Sanctions to Prevent Iran from Capitalizing On Globalization

Further sanctions could drive Iran to produce domestically and adopt inward-oriented development strategies. However, in the long-run, Iran's economic growth depends on its ability to export.
An Iranian news agency reported that sanctions imposed by the US and the UN have supported the growth of Iran's electronic industries. It is possible that further sanctions could drive Iran to produce domestically and adopt inward-oriented development strategies, such as import substitution industrialization (ISI).

The underlying idea behind ISI is to use primary products that are produced domestically to enable development of new industries. This development strategy supports a national ideology of self-sufficiency because every product along the chain of production is produced domestically.

In contrast with free-market economies, countries that pursue ISI policies

  • subsidize and coordinate production of strategic substitutes;
  • introduce trade barriers (e.g. tariffs), and
  • adopt monetary policy that keeps domestic currency undervalued.

Adopting inward oriented policies could lead to worsening of balance of payments and would threaten continued growth and socio-economic stability. Furthermore, subsidies that are used to protect domestic infant industries from external competition bring about distortion in price and resource allocations.

The success of ISI policies in Iran lies on Iran's decision to undergo profound structural changes that will bring about privatization and would attract foreign investment.

However, in the long run, export-led growth and the opening of domestic markets to foreign competition are essential for Iran to achieve significant growth and improvement in quality of life for all its citizens.

Ultimately, to capitalize on its natural resources and newly acquired technological skills, Iran would depend on the benefits of globalization.

The Reut Institute contends that further sanctions could drive Iran to adopt inward-oriented industrialization policy. Nevertheless, the economic potential of such policies would be restricted by sanctions.

Sources

  • FARS News Agency, 24/02/07 Click here.
  • Hamid Zangeneh, Socioeconomic Trends in Iran: Successes and Failures, The Muslim World, Oct 2004, p. 481.
  • Kankesu Jayanthakumaran, Industrialisation: Import Substitution to Export Promotion, University of Wollongong, Department of Economics. Working Paper Series 2000. Click here.