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Iran: the $1 Trillion Growth Opportunity? (2016)

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Iran: the $1 Trillion Growth Opportunity? (2016) IRAN: THE $1 TRILLION GROWTH OPPORTUNITY? JUNE 2016 In the 25 years since its founding, the McKinsey Global Institute (MGI) has sought to develop a deeper understanding of the evolving global economy. As the business and economics research arm of McKinsey & Company, MGI aims to provide leaders in the commercial, public, and social sectors with the facts and insights on which to base management and policy decisions. The Lauder Institute at the University of Pennsylvania ranked MGI the world’s number-one private-sector think tank in its 2015 Global Think Tank Index. MGI research combines the disciplines of economics and management, employing the analytical tools of economics with the insights of business leaders. Our “micro-to-macro” methodology examines microeconomic industry trends to better understand the broad macroeconomic forces affecting business strategy and public policy. MGI’s in-depth reports have covered more than 20 countries and 30 industries. Current research focuses on six themes: productivity and growth, natural resources, labour markets, the evolution of global financial markets, the economic impact of technology and innovation, and urbanisation. Recent reports have assessed the economic benefits of tackling gender inequality, the global consumers to watch, a new era of global competition, Chinese innovation, and digital globalisation. MGI is led by three McKinsey & Company directors: Jacques Bughin, James Manyika, and Jonathan Woetzel. Michael Chui, Susan Lund, Anu Madgavkar, and Jaana Remes serve as MGI partners. Project teams are led by the MGI partners and a group of senior fellows, and include consultants from McKinsey & Company’s offices around the world. These teams draw on McKinsey & Company’s global network of partners and industry and management experts. Input is also provided by members of the MGI Council: Eric Labaye (chairman of MGI), Andres Cadena, Richard Dobbs, Katy George, Rajat Gupta, Eric Hazan, Acha Leke, Scott Nyquist, Gary Pinkus, Shirish Sankhe, Oliver Tonby, and Eckart Windhagen. In addition, leading economists, including Nobel laureates, act as research advisers. The partners of McKinsey & Company fund MGI’s research; it is not commissioned by any business, government, or other institution. For further information about MGI and to download reports, please visit www.mckinsey.com/mgi. MCKINSEY & COMPANY McKinsey & Company is a global management consulting firm, deeply committed to helping institutions in the private, public, and social sectors achieve lasting success. For more than eight decades, our primary objective has been to serve as our clients’ most trusted external adviser. With consultants in more than 100 offices in over 60 countries, across industries and functions, we bring unparalleled expertise to clients anywhere in the world. We work closely with teams at all levels of an organisation to shape winning strategies, mobilise for change, build capabilities, and drive successful execution. Copyright © McKinsey & Company 2016 IRAN: THE $1 TRILLION GROWTH OPPORTUNITY? JUNE 2016 Richard Dobbs | London Homayoun Hatami | Paris Tera Allas | London Saba Arab | London Arsalan Mahtafar | New Jersey PREFACE Prospects for Iran’s economy are attracting widespread attention following implementation in January 2016 of a nuclear accord between Iran and the United States, the European Union, China, France, Germany, Russia, and the United Kingdom, and the subsequent easing of international sanctions. Numerous business and government delegations have been visiting Tehran and other cities to size up the potential opportunities and to sign deals and commercial agreements. Iran for years was largely cut off from the globalisation trends that have supported growth around the world. With some of the sanctions lifted, the country now has an opportunity to reconnect with the global economy, but many questions remain. How big is that opportunity, for Iran, and for the global economy? How could both Iranian and international companies capture it? And what measures would Iran need to adopt in order to help usher in a new era of prosperity? This report discusses the strengths and challenges of Iran’s economy and its potential over the next two decades to 2035. It is the fruit of several months of in-depth research, including an examination of key sectors of Iran’s economy ranging from oil and gas to fast-moving consumer goods, agriculture, and information and communications technology. We find that Iran has the potential to add $1 trillion to GDP and create nine million jobs by 2035. If it is to realise this potential, Iran will have to put in place key enablers of rapid growth, including measures to increase the