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Last Updated: Thursday, 26 May, 2005, 14:48 GMT 15:48 UK
Iran: An economy on the move?
By Ben Richardson
BBC News business reporter

Iranian car plant
There is more to the Iranian economy than natural resources
Iran's economy gets mixed reviews.

For some observers it is inefficient, bloated and over-reliant on oil revenues, for others it has the potential to become a leading light in the Middle East.

There is truth in both points of view.

Iran's undoubted strength is its reserves of natural resources, most notably oil and gas. Iran holds about 10% of the world's crude oil reserves and is second only to Russia in terms of natural gas.

One-trick pony

The second-largest producer in oil-cartel Opec, Iran is currently bobbing along on a wave of record crude revenues.

Major customers for Iranian oil and gas include the booming economies of China and India, as well as Japan, South Korea, Taiwan, and Europe.

The extra oil cash will help underpin increased state spending and drive Iran's economic expansion - the International Monetary Fund estimates growth at 6% during this year and the next.

Map of Iran

However, Iran is not just a one trick pony and, having avoided the conflicts that hammered neighbouring Afghanistan and Iraq, it is well-placed to prosper.

The state is looking to diversify into new areas and has invested in developing the nation's petrochemicals businesses so that Iran can manufacture more profitable crude oil derivatives.

Industry in Iran, which includes large state-run textile and automotive companies, accounts for about 41% of annual gross domestic product (GDP).

Service industries, meanwhile, generate 49% of GDP, with agriculture making up the remaining 10%.

As well as oil and gas, exports include pistachio nuts, fruit and carpets, and are worth close to $39bn (21bn) a year.

Foreign interest in Iran is increasing as its political cold shoulder begins to thaw; French carmaker Renault recently said it will build Megane cars in Iran from 2006.

Dark spots

Despite all the positives, Iran has significant problems that oil revenues are likely only to paper over and are unlikely to solve, analysts said.

Even with the efforts to diversify, Iran's fortunes remain closely tied to the price of oil.

Huge state subsidies mean that the country's firms are inefficient and unlikely to be able to withstand foreign competition should Iran decide to open up its domestic markets.

Iranian oil worker
Keeping oil pumps pumping will be key to the Iran's economic future

Small and medium-sized businesses, meanwhile, are few and far between making it difficult to get the official unemployment rate down from its current 11%.

The youthfulness of Iran's population of 70.7 million makes matters more serious; one out of every two of Iranians is under the age of 25.

With so many young people looking for work, Iran must create almost 1 million new jobs every year just for its unemployment rate to remain at its present level.

Opportunities for foreign trade, meanwhile, are restricted by decade old US-imposed sanctions.

Many analysts also point to a lack of political reform as President Mohammad Khatami has battled hardline conservatives over his planned social changes.

Professor Rodney Wilson at Durham University's Centre for Middle East and Islamic Studies said that it was less a link between political reform and growth and more the fact that the economy has been ignored during the in-fighting.

"Political reform is not as crucial as it might seem," Mr Wilson said. The conservatives "are not against economic growth but against Westernisation".


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