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Eqtesad-e Iran; Economic, Financial & Industrial (Monthly)
Aug. 2000, No. 17
Summary: Iran's share of the industrial sector in the Gross Domestic Product (GDP) is about 15 percent. Also, on the basis of the studies carried out by the World Bank in 1996, the country's value added in the industrial sector is 0.22 percent of the world's industrial value added. The ratio has changed in various periods of time in accordance with the rise and fall of the oil revenues.
Text: On the basis of the studies carried out by the World Bank in
1996, the industrial sector of Iran had managed to achieve a 0.22 percent of the world's
industrial value added. Iran makes up 1.23 percent of the total area of the Earth and the
population of Iran is 1.05 percent of the world's total population. The share of the
industrial sector in the Gross Domestic Product (GDP) of the country is about 15 percent
according to the newly released statistics.
TREND OF VALUE ADDED
During the past years the trend of value added has been subject to the ebbs and flows of
the periods of economic prosperity and the fluctuations in the oil revenues. The
industrial value added and its growth enjoyed a positive trend before the Revolution. By
taking the fixed prices of 1982 as the base, the growth in value added reached a
staggering 1101.3 billion rials in 1977 from 13.2 billion rials in 1960.
The industrial sector had to face a serious slump in early 1979 because of the continuation of developments originating from the Revolution and the strikes of 1978. The value added diminished in this year so much during this period that during 1978-80, it was the most negatively affected after the oil industry. This came into being because of the economic recession and the difficult complexities of the industrial sector and the close dependency of the industrial sector on the hard currency revenues of the government.
There were other reasons for this economic recession. A dearth of raw and intermediary materials, extreme cases of mismanagement, and the absence of any incentive for the private sector to make any investments in this sector were among the most important contributing factors. In 1981, following the growth in the value added in large industrial workshops, the value added in the industrial sector also began to grow. This growth was the result of the government contributions to the large industries in order to produce raw and intermediary materials at official prices.
Nonetheless, in 1982 circumstances resulting from the war pushed the growth of the value added into negative figures. In the same breath, in 1983 the activities of the industrial sector enjoyed a very favorable growth because of the injection of a considerable amount of hard currency into the importation of raw materials and machinery spare parts. In 1984, the performance of the industrial sector was by far above the average general growth of the economic activities of the country because of the allocation of hefty amounts of hard currency to industries and the growth of machinery spare parts in inventories.
In 1985, the value added of the industrial sector took a nosedive which was a direct result of severe slumps in large industrial workshops of the country such as machinery, metal works, chemical industries, materials and products, paper and cardboard industries and paper products. The main reason for this severe slump was the absolute dependency of these industries on foreign raw and intermediary materials with the direct result of heavy hard currency outlay requirements.
The disequilibrium in the growth of the value added of the industries both before and
after the Revolution gives the sad account of this sector's having failed to be
structuralized. A sudden plummeting of the value added rate in this sector from 18 percent
in 1991 to 3.2 percent in 1992 and still going down to minus 0.5 percent in 1993 was seen
to be a direct result of changes in the allocation of hard currency to this sector and a
good indication of how vulnerable this sector is.
EXPORTS OF INDUSTRIAL SECTOR
The trend of industrial exports during the past three months tells us that up to the Revolution the value of the industrial exports in comparison with the total exports made up a very small fraction. In 1974 the Iranian foreign trade in parallel with rapid growth of the oil revenues and the resulting prosperity in economic activities was vastly expanded. However, the shortage of raw materials and an escalating rate of domestic consumption resulted in a drop in the export of traditional and agricultural products.
Contrary to this trend, the export of industrial goods enjoyed a very rapid growth. This was mainly in the form of export of detergents, soaps, ready made clothing and woven materials, vehicles and glycerin and chemical materials. In 1976, the industrial exports rose by 16 percent and its share of 25 percent of aggregate exports in 1975 rose to 33 percent. The growth of the industrial exports in this year was also due to the increase in the export of glycerin and chemical products.
