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Tuesday, April 19, 2016

An Economist’s Advice on Bringing Prosperity to Iran

Unleash Investment, Trade, and Entrepreneurship

I was pleased to be one of a group of economists asked to publish a letter to Iran in the New Year’s issue of Tejarat-e Farda, an Iranian business weekly. The issue features messages from economists around the word.

Here is my letter:

Happy Nowruz! I celebrate today not only a New Year but what I hope will be a new beginning. Political differences have cut Iran, long a center of world trade and commerce, from the world economy. As a result, the Iranian economy has performed for a generation or more well below its potential. But Iran has great national resources and could experience an explosion of prosperity if it adopts the right institutions.

Turkey and Iran once had similar standards of living, but GDP per capita today is more than twice as high in Turkey as in Iran. On the World Bank’s Ease of Doing Business Index, Turkey is not a world leader, it ranks just 55th in the world (Singapore ranks 1st), but Iran ranks only 118th out of 189 countries.

Iran, however, is moving in the right direction. Privatization of state enterprises, when combined with competitive and open markets, will improve efficiency and innovation. Greater experience with private markets and commercial law also hold the promise of building a more secure foundation for property rights, especially for foreign investors. With the right business climate, billions of dollars could flow to Iran including many billions from successful Iranians who live in the United States and around the world.

The United Arab Emirates provides an interesting model. The UAE has the best business climate in the region and its reputation for security of property has allowed the UAE to attract investment from all over the world including at least $200 billion from investors of Iranian heritage. The government of the UAE takes pride in its business climate and they have used international benchmarks to attract investment and measure their own achievements. It’s remarkable that in their vision document the UAE explicitly aims to be the number one ranked country on the World Bank’s Ease of Doing Business Index by 2021. Iran could similarly set goals and mark achievements using international benchmarks such as the Ease of Doing Business Index, the Global Competitiveness Index, and the Transparency Index.

The size of the Iranian market makes it attractive to foreign investors as does the sophistication of the Iranian consumer. Iran has a great history of investment in education and its population is among the best educated in the region. Iran is well poised to succeed in information technology and internet startups especially if it offers guarantees and protections for free movement of information.

Iranians have a long history of entrepreneurship and trade, they are among the best educated people in the region, and there is a large Iranian community in the world who would like to invest in their homeland. Iran has strong foundations and with the right institutions it could achieve a prosperity takeoff that would be welcomed by Iranians as well as by the many people around the world who wish the best for the Iranian people in the community of nations.

  • Alex Tabarrok is a professor of economics at George Mason University. He blogs at Marginal Revolution with Tyler Cowen.