Economy, Business And Markets

The Missing Middle in Iran’s Industries

The Missing Middle in Iran’s Industries
The Missing Middle in Iran’s Industries

As foreign trade delegations flock to Iran, economic players of the domestic private sector are doubling efforts to attract investment to the small- and medium-sized enterprises. The heavy presence of the government in the production sector and the absence of a support system for SMEs are to blame for these enterprises’ insignificant role in Iran’s economy.

According to an analytical report by the Economic Studies Office of Parliament Research Center, Iran is facing a “Missing Middle Problem” with a large number of small businesses but few middle-sized enterprises, which is mostly the case in less developed countries.  

Once the phenomenon emerges, midsized enterprises fail to grow, a part of them disappears and the rest are forced to fly under the radar by staying small and informal. This flawed mechanism creates barriers for doing business.  The Financial Tribune’s sister newspaper Donya-e Eqtesad has weighed two factors of employment rate and value added rate in Iran’s SMEs.

The ratio of SMEs’ employment to the total employment rate is a first criterion through which the state of SMEs can be weighed. In 2011, the ratio of Iran’s SMEs’ employment to the total employment of industrial enterprises stood at 30.6%. This is while SMEs constitute 85% of private enterprises. In 2010, the figure hovered around 80% in China and the eurozone posted 66.8% in 2013.

According to the Ministry of Industries, Mining and Trade’s definition, SMEs are industrial or service-providing entities that have fewer than 50 employees. The Statistical Center of Iran has divided the businesses into four classes: businesses with one to nine employees, those with 10 to 49 employees, the 50 to 99 employee bracket and finally enterprises of more than 100 employees.

Despite the superficial dissimilarity with the EU definition, SCI labels the businesses with less than 10 employees as SME and puts the rest under the category of large industrial firms. The Central Bank of Iran regards those with fewer than100 employees as SME.

The ratio of SMEs’ value added to the total value added of the industry sector is another key criterion by which the performance of these enterprises can be evaluated. SMEs’ value added rate in Iran was as little as 14% in recent years. Despite the emphasis on expansion and growth of SMEs in the fourth and fifth five-year development plans (2006- 16), they seem to be suffering from a sad state of affairs. Studies show the policies implemented to clear the hurdles in the way of their growth have proved futile.

The all-out presence of the government in all economic segments of the country is one of the main reasons hobbling SMEs’ growth. State-run establishments, organizations and companies have overshadowed private sector entities and have at times shut them out of the market.

More than 80% of Iran’s economy are run by governmental and quasi-governmental companies in crude oil exploration, technology and trade, petrochemicals and natural gas sectors. These sectors account for 80% of Iran’s export revenues and generate 40% of government budget, which created heavy dependency on these sectors, particularly for the giant state-run companies.

A major part of Iran’s economy belongs to microenterprises and SMEs. In fact, the government can encourage and accelerate innovation in industry by providing financial, technical, educational and consultative facilities and help prevent SMEs from falling apart.

Lack of proper financial tools for the SMEs is another reason behind their lackluster performance. A constructive link between the banking sector, as the main establishment for providing finance, and the production sector has yet to be formed. On the other hand, Islamic financial tools and the potential of Islamic banking to provide for SMEs has not won over the country’s banking sector yet.

Regarding the fact that there is a fixed transparent approach in almost all countries for the growth of SMEs, the lack of such support system for Iran’s SMEs in their early stages of activity has led to the dominance of large enterprises.

Top government and private sector officials have also acknowledged the existence of such problems in the country’s economy.

In a meeting with the managing directors of governmental and private banks and finance and credit institutions, Minister of Economic Affairs and Finance Ali Tayyebnia said economic growth has yet to emerge in SMEs due to the deep-rooted problems in the economy and the wrong policies adopted in the past.

“The 3% economic growth of late is largely because of the large enterprises and not the SMEs,” ISNA quoted Tayyebnia as saying. “The production sector is in a fix due to the shortage of finance and high interest rates. Finding a way out of such tangle is one of the challenges ahead of the administration.”

Also, the head of Iran Chamber of Commerce, Industries, Mines and Agriculture has underlined the fact that SMEs need to play a more active role in the economy.

“Given the new regional condition, we should not miss out the opportunity to hand over the management of economic entities to the people,” Mohsen Jalalpour said. “A new method will be employed in the next two months to inject liquidity to the manufacturing units.”