Industrial, Trade, and Employment Policies in Iran

Industrial, Trade, and Employment Policies in Iran

Pooya Alaedini Mohamad R. Razavi Editors Industrial, Trade, and Employment Policies in Iran Towards a New Agenda

Editors Pooya Alaedini Department of Social Planning University of Tehran Tehran, Iran Mohamad R. Razavi Department of Management and Economics Islamic Azad University Science and Research Branch Tehran, Iran ISBN 978-3-319-94011-3 ISBN 978-3-319-94012-0 (ebook) https://doi.org/10.1007/978-3-319-94012-0 Library of Congress Control Number: 2018950401 Springer International Publishing AG, part of Springer Nature 2018 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Acknowledgment During the time of preparation of this book, we greatly benefited from the support provided by our families. We would like to thank the Springer team for their patience and willingness to help throughout the project. Our gratitude further goes to the anonymous referees who read the original project proposal; Dr. Mohammad R. Rafati for giving valuable comments on certain chapters; and Nasim Yeganeh and Neda Talebian for providing assistance on the preparation of the manuscripts. As editors, we would also like to extend our appreciation to all our chapter authors for their contributions. v

Contents Toward a Capability Approach to Development and Industrialization in Iran: An Introduction... 1 Pooya Alaedini Industrial Development in Post-revolutionary Iran: Continuity and Reform in a Turbulent Environment... 29 Mohamad R. Razavi Manufacturing Exports and Employment in Iran: The Role of Economies of Scale and Human Capital... 55 Hamid R. Ashrafzadeh and Pooya Alaedini The Role of State, Domestic Firms, and MNCs in the Iranian Auto Industry: Improved Competitiveness or Policy Capture?... 77 Mohamad R. Razavi and Pooya Alaedini Trade Policy, Foreign Exchange Regime, and Industrial Development in Iran... 107 Behrouz Hady Zonooz Iran s Trade Policies: Connecting to the Markets... 141 Mina Mashayekhi Iran s Accession to the World Trade Organization: An Impediment or a Catalyst for Development?... 177 Sadeq Z. Bigdeli Gender and Industrial Policy: Considerations for Iran... 211 Nadereh Chamlou Employment of Highly Educated Labor Force in Iran: Challenges and Prospects Through the Sixth Development Plan and Beyond... 247 Gholamali Farjadi, Alireza Amini, and Pooya Alaedini Index... 269 vii

List of Figures Toward a Capability Approach to Development and Industrialization in Iran: An Introduction Fig. 1 Gross fixed capital formation as percentage of GDP, 1979 2014 [Source: World Bank (2016), World Development Indicators]... 10 Fig. 2 Per capita manufacturing value added and exports, 1990 2015 [Source: UNIDO (2017), UNIDO statistics data portal]... 11 Fig. 3 Performance of MVA and manufacturing exports, 1990 2015 [Source: UNIDO (2017), UNIDO statistics data portal]... 12 Industrial Development in Post-revolutionary Iran: Continuity and Reform in a Turbulent Environment Fig. 1 GDP and manufacturing growth rates in Iran during 5-year development plans (FYDP) (1989 2015) [Source: CBI (1989 2016), Economic Report and Balance Sheet]........... 38 Fig. 2 Share of manufacturing in GDP nominal and in constant 2004 Fig. 3 prices [Source: Reproduced from Tashkini (2016)]... 40 Value of industrial investment according to utilization permits, 2001 2017 [Source: MIMT (2001 2017), Annual performance report (utilization permit data)]... 48 Manufacturing Exports and Employment in Iran: The Role of Economies of Scale and Human Capital Fig. 1 Rates of unemployment and labor force participation (%) [Source: World Bank (2017), World Development Indicators (ILO model estimates)]... 57 Fig. 2 Enrolment at institutions of higher education [Source: SCI (2016), Time series data]... 57 Fig. 3 Labor productivity (value added per worker at constant [Iranian fiscal year] 1997/1998 prices) and total factor productivity [Source: Based on SCI (2016), Time series data]... 58 Fig. 4 Sector shares of employment (%) [Source: SCI (2016), Time series data]... 59 ix

