georgia, Oman, India, and China.16 There are more than 60 production factories in Iran as of 2012 and the cement production capacity is supposed to reach 110 million tons by 2015 to 16.17
Machinery
In 2008, Iran produced approximately $23 billion of industrial products and machinery.18 The country plans to become self-sufficient in producing essential pieces of oil industry equipment. Iranian industrial companies have been carrying out projects in 27 countries including Azerbaijan, Uzbekistan, Tajikistan, Pakistan, Oman, Sudan, and Iraq.19 The value of exported industrial and engineering services has reached over $20 billion in 2011.20
Steel
With a production of 16 million tons of steel per year, Iran is among the 15 major steel producers in the world.21 According to the World Steel Association, Iran was ranked first in steel production in the Middle East in 2013. Considering the centrality of steel production in socioeconomic development, Iranian government has taken drastic measures to increase the output to 55 million tons in the next five years. Despite the significant domestic consumption, in 2013, Iran exported over $500 million of steel products. The major raw steel factories in Iran are the Mobarakeh Steel Complex with approximately 47 percent, the Khuzestan Steel Company with about 23 percent, the Isfahan Foundry with about 20 percent, and the Iran National Steel Industries Group with approximately 10 percent of the market share.22 Overall, the prospects of Iran’s steel industry seem promising as the country enjoys large and rich resources, abundant sources of energy, and adequate domestic technology.
Pharmaceutical
In 2012, Iran’s health care industry was worth $28.13 billion of which the pharmaceutical market was estimated to be around $3.51 billion. The country has a strong pharmaceutical industry and according to Iran’s Health Ministry, about 97 percent of Iran’s required medicine is produced domestically.23 Exports of pharmaceutical products amounted to $114 million in 2012, but the domestic pharmaceutical industry is highly dependent on the imported raw materials, machinery, and specialized drugs.24 For instance, Iran’s pharmaceutical imports were estimated at $1 billion in 2012.25 Iran’s health care market is expanding and the government plans to attain national self-sufficiency and local production of essential drugs and vaccines. Therefore, the prospects of investment and growth in Iran’s pharmaceutical sector seem quite favorable.26 Cardiovascular diseases, road accidents, cancer—particularly lung cancer— diabetes, osteoporosis, and nutritional and psychological disorders are the main health hazards and are accounted for the main health-related expenses. Furthermore, Iran enjoys a well-established medical education system and attracts a large number of medical tourists from the neighboring countries. In 2012, more than 200,000 medical tourists sought treatment in Iran and brought in over $1.5 billon.27
Carpets
The hand-woven carpets are an essential part of Persian history, culture, art, and business. The Persian carpets decorate the floor of every Iranian house and employ about 1.2 million weavers and merchants across the country. Thanks to their artistic designs and high quality, Iranian carpets are among the top Iranian traditional manufacturing items. Iran controls almost 30 percent of the world carpet market and in 2011 the country exported more than $560 million worth of hand woven carpets.28 It is estimated that around 70 percent of Iranian-made carpets are exported to more than 50 countries.29 In the past 20 years, the Iranian carpet industry has faced fierce competition from other countries such as China, Pakistan, and Turkey imitating the original Persian designs at a cheaper price. Furthermore, international sanctions coupled with rising costs of labor in Iran have put significant pressure on the industry. Yet, the Persian carpets still enjoy a good reputation and Iranian exporters are optimistic that the country will remain the world’s leading exporter of hand-woven carpets for the foreseeable future.
Telecom and Information Technology
Iran’s telecommunications sector is highly regulated and is dominated by the state-owned Telecommunication Company of Iran. There were 1,200 registered information technology companies in 2002. The telecommunication sector accounted for 1.5 percent of GDP in 2002. There is insufficient data about the export of telecommunication services, but Iran is involved in exporting domestically made products and software to several countries. Major domestic firms involved in software production include Sena Soft, Dadeh-Pardazi, Iran Argham, Kafa System Information Network, Iran System, and Puya.30 Software exports were estimated to be over $400 million in 2013.31 Landline and mobile phone penetration rate is very high by regional standards.32 For instance, in 2012, Iran had more than one mobile phone per inhabitant.33 The country’s mobile phone segment is still growing, and there is a potential for growth particularly in broadband Internet and software development.34 In 2012, there were 43 million Internet users in Iran ranking the country first in the Middle East.35 Considering the socioeconomic and demographic variables such as GDP per capita, literacy (over 80 percent), population size, and median age, the prospects of Iran’s telecommunications sector seem very promising. Almost all cities, small towns, and villages have full Internet access. In the recent years, the government has been computerizing administrative and commercial services. The banks, schools, colleges, hospitals, supermarkets, and small businesses have been adopting the latest telecommunication platforms. Most importantly, Iranian consumers are quite tech-savvy and are increasingly demanding new products, innovative services, convenient software, and more reliable networks.
