Nuclear deal could unleash Iran’s economy

After almost 15 years of intermittent negotiations, Iran and the P5+1 group of six major world powers have reached a framework agreement on Iran’s nuclear program.

The deal couldn’t have come soon enough for the Iranian economy, which has been crippled by sanctions imposed by the U.S. and the United Nations. At the same time, state oil revenues are shrinking every day, and unemployment and inflation have soared to levels not seen since the catastrophic Iraq-Iran War of the 1980s. Since 2010, sanctions have specifically targeted Iran’s central bank, leading to rapid currency devaluation and near-zero rates of economic growth. Living standards for the working class and low-income Iranians are abysmal, with many unable even to purchase basic medicine.

The nuclear deal clears the path for the end of sanctions and the emergence of a dynamic Iranian economy. Iranian President Hassan Rouhani, whose Cabinet includes more graduates of prestigious American Ph.D. programs than President Barack Obama’s, is committed to reforming the economy and taking a leadership role in the developing world.  

Compared with other developing countries, especially considering the damage of war and sanctions, Iran performs decently on measures of human development. Its average life expectancy increased dramatically, from 54 in 1980 to 74 in 2012; 98 percent of 15-to-24-year-olds are literate; and according to the United Nations, Iran’s overall human development index has improved by 67 percent in the last decade.

Despite sanctions, Iran is one of the world’s top 20 economies. For the first decade of the 21st century, annual growth rates hovered around 5 percent, sometimes reaching as high as 7 percent. The 2010 round of sanctions were devastating, but the government has recently announced the return of positive growth. According to an International Monetary Fund forecast, the Iranian economy will grow 2 percent in 2015, an impressive reversal from the 5 percent contraction that occurred in 2012. 

Iran, which invests more in scientific research than any other Middle Eastern nation, has seen rapid growth in its high-tech sector. Its elite technical universities are ranked among the top in the world. Sharif University of Technology — Iran’s MIT — was hailed by a professor of electrical engineering at Stanford as the the finest university in the world preparing undergraduate electrical engineers. Iran also stands among the leading countries in cutting-edge sciences such as stem cell research and nanotechnology.

While the Iranian economy is still largely dependent on oil exports, it has also seen significant industrial development. In 2009, Iran’s auto industry became the 11th largest in the world, producing more than 1.4 million vehicles (more than the United Kingdom or Italy). Auto is the second-largest sector, after oil, and offers vast employment opportunities to young workers in Iran. The country boasts significant development in high-tech industries such as machinery, automotive, steel, petrochemicals and medical technology. 

How can Iran make the most of its postsanction economic opportunities? The single most important step is to move away from dependence on energy exports and toward growth in labor-intensive industries. Since Iran’s oil reserves will eventually be depleted, it is crucial to identify alternative sources of revenue.

But even if the oil never runs out, oil dependence exposes the economy to the risks of a constantly fluctuating market. Last April a barrel of oil cost almost $100, but the price now hovers around $40. This turbulence makes long-term development planning susceptible to uncertainty and risk. Furthermore, modern refineries are highly technology intensive, so they do not generate many employment opportunities, nor do they provide learning-by-doing training for the workforce in those industries.

In short, an expansion in exports of the nonoil sectors such as manufacturing will allow Iran to adopt the growth model that the East Asian “tigers” such as South Korea and China followed. If Rouhani can keep the nuclear deal on course and implement new economic policies, Iran may soon be recognized as one of the world’s most promising economies of the 21st century.