Economy, Business And Markets

Renewed Focus on Industrial Sector

Renewed Focus on  Industrial SectorRenewed Focus on  Industrial Sector

Exactly half a century after the publication of Nasser Motamedi’s book “Iran is Not an Agricultural Country: It Has to Industrialize”, the government is focusing on finding the best way to strengthen and expand Iran’s key industries.

Last week, the most comprehensive industrial development plan in at least 15 years was released by the Ministry of Industries, Mining and Trade titled “Strategic Plan”. It is unique in its degree of articulation and reliance on seven “priority industries”, including car, steel, clothing, cement, tire, home appliances, and tiles and ceramics industries. These industries were chosen on the basis of a broad set of tangible parameters like value added, job creation, export potential, market share, supply chain and impact on knowledge economy.

The plan sets the target of increasing the cumulative share of the industrial, mining and trade sectors in the GDP from 31.6% last year to 32.5%, 33.5% and 35% respectively during the specified years and absorbing $20 billion in foreign investment by 2025 compared with last year’s $500 million.

Furthermore, for the first time in the history of Iranian industry, growth will be created not by the state but by the “real private sector,” with the government retaining its role as supervisor and provider of subsidy and political support, as outlined in the Strategic Plan.

The Ministry of Industries, Mining and Trade points out several obstacles to achieving the goals set by the plan, the most important of which are related to international competitiveness and Iran’s ability to turn these industries into a profitable export-based growth engine.  

One important issue is years of economic sanctions that have reduced these heavy industries to mere suppliers of domestic market. The Strategic Plan recognizes this issue, pointing to the “extremely high dependence of industrial producers on the domestic consumer market.”

Iran reached a deal with major world powers in mid-July over its nuclear energy program, as part of which economic sanctions against the country are to be lifted, which would expand the industrial sector’s outreach to the international community.

Another important systemic obstacle to Iranian industry’s ability to become internationally competitive is oil dependency. Behrouz Hadi Zanour, emeritus professor at Allameh Tabatabai University argues that oil dependency is why Iran is not able to follow the export-driven industrial growth model of Asian tigers like South Korea. While Korean development was the result of large, export-driven companies with close ties to the state (the chaebols), the export ability of Iran’s industries is hampered by the tendency for the rial to appreciate as the oil economy expands.

With a strong industrial backbone, a resource-rich country like Iran would be able to reap the fruits of the value added by turning raw materials into finished products. Value added has been declining for at least two decades and stood at only 16.6% of GDP in 2014, indicating the steady decline of industries and increasing reliance on importing finished products and exporting raw materials. The car industry for example is almost solely an assemblage belt, with value added accounting for only 11.4% of the total share.

Although the Strategic Plan reaches an unprecedented level of industrial policy articulation, it also leaves the future of a range of major industries in the dark. The chemical industry, for example, leads in value added but has been granted no spot among the seven priority industries.