x List of Figures Fig. 5 Non-oil exports (current million US dollars) [Source: CBI (2016), Time series data]... 60 Fig. 6 Changes in economies of scale for Iran s manufacturing subsectors... 65 Fig. 7 TFP changes for 101 manufacturing subsectors... 65 The Role of State, Domestic Firms, and MNCs in the Iranian Auto Industry: Improved Competitiveness or Policy Capture? Fig. 1 Auto production and imports during Iranian fiscal years 1969/1970 through 2015/2016 (1000 units) [Source: Statistics on production based on MIMT (1969/1970 through 2015/2016); data on imports from CAI (1969/1970 through 2015/2016)]... 79 Fig. 2 Increasing share of locally produced parts in the total production value of Iranian auto industry during Iranian fiscal years 2004/2005 through 2014/2015 (percent) [Source: Calculated by the authors based on SCI (2004/2005 through 2014/2015), Census of large industrial establishments]... 84 Fig. 3 Various types of international cooperation agreements in Iran s auto parts industry during Iranian fiscal years 2009/2010 through 2015/ 2016 (percent) [Source: Calculated by the authors based on foreign cooperation information in Auto Parts Manufacturers Association (2016)]... 85 Fig. 4 Ratio of auto export value to sales value for the two main auto assemblers during Iranian fiscal years 2006/2007 through 2015/2016 (percent) [Source: Calculations based on financial statements for Iran Khodro Industrial Group and SAIPA Group provided in Codal (2006/2007 through 2015 2016)]... 91 Trade Policy, Foreign Exchange Regime, and Industrial Development in Iran Fig. 1 Official and free market exchange rates (one US dollar), 1978 2014 [Source: CBI (2016a), Economic Time Series Database]... 114 Fig. 2 Developments in real exchange rate and oil/gas exports [Source: CBI (2016a), Economic Time Series Database]... 115 Fig. 3 Free market exchange rate and weighted average exchange rate for imported goods (rials) [Source: CBI (2016a), Economic Time Series Database; balanced averages calculated by author]... 118 Fig. 4 Nominal rate of protection based on free market exchange rate (percent) [Source: CBI (2016a), Economic Time Series Database; CBI (2000 through 2013), Economic Trends. Nominal protection rate calculated by author based on nominal free market exchange rate]... 118 Fig. 5 Energy consumption by workshops employing ten or more workers in 2012 (million barrels of oil) [Source: SCI (2012), Survey Results for Consumption of Energy by Industrial Workshops Employing 10 or More Workers]... 121

