The controversial plan on monetization of state assets has been met with strong opposition these days. Let’s take a look at Iran’s industrial enterprises as the most productive part of the economy to see why they are operating in an unproductive structure and degrading by the day, while behind their competition in developing countries. Hossein Haqgou, an economic commentator, prefaced his article for Persian-language daily Ta’adol with this note. Below is a translation of the text.
According to a report by Industrial Management Institute, the economic enterprises in Iran registered sales worth 36,980 trillion rials in the last Iranian year (March 2021-22), i.e. 16% of the gross domestic product. Top 100 large companies accounted for 88.2% of sales and the remaining 400 companies accounted for as little as 12%. The large industrial enterprises on this list mainly rely on energy, minerals and basic resources. The performance of Iranian economic and industrial enterprises is insignificant compared with those in developed countries and even with those of the neighboring country, Turkey. According to the CEO of the Industrial Management Institute, export per capita of 500 Iranian companies is 43% of the exports of 500 Turkish companies. The sales of the first Turkish company are 1.6 times bigger than the sales of the first Iranian company. Of course you cannot expect anything else.
Huge investment and having access to modern technology are the main requirements for the growth of industrial enterprises. Both of these necessities are hard to meet in our country. The Iranian corporate system relies on the banking system for up to 80% of investments. The capital market and other sources (like bonds) have a much smaller share. The banking system however does not have the ability to provide financial support for this level of demand because due to many reasons, including the mandated interest rate, it is struggling with major crises and huge imbalances.
The Ministry of Industries, Mining and Trade has required the crisis-stricken banking system to allocate 9,000 trillion rials to the industry sector (30% of banks’ total resources). Even if realized, such level of investment won’t solve the financing problem of companies. The fact of the matter is that macroeconomic policies are to blame.
Economic enterprises are wrestling with the inflation rate of 40-50% and extreme fluctuations in foreign currency exchange rates, which make it very difficult for them to supply raw materials. They also face the government’s mandatory pricing and price suppression, which deprives them of the right to freely determine the price of products. It is the government bureaucrats who determine the prices of the goods.
The same bureaucrats set the interest rate on bank deposits at half the inflation rate or new exchange rates. One cannot expect to see the growth of enterprises and their financing through internal resources and the global logical routines in a country where economic components are not real and are being manipulated according to political considerations to tackle the budget and banking system and foreign trade imbalances.
Economic enterprises, as the backbone of any economy, need security and confidence to attract domestic and foreign capital, transfer technology and knowledge as well as the stability of macroeconomic variables and a favorable business environment. In an economy where such necessities are considered trivial and work is being carried out after orders are given, enterprises turn into economic units that focus on meeting needs of domestic, small markets or a handful of limited regional markets. On why institutions such as banks and insurances are not efficient in developing countries, Douglass North, American economist, speaks of the drawbacks in property rights and the lack of free and competitive access to facilities. He says that the fault is in the governance; as long as these issues remain unresolved, every river will flow into the sand plains and every productive entity will transform into something unproductive.