In 1977, the exports of industrial goods decreased by 5.8 percent and as a result its share in the aggregate exports of the country dropped to 27.5 percent. The reason for the drop in the exports in that year was a sudden rise in the domestic demand for those products and the inattention of the producers to the quality of the produced export products as well as a very good domestic market for these products. After the Revolution, the export of the industrial goods took a severe beating and in 1980, in spite of efforts made to rejuvenate the exports and because of various reasons the export of non-oil goods was still going down. The existing difficulties and shortages in the production of export goods coupled with an increase in the smuggling of these goods, a quickly rising rate of domestic inflation and as a result an increase in the export goods production costs, the outbreak of the war and a rise in the domestic demand for some export goods were among the major contributing factors. Of course there were other problems such as the inadequacies in the transportation network and the closures of some export oriented ports, an increase in the rate of import taxes levied on Iranian export goods because of the imposed economic embargo by other countries, as well as the economic slump in the European countries that contributed to exacerbation of the problem ever more.
In this year, the export of industrial goods took a nosedive of 64 percent in view of the country's industrial dependency on the import of machinery, raw material, enforcement of import restrictions and a drop in the rate of domestic production. Rapid and intense fluctuations of the hard currency revenues after the Revolution, such as what took place in 1986, diverted the attention of the economists and policy makers as they concentrated ever more on export of non-oil commodities. During the First Five Year Economic Development Plan (1989-1993), the expansion of non-oil commodity exports and during the Second Plan (1995-1999), the acceleration of such exports with a stress on industrial exports were among the most important programs implemented in the country.
Within the context of the Economic Rehabilitation and the Third Economic Development Plan, the expansion of those industrial exports which enjoy high value added was once more given the unanimous emphasis. Although during the life span of the Second Plan the expansion of non-oil and industrial goods exports was among the main objectives and there was an upward trend in this sector up to some extent, all the same, a huge drop was witnessed in it during 1995 to 1997. The Iranian economic system is a single commodity economic system and badly dependent on oil revenues. That is the core of the reason for the inattention to non-oil exports when oil revenues manage to secure the country's hard currency needs. On the contrary, when the oil revenues hit a snag, the economic policy makers have devoted themselves to the expansion of exports of non-oil commodities.
The trend of the relative share of economic sectors in non-oil goods exportation gives a good indication of this fact that the export of agricultural commodities have had the lion share in the exports of non-oil commodities.
During 1981 to 1999 the share of agriculture in the exports of non-oil goods made up 72
percent of the aggregate non-oil commodity exports. By the same token, the industrial
exports had 23.8 percent share in these exports. In view of these latest figures, the
growth rate of relative share of industrial exports, in particular during the life span of
the First Plan, was favorable even though toward the end of that period 50 percent of the
exports of non-oil commodities were agricultural. However, the downward trend of the
relative share of agricultural exports and the upward trend of the share of the industrial
exports are indicative of a slow but favorable movement. The average share of industrial
goods exports has increased from 24 percent during 1989-1993 to 47.7 percent for the
period between 1995 and 1999.
INVESTMENTS IN INDUSTRIAL SECTOR During the period for 1965 to 1998 the share of fixed capital formation in the GDP at the fixed prices of 1982 was subject to more intense fluctuations and dropped from 16.3 in the period of 1968 to 1977 to 13.9 percent in the period of 1989 to 1998. Fixed investments in the production sector of industries and mines, which are the main agents for paving the way for development of the industries and expansion of non-oil goods exports especially the industrial ones was 557.3 billion rials at the fixed prices of 1982 in 1975 and dropped to 445.9 billion rials in 1998. This shows a decrease of 20 percent.
As the oil prices took an upward trend in 1974 and enjoyed a four fold increase, the government was blessed with more revenues. This naturally gave rise to a huge investment outlay on the part of the government. This latest development came at a time when the private sector could not only make investments in such sectors as automobile industry and equipment manufacturing, but this sector was also allowed to invest in establishment of banks and insurance companies in participation with foreign companies before the Revolution.
