The Forum for Partners in Iran's Marketplace

March 2021, No. 96

Q & A

Industrial Feudalism

Pedram Soltani, an economic activist and former vice president of Iran Chamber of Commerce, Industries, Mines & Agriculture (ICCIMA), says: ďApart from the fact that the rate of fixed capital formation in our country has dropped dramatically, most of this insufficient investment is made by the public sector and the government.Ē He warns: ďThe result of the current situation is that in five years the Iranian economy will be in a situation which I would call Ďindustrial feudalismí; that is, a series of large industrial or investment cartels in the country, all of which are attached or associated with the ruling establishment run the countryís large enterprises, and the private sector in the capacity of small and medium enterprises are dependent on this large sector. This is done in order to get raw materials, sell its services and goods, be partner with them, get concessions from them in the supply chain and be in their industrial clusters. This is a form of feudalism. 

What are the features of Iranís economy in which the land of the private sector is shrinking and quasi-government organizations are rapidly replacing the private sector?

What has driven Iranís economy in this direction is that the political structure in Iran suffers from a serious lack of trust in the private sector. Basically, the work of a politician after the Revolution began with distrust of the modern private sector, and with the confiscations that took place, the modern private sector and the private sector of the company that was transforming the countryís economy were almost destroyed, leaving only small and medium industries and traditional markets. At the same time, the ďgovernanceĒ sector replaced the private sector.

My emphasis on using the term ďgovernanceĒ to describe this sector is that it is not a governmental or non-governmental public sector, but part of the establishment that does not fall under the umbrella of the government and can act beyond the government and even more powerfully than the government. After the Revolution, the governing sector replaced the modern private sector with the formation of foundations, various institutions, and perhaps to some extent, the sweet taste of economic activity went into the mouth of this sector and caused it to continue in the same way for years. 

What are the barriers to the private sector in the business environment that quasi-government agencies easily pass through or do not face at all?

In my opinion, the main difference between the activities of these two sectors is not to do with obstacles. If we denote the intensity of the barriers to the private sector activity by 20, the intensity for the state affiliated sector is 14, not zero. The ruling sector naturally faces fewer barriers to action because access to information and communication reduces the severity of barriers for them. But the main gap between the two is the gap in vision and in authority, meaning that the private sector, because it has its own capital, is cautious in looking at the perspective and by calculating and concluding that it cannot trust the future for development of investment.

In contrast, the capital of the governance sector does not belong to itself and it receives orders from elsewhere and for example operates according to slogans. The private sector has been stripped from the courage and vision required to make an investment and foundations want to fill the vacancy in the private sector, and in some places take advantage of this opportunity. The point is that the sector has vast resources at its disposal, and with orders, slogans, and macro-policies coming from above, they are diverting resources to various economic activities.

In recent months, despite the unfavorable investment climate in the country, the news is full of headlines about investment of these foundations; Barakat Foundation invests several thousand billion in one province; the Foundation for the Underprivileged inaugurates projects in another province; and so on in the public sector, for example, Shasta invests 20,000 billion rials in Sistan and Baluchestan Province. That is, in a situation where economic logic completely signals a lack of investment and statistics recommend a lack of investment, these foundations fill the investment gap.

My recent statement that ďIranís economy will suffer more in the coming years under the weight of these institutionsĒ is due to the fact that although the steady rate of fixed capital formation in our country has fallen sharply, much of the existing insufficient investment is done by the public sector and the governance sector. The result of the current situation is that in the next five years, Iranís economy will be in a situation that I would describe as ďindustrial feudalism.Ē 

What are your predictions about the outcome of the quasi-government and governance sectors investments in the coming years? Why canít these investments promise economic growth?

Our state sponsored economy has turned into a non-governmental sovereign economy as of 2005. The blow that struck the economic literature in Iran from that period was the establishment of an unwelcome agency under the title of ďnon-governmental public sectorĒ in line with implementation of the policies of Article 44 of the Constitution. Before, we had the public, private and cooperative sectors, but with the creation of the non-governmental public sector, the entire government sector has gone under this umbrella and is taking advantage of its concessions. Therefore, in the coming years, we must see a new wave of corruption in these institutions because the accumulation of power and wealth everywhere, and by any moral standard, will eventually lead to corruption. We have witnessed a number of these corruptions during this period, but due to the large numbers that are handled in these institutions a new wave of corruption will occur in the coming years.

Unfortunately, this part of the governance sector is also ineffective in the economic growth of the country because most of them are exempt from taxes; taxes that the government can collect from economic activities and spend on public expenditures. General government spending is one of the four sectors of GDP, and this sector is smaller due to not paying taxes. On the other hand, the uses of these institutions, foundations are also unknown. They gain resources in economic activities, but it is not clear where these resources are spent.

What can create a new wave of corruption is that a significant part of this money is not seen in the countryís economic cycle, that is, the countryís wealth is not spent on economic growth. That is why our economy will not recover even with the lifting of the sanctions; this is what Dr. Nili said recently from an economic point of view, and I want to emphasize it from the perspective of the private sector and the investment perspective in the country. So I still predict difficult conditions for the next four or five years.


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  March 2021
No. 96