High Export Concentration Index: A Cause for Economic Concern

EghtesadOnline: Iran’s Export Concentration Index, which estimates a country’s reliance on a limited group of commodities as its primary source of foreign exchange income, stood at 0.43 in 2019, about six times higher than that of Turkey and Poland.

News ID: ۷۵۱۲۷۰

14 October 2020

According to a report by ILNA, citing the Economic Analysis Center of Tehran Chamber of Commerce, Industries, Mines and Agriculture, the high concentration score must be a concern for economic planners as it suggests the country’s trade vulnerability to changes in global demand.

The index is calculated as a sum of squared shares of products constituting a country's exports. Ranging from 0 (perfect diversification) to 1 (concentrated on a single product), a comparison of index scores to the contribution of natural resources to GDP worldwide shows that resource-rich countries tend to have a less diversified export base.

Among 13 countries surveyed by TCCIM, Iran ranks first in the index with a score of 0.43 and Turkey and Poland come last with a score of 0.07. After Turkey and Poland, the Southeast Asian country Thailand scored 0.08. It was followed by China (0.09), India (0.12), Indonesia (0.14), Mexico (0.15), Brazil (0.16), Vietnam (019), Malaysia (0.23), Georgia (0.25) and Russia (0.34).

“Iran’s high score is driven by its export concentration in petrochemicals and gas condensates,” Mohammad Lahouti, the head of Iran Exports Confederation, told the Persian economic daily Donya-e-Eqtesad.

“Petrochemicals, which are the raw materials of factories, and intermediate goods [producer goods] account for 50% of Iran's export basket. We need to lend support to downstream industries and gradually create production chain to increase the diversification and added value of the country’s exports.”

Limited Export Destinations

Lahouti also believes that there is no less concern about Iran’s limited export destinations than its limited group of export commodities.

“Sanctions have created this restriction for the country and increased the risk associated with trade. Therefore, regardless of conditions, we need to expand our export markets. Or, at least shift exports to our neighboring countries from the export of raw materials to export of consumer goods. Preferential trade tariffs would also be of help to export and reduce exporters’ expenses,” he said.

According to Mohammad Reza Modoudi, the former caretaker of Trade Promotion Organization of Iran, products that account for 90% of the country’s exports are not more than 300 items.

“Iran's primary exports are limited to petrochemicals, minerals and some agricultural products and food. This lack of diversification would have a pernicious effect on the economy and increase our vulnerability in the face of rivals,” he said

Referring to Russia’s high score in Export Concentration Index, the foreign trade expert said, “Russia is more of an importer than an exporter. Natural gas exports, for example, make up a relatively high percentage of Russia’s export income.”

Modoudi noted that most developed economies tend to maintain more diversified export profiles.

"Take China, for example, whose concentration index is much lower than Iran’s, despite the fact that its exports are over $2,500 billion compared with Iran’s $40 billion annually. Or Turkey, which does not have Iran’s oil, gas and mineral resources, but has managed to diversify its export items.

“Iran manufactures a variety of products, but at scales large enough to only meet local needs. By taking Export Concentration Index seriously, we need to make short- and long-term plans to produce items at global scale,” Modoudi was quoted as saying in an earlier interview with the Persian daily Iran.

“Iran’s export performance is hobbled by the absence of strong exporting companies, insufficient volume of production and lack of transparency and information on exported goods that enjoy comparative advantage.”

Need to Diversify Exports

The official noted that investment in improving Iran's export competitiveness has been poor and the same has limited the number of exported goods.

According to IRNA, more than half of Iran’s “non-oil" exports actually consist of gas condensates, petroleum-driven products and petrochemicals that are either directly or indirectly related to the oil industry.

Oil is still Iran’s “export identity card” despite efforts made over the past years to wean the country’s economy off petrodollars and shift it toward non-oil exports.

