Economy, Business And Markets

Widespread Middlemanship: Causes and Effects

Widespread Middlemanship: Causes and EffectsWidespread Middlemanship: Causes and Effects

In a quiet street in Tehran’s central Amirabad neighborhood, Mohammad’s little corner shop caters mostly to conscripted soldiers taking a break from their military barracks a few blocks down the road. The corner shop is open from early morning to late evening. Mohammad takes turns with his son, brother and father to run the small business.

Mohammad’s shop is just one example of an exploding phenomenon that has taken root in Iran over the past three decades: the growth of small-and medium-sized retail outlets, including corner shops, brokers and all sorts of middlemen.

According to data obtained by IRNA, there are more than 1,400,000 shops and 900,000 service provider units in Iran. The data also show that over the past years, the number of productive units has been on the decline.

Economists point to the failure of domestic industries, as a result of which new entrants to the labor force have been forced to look for or create their own jobs in the services and distribution sectors. In particular, the government’s trade policies have been blamed for exacerbating unnecessary imports.

 Akbar Torkan, head of the High Council of Free Trade, Industrial and Special Economic Zones, argues that: “the cause of economic problems during the eight years of former president Mahmoud Ahmadinejad’s tenure were [the increase in] consumer goods imports and the middlemanship mentality. During the period, Iran’s imports increased from $20 billion to $60 billion a year–the vast majority of which consisted of consumer goods rather than capital goods or goods that added value in the production process. Once upon a time, we used to import capital goods, machinery and technology, but with the coming of massive and unprecedented oil revenues, imports [of consumer goods] jumped up.”

Between 2005 and 2013, imports totaled $720 billion. According to Behzad Shiri, a senior official at the Islamic Republic of Iran Customs Administration, this figure consisted of $513.22 billion in goods, $126.381 billion in services and $74 million in gas and oil-related products.

“Before [the Iranian year of] 1984 [2005] gold imports were still limited and we were even forced to work night shifts by the yearend. But now as a result of unprecedented imports, our job implies sitting down long hours in our shops,” says Ahmad Habibi, who represents the jewelers guild.

Cheap imports from China have been particularly problematic since they have brought about destruction on local industries that were able to produce similar products but with higher production costs. Among them have been the kitchenware and clothing industries, heavy industries like metal as well as more traditional arts like carpet making.

Even President Hassan Rouhani has criticized the inflow of cheap Chinese goods, arguing that Iran has created jobs for Chinese workers rather than its own.    

Every hour a truck filled with Chinese clothing enters Iran.

Ali Fazeli, head of the Iran Chamber of Guilds–an influential body representing Iran’s many guilds and workers communities–confirmed that “our economy is centered around middlemen who have in recent years experienced unprecedented growth without economic planning.”

Middlemen run up to two-thirds of the Iranian economy, Fazeli estimates. “Globally, for every 37 retail outlets, there is one middleman, but in Iran there is one for every seven households. This trend has worsened in the past years,” he adds.

The centrality of distribution-related jobs in providing employment has not only been a consequence of the influx of Chinese goods but also has to do with the failure to incorporate surplus labor after the 1979 Islamic Revolution.

Iran’s economy came to a standstill when Iraq invaded the country in 1980, forcing the government to shelve development plans and enlist young fighters for the front instead.

Fazeli points out that after the eight-year war, young fighters returned home without the necessary education while an exhausted state was not able to provide employment. “These people had little choice but to enter the shop and brokerage market.”

Since then, the middlemen culture has exploded. One of the worst side effects of the presence of middlemen is the consequent low level of productivity.

Ebrahim Razzaqi, economics professor at the University of Tehran, argues that “a majority of shops in Iran have only a small amount of customers throughout the day, meaning that their owners spend their work hours unproductively. In fact, these shop owners should be counted in as a form of hidden unemployment.”

The significant expansion of an unproductive services sector has been to the detriment of industry and agriculture. Similarly, disappointing growth in productive sectors has also hit the distribution and retail sector. The head of the Chamber of Guilds confirms this by saying that: “Our labor market has not been specialized, causing both production and distribution to take the hits.”

The failure to promote domestic industry and the centrality of semi-professional distribution networks is not only an Iranian problem, but can be witnessed in many other Middle Eastern and developing countries.

The Rouhani government has been more focused than previous administrations in trying to solve this problem. The head of the Chamber of Guilds applauds Rouhani’s success in stabilizing domestic markets over the past two years, saying: “Luckily the government has been able to pull the plug on the rising number of middlemen.”

Fazeli wants the government to support small-and medium-sized enterprises, which are the largest employers in Iran, by removing legal obstacles to production such as high interest rates on bank loans and additional costs.

Mohammad, the Amirabad shop owner, is hopeful that the nuclear deal will improve his income. “The main reason why our shop is open even at hours when customers are few is because of money.”