List of Figures xi Fig. 6 Fig. 7 Fig. 8 Real interest rate of banking facilities provided to industrial sector, 1958 2014 [Source: Calculated by author, based on data from CBI s (1979 through 2010) Annual Review and CBI s (2012 through 2014) Economic Trends; conversion of nominal to real rate for banking facilities was made using the implicit price index of value added in the manufacturing sector]... 121 Trade balance with and without oil exports [Source: CBI (2016a), Economic Time Series Database; CBI (2016b), Economic Trends, No. 82]... 122 Annual average investment in the manufacturing sector (billion rials, at constant 2004 prices) [Source: CBI (2016c), National Accounts 1959 2012; CBI (2016b), Economic Trends, No. 82]... 123 Fig. 9 Impact of the manufacturing sector on trade balance, 2001 2012 (US$ million) [Source: CBI (2009, 2013), Economic Report and Balance Sheet]... 131 Fig. 10 Fig. 11 Fig. 12 Growth rates of manufacturing value added at constant 2004 prices (percent) [Source: CBI (2016c), National Accounts 1959 2012; CBI (2016b), Economic Trends, No. 82]... 132 Per capita manufacturing output at constant 2004 prices (million rials) [Source: CBI (2016c), National Accounts 1959 2012; CBI (2016b), Economic Trends, No. 82; CBI (2016a), Economic Time Series Database]... 133 Share of manufacturing value added in non-oil GDP, 1959 2014 (percent) [Source: CBI (2016c), National Accounts 1959 2012]... 135 Iran s Trade Policies: Connecting to the Markets Fig. 1 Nominal effective exchange rates for selected countries (index 2013/01 ¼ 100) [Source: BIS (2016), Effective exchange rate online data]... 146 Fig. 2 Trade unit prices of energy and other commodities (index 2013/01 ¼ 100) [Source: CPB (2016), World Trade Monitor]... 146 Fig. 3 Merchandise exports by region and development status (index 2008 ¼ 100) [Source: UNCTAD (2016c), UNCTADstat].......... 147 Fig. 4 Services exports by region and development status (index 2008 ¼ 100) [Source: UNCTAD (2016c), UNCTADstat].......... 148 Fig. 5 Domestic and foreign services value-added share of gross exports, 2011 (percentage) [Source: UNCTAD calculations, based on OECD and WTO (2016), TiVA database]... 149 Fig. 6 Annual growth rate of GDP for selected economies, 2005 2015 (percentage) [Source: UNCTAD (2016c), UNCTADstat]... 150 Fig. 7 Iran s annual GDP growth rate by type of expenditure, 2005 2014 (percentage) [Source: UNCTAD (2016c), UNCTADstat]... 151 Fig. 8 GDP by type of economic activity for selected economies, 2014 (percentage) [Source: UNCTAD (2016c), UNCTADstat]... 151

xii List of Figures Fig. 9 Jobs by type of economic activity in Iran, 2005 and 2014 (percentage) [Source: World Bank (2016a), World Development Indicators]... 152 Fig. 10 Iran s exports and imports of goods and services, 2005 2015 ($ billion) [Source: UNCTAD (2016c), UNCTADstat]... 153 Fig. 11 Value and volume indices of exports for Iran, 2000 2015 (index 2000 ¼ 100) [Source: UNCTAD (2016c), UNCTADstat].......... 153 Fig. 12 Distribution of Iran s goods exports, 2015 (percentage) [Source: UNCTAD (2016c), UNCTADstat]... 154 Fig. 13 Distribution of Iran s merchandise exports by partner, 2005 (above) and 2015 (below) (percentage) [Source: UNCTAD (2016c), UNCTADstat]... 155 Fig. 14 Iran s non-oil goods exports, 2005 2015 ($ billion) [Source: UNCTAD (2016c), UNCTADstat]... 156 Fig. 15 Iran s commercial services exports, 2005 2014 ($ billion) [Source: UNCTAD (2016c), UNCTADstat]... 158 Fig. 16 Iran s non-oil goods exports by type of technology, 2005 2015 (percentage) [Source: UNCTAD (2016c), UNCTADstat]... 162 Fig. 17 Asia-Pacific s export destinations, 2002 2014 (percent) [Source: Reproduced from ESCAP (2015)]... 163 Fig. 18 Services in global value chains [Source: Reproduced from Asia Global Institute (2015)]... 164 Fig. 19 Services share of Iran in gross exports and in total forward linkages value added, 2011 (percentage) [Source: UNCTAD calculations based on the World Bank (2016c), Export value added database]... 165 Fig. 20 Services share in total forward linkages value added for selected economies, 2011 (percentage) [Source: UNCTAD calculations based on the World Bank (2016c), Export value added database]... 166 Fig. 21 Global Competitiveness Index 2016/2017 for Iran and selected economies [Source: UNCTAD calculations based on WEF (2016), Global Competitiveness Index]... 167 Fig. 22 Global Competitiveness Index 2016/2017 by pillar for Iran and selected economies [Source: UNCTAD calculations based on WEF (2016), Global Competitiveness Index]... 168 Fig. 23 Coherence between policy pillars as a driver for trade policy frameworks [Source: Mashayekhi (2015)]... 170 Iran s Accession to the World Trade Organization: An Impediment or a Catalyst for Development? Fig. 1 Current status of Iran s accession [Source: WTO (2017)]... 185 Fig. 2 Iran s Trade Freedom Index in comparison with neighboring countries and World Average [Source: Heritage Foundation (2017)]... 199

