Iran is a major power in the Middle East, with a population of over 80 million and strong military capabilities. It is the third largest economy in the Middle East and North Africa (MENA) region after Turkey, and Saudi Arabia, with an estimated Gross Domestic Product (GDP) of over $400 billion. Importantly, Iran ranks second in the world in natural gas reserves (behind Russia), fourth in proven crude oil reserves (After Venezuela, Saudi Arabia and Canada).

Iran is rich with natural resources for growth and the statistics point to a potential bonanza. With 70 percent of the population whom was born after the Iranian revolution in 1979, many are well-educated or skilled workforce, offering a strong foundation for economic growth.

Certainly, Iran is expected to be one of the fastest growing economies in the MENA over the next five years with real GDP growth projected at an annual average of 4-4.5 percent. Although the Iranian government is more optimistic as its sixth five-year (2016-2021) development plan envisages an annual economic growth rate of 8 percent. In the broader picture, Iran’s “Vision 2025” has a bigger ambition: Becoming the Middle East’s top power by the year 2025.

Iran has also set itself an ambitious target: boosting its oil production from 3.8 million barrels a day to 5 million by 2020. However, the country needs $200 billion in foreign investment over the same period to achieve that target. Most estimates suggest that Iran will not produce more than 4.2 by end of the current decade.

Despite the rosy picture, Iran remains a minefield for foreign business and investors. Unlocking Iranian economy’s growth potential will require serious and deep reforms.

Dr. Naser Al-Tamimi

“The World Bank projects that Iran’s exports of oil and oil products could increase from 1.27 (mb / d) in 2014 to 2.53 (mb / d) by 2020. As for gas, Iran is set to be the largest driver of gas production gains in (MENA) region in 2015-2021, with the International Energy Agency (IEA) expecting an annual output to rise by 29 billion cubic metres (bcm) of natural gas to 199 (bcm). That said, domestic demand is set to rise by 26 (bcm) to 195 (bcm), so it’s not a game changer in short and medium term.”

Iran has huge potential across almost all sectors, particularly automobile, petrochemicals and consumer goods. The country has the second-largest petrochemicals industry in MENA region after Saudi Arabia and has the ambition to double its production capacity to 120 million tonnes by 2025.

On top of this, Iran is looking to significantly increase production of aluminium, steel, and copper within the next decade as it possesses 7 percent of the world’s total mineral reserves and already has the largest mining industry in the region.

The automobile sector, Iran’s second largest sector after energy, has strong potential to make the country a regional hub for export to neighbouring states as Tehran is optimistically hoping to triple its current production to 3 million vehicles by 2025.

Above all, Iran benefits from its strategic geographical location, the country has potential to develop into a key transit point for East-West trade. However, all transport infrastructures are in need of modernization. The World Bank’s Logistics Performance Index for 2016 places Iran at 96 globally out of 160 countries. Some estimates indicate that Iran’s infrastructure investment needs are at staggering $1 trillion over the next decade.

Not the next China

Despite the rosy picture, Iran remains a minefield for foreign business and investors. Unlocking Iranian economy’s growth potential will require serious and deep reforms.

Central in these efforts according to the IMF “will be promoting the private sector, attracting foreign investment, reducing the cost of doing business, and enhancing transparency and governance.”

However, under the prevailing political developments in Iran, sectarian tensions in the region and the fears of neighboring countries of Tehran’s intentions; the theory of “Iran is the next China” will be difficult to materialize in medium term for the following reasons:

1. Economic Growth: Although China’s policy of opening up to the outside world in 1979 coincided with Iranian revolution, but the difference in growth rates between the two countries was very wide. China has managed to achieve an average growth of almost 10 percent between 1980 and 2015, while Iran’s economy grew by only 2.5 percent for the same period. Looking forward, even with the slowdown in Chinese economy, the country is expected to record growth rates in the range of 6 percent in the medium term (2016-2021), comparing with 4-4.5 percent for Iran. Interestingly, Chinese economy in 1980 was equivalent to around 3-fold the Iranian GDP (market value), but the gap widen significantly in 2015 to more than 29-fold. Iran’s per capita income was higher more 8-fold than per capita income in China in 1980. Last year, China’s per capita income was double than the Iranian one according to the latest IMF data. Importantly, Iran still dependent on the energy sector, relying on 80 percent of its export’s revenues on oil sales, and most of its trade conduct with Asia. While China’s exports are more diverse, and neighbouring countries are heavily dependent on the performance of its economy.

2. Foreign Policy: Since the 1970s Chinese leaders have realized that without improving their country relations with neighbouring and western states, it will be difficult to achieve high rates of economic growth. The Chinese famous leader Deng Xiaoping’s 24-character strategy: “keep focused on domestic economic growth, stresses the importance of keeping a low profile on the world stage and do not challenge western countries” dominated China’s foreign policy for more than three decades. In Iran the opposite has been evolving or as Henry Kissinger once said that Iran has to decide “whether it is a nation or a cause.” Until then, most the Iranian potential will remain untapped.

3. The domestic politics: When China launched its reforms in 1979; there was a broad consensus among the Communist Party leaders that without economic openness, and improving relations with the West the regime could collapse. Iran has several competing power centres; although the Supreme Leader Ayatollah Ali Khamenei is the true centre of power in the country. Judging him by his recent speeches, one can say that he is maintaining an uncompromising approach towards social/political reforms and the United States. While the Islamic Revolutionary Guard Corps (IRGC) which has substantial business interests comprise around 30-40 percent of the overall Iranian economy will make sure that any reforms will not seriously threaten its stakes. This situation will for sure conspire against achieving very high rates economic growth rates, as it was the case in China.

4. Demographic Shifts and diverse population: Although China has concerns about separatist movements in Tibet and the Muslim region of Xinjiang, but currently they do not represent a serious threat. Importantly, Han Chinese constitutes almost 92 percent of China’s total population. The demographic picture in Iran is quite different. According to the CIA World Factbook Iran’s population reached 82.8 million in July 2016. Persians comprise over 60 percent of the total, with the minorities (Azeris, Kurds, Arab, and others) accounting for nearly 40 percent. A recent analysis of Stratfor noted that Iran is taking hits from minority groups throughout its borderlands. Although Iranian security apparatus still have upper hand, but the question is if Iran will be able to keep the lids on in the longer term. Indeed, there is growing attractiveness of Persian nationalism, and this trend is expected to rise as the regime’s ideological appeal weakens. Should this happen, it may increase the sectarian divisions and have serious repercussions in Iran. In parallel with the complex demographic picture, youthful population is another potential risk to political stability. According to UN statistics, around 40 percent of Iran’s population were younger than 25 years in 2015. The official unemployment rate was above 12 percent last year, but unofficial estimates put it closer to 20 percent, with youth unemployment likely to be even higher.

All in all, if the nuclear deal between Iran and the great powers survives against the odds, there is no doubt that the Iranian economy will get bigger and could double within a decade. However, it is unlikely under the current circumstances that Iran will become a regional superpower or the next China by 2025.

Source: english.alarabiya.net