Economy, Domestic Economy

New FTZs Should Learn From History

New FTZs Should Learn From HistoryNew FTZs Should Learn From History

With the aim of spurring non-oil exports, the government has shifted its focus to free trade zones for quite some time; and now the parliament looks set to approve six more such zones.

However, some experts believe that Iran’s experience with FTZs has not been as predicted, urging the government to commit to thorough review before launching more similar projects.

Iran started to experiment with free trade zones in the early 1990s. China’s Special Economic Zones had gained global attention for their role in spurring growth in a mostly state-owned economy and Iran hoped to follow suit.

In contrast to China, however, Iran saw FTZs as a solution to falling global oil prices and revenues. In 1989, oil revenues had fallen to only $7 billion, significantly below its average $20 billion at the time. The government, which was then led by Hashemi Rafsanjani, believed FTZs could boost non-oil export revenues.

Under article 19 of the First Five-Year Economic Development Plan (1991-1996), Iran’s first three FTZs were formally established.

Since then the total number of active FTZs has grown to seven, including Kish, Qeshm, Chabahar, Aras, Anzali, Arvand and Maku.

The Supreme Council of Iran’s Free Trade, Industrial and Special Economic Zones, the body charged with overseeing the FTZs, released a report ten years later showing that many projects had run into unforeseen problems.

Most importantly, the zones were found to be managed badly, causing a sharp rise in smuggling. Iran’s FTZs are situated close to border points, making them a perfect target for smugglers if the flow of goods and services is not regulated.

Additionally, the report found that most zones lacked the necessary logistical and economic infrastructure. Often a piece of undeveloped land would be singled out as free trade zone, lacking the appropriate human resources or logistical connections.

The question remains whether the six new free trade zones, soon to be approved by parliament, could turn around the tide and spur economic growth.

 Kurdistan Development Plan

One proposal would see the creation of an FTZ on the border with Iraqi Kurdistan. This FTZ is called the Marivan-Baneh zone, since it would encompass these two cities.

The Marivan-Baneh FTZ is unique because it would be the first concrete step at developing Iran’s Kurdistan, a region which has lagged behind the rest of the country in economic development.

Akbar Torkan, a senior advisor to the president, stated that: “This step is practically in line with the government’s action plan to give a boost to Kurdistan’s economic situation, as well as the realization of electoral promises made by President Rouhani to the people of Kurdistan,” according to ISNA news agency. Although the parliament has not yet approved this FTZ formally, Torkan has given “his definite promise” that the plan will take off, a representative of Baneh told ISNA.

“We must start the industrialization of Kurdistan with the establishment of this free trade zone,” Torkan added.  

Nevertheless, President Rouhani was not the architect of the plan. Kurdistan’s governor, Abdol Mohammad Zahedi explained that the idea to establish a trade zone in Marivan and Baneh was first introduced during the second term of former president Mahmoud Ahmadinejad. It was never executed.

The governor also expressed concern that the FTZ may only be exploited for low-value cross-border trade. He stressed that: “production should also be taken into consideration.”

Another obstacle that might prevent the attraction of foreign capital to free trade zones is that many of these regions lack the essential human resources. Hamed Qaderzadeh, a professor in economics, points out that Kurdistan in particular has experienced a flight of highly-educated workers, many of whom move to Tehran in search of better employment opportunities. “If the necessary infrastructure is not achieved, economic spurts could cause the destruction of that region,” Qaderzadeh argues in an interview with ISNA.

Additionally, this trade zone might simply be too large to develop as planned. Eshaq Jahangiri, the president’s first advisor, argued several months ago that similar demographic obstacles in the Arvand FTZ, located in the south of Iran and connecting the cities of Khorramshahr and Abadan, had prevented development. Although investment increased in Arvand, it still amounted to only $108 million in the last Iranian year (ended March 20) – a minimal amount given its location in oil-rich Khuzestan, including access to Iran’s only navigable river and two large cities.   

Western-imposed sanctions are a final issue that put spokes in the wheel of the FTZ dream. The Chinese experience has it that successful trade liberalization combines the gradual expansion of FTZs with the integration of the national economy with international commerce. Iran has been expanding its number of FTZs while sanctions have prevented the latter.