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Iran: The Mideast’s Model Economy Essay Sample

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Iran: The Mideast’s Model Economy Essay Sample

      A large consumer market, high current income, and income reserves are all factors that  contribute to Iran’s positioning to become the model economy for the Middle East region.  The population of 69 million people is the largest in the Middle East.  Oil prices account for the country’s high income.  The large amount of gas reserves is Iran’s insurance of future income.

            It is interesting to note that a major U.S. interest in Iraq is to turn Baghdad into the model Middle Eastern economy.  Iran’s shared interests with the U.S. included bringing down the Saddam Hussein regime, and stopping the activity and influence of the Taliban in Afghanistan.  Iran is supplying goods to its neighbor Iraq.  Iran’s independent interest in Iraq  is that a Shiite government will remove al-Sadr from power, thereby facilitating a U.S. withdrawal and a diplomatic alignment between Iraq and Iran.

Strategic Issues: Problems and Opportunities

            Economists compare Iran’s economic growth to that of China’s, stating that a solution to social and political challenges could facilitate a double digit economic growth factor.  The current economic climate is characterized by consistent growth over the last four years, surplus trade balance, $35 billion in currency reserves, and aggressive privatization of assets and enterprises.  The current political climate is characterized by the shift from a religious majority to a parliament run by entrepreneurs who are highly focused on the economy.  They have maintained the moderate to liberal social climate in Iran.  The goals for the conservative majority are to further improve the standard of living in Iran, to elect a conservative president, and to repair diplomatic relations (tensions over nuclear issues) with the U.S.

            The Iranian government has been aggressive in privatization efforts, selling $1.3 billion in assets to private companies.  However, government and religious leaders retain a 50% stake in these private concerns.  Outside investment is controlled and limited.  For example, foreign investors cannot buy rights to Iranian oil.  They can only participate in buy backs which give fixed returns back to the Iranian government.  This policy is believed to be response for the decrease in oil production since 1979.  As in many cases of government-private sector business arrangements, corruption abounds.     The Iranian stock exchange is filled with opportunities for both local and foregn investorss due to an increase in Initial Public Offerings.  Thes IPOs were fafilitated by the government granting foreign banking licenses, and by privatizing the auto industry and slowly softening tariffs on auto imports.  The Secretay General of the stock exchange suggests opening trading floors in other cities to attract local investors, and creating separate classes of investment vehicles to attract foreign investment.

Analysis and Evaluation

            Iran has managed to grow its economy despite diplomatic tensions with the West, government control over most enterprises, and limited foreign investment.  This would probably not have been possible without the massive amounts of oil reserves and the income the country receives currently from oil production projects.  A slow and deliberate shift in economic policy and business strategy provides protection from a surge in foreign competition.  As the government transfers assets and operations to private business concerns and entrepreneurs are starting businesses at ground level, Iran has time and opportunity to build its economic base from the inside out.  Iran is building its internal infrastructure – social, political, and economic.  Although they consider their social climate moderate, it is very liberal in comparison to some Middle Eastern countries.  A political system run by business leaders instead of religious leaders will continue to facilitate economic growth, and possibly position Iran to become an exporter of goods and services other than oil.  Retaining a 50% stake in private businesses facilitates the ability to profvide government financing maintain these businesses in case of an economic downturn.  It also allows the government to track the progress of foreign market competitors and the activities of foreign investors.

Recommendations and Implementation

            The challenge for Iranian leaders is to figure out how to reduce government control over private businesses and attract foreign investment without loosing control of the Iranian market.  In order for Iran to become and remain a model economy, business and political leaders must maintain the growth momentum Iran has enjoyed for the last four years.

            The short-term objective should be to define a three tiered strategy for investment in Iranian business.  Publicly traded Iranian companies can develop a positive international reputation for Iran.  There should be government investment tier, a foreign investment tier, and a private investment tier.  The government investment tier should provide financing and diplomatic positioning that allows Iranian businesses to expand into regional and foreign markets.  The foreign investment tier should facilitate R&D and marketing channels that introduce new business opportunities to Iranian entrepreneurs as well as allow export opportunities and foreign operations.  The private investment tier should provide individual investment opportunities for non-entrepreneurs and develop a market for institutional investors.

Conclusion

            Iran has developed a trade relationship with Iraq.  The social environment is moderate to liberal.  The political environment is being shaped by conservative business leaders whose goals and strategies are quite different from the religious wing.  Privatization of government owned concerns and the rise of ground floor entrepreneurial opportunities puts Iran in a position to realize global economic positioning similar to that of China.  As the economy shifts from a religious run government enterprise to an entrepreneurial driven private enterprise, Iran will be in a position to enhance both its diplomatic and economic positioning.

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