attractiveness of the country to foreign investors, ensure macroeconomic stability, strengthen and deepen its financial system and its international connectivity, raise productivity, and upgrade its industrial infrastructure. Whilst the political environment and stability are important to economic outcomes, we do not comment on politics in this report. The analysis was led by Richard Dobbs, a McKinsey and MGI director based in London, and Homayoun Hatami, a McKinsey director based in Paris. Tera Allas, an MGI visiting fellow in London, headed the project team, which was directed by Saba Arab and Arsalan Mahtafar and comprised Julian Buckner, Samuel Byrne, Maggie Desmond, Alistair Fernie, Owen Gallogly, Sajjad Goli, Babak Hashemi, Amir Hosseini, Amir Ali Motahari, Juan de Francisco Rasheed, Kevin Russell, Ata Seifi, and Pegah Soltani. Peter Gumbel, senior MGI editor, and Matt Cooke, director of MGI external communications, also contributed to this report, for which Marisa Carder, Julie Philpot, Margo Shimasaki, and Patrick White provided editorial support. We are grateful for the advice and input of many McKinsey colleagues around the world who provided industry expertise and analysis. We are also grateful to a number of academics, experts, business executives, policy makers, and institutional stakeholders who offered their opinions and insights in private discussions. The McKinsey Global Institute operates in full compliance with current laws and regulations, including US regulations. The McKinsey Global Institute is publishing this document for informational purposes only. It is not intended to facilitate, encourage, or support client activities. This report contributes to MGI’s mission to help business and policy leaders understand the forces transforming the global economy, identify strategic opportunities and challenges, and prepare for the next wave of growth. While we are grateful for all the input we have received, the report is ours, including any errors. As with all MGI research, this work is independent and has not been commissioned or sponsored in any way by any business, government, or other institution. Jacques Bughin Director, McKinsey Global Institute Brussels James Manyika Director, McKinsey Global Institute San Francisco Jonathan Woetzel Director, McKinsey Global Institute Shanghai June 2016 The gardens of the Bagh-e Eram Palace in Shiraz are a UNESCO World Heritage Site. © Latitudestock/Getty Images CONTENTS HIGHLIGHTS In brief 55 Executive summary Page 1 1. Six core strengths Page 19 Iran can build future growth on fundamental strengths including a diversified economy, Iran has a diversified strong scientific education, a high degree of urbanisation, and an entrepreneurial tradition economy 71 2. The $1 trillion growth opportunity Page 35 Our sector-by-sector analysis of Iran’s potential suggests the country could add $1 trillion to GDP and create nine million jobs within 20 years. We divide the sectors into four growth engines Building up knowledge Harnessing natural resource endowments Page 38 sectors Nurturing internationally competitive industries Page 54 110 Transitioning to a knowledge-based economy Page 71 Expanding and modernising infrastructure Page 93 Special feature: Investing in Iran Page 104 Reconnecting with the global economy 3. Challenges, and an agenda for action Page 109 Iran’s economy will need to undergo profound reforms if it is to realise its growth potential Annex: International corporate deals since the nuclear agreement Page 131 Technical appendix Page 133 Bibliography Page 149 IN BRIEF IRAN: THE $1 TRILLION GROWTH OPPORTUNITY? A new era has begun for Iran’s economy. Isolated from the West, and operating in relative autarky, it has an opportunity to reconnect with the global economy following the January 2016 easing of international sanctions. Expectations of rapid growth are running high within the Iranian government, among ordinary Iranians, and in the domestic and international business community. In this report we gauge Iran’s growth opportunity to 2035 through a sector-by-sector examination of the economy’s potential and challenges. As Iran emerges from the sanctions era, it has six core strengths on which to build future growth. Its diversified economy, strong tradition of scientific education, and fast-growing consumer class, along with a high degree of urbanisation, a deeply rooted culture of entrepreneurship, and the country’s geographic location between East and West, could all contribute to Iran’s reconnection with the global economy and its future prosperity. Iran’s very substantial oil and gas reserves will be essential drivers of economic growth, but the country also has many other sectors with the potential to contribute to GDP growth and employment. They include other resource-based industries such as petrochemicals and mining;
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