List of Figures xiii Gender and Industrial Policy: Considerations for Iran Fig. 1 Export diversification and gender inequality, 1990 2010 [Reproduced from Kazandjian et al. (2016: 6), based on World Bank (2016a), UN (2015), IMF (2014), and estimations made by the staff of International Monetary Fund]... 219 Fig. 2 Output diversification and gender inequality, 1990 2010 [Reproduced from Kazandjian et al. (2016: 6), based on World Bank (2016a), UN (2015), IMF (2014), and estimations made by the staff of International Monetary Fund]... 220 Fig. 3 (a) Male-female labor force participation rates, (b) Male-female unemployment rate (percent) [Source: World Bank (2016b), World Development Indicators]... 224 Fig. 4 Female labor force participation trends in Iran [Source: ILO (2014), Key Indicators of the Labor Market]... 226 Fig. 5 Female labor force participation and unemployment rates [Reproduced from World Bank (2004: 8), data for latest available years]... 226 Fig. 6 TFP trend growth in non-oil sector [Reproduced from IMF (2015: 9), based on information from Iranian authorities and IMF estimates]... 228 Fig. 7 Long-run GDP loss due to occupational gender gap (percent) [Source: Based on the results of Cuberes and Teignier (2015)]... 228 Fig. 8 Number of legal gender barriers [Reproduced from IFC (2016: 4), based on Women, Business, and the Law Database]... 228 Fig. 9 Intergenerational progress in learning theme score average [Reproduced from World Economic Forum (2016: 17), based on Human Capital Index 2016]... 229 Fig. 10 (a) Age-dependency ratio [Source: World Bank (2016b), World Development Indicators], (b) Economic dependency number of persons supported by each worker [Source: World Bank (2016b), World Development Indicators], (c) Employment-to-population ratio (percent) [Source: World Bank (2016b), World Development Indicators, and ILO (2014), Key Indicators of the Labor Market]... 230 Employment of Highly Educated Labor Force in Iran: Challenges and Prospects Through the Sixth Development Plan and Beyond Fig. 1 Number of students in higher education, 1996 2015 (thousand persons) [Source: SCI (2016d), excel tables on higher education]... 250 Fig. 2 Graduates from higher education institutions by field of study, 1996 2015 [Source: SCI (2016), excel tables on higher education in Iran]... 250 Fig. 3 Supply of labor with higher education (persons) [Source: SCI (1996a, 2006a, 2011a), Census results; SCI (2016d), Results of labor force survey]... 251

xiv Fig. 4 Fig. 5 List of Figures Unemployment rate of labor force with tertiary education (percent) [Source: SCI (1996a, 2006a, 2011a), Census results; SCI (2016b), Results of labor force survey]... 251 Unemployment rate of college/university graduates by educational attainment, 2016 (percent) [Source: SCI (2016b), Results of labor force survey]... 252

List of Tables Industrial Development in Post-revolutionary Iran: Continuity and Reform in a Turbulent Environment Table 1 Key indicators of economic performance during Iran s 5-year development plans... 34 Table 2 Changes in the mix of key manufacturing activities 1994 and averages for 3rd and 5th 5-year development plans (FYDP) (percentages show share of the type of industry in the relevant variable)... 42 Table 3 Investment growth rates in Iranian manufacturing and actual investment shares in priority sectors during the 5-year development plans (FYDP)... 46 Manufacturing Exports and Employment in Iran: The Role of Economies of Scale and Human Capital Table 1 Variable definitions and sources of data... 63 Table 2 Estimation results for translog cost function... 64 Table 3 Effects of economies of scale, TFP, efficiency, and human capital on total employment of manufacturing sector... 67 Table 4 Effects of scale, human capital, wage, TFP, efficiency, and 1- and 5-year interest rates on employment for manufacturing subsectors... 69 Table 5 Impact of export unit value, human capital, and scale on exports... 70 Table 6 Estimation results for exports of 101 manufacturing subsectors... 71 Table 7 Four-digit ISIC subsectors with higher export performance in terms of scale economies... 73 xv

