March 17, 2023
An American-based Iranian economist says Iran’s automobile industry is a telling example of how government interference twists an industry into contortions that shafts the public with a product of high price and low quality.
Hossein Abbasi, a lecturer in the Department of Economics at the University of Maryland, described the economic problem in considerable detail in an article in the Persian economic daily Donya-e-Eqtesad.
He said carmaking in Iran is grossly inefficient.
“Iran Khodro, with 56,000 workers, currently manufactures up to 500,000 cars annually,” he wrote. “Compare this with Kia Corporation whose 2,700 workers manufacture 250,000 cars at its American factory in Georgia. This means that every employee of Kia is more efficient than 10 employees of Iran Khodro.”
He said former managers of the Iranian carmaker have said a large number of workers in the industry have been employed at the insistence of politicians, showing the dominance of political concerns over economic calculations.
Second, he wrote, prices are imposed by government organizations, but the prices are lower than production costs, so that every year sees losses imposed on the industry. “Domestic carmakers are constantly facing losses, but the interesting point is that these losses do not make them bankrupt. On the contrary, given that the government institutions are the cause of these losses, the carmakers force the government to pay these losses from the budget. The logic behind such a mechanism cannot be justified by economic theories,” Abbasi wrote.
He added that when auto-makers are forced to comply with a mandated price, “they make demands in return, the most important of which is securing government protection against potential and actual competitors. The fact that domestic carmakers seek to control imports or, under unusual pretexts, place hurdles in the way of imports is an example of such demands.”
Furthermore, Abbasi wrote, “Iranian consumers have to pay multiple times the price of a similar car produced in other parts of the world. Given their subpar quality, the prices consumers pay are very high in Iran. The basic principles of economics tell us that this is not possible, except by creating a monopoly that creates barriers to the import of better and cheaper products.”
Abbasi wrote, “The main problem is in the kind of relationship established between the carmaker and the supervisory body, i.e., the government. Instead of monitoring and ensuring the improvement of quality and competition, the supervisory body extends unconditional support to domestic carmakers.
“At present, there is a regulatory and supervisory organization for almost every industry in the world. The responsibility of these agencies is to ensure compliance with standards and prevent monopolies so that the market witnesses higher quality and lower prices. The automaker must constantly see itself at risk of being struck out of the market by more efficient rivals….
“The supervisory organization must be sure that no producer can avoid this competition through political and economic bargaining. This is the key to the success of this industry in the world and its failure in Iran. This relationship has been reversed in the Iranian car market. The watchdog seems to be very careful not to expose carmakers to competition. Bankruptcy and exit from the market are meaningless in Iran. The carmaker is allowed to operate at high costs without worrying about losing the market to more efficient rivals. The losses of the carmakers are ultimately transferred to consumers,” Abbasi wrote.
