Iran's Comeback – a Game Changer

The key assumption of this paper is that, as it appears at the time of writing, spring 2014, a nuclear deal permitting the reintegration of Iran into the world economy is likely, notwithstanding opposition among hardliners in Iran as well as in the US Congress. An understanding on the nuclear issue would reduce political tensions not only between Iran and the West, but also with the states of the Gulf, first of all with Saudi Arabia. For many years, debate on Iran has focused on nuclear politics, economic aspects have been largely ignored. The narrow economic discussion has highlighted oil and natural gas, ignoring the industrial and manufacturing potential. Indeed, on the condition of being readmitted into the world economy with sanctions lifted, Iran has a potential for high economic growth. If, by chance, negotiations should stall or an understanding with Iran should be blocked by the US Congress, sanctions reasonably would grind down gradually, possibly on a countryby- country basis, leaving the United States and a few other countries isolated. In that case, Iran's comeback would be slower, but hardly halted. A major difference is that in the first case, Iran would reintegrate the world economy with the approval of the United States; alternatively, it would reintegrate the world economy in opposition to the United States, most likely with close ties to China and Russia.

The Iranian economy has weathered the sanctions better than many expected. Indeed, sanctions have spurred the country to find new ways, accelerating economic reform. Even if Iran still has huge liabilities in its political economy in the form of cronyism, corruption, barriers to entry, imperfect competition, and oligarchic structures in control of industry and key services, the assets are also important. Iran has a large, relatively educated young population, meaning a skilled workforce as well as a big home market. The infrastructure has been developed through substantial investment in roads, railways, telecommunications and power supply. Local governments are able to provide basic education and health services. Consequently, Iran is ripe for foreign direct investment; it should be open for business, possibly on a large scale.

Against this backdrop, reasonably, lifting sanctions would lead to economic growth, not only based on oil and natural gas, but also in manufacturing. Iran would gain in economic weight in the Gulf, in addition to its demographic weight.