Sunday, 18 November, 2018

Iran turns to economic zones to encourage balanced growth

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The Iranian government is trying to address the issue of uneven economic development, which is most obvious in border regions, by creating more economic free zones. In pursuit of this aim, a bill proposing the establishment of eight new economic-industrial free zones and 12 special economic zones (SEZ) was submitted to parliament in 2016. The text was just approved by lawmakers Aug. 29 after the number of SEZ was increased to 69 earlier this month by parliament’s Economic Commission.

The legislation could transform Iran’s geo-economic map.

If the initiative is implemented, it will establish the following free zones: Incheh Borun, in conjunction with the North-South Transportation Corridor, to expand trade with Central Asia; Ardebil, as an export platform to Azerbaijan; Baneh-Marivan, to expand economic relations with the Kurdistan Region of Iraq as well as Turkey; Bushehr, to expand trade with Qatar and focus on the petrochemical industry; Jask, to expand Iran’s oil and gas industry; Mehran, to develop the energy industry and expand trade with Iraq; and Sistan, to expand economic relations with Afghanistan and Central Asia. In addition, the law also would allow several other SEZ to be developed in various Iranian provinces.

The initiative has faced extensive disputes over the merits of free zones, based on zones established during the past 40 years. The Persian Gulf island of Kish became Iran’s first free zone back in 1979, and gradually — especially after the end of the Cold War — the number of free zones increased to eight while the number of SEZ expanded to 26.

Critics argue that those free zones have failed to achieve their goals of boosting employment, attracting foreign technology and capital, increasing exports and improving local living conditions. These failures are mostly ascribed to issues such as lack of proper infrastructure, inefficient sizing (Iran is home to the world’s biggest free zone at 500,000 hectares, or 1.24 million acres), weak management and lack of cooperation with other economic bodies, especially the Customs Administration. Critics also point out that the free zones have created problems such as smuggling, economic rent-seeking, tax evasion, shell companies and increasing social class divisions.

Some have even claimed that the income earned by the organizations in charge of these zones — income mostly generated from land sales and import duties — is “poisonous” and have referred to the zones as the government’s “back alley.” Two senior officials of President Hassan Rouhani’s administration have publicly clashed over how the zones should be managed. These criticisms resulted in parliament conducting an inquiry into the free zones and publishing a report critical of their performance. Critics of the bill say the establishment of new free zones as well as SEZ will only result in the same failed experience.

In addition to these criticisms, the Rouhani administration faces the challenge of securing financing to develop the necessary infrastructure for the zones. The spending envisaged in the law is estimated at 47 trillion rials ($1.12 billion), and it’s not quite clear where this money will come from. So, the proposed zones won’t begin operating until funding is provided and the infrastructure is built.

It’s clear that with the US reimposing sanctions and the Rouhani administration consequently losing part of its revenues, funding will become even more difficult.

On the other hand, supporters of the bill claim the government’s decision to put the Ministry of Economic Affairs and Finance in charge of the High Council of Free Zones — the top decision-making body when it comes to these zones — has not only solved the issue of a lack of coordination between relevant decision-making organizations, but has also put parliament in charge of supervising the zones’ management. They also believe that by designating new free zones, the Rouhani administration is trying to build the necessary infrastructure for these zones before they become operational and is trying to reduce their sizes with the aim of making it easier to exercise legal control over them.

Considering all these challenges and criticisms, it’s likely that the Rouhani administration’s motivation in insisting on establishing these zones — aside from the economic advantages they may yield — is strategic. Contemporary Iran is the heir of one of the oldest and most enduring Eastern empires. A center-periphery balance has always existed in this empire. However, during the past century, uneven development has produced a center-periphery imbalance, featuring an uneven distribution of population, industry and prosperity. Tehran is the center of this imbalance, so much so that 20% of Iran’s industry is situated in Tehran province alone. With the exception of the oil industry, other major segments of Iranian industry are also concentrated in provinces close to the capital. For instance, Isfahan province is home to more than 9,000 industrial units, while Golestan province only hosts 905 units.

Uneven development, coupled with climate change, is rapidly changing the traditional patterns of population distribution in Iran, resulting in extensive migration from the periphery to the center. Indeed, 16% of Iran’s population is now centered in Tehran, which makes up only 1% of the country’s surface area. This is while the southern coast of Iran, from Khorramshahr on the border with Iraq, to Gavater on the border with Pakistan, is home to less than 2% of Iran’s population. These changes are accompanied by social problems increasing so much that about 20% of Iran’s population currently live in slums on the outskirts of urban centers.

From the perspective of the Iranian government, free zones play a key role in local economic development, increasing the population in such zones and increasing security at the borders. The areas described as free zones and SEZ in the bill are mostly located in the “periphery” such as border areas, which in recent years have faced increasing poverty, migration and depopulation. Thus, the Rouhani administration’s reason for drafting the bill and insisting on its passage is more about finding a solution for the many challenges of uneven economic development than any desire to compete with neighboring free zones or to play a new role in the world economy.

By creating these new free zones, both the administration and parliament are trying to tie the zones to the economies of neighboring countries and reduce the zones’ dependence on government rents. The zones’ success will depend on the macroeconomic policies of the country, the future of its relations with its neighbors and its position in the global economy. The geo-economic map of Iran will change as a result of these shifts. However, it won’t be easy to guide these changes in the direction that the Iranian government desires.

Via: al-monitor

Photo: freezones.ir

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