Geoeconomics, Structural Change and Energy Use in Iran: A SAM-Based CGE Analysis with Some Geoeconomic and Geopolitical Considerations

In this paper we present a structural CGE model for analyzing the energy situation in Iran and to draw some tentative economic policy and geopolitical conclusions. An important feature of the Iranian economy is its constant intensification of energy use per unit of labor. At the same time, Iran shows only slow improvement in energy intensity i.e. the use of energy per unit of output. Our structural computable general equilibrium (CGE) model for Iran is based on 3- aggregate productive activities input-output structure- agriculture, energy and industry ---within a social accounting matrix for Iran. Four simulation exercises are conducted using this model--- industrial investment demand increase, industrial wage increase, exchange rate depreciation, and government spending increase in industry. Our results show that structural change associated with raising industrial labor productivity and employment share are likely to result in simultaneous intensification of per worker energy-use and slight reduction of energy productivity in Iran. Industrial wage increase can create cost-push inflation and output contraction through a decrease in input use and increase in imports. Exchange rate devaluation is expansionary. Furthermore, when industrial output is insulated from foreign-domestic relative price effects, devaluation too becomes contractionary and wage increase results in a slight contraction in real GDP due to the "forced saving" effect. The model illustrates some of policy challenges Iran faces in its attempt to achieve "green growth" objective with high level of employment. To implement socially beneficial, capabilities- enhancing wage-led growth, Iran has to first successfully rebalance from its export-oriented growth path, which might require the government providing better social safety net for its citizens and increase their purchasing power across the board and generate further productive capacity in the Agricultural sector rather than generate inflation by increasing just the industrial sector wage. This would require a careful crafting of guaranteed income esp. for the Agricultural sector and government programs and incentives for increasing supply and productivity by enhancing both physical infrastructure, technical change and human capabilities. Geopolitically, Iran’s current competition with Saudi Arabia and Turkey diverts valuable economic resources from development to political purposes. Satisfying legitimate security concerns rationally while reorienting the geopolitical concerns to a peaceful commercial relation to North and East of Iran including Japan will lead to much more stable and prosperous economic conditions than Iran experiences at present. However, provocations such as the June 2017 Qatar crisis provoked by Saudi Arabia and its “Islamic NATO” alliance makes geopolitical complexities more acute for Iran. Still Iran needs to avoid sanguinary conflicts and try to isolate Saudi Arabia politically. Geopolitical, 2023 moves for reconciliation via China and Russia seem to indicate a northward and eastward direction of energy and other related policies of both Iran and Saudi Arabia.