xvi List of Tables The Role of State, Domestic Firms, and MNCs in the Iranian Auto Industry: Improved Competitiveness or Policy Capture? Table 1 Implementation of international (European Union) fuel standards in Iran... 87 Table 2 Key characteristics of government s role in pricing of cars since 1980... 89 Table 3 Tariff rates for auto imports based on engine size during Iranian fiscal years 2004/2005 through 2016/2017 (percent)... 91 Table 4 Exports of Iranian cars and shares of destination markets during Iranian fiscal years 2009/2010 to 2014/2015 (percent)... 92 Table 5 Post-sanctions foreign agreements with the two main assemblers and other firms in the Iranian auto industry... 97 Trade Policy, Foreign Exchange Regime, and Industrial Development in Iran Table 1 Relationships between incentives and trade strategies... 110 Table 2 Sectoral and market orientation of strategies... 112 Table 3 Developments in nominal and real exchange rates for different periods... 116 Table 4 Developments in Iran s trade policy... 119 Table 5 Regulations governing imports of industrial goods to Iran, 1984 1987... 124 Table 6 Regulations governing imports of industrial goods to Iran, 1988 1992 and 1993 1997... 126 Table 7 Effective protection rate in selected branches of manufacturing industry in Iran, 1996... 127 Table 8 Net taxes on manufacturing imports in 2011 (percent)... 129 Table 9 Domestic resource costs for selected manufacturing industries, 1996 (rials)... 135 Iran s Trade Policies: Connecting to the Markets Table 1 SDGs: selected trade-related goals and targets... 143 Table 2 Revealed comparative advantages associated with Iranian trade in goods, 2005 and 2014... 157 Table 3 Revealed comparative advantages in Iranian trade in commercial services... 159 Iran s Accession to the World Trade Organization: An Impediment or a Catalyst for Development? Table 1 Chronology of Iran s relations with the world trading system.... 196 Gender and Industrial Policy: Considerations for Iran Table 1 Explaining export diversification... 232 Table 2 Explaining output diversification... 234 Table 3 Explaining export diversification dimension of gender inequality... 236 Table 4 Explaining output diversification dimensions of gender inequality... 239 Table 5 Explaining diversification instrumental variable GMM... 242

List of Tables xvii Employment of Highly Educated Labor Force in Iran: Challenges and Prospects Through the Sixth Development Plan and Beyond Table 1 Sectoral distribution of employees with tertiary education, 2005 and 2015... 252 Table 2 Human capital in Iran s manufacturing sector... 254 Table 3 Skill intensity in the most skill-intensive manufacturing activities (percent)... 255 Table 4 Share of employee compensation in value added for skill-intensive manufacturing activities... 256 Table 5 Share of R&D in value added in skill-intensive manufacturing activities (percent)... 257 Table 6 Export-to-output ratios in skill-intensive manufacturing activities (percent)... 258 Table 7 Average value added per establishment in skill-intensive manufacturing activities (billion rials, constant Iranian fiscal year 2011 2012 prices)... 259 Table 8 Manufacturing workforce with tertiary education by firm size (percent)... 259 Table 9 Summary characteristics of skill-intensive manufacturing subsectors in Iran... 260 Table 10 Iran s labor productivity, export-to-output ratio, and share of R&D in manufacturing value added in comparison with selected economies... 261