Iran’s Rouhani faces a steep challenge in economic ambition

The Iranian president has committed his country to rapid growth and hopes of building a top 10 global economy. But it will not come easy, even amid easing tensions with the West.

Hassan Rouhani, the president of Iran, has committed his country to rapid economic growth and a jump in living standards experienced by few countries in history.

At Davos a couple of weeks ago, he told global leaders that the aim was to make Iran one of the top 10 economic powers in the world within two decades. That is a staggering ambition, not least because of the current obstacles at home and abroad to achieving such a goal.

Despite the pacific noises coming out of Tehran about the nuclear issue, there is much scepticism – among leaders in the GCC and in the West – that Mr Rouhani can force the climbdown that would be necessary by Iran’s hawks to permit the complete removal of US sanctions. That is obstacle number one.

The second is the sclerotic nature of the Iranian economy, which for decades has been frozen in a pattern of high dependency on energy products, dominated by a public sector apparently run by shadowy figures in the Iranian military-industrial complex, with a limited domestic manufacturing sector and antiquated agricultural system.

A snapshot of the Iranian economy shows the dire results of sanctions and domestic inefficiencies. Inflation is running at about 25 per cent; the currency has been devalued by more than 30 per cent over the past two years; GDP and oil production have contracted in the same period, although some say both are set for a small positive rise this year; official unemployment has stuck doggedly at double-digit levels, and even that may be a big underestimation.

However, some experts see positive signs and acknowledge the great potential of the Iranian economy. Nouriel Roubini, the economist who forecast the global financial crisis, believes rapid growth is possible if sanctions are removed and genuine reforms are pushed through at home. Both are big “ifs”.

Nasser Saidi, formerly the chief economist of the Dubai International Financial Centre and now an independent consultant, says détente between the West and Iran could be “a historic game changer” for the country and the region. Iran would need inward investment of some US$1.3 trillion to make up for the years of stagnation. This would be a huge boost to the region, especially the UAE, through which much of this capital would be channelled.

Behind all this optimism is a rather more vague but significant feeling that there is some fundamental entrepreneurial dynamism waiting to burst out of a frustrated Iranian middle class. With a population of more than 75 million eager would-be consumers, huge oil reserves and a tradition of commercial expertise, Iran satisfies many of the conditions for rapid economic growth identified by the British economist Jim O’Neill, famous for the “Bric” concept.

But will Iran be able to break into the top 10 global economies, as its president has pledged? That does not look such an easy task.

The country currently ranks at number 21, according to the IMF, with GDP of US$549 billion. Its economy would have to more than triple in size over the next two decades to get to where India, now number 10 with output of $1.8tn, stands today. And India, of course, will not be standing still to be overtaken.

Such rapid growth is possible in such a time frame, as Germany, Japan and South Korea have showed in their own economic “miracles”.

But getting into the top 10 is a different proposition. The elite rank of global economies has actually changed little over the years.

Angus Maddison, a British economist, compiled the chart positions going way back to 1820, when China was the biggest. From 1913 onwards, the US claimed top slot, although China is forecast to regain pre-eminence by 2030.

But what’s significant is that the lower rankings have largely stayed the same, although sometimes those ranked there have taken different guises. The German and Russian empires, as well as the Soviet Union, may be no more, but the nation-states at their core are still among the biggest world economies, along with the UK, France and Italy.

By 2030, Maddison suggests, Iran would have to contest entry into the top 10 with Indonesia and Brazil, both with bigger populations and a big head start in economic terms.

Normal commercial relations between Iran and the rest of the world, if possible, would undoubtedly be a good thing. But Mr Rouhani may have to postpone his dreams of economic superstardom for some decades.