The Next Big Thing

Professor of Economics
The Next Big Thing
The Next Big Thing

The Iran deal is less than a month old and it already feels like a new era has begun. European officials and businesses are regularly visiting to discuss joint ventures and economic collaboration. In less than three weeks high-ranking German, French and Italian delegations held talks in Tehran. A friend compared the European visits to the Nowruz (Iranian New Year) tradition of visiting friends and family. Indeed a 'new day' has arrived and Iran is open for business.

It is not easy to predict when and where the next big move will gather momentum in Iran. The economy is multidimensional and diverse offering a multitude of areas for growth.  It is true that oil and natural gas constitute the most significant sector, however, for the first time in our contemporary history energy is not and should not be the only magnet. Auto production, tourism, aviation and transportation demand equal if not more attention. Which one will be the next “big thing” in Iran?

First one has to determine what will be considered big. Three potential classifications arrangements come to mind. One is based on how much investment a sector can attract both through domestic and foreign direct investment. We can also define the next big thing using the potential for exports and value of manufactured goods. In this category the focus is on how much revenue can be generated in trade and from domestic sales. To these two one final definition can be added and that is the potential for creating much-needed jobs. Based on these criteria three sectors have the potential of being the next big thing each in their own right: oil and natural gas, auto manufacturing and tourism.

In terms of dollar value, oil and natural gas are best placed to attract the lion's share. Oil projects have been going on and news investments will increase their pace. Certainly this will help augment production and revenues.                

Iran will be able to explore new fields and upgrade existing technology in exploration and extraction. However the global oil market seems to be sluggish at current price levels.

Iran’s oil revenues will be constrained by the soft global market. Still its vast oil and natural gas resources remain attractive for many investors as always. This might be the first place to attract foreign investment and forge partnerships. The big oil players and others involved have shown deep and increasing interest after the nuclear deal was signed in Vienna on July 14 by Iran the six world powers to put a permanent end to the dispute over Tehran’s nuclear energy program.

After energy the attention will  be on Iran’s huge auto industry. Sanctions did hurt the domestic car manufacturers. Ironically it is also true that demand for new cars has been continuously increasing in Iran. Car ownership is on the rise and Iran’s 80-million-strong market demands all kinds of vehicles, both light and heavy. The auto sector has indeed established itself as an economic powerhouse in Iran. Its assembly lines and parts producers are located across the country and its impact is no more limited only to Tehran.

Put differently, Iran has a clear advantage to become the main supply center for this large and fast growing industry in the Middle East. Although its immediate markets in Iraq and Afghanistan are far from ideal conditions, one has to take into account their future potential as well as markets in East Africa and South and Central Asia. With proper leadership, investments and export focus Iran’s car manufacturers can and will be the next big economic phenomenon in this part of the world.

Last but not least is tourism. If oil and natural gas is poised to attract most investment and if car producers have the opportunity of a lifetime to become exporters, Iran’s tourism can muster most of what is hoped for by the average Iranian: jobs. The good news is that the number of foreign arrivals is already rising. Tourist attractions are evenly distributed across the country thus making its economic impact felt nationwide.

To accommodate the expected flow major projects need to be defined to build hotels, roadways and improve road safety, upgrade airports and rail stations and train people wanting to work in the hospitality industry. The economic clout of these projects can be measured not only in urban areas but also in rural Iran.  

So, on which sector should the government focus? This is not an easy question to answer. Oil and gas sector is a key public sphere in which the government is omnipresent. Vehicle manufacturing is a mix of public and private firms with their own interests and agendas. Tourism is the one area where private sector is present at all levels and is able and willing to invest. It seems all three sectors will embark on a path of simultaneous growth. It is fair to say for the government it will be the least costly to coordinate the energy sector leaving the other two to grow endogenously.

Here tourism comes out first. It has the potential of becoming the first engine of growth in Iran owned, built and fueled by private sector and local communities. Certainly the government has a role by defining new infrastructure, however here it can rely on local governments and entities to do the job and in the process raising the decentralization bar to a higher level.

This canl give a new meaning to the emerging socioeconomic reality and will be a significant achievement. It might well be the next big thing that gives essence to a growth-oriented and service-focused private enterprise with its own vision, resources and devices.