Economic complexity: A missing link in Iran’s resistance economy

One of the most important strategies in building economic resistance against sanctions is to nurture a knowledge-based economy, maximizing the resilience of countries against economic and political pressures.

There are several indicators to measure the level of knowledge used in the products of a country, the most important of which is the economic complexity index. Economic complexity is the idea that you can infer how good an economy is by looking at the activities that it is able to develop successfully.

The theory of economic complexity has recently been developed by two groups of scientists at Harvard University and MIT, according to which the productive capabilities accumulated in each country determine its structural changes and economic growth.

The economic complexity index (ECI) is calculated annually for more than 120 countries to measure the volume of accumulated capabilities. The economy of Iran has an ECI of 0.081, making it the 65th most complex country.

According to the research, Iran exports 60 products with comparative advantage, meaning that its share of global exports is larger than what would be expected from the size of its export economy and from the size of a product’s global market.

The results for the country’s provinces show that Kohgiluyeh and Boyer-Ahmad, Khuzestan, Ilam and Bushehr had the lowest degree of economic complexity in most years and in contrast, Qom, Tehran, Isfahan, Qazvin, Markazi and East Azarbaijan had the highest among the provinces.

Iran has been the subject of one of the largest, longest and toughest sanctions regime in history for more than four decades. Given how constrained it is by the measures, it has to find and exploit any means of increasing exports which entails in building a degree of resilience and economic self-reliance.

Iran’s golden goose is its oil industry, the most fundamental sector of the country’s economy. The sector has always been the key target of economic sanctions, with a consensus having formed in the United States and the West that oil is the Achilles' heel of the Iranian economy.

Economic resistance, by definition, is an effort to enhance the country's economic strength against internal and external shocks. It is meant to detect pressure nodes and subsequently control and attenuate them, and under ideal conditions to convert this pressure into opportunity.

In other words, resistive economy aims to reduce dependence and emphasizes the advantages of domestic production and self-reliance.

In the emerging global construct, the main economic resources are no longer more capital, natural resources or labor. The main economic resource, rather, is knowledge where a knowledge-based economy relies on the crucial role of intangible assets facilitating modern economic growth.

In this construct, investment in knowledge can increase the productive capacity of other factors of production and transform them into new processes and products.

An economy based on raw materials and simple production is at constant risk of pressure and coercion. Economic complexity is related to the mix of products manufactured and exported by a country and represents the set of capabilities to maintain and combine knowledge and skills.

Obviously, societies that lack such capabilities are doomed. Countries do not produce anything unless they have knowledge and skill to produce it, indicating the accumulation of productive knowledge available in their national economies.

Still, the importance of economic complexity is not limited to the ability to apply knowledge in the production process.

The more diverse and complex a country's export basket is, the more powerful it is in international economic interactions, and the more resilient is its economy. On the contrary, if a country's export basket is more limited and the goods in it are more ubiquitous, the more fragile it is in trade exchanges, and the less resilient is its economy.

A resilient economy is one in which a country is less dependent on a particular export commodity, such as crude oil. While diversification or moving away from a single-product economy is a common feature of every developed country, in a resilient economy this happens more carefully and on a larger scale.

Iran’s remarkable rise as global leader in knowledge-based companies

Iran has managed to emerge as a global powerhouse when it comes to knowledge-based companies.

The simplicity of products makes the economy fragile and vulnerable where they are easily substituted by competitors during the time of sanctions.

The share of knowledge-based and complex goods should be exponentially increased with right policies and necessary incentives.

Over the past few years, Iran has emerged as an arguably regional powerhouse in knowledge-based production ecosystem where a sprawling expanse of science and technology parks has helped it break the fangs of oppressive sanctions. 

The number of knowledge-based enterprises has grown in recent years – from only 50 firms and startups in 2023 to more than 6,000 at present, according to the vice presidency office for science and technology.

Based on the National Innovation Fund statistics, tech firms and knowledge-based companies raked in more than $5 billion in revenues in 2021. Some 40 knowledge-based companies are listed in the stock market as well.

By identifying the country's relative and absolute advantage, Iran needs to take bold steps on economic complexity. One way is to study the evolution of successful countries and use their experiences in various fields.

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