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Iran’s 20-Year Economic Perspective: Promises and Pitfalls Jahangir Amuzegar Dr. Amuzegar served the pre-revolution government
of Iran as minister of commerce, minister of finance and ambassador-at-large.
He was on the Executive Board of the International Monetary Fund,
representing Iran and several other member countries between 1974
and 1980. He has taught at UCLA, the University of Michigan, Michigan
State University, the University of Maryland, American University
and Johns Hopkins SAIS. He is the author of seven books and more than
100 articles on Iran, oil, OPEC and economic development. The widely publicized document called
for (a) achievement of fast-paced and sustainable economic growth;
(b) creation of durable employment opportunities; (c) enhancement
of factor productivity; (d) active presence in regional and international
markets; (e) development of a diverse, knowledge-based economy free
of inflation and blessed by food security; and (f) establishment of
a market environment conducive to domestic and international business
entrepreneurship. With the first
of the four five-year plans nearing its end without reaching any of
its major targets (e.g., rapid growth, price stability, high employment,
increased investment and reduced reliance on oil-export receipts),
a fresh appraisal seems appropriate.2 And, since the Islamic Republic currently
lags far behind other countries in the region in most of those measures