With its relatively higher added value, non-oil exports are of greater importance. However, it is a matter of debate how the Islamic Republic of Iran Customs Administration has classified non-oil exports.

By “non-oil”, IRICA actually refers to all commodities, except crude oil. Today, gas condensates undergo the least change before being exported. Even liquefied natural gas and petrochemicals, the the backbone of Iran's exports, have been classified as "non-oil".

Low Technology

Modoudi noted that Iranian products also suffer from low penetration rate of technology.

"The level of the country’s high-tech exports in 2018 was lower than the world’s average technology of exports 20 years ago, i.e. in 1998," he added.

Noting that had it not been for petrochemical and steel exports, the level of Iranian export technology would have been far lower, the official said, “Petrochemical and steel products are not counted as high-tech industries. They are medium-technology industries. However, you do not see a sophisticated technology in other exported items.”

Referring to the technology employed in the production of macaroni and tomato paste, Modoudi said, “If the current trend persists, we might even lose the markets of neighboring countries. We need to increase the use of high technology in our products to maintain our export markets such as Iraq.”

Major Exporters

Modoudi further said there are 80 companies each with exports worth over $50 million.

Their exports, which are mainly petrochemicals and steel, generate $30 billion altogether, accounting for 65% of Iran's overall exports.

There are also 450 companies each with exports worth $10 million. These numbers suggest that Iran’s 10,000 exporters have failed to play a significant role in improving the country’s exports whereas the neighboring Turkey is home to 1,700 companies with over $10 million worth of exports.

On how to secure a place in export markets, Modoudi said the country needs to focus on the export of 100 commodities and double the amount of exports.

“The government is planning to boost exports of several commodities, including home appliances, and tap into the capacities of special economic and free trade zones. TPO will organize exhibitions in target markets and invite traders of neighboring countries with the help of the private sector in the near future. All trade unions, associations and commerce chambers are invited to help the government identify new markets and enhance Iran’s presence there,” he concluded.

H1 Trade in Review

Latest data released by the Islamic Republic of Iran Customs Administration show 46.31 million tons of goods (except crude oil) worth $13.56 billion were exported from Iran during the first half of the current fiscal year (March 20-Sept. 21), down 35% in value compared with the corresponding period of last year.

Gasoline was the country’s top exported commodity in H1 followed by polyethylene, polyethylene terephthalate, methanol and urea.

China was Iran’s main export destination, with 13.11 million tons worth $3.7 billion during the six-month period ending Sept. 21 to account for 27.3% of Iran’s total exports.

It was followed by Iraq with 9.28 million tons worth $2.97 billion and a share of 21.9% of Iran’s exports, the UAE with 7.16 million tons worth $1.93 billion and a share of 14.2%, Afghanistan with 3.33 million tons worth $1.1 billion and a share of 8.1% and Turkey with 1.44 million tons worth $731 million and a share of 5.3% from Iran’s total exports.

Overall exports to these five countries amounted to $10.44 billion, accounting for 72% of Iran’s exports in terms of weight and 74% in terms of value.

H1 imports stood at 16.52 million tons worth $16.78 billion, marking a 21% decline in value.

Top five exporters to Iran were China with 1.59 million tons worth $4.29 billion and a share of 25.6% of Iran’s total imports, the UAE with 2.11 million tons of non-oil goods worth $3.96 billion and a share of 23%, Turkey with 2.4 million tons worth $1.81 billion and a share of 10.8%, India with 1.26 million tons of non-oil goods worth $1.09 billion and a share of 6.5% and Germany with 772,000 tons of goods worth $835 million and a share of 5%.

These countries exported a total of 8.16 million tons of non-oil goods worth $12 billion to Iran, accounting for 53% of Iran’s total imports in terms of weight and 70% in terms of value.

Essential goods made up 70% of Iran’s imports and the rest included raw materials, machinery and production components, according to the IRICA chief, Mehdi Mirashrafi.

The country registered a trade deficit of $3.22 billion during the period under review.