Private Firms Grapple With Systemic Barriers

EghtesadOnline: A significant number of private owners and managers of financial, industrial and commercial firms are watching in dismay, as their businesses are falling apart at warp speed.

News ID: ۷۸۳۷۸۵

26 August 2018

Governmental and semi-governmental firms are in less disarray because of the support of the government and its subsidiaries. They too are facing uncertainty.

In an attempt to shed light on the state of non-governmental firms in Iran, Hossein Salah-Varzi, vice president of Iran Chamber of Commerce, Industries, Mines and Agriculture, recently wrote an opinion piece for the Persian weekly Tejarat-e-Farda. What follows is a condensed translation of his piece.

The reasons behind the current state of Iranian firms, particularly non-rent-seeking ones, can only be found through expert analysis. According to Financial Tribune, one such analysis is provided below:

Strategic Errors

The first step toward understanding the situation with non-corrupt firms would be to realize the strategic mistakes made in the past decades.

Most countries with high per capita income, sustained economic growth and strong domestic economy moved past governmentalization and toward privatization by strengthening civil institutions such as the family, political parties and non-governmental firms.

The move away from governmental welfare economy was initiated in England, which spread widely across the world.

All the while, Iran moved in the opposite direction. With the start of Iran-Iraq War (1980-88), the circumstances dictated the move toward governmentalization, which has only gained pace and created uncertainty for private firms.

Such was the vehemence of the govermentalization force in the first two decades after the 1979 Islamic Revolution that despite the sellout that followed, a large portion of the economy is still controlled by the government.

Accordingly, foreign trade policies follow suit, with exports stopping at the government’s whims and imports afflicted by high tariffs. The country’s monetary policy is also dictated by the government that can increase or reduce interest rates at will, pressuring firms and increasing production costs.

Each of the policies imposed by the government and the government-controlled central bank has damaged businesses.

Insecure Environment

The government’s role depends on the level of freedom for political, social and economic activities.

The Iranian government has taken on a large number of responsibilities, including providing the general populace with housing, employment and educational facilities. Additionally, the government is responsible for health-related services, infrastructure and internal and external security.

As the government’s main source of income is its oil revenues, any upheaval in the oil market can disrupt the government’s plans, which in turn leads to it pressuring firms for more taxes and higher import tariffs.

It also forces the firms to maintain a dictated price for their products in order to keep the general populace satisfied under the difficult economic circumstances. That is why Iran might not be such a safe venue for investment.

In addition to the issues discussed above, the rate of interest on bank loans is another government-controlled obstacle facing private firms. The interest rates have already jumped twice in the past six months and it is unclear whether economic players should expect a third hike.

Non-rent-seeking firms without access to insider information on upcoming policies are playing Russian roulette with their capital.

Sanctions

Iran’s economy is not an island that can thrive without foreign trade. Its exports stand at $100 million per year and its imports amount to $70 million.

With the rising threat of sanctions, a huge portion of the Iranian economic activity will be hampered. This is while governmental and semi-governmental firms opt for closure or rent-seeking, as non-governmental firms face the increasing pressure of limitations imposed on their economic potentials, alongside liabilities toward their employees.

What Must Be Done

There are only two channels for economic activities, namely monopoly and competition. Of the two channels, the former afflicts the most harm upon a country’s economy and it is the channel through which activities related to many economic sectors are carried out in Iran.

The only glimmer of hope for private firms would be for the authorities to set foot on the road of de-govenmentalization of the economy.

Granted, taking such a step would require long-term planning and management. However, the disorderly state of affairs could be straightened if the government enters into dialogue with the private sector to find a cure for the malignant diseases afflicting the non-governmental, non-rent-seeking firms.