Agriculture and Food
Agriculture sector accounts for 10 percent of Iran’s economy and 21 percent of nonoil exports.36 It is estimated that 80 percent of Iran’s consumed food is domestically produced. With an average rainfall of 240 millimeters per year, Iran is considered a dry land. Approximately, 90 percent of its territory is classed as arid and semiarid. Only one-third of Iran’s total area is suited for farming. The western and northwestern provinces have the most fertile soil and enough water resources. Around 21.5 percent of the population live in rural areas and are directly engaged in agriculture.37 Farms are small, generally less than 25 acres, and are not economically viable. Many farms are smaller than 10 hectares and do not benefit from economies of scale. Furthermore, around two-thirds of cultivable land is not in use and the majority of farms operate far below full capacity. As a result, the farms have low yields, and poverty in rural areas is very common. Wheat, rice, and barley are grown on 70 percent of cultivated land, with wheat accounting for over half of the total crop production. Iran is a net importer of rice, importing around 450,000 tons per year. Other important crops include potatoes, dates, figs, pistachios, walnuts, almonds, cotton, sugarcane, sugar beet, tea, and tobacco. Main produces are wheat, milk, fruits, nuts, potatoes, tomatoes, rice, barley, and grapes. It is estimated that in 2011–2012, Iran exported $5.1 billion and imported $9.7 billion of agricultural products.38 During 2012 to 2013, the government invested about $12.2 billion to stimulate agriculture sector. The objective of the government has been self-sufficiency in major crops such as wheat and sugar.39 The country was ranked the 11th producer of wheat in the world in 2011. Pistachio and saffron are the two top agricultural exports. According to the World Food and Agriculture Organization (FAO), Iran was marked as the top pistachio producer with an annual production of 300,000 metric tons.40 Both pistachio and saffron producers have been under growing pressure from more technologically advanced countries such as the United States and Spain. Indeed, while Iran is recognized as the top producer and exporter of pistachio and saffron, it suffers from low productivity and competitiveness. The producers have been planning for raising value of the pistachio and saffron exports by increasing the output, finding new markets, and improving packaging and marketing strategies. The processed and packaged food products have been growing quickly in the recent years as a large number of small and medium-sized businesses have entered the industry. Similarly, the Iranian dairy industry is expanding as the investment is being increased. The exports of dairy products were estimated at $500 million in 2012 and are expected to rise in the coming years.41 With a diverse climate and an annual harvest of about 20 million tons, Iran is also a major fruit producer in the world.42 Main produced fruits include different types of citrus, apples, grapes, dates, and peaches. The country is one of the largest producers of dates with an annual production of more than one million tons in more than 40 varieties.43 Sheep are the primary livestock with smaller numbers of goats, cattle, donkeys, horses, and water buffalo.44 According to the FAO of the United Nations, Iran is ranked 33rd in fishery output. Over 200,000 individuals work in the fishery sector and output was estimated at 735,000 tons with the exports around $210 million in 2012.45 Similarly, the production of meat is estimated at over 2.5 million tons per year that is enough to satisfy the domestic demand.46 Overall, it seems that the agriculture sector has suffered from lack of public and private investment, droughts in the past 10 years, poor quality seeds, and outdated farming techniques.47 Therefore, the food and agriculture industries offer many business opportunities in water and soil management, advanced farming, and animal husbandry.
