TRADE AND FINANCIAL LIBERALIZATION AND THEIR EFFECT ON ECONOMIC GROWTH OF IRAN

In this paper, self explanatory dynamic approach with distribution lags, and for short run relation between variables, vector error correction model is used. The finding of this paper shows that, in short run, there is a direct significant relation between economic growths in one period with that of previous one. In addition there is a direct significant relation between economic growth and increase in Gross Domestic Investment in construction and machinery sectors. A comparison between long and short run effect of Gross Domestic Investment on economic growth of Iran shows that in the short run, an increase in formation of Gross Domestic Investment accelerates economic growth more than the long run. In the short run, there is a direct significant relation between FDI in one period with FDI of the pervious period. In other word, in the short run, increase in the FDI shall accelerate the economic growth of next period. Finally, imposed war on Iran has shown its negative effect on economic growth in both long as well as short run. KeywordsEconomics Growth; Foreign Direct Investment; International Trade; Iran. Prosperity and continued growth of the economy of a country requires understanding and application of fundamental economic policies in the country one of these policies is the rapid development of the financial and investment markets of the country . and foreign direct investment can play a key role in this regard. In addition one of the leading issues which have taken the interest of the economist is the relation between globalization and world trade and the size of the government. One of the problems preventing the countries from joining WTO is shortage of financial markets and capital. Iran is also suffering from same phenomena . Iran, can through experiencing a high and sustained economic growth raise her per capita income and improve her place, from degree of development among other countries. To achieve this goal we should know factors affecting economic growth and the way these factors influence on the economic growth of the country. In this paper it is tried to have a glance at theoretical literature concerning effect of macro variables of economics such as fixed gross domestic investment, foreign direct investment, size of the government, level of foreign trade and discussing various ideas about this topic, a suitable pattern of econometric will be designed. Then by collection and processing of required time series data for each one of explanatory and dependant variable and ensuring about their stationary models will be estimated . after estimation of the model and with regard to estimated co efficient, effects of aforesaid variables on economic growth will be analyzed. At last conclusion regarding effects of variables of the model on economic growth in a short and long time will be discussed. II. THEORETICAL BACKGROUND A. Definition of Foreign Direct Investment. Generally . any kind of investment in foreign country by private companies and real persons (excluding government help) is called foreign investment. According to a definition foreign investment contains long run relations which reflect profit and continued observation of private property of a country, which is in the economy of another country. This kind of investment includes trade between trading partners and all the trades thereafter, between these peoples and other affiliated organizations. In addition this investment includes capitals transferred from one middle investment company to foreign direct investors through accepting capital from foreign direct investors by these companies and includes three topics: 1-foregn shares: purchase of shares from a production unit from a foreign country. 2-reinvested profit: distributed or undistributed shares of investors in a foreign company (which is reinvested) 3-inter-company loans: long or short run loans between investing companies and companies related o them and vice versa. Some of the outcomes of foreign direct investment are the increase in potentiality of production of goods in foreign country, change in excess balance of payment, change in exchange rate, change in corporate taxes, transformation of technology and managerial skills, prosperity of advantages, ease of globalization, change in the size Of government and finally economic growth of the country . B. FDI and Strategy of Export promotion. Basically those countries which have adopted import substitution strategy do not enjoy comparative advantage in their capital intensive sectors. And since foreign investment is mostly used in capital intensive sectors, therefore foreign