FDI in Iran: an exercise in falsification

Despite the fact the FDI in Iran has shown 87% increase in one year, it stood at $3 billion- at this rate, it would take Iran nearly three centuries to attract what it needs in the next five years!

The pro-government site Fars News recently claimed: “The growth of Foreign Direct Investment [hereafter FDI] in Iran is the sixth highest in the world” [1]. It is an interesting and an important claim, and if true, it would have serious domestic as well as international implications. Our own view is rather pessimistic.

It appears from a variety of sources that economic sanctions were hitting hard, and have forced potential investors out of Iran. In addition, I argue that there are many internal factors that would make Iran a very unattractive place for investment by foreign firms. For a variety of reasons, political risks in Iran are high enough making Iran, as a potential location for this type of investment, less attractive.

The arbitrary nature of politics, despotism, and absence of an independent judiciary and free press besides institutionalised lawlessness, irregular but frequent intervention by the Guardian Council as well as other un-elected and unaccountable religious preachers in economic and socio-political are some of the factors undermining Iran’s potential as potential destination for the foreign capital.

With this background, the claim by the Fars, not only was attractive but it was strange too. In the Fars and similar news agencies another euphoric account is the annual investment report published by the United Nations Conference on Trade and Development [UNCTAD] for 2010 [2]. The UNCTAD reports are among the most authoritative sources for studying capital flows in the world.

At one high-profile gathering in Tehran, in addition to the head of Foreign Direct Investment Organisation, Ali Shiri, the Senior Vice President, Rahimi, and the Minister for Economic Affairs, Hosaini, were present too, congratulating one another on the massive economic achievements. Shiri said in this meeting that out of 140 countries studied, only 20 countries showed a rise in the FDI and among this smaller group, Iran with 86% rise in FDI is at the sixth position. He later added that “Iran, Qatar and Cyprus are the three countries that managed to sustain their growth rate”. This latter claim is refuted by the UNCTAD’s report for 2010. In the report, the FDI into 30 countries including Iran showed a positive growth. However, the FDI into Iran though increased by 87% yet the point not mentioned in the commotion in Tehran was: Iran attracted only $ 1.6 billion in 2008 and this rate has gone up to $3 billion for 2009. While the growth rate is impressive, the scale of FDI in Iran is rather disappointing. A relatively large and resourceful country that offers massive potential attracted such a miserable amount of foreign capital.

The head of Iran Chamber of Commerce recently stated that if Iran was to meet its stated growth targets, it should attract $1000 billion in the next five years [3], on average, $200 billion a year.

Despite the fact the FDI in Iran has shown 87% increase in one year, it stood at $3 billion- at this rate, it would take Iran nearly three centuries to attract what it needs in the next five years!

One aspect that is particularly disturbing is Iran’s position in the Middle East. If we take a period of 2007-2009, total FDI into Iran for this period is only $6.3 billion, and this is the lowest amount of FDI into the 20 countries in this region. Comparing the FDI records of the Middle Eastern countries is very interesting. In this period, Saudi Arabia attracted nearly $96.5 billion; Turkey with $47.8 billion was in the second place. The third most attractive location was the United Arab Emirate with $31.9 billion. In the fourth place was Egypt by attracting $27.8 billion FDI.

The largest Middle Eastern economy in terms of population and the second richest in relation to its oil and gas reserves [after the Saudi Arabia] fails so miserably in attracting investment and yet with such nuisance in Tehran, its politicians try to give a different picture.

We also have some data on the FDI in these countries for the period 1990-2009. For the whole of this period, Iran attracted a little less than $22 billion, but for the same years FDI in Egypt was $56 billion, in Lebanon $32 billion while Saudi Arabia attracted more than $125 billion FDI. Once again, Iran’s record is rather poor. Turkey attracted more than $66.5- more than three times the amount that was invested in Iran- and the United Arab Emirate’s share was $73 billion.

As indicated earlier, a combination of internal and external factors are responsible for this lacklustre performance. Economic sanctions have contributed of course but I argue that the major contributory factors have domestic origin. It is the despotic nature of the state, and its institutionalised lawlessness which are the main internal culprits and unless and until there is substantial changes in these areas, Iran would not attract the amount of the FDI that it deserves.

Let us conclude with a little old fable. Once upon a time there was a dishonest cloth merchant in an Iranian town who would buy impure woollen goods and try to sell them as pure wool to his customers. He had a copy of Holy Quran next to his till too and whenever he entered into a transaction, with one hand touching his beard, another figure pointing to Quran he would say, “I swear to Quran that this is pure wool”- while his hand was touching his beard. He was satisfied that he was not lying as his beard was pure wool. This is how policy makers in Iran are behaving. It is true that the FDI into Iran has increased by 87% in one year, and this may be a high rate, but if you double the weight of an ant in a year, it is still too little and too insignificant to have much impact.

Notes:

[1]http://www.farsnews.net/newstext.php?nn=8904310742

[2]http://www.unctad.org/Templates/webflyer.asp?docid=13423&intItemID=2068&lang=1

[3]http://aftabnews.ir/vdch-inzm23nv-d.tft2.html

After nearly 30 years of teaching, the author has retired in 2010 from his post at the University of Staffordshire. Currently he is teaching at Regent's College in London Email: