Economic Consequences of Smuggling in Iran

다국어 초록 (Multilingual Abstract)

Islamic Republic of Iran is OPEC’s second largest oil producer exporting between four and five million barrels of oil per day. It holds 10 percent of the world’s confirmed oil reserves. Iran also has the world’s second largest natural gas reserves. Compared to the abundant natural sources, this oil rich country’s economic situation has not been bright but doomed.
My thesis brings up with four questions. Firstly, what is the reason for the weak economy? Sanctions by the U.S. since 1979 Iran revolution, the low oil price in oil markets, the war with Iraq during 1980-88, budegt deficits, limited private sector activities, ineffective bureaucratism, and prevalent nepotism are the crucial factors for the weak economy. However, in view of the relatively large size of its underground economy, the thesis addresses that Iranian smuggling activity is also given much weight in Iran’s economic stagnation.
Secondly, if smuggling in Iran is a significant factor on the fragile economy, what causes the smuggling activity in Iran? The smuggling phenomenon prevalent in present Iran has been derived from the rooted underground economy combined with historical background, Shi’ia’s religious practice, post-revolution ineffective policies, and weak governance system. Iran’s restricted Islamic society, energy subsidies in Iran, and political factors such as separatists near borders are also behind this activity. The thesis focuses on the internal elements Iran itself has rather than the external elements.
The third question is what types of smuggling activities there are in Iran and what features they have. There are three main smugglings such as drug trafficking, tobacco trafficking, and fuel trafficking. Each smuggling has its own features. The primary characteristics of opium smuggling in Iran are that no licit or illicit cultivation and Iran is still one of the main conduits for illegal substances originated in Afghanistan and Pakistan and destined for European and Persian Gulf. The features of tobacco trafficking are that Iran’s tobacco market has been paid attention by the world market and the tobacco trafficking has an effect on a the tobacco industry positively. In fuel smuggling, revenues of oil smuggling have two types. One is to get transit fees by letting traffickers from especially Iraq use the water route of Iran’s Hormuz Straight and go into the other countries for smuggling. The other is to smuggle from Iran directly to other neighboring countries such as Afghanistan and Pakistan. Fuel smuggling harms national interests as it leads to a waste of the economic subsidies. Fuel prices in Iran are among the lowest in the world and cheap gasoline prices have initiated an organized smuggling activity of fuel from Iran to its neighboring countries, where gasoline costs up to three times the price.
Finally, how does the smuggling affect Iran’s economy? To analyze the effect of the smuggling on economy, I figured the costs of expenditures by government for smuggling and the profits gotten by the traffickers because those two are represented as the main negative factors for the economy. Figures are shown as a percentage of GDP to understand the effect on economy clearly. According to the figures I estimated, drug trafficking, tobacco trafficking, and fuel trafficking are portioned as 4.9%, 2.3%, and 11.8% of GDP respectively in 2001. Profits by traffickers are portioned as 1.3% of GDP in drug, 0.95% of GDP in tobacco, and 0.54% of GDP in fuel.
In my thesis, rather than the general causes , the size and effects for underground economy in Iran with which the existing papers deal, distinctive causes, features, and costs for each smuggling item, i.e. opium, tobacco, and fuel are discussed. It also focuses on smuggling activity’s effects on Iran’s economy.
What differentiates my thesis from others extraordinarily is that in opium smuggling, corruption is a significant factor on opium price. Therefore, the drug users in such a high-level corrupted country as Iran consume opium at a higher price than the ones in a low-level corrupted country. In order to analyze whether the country’s corruption level factor is significant in the opium prices, the Ordinary Least Squared model was used. Based on the estimates by OLS methods, when Iran is compared to the other country that has 1 point higher transparency Index (cleaner), Iran’s opium abusers pay for the opium 4.55$ per gram higher than the other country.
The aim of this thesis is to analyze what kinds of backgrounds are behind in Iran’s smuggling and how the smuggling has effects on Iran’s economy statistically and quantitatively.

목차 (Table of Contents)

• I. Introduction 1
• 1. Field of Study and Aims 1
• 2. Methods and Study Plan 5
• II. Overview of Iran’s economy 7
• 1. Sectors of the Economy 9
• 2. Current Status and Problems 13
• III. Smuggling Background of Iran 14
• 1. Rooted Underground Economy 14
• 2. Social and Religious Factors 19
• 3. Political Factors 20
• 4. The Impact of Subsidy Economy Structure 24
• IV. Types of Smuggling 29
• 1. Drug Smuggling 29
• 2. Tobacco Smuggling 44
• 3. Fuel Smuggling 56
• 4. Comparisons and Conclusions 63
• V. Economic Consequences of Smuggling 64
• 1. Overall Economic Consequences 64
• 2. Economic Costs in Smuggling 71
• 2.1. Drug 71
• 2.2. Tobacco 86
• 2.3. Fuel 89
• 2.4. Analysis and Conclusions 94
• VI. Conclusions 104
• REFERENCES 106