Mining
Iran is ranked among the 20 major mineral-rich countries of the world;48 it holds 68 types of minerals, 37 billion tons of proven reserves, and more than 57 billion tons of potential reserves.49 In 2011, Iran’s mineral reserves were valued at more than $770 billion.50 The country is one of the major producers of zinc, lead, cobalt, aluminum, manganese and copper in the world and exports its mineral products to 159 countries. The country holds the world’s largest zinc reserves, the 2nd largest copper reserves, the 9th largest Iron reserves, the 10th largest uranium reserves, and the 11th largest lead reserves. While Iran holds more than 7 percent of the world’s total mineral reserves, the mining industry contributes only 0.6 percent to the national economy.51 Many factors contribute to the underdevelopment of mining industry including lack of foreign investment, obsolete technology, legal barriers, and government intervention. Indeed, the government owns and controls 90 percent of all mines and related industries.52 The country plans to increase mining production by attracting investment and modernizing technology. The prospects of Iran’s mining sector seem very favorable as it benefits from many advantages including the abundant metal and nonmetal resources, existence of supporting and related industries, sizeable domestic consumption market, and relatively well-developed transportation networks across the country.
Transportation
Transport sector accounts for 10 percent of Iran’s GDP.53 The country has a network of 140,200 kilometers (87,120 miles) of roads, of which 49,440 kilometers (30,722 miles) are paved. Some major highway networks run across the country and connect major cities. Many private companies provide bus service between large and small cities. The Islamic Republic of Iran Railways is the national state-owned railway company of Iran and manages all the passenger trains and some international trains. The major ports are on the Persian Gulf or the Caspian Sea coasts and include Assaluyeh, Bandar Abbas, Bandar Imam, Khomeini, Bandar Anzali, Bandar Mahshahr, Bandar Shahid Rejaie, Sirri Island, and Khorramshahr. Imported goods are transported throughout the country by trucks and freight trains. The Tehran–Bandar Abbas railroad that opened in 1995 connects Bandar Abbas to the railroad system of Central Asia via Tehran and Mashhad. Iran’s aviation is relatively well-developed and dozens of cities have airports that serve passenger and cargo planes. Tehran has a subway system (metro) and many other cities including Mashhad, Shiraz, Tabriz, Ahwaz, and Isfahan are in the process of constructing underground mass transit rail lines. The government is planning to carry out several projects including highways, arterial and rural roads, railroads, ports, and airport facilities. Iran is considering a land transport development plan to establish a quick and affordable network between the north and south. The construction of North Free Way, which would connect Tehran to the Caspian region and Qom to Mashhad, are other road building projects.54 The expansion of the railway system to major ports is another pressing priority. Similarly, the country aims at developing the logistic advantages in the maritime transport. In the aviation sector, the country needs to make huge investments to renovate the airports and purchase new aircrafts. Despite the old aviation system, the number of domestic and international passengers at Iran’s airports has been increasing in the past five years and has reached to 40.1 million persons in 2010 to 2011.55
Tourism
Iran’s natural environment is highly diverse and offers various landscapes and climates. The country’s historical and archeological sites represent significant cultural attractions. In addition, the country offers a promising prospect for attracting a large number of health-related and medical tourists. Before the Islamic revolution (1979), Iran was considered a major touristic destination and attracted a large number of visitors. The things changed shortly after the revolution and particularly during the Iran–Iraq War in the 1980s as Iran’s tourism sector substantially declined. In the recent years, there have been timid improvements in the tourism industry. The number of foreign tourists who visited Iran was estimated at 3.2 million in 2011–2012, contributing more than $2 billion to the national economy.56 The majority of foreign visitors to Iran consist of religious pilgrims, Iranian diaspora, and businessmen.57 The most visited cities in Iran include Tehran, Mashhad, Yazd, Isfahan, Shiraz, Tabriz, and Kish Island.58 The tourism sector provides an appropriate option for Iran to create jobs and diversify its economy. The government aims at increasing the number of tourists to 20 million by 2025. To attain this objective, the country needs to make huge investments in tourism infrastructure and services including hotels, airlines, airports, marketing and promotion, travel agencies, shopping centers, and recreation facilities.
