Investors Have Always Struggled in Iran

(Bloomberg Opinion) -- Bloomberg Opinion is marking the 40th anniversary of Iran’s Islamic Revolution with a collection of columns from around the world.

Given how Iran’s economy has fared in the 40 years since the Islamic Revolution, it’s reasonable for Iranians to wonder whether they might be more prosperous had the revolution never taken place. Iran’s average annual growth in gross domestic product for the years 1961-78 was 8.86 percent, or more than three times higher than the 2.44-percent average for 1980-2017.

Fantasy-bursting economists might point out that the pre-revolution figures are inflated by the “catch-up effect,” when a poor country achieves quick growth from a low base by building new roads, electrifying towns, adopting new technologies, liberalizing markets and so on. All the same, Jahangir Amuzegar, a former executive director of the International Monetary Fund (and briefly Shah Mohammed Reza Pahlavi’s finance minister in 1962), argued that Iran’s economic performance, “if not exactly the ‘economic miracle’ that the Shah’s supporters liked to call it, was undoubtedly one of the world’s clearest success stories.”

Iran’s governments since 1979 have successfully diversified Iran’s industrial sector, expanded its tax base, and reduced inequality, but they have also earned a reputation for ineptitude and corruption. Even the Supreme Leader, Ayatollah Ali Khamenei, has admitted that “more than the sanctions, economic mismanagement is putting pressure on ordinary Iranians.”

The gap between the pre- and post-revolution growth rates may encourage the belief that the change in Iran’s leadership is to blame for the change in economic fortunes. But the historical memory of 1979 obscures the fact that many of the factors behind economic mismanagement in Iran have little to do with who is in charge.

This is borne out by a fascinating paper by Regina Lee Blaszczyk, who chronicles the experience of American chemicals giant DuPont as it launched Polyacryl Iran Corporation, the largest U.S.-Iranian joint venture. Between 1972 and 1978, DuPont spent $118 million to build Iran’s first plant to make synthetic fibers like polyester and acrylic. Even before the revolution hit in 1979, the joint venture was nearly bankrupt because of Iranian economic mismanagement.

At the outset, construction costs ballooned when the DuPont realized it needed to spend $30 million to build its own port at what’s now called Bandar Imam Khomeini because the existing infrastructure was insufficient and “the Iranian government could not fulfill its promises or obligations.” When it was time to import critical equipment for the plant, the Shah’s administration chose to prioritize its own imports. “DuPont’s GE turbines sat in port for a year after the Iranian government commandeered every available dolly in the country to bring in its own generating equipment,” Blaszczyk writes.

Worse, the Iranian government had pushed DuPont to build a larger factory than originally intended, at a time when global fiber market was oversupplied. DuPont executives obliged, on the understanding that the Iranian government would ensure a “protected market and a price structure that would permit profits,” according to Blaszczyk’s account. But as construction progressed, the executives learned that the government was still allowing the low-priced fabrics and fibers to enter the country. Between the cost overruns and the government’s failure to keep up its end of the bargain, as early as 1977 some within DuPont considered the joint venture wounded fatally.

DuPont’s experience was not unique. As Blaszczyk recounts using contemporary sources, dozens of major joint ventures became “corporate nightmares” due to skyrocketing costs and poor infrastructure along with “delays, vacillating government policies and attitudes, manpower shortages plus a host of other operational headaches.” When companies sought solutions from the government, poor communication and corruption strained relations.

One executive recalled that prior to the revolution, “We rushed to Iran, following the oil-price increase in 1973, expecting to find the streets paved with profits and, like a lot of others, found more potholes than pavement.”

That feeling will be familiar to many foreign businessmen who raced to Tehran after the signing of the Iran nuclear deal in 2015 signaled the end of the international sanctions that had kept them away. Even before the U.S. withdrawal from the deal last May nixed many foreign projects, executives were complaining about poor infrastructure, unhelpful officials and opaque institutions. If Iran was a frustrating place to do business 40 years ago, it remains so today.

This may seem academic at a time when renewed U.S. sanctions are likely to keep most foreign companies from venturing into Iran. But at a time when Iran’s economic underperformance is being counted by some of the theocracy’s critics as a justification for regime change, the cautionary tale of the DuPont joint-venture shows that a change in government would not necessarily remove barriers to more robust economic growth. Whether the ruler wears a crown or turban has little bearing on his ability to manage an economy.

Real change must come from within the organizations that are conducting and facilitating economic activity. For Iranian business leaders and government officials, the DuPont story offers valuable lessons on how and how not to treat investors, domestic as well as foreign. Their objective should be to ensure that nobody is compelled to ask, as DuPont manager Millard Gamble once did, “How on earth did we get involved in Iran?”

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Esfandyar Batmanghelidj is the founder of Bourse & Bazaar, a media company that supports business diplomacy between Europe and Iran through publishing, events and research.

©2019 Bloomberg L.P.

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