Investigating Changes in Production Chains in Iran by using the Average Propagation Length Method

Document Type : Research Paper

Authors

1 Ph.D. Candidate in Economics, University of Shahid Beheshti, Tehran, Iran.

2 Assistant Professor of Economics, Department of Economics, Faculty of Economics and Political Sciences, Shahid Beheshti University, Tehran, Iran.

3 Professor of Economics, Department of Economics, Faculty of Economics and Political Sciences, Shahid Beheshti University, Tehran, Iran.

Abstract

Purpose: In Iran (as a resource base country), despite the acceptance of the need to diversify production activities, the planned industrial upgrade did not take place, and the lack of clear industrial strategy, especially in resource-oriented production chains, and the lack of chain attitudes to activities and an introspective viewpoint to the development of activities have sometimes prevented production chains from becoming intertwined. This is while the resource-based industrial development strategy suggests the resource-based countries to move towards the downstream of the chains and increase the economic scale by joining the regional and international value chains. Therefore, identifying the activities in a chain is very important because it gives the politician more power to analyse the situation and helps to make decisions. Also, since the input-output tables are used to analyse the economic structure, the APL method is used to understand the importance of production activities. The main goal of the current research is to examine the changes in the economic distance between economic activities and the structural changes of Iran's economy by using the Average Propagation Length Method and the input-output tables of 1999, 2004, 2010 and 2016 (the last available table) of Central Bank. The purpose is to know the production chains and examine the changes of production activities with chain attitudes over time.
 
Methodology: The economy is divided into several activities, and each activity buys products from and sells products to other activities. The output of an industry consists of inter-industrial deliveries to final demand categories like export, consumption and investments. The added value used in each activity also includes service compensation, net tax and mixed incomes, etc. In this research, first all the four input-output tables are calculated based on the constant prices of 2016. Because calculating APL index needs internal tables, imports were derived from the main tables, and internal tables were obtained. Finally by using Average Propagation Length method, the production chains in terms of the upstream and downstream positions of the chains were identified.
Findings and discussion: Based on the results, Table 1 can be analyzed in two ways, in rows and in columns. When they are analyzed in columns, the activities can be classified in terms of upstream and downstream, and structural changes can be visualized when they are analyzed in rows.
The activities of planting crops, raising animals and forestry in agricultural chains are upstream activities and the rest of the activities of these chains, including the production of food and beverage, the production of textiles and clothing, the production of leather, wood, paper and furniture are downstream activities.
In mining-oriented activities, the basic resource activities include crude oil and natural gas extraction, extraction of other mines and production of petroleum products are upstream activities. The production of chemical materials and products, production of basic metals and production non-metallic minerals are intermediate activities. The activities of producing rubber and plastic, production of fabric metal products, production of machinery and equipment, production of electrical equipment, production of vehicles, and production of computer-electronic and optical products are downstream activities.
The development of production activities from 1999 to 2016 was more focused on mining. From 2004 to 2010, the inter-sectoral relations among production chains in Iran was weakened, and this weakness showed itself mostly in the downstream part of chains (rubber and plastic, electrical equipment and machinery and equipment). Since the activities of mining (oil and other mines), production of non-metallic minerals and production of petroleum products have short backward linkages and long forward linkages, they have always been the attention of politicians. On the other hand, due to longer backward links and shorter forward links of downstream activities like rubber and plastic, metal products, and machinery and equipment are generally not considered by policymakers for development. But in order to create more value added, increase employment and reduce the export of raw and semi-raw products, it is necessary to move towards the development of downstream activities on the production chains with the resource-based industrial development strategy. The results show that the production chains in agriculture and mining (oil and other mines) do not have strong connections within the chain, and three separate chains have been formed, which has resulted in the isolation of production chains.
Conclusions and policy implications: From the strengthening and weakening of the links between different activities during the studied years, it can be concluded that the necessity of choosing the industrial development policy is clearly evident. Due to the limitation of capital, knowledge, etc. in Iran, the development of activities is of an unbalanced type of growth, and the policymaker should prioritize the development of chains towards the downstream side. Therefore, it is suggested that, while completing the missing links of the production chains towards the downstream activities, it is better to starts with the mining-oriented chains and then complete the agriculture-oriented chains.

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The Journal of Economic Policy
Volume 16, Issue 31
September 2024
Pages 345-395

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