Right after the victory of the Revolution, the early political instabilities, the changing of the Constitution and the inclusion of Article 44 based on the fact of nationalization of the banks, insurance companies and later on the passing of a law for protection of industries which boosted the intervention of the government, private companies were also nationalized. During the period of 1989 to 1993 the formation of fixed gross domestic capital of the industry and mines sector enjoyed an average growth rate of 29.1 percent per annum. During this period a total of 32 billion dollars was injected into the industrial sector of which 44 percent was in the form of investments in this sector.
In fact the foreign loans and credits which were put at the disposal of the economy
during this period (reconstruction period) had a very decisive and effective role in the
stimulation of investments and utilization of the idle industrial capacities, even though
there were not many specific varieties effected. In order to make up for the previous
failures, the government gave in to making heavy investments. Later on, the rate of
investments in recent years has always headed downward. Ever since 1995, the growth rate
has been heavily negative. The trend in investment is an indicative of the fact that long
term investments which generate real revenue have by and large faced some difficulties and
pinches after the Revolution and a suitable climate for the growth and expansion of these
investments, in particular, in the industrial sector has accompanied some constraints. Of
course, one should note the fact that uncontrolled and wild growth can not go on for ever
and sooner or later they will turn into negative growth.
INVESTMENTS BY THE GOVERNMENT
In the Iranian economy, because of a host of different reasons, such as restrictive laws and absence of a dynamic private sector, investments have always been influenced by the investments on the part of the government sector. The latter is also hugely affected by the governmental expenditure budgets within the framework of the general budget.
In this line, a part of the government expenditure budget is annually used under the nomenclature of economic affairs, and under the economic affairs heading there is another nomenclature by the name of industries, which gives an indication of the allocation of government expenditure budget within the collection of economic affairs as well as industries.
The share of the economic affairs from the government expenditure payments during the
period after the Revolution in comparison to what it was before the Revolution has
decreased dramatically. The share of the industries, however, has faced a lot of ups and
downs and has dropped from 20 percent during 1971 to 1980, as we have witnessed in recent
years, to 5 percent in the period for 1991 to 2000.
The reason for this drop has been attributed to non-developmental mentality toward the
economy and sensitivity of the state economy to fluctuations of the crude oil prices. In
spite of a considerable increase in the revenues resulting from the exports of the crude
oil, the share of industries in receiving government expenditures for the economic affairs
was a mere 0.6 percent in 1999 and this is the least for the period of 1971 to 2000.
The figures for the year 2000 budget indicate that an amount of 24,935 billion rials
has been allocated to development, which compared to the budget of the previous year shows
a decrease of 25.2 percent. This is taking place at a time when the revenues resulting
from the sale of crude oil which is the main source of government revenues have become
twice as much as that for the previous year. Naturally, the decrease in the volume of
industrial investments of the government can effectively reflect the economic incentives
and in particular the inclination of the private sector for more investment. The amount of
national investment and industrial investments in comparison with those in other countries
and the productive capability of the country is a small figure, which indicates the
weakness in mobilization of the sources on the one hand and it shows the unsuitability of
resource allocations and capital formation in the industrial sector on the other hand.
EMPLOYMENT IN INDUSTRIES From a quantitative point of view, during the years from 1976 to 1994 the number of job holders in the industrial sector has on the average increased by 52 thousand people annually. The share of this sector in the aggregate employment picture of the country has dropped from 19 percent in 1976 to 13.2 percent in 1977 and then through a rising trend again reached 18.9 percent in 1994. The growth in the number of job holders in industries during this period was about 56 percent. Once more during the same period the employment levels on the country wide scale has increased by 58 percent and in the service industries the increase has reached 115.3 percent. However, the employment in the agricultural sector, industries and mines, that is the most important economic generators of the country, has been 22.3 and 39.2 percent respectively.
These figures go a long way to show that long term and real revenue generating investments have by far not been made in the country. All in all, these investments are facing a lot of difficulties and pinches and a suitable climate for the growth and expansion of these investments and boosting of the employment levels in the different sectors of industry have failed to materialize.
In this regard, the statistics of large industrial workshops of the country (those with more than 10 employees) indicate the fact that the industrial sector has not been successful in absorbing manpower and investments. That is to say, the move has been in the direction of labor saving in large industrial workshops of the country.