Residential Construction and Urban Infrastructure
The residential construction is one the most attractive sectors to the private entrepreneurs and investors. Indeed, the residential construction is among the few sectors of economy that is somewhat immune to government intervention. The share of private investment in the housing sector is estimated to be around 98 percent. After the Iran–Iraq War and particularly in the past decade, the residential construction has attracted huge investments and has grown significantly. The house prices have been increasing at around 20 percent per year over the past two decades.59 The average price of a housing unit in urban areas is estimated to be about 10 times the annual income of an urban household.60 To create more stability in the housing market, in 2011, the government implemented a national electronic system for tracking real estate transactions. According to the Central Bank of Iran, almost 70 percent of the population own homes or dispose of sufficient amounts that they can invest in the housing market.61 Considering Iran’s demographical trends, the housing sector is supposed to continue its phenomenal growth in the foreseeable future. It is estimated that every year there is a need for 750,000 additional housing units as the youth reach the marriage age.62 What’s more, some old dwellings need to be renovated or replaced by earthquake-resistant buildings. Furthermore, Iran has been embarking on an accelerated urbanization for more than six decades and more than 70 percent of its population resides in urban areas. The massive urbanization requires large investments in infrastructure, public services, urban transport, water supply, traffic management, sewage system, environment protection, waste management, and other associated projects. The Iranian house builders are keen on adopting new construction techniques and materials to enhance the quality and reduce the cost of construction. Iran has been seeking to attract foreign investment in the housing sector. More recently, the country has started some cooperation with Turkish companies for training experts, producing construction materials and applying new technologies.63
Retail
The prospects of retail sector in Iran seem particularly favorable as the country enjoys a predominantly young, urban, and middle class population. Due to international sanctions, the backbone of Iran’s retail sector and distribution system is controlled by traditional bazaar merchants and some state-supported companies. The current retail and distribution system relies on outdated technologies and procedures and is mostly inefficient and unproductive. In the recent years some large supermarkets have been emerging in Tehran and other large cities, but their operations have remained very limited. In view of its size and its projected growth, Iran’s retail sector seems an attractive target for modern and experienced retailers.
Petrochemical
Iran’s strategy has been to create value-added petrochemical products for export instead of selling crude oil. For that reason, the petrochemical industry has been the focus of the Iranian government in the past 20 years. Iran’s oil and gas endowments offer a strong competitive advantage to petrochemical industry. Capitalizing on this advantage, Iran has built some of the largest petrochemical complexes in the world.64 At present, the petrochemical industry accounts for about 35 percent of nonoil exports and has a production capacity of 55 million tons per year. Methanol, polyethylene, butadiene, ethylene dichloride, and ethylene are the main exported petrochemical products. The country exported a total of 18.2 million tons of petrochemicals and polymer products estimated at $14.2 billion in 2011. The petrochemical industry is expected to grow significantly in the near future and production may reach 100 million tons by 2015.65 The current investment opportunities in Iran’s petrochemical industry are estimated to be about $80 billion in both upstream and downstream activities.66
Prospects
Since the 1960s, Iran has been resolute to diversify the structure of its economy by placing emphasis on development of nonoil sectors. Relying on the oil revenues, the government has been developing appropriate infrastructure in the country and has taken drastic measures to boost nonoil exports particularly in petrochemicals, manufacturing, and agriculture sectors. The reduction of oil revenues, international sanctions, and the rising number of young and educated job seekers are the main motives of such emphasis on nonoil sectors. It seems that the growth of Iran’s nonoil sector will be accelerated in the coming years, as the country is pushing forward multiple privatization programs and subsidy reforms and is introducing attractive incentives to entrepreneurs and investors. Manufacturing industries, such as automotive, pharmaceutical, and consumer electronics, have been developed mainly through licensing contracts and reverse engineering. While Iran has shown some success in developing nonoil sectors, its overall achievement has been substandard in many industries such as car manufacturing and petrochemicals. Iran’s manufacturing exports are very limited and consist of a few products. Except for mining and metals, the manufactured products lack technological improvements and cannot compete on international markets.67 Iran has built a significant technological capacity by building research institutes, and training a large number of scientists and engineers, but according to the United Nations Development Program, the country has a very low proportion of technology-based exports, estimated at around 2 percent of the total exports.68 The research centers and universities are generally government owned and are disconnected from the consumer market. Furthermore, entrepreneurship is not advanced mainly because business associations and consumer groups are not well represented and do not play an active role in production. That may explain why the small and medium enterprises (SMEs) play only a small role in the national economy. International isolation, trade sanctions, lack of innovation, the gap between consumers and producers, the complex system of licenses and subsidies, and inadequate regulatory system can be considered as some of the main causes of Iran’s poor performance in developing and commercializing nonoil products. While opening the Iranian business environment to foreigners may create serious challenges to domestic businesses, it could bring in new ideas, technologies, products, processes, and management styles and push the domestic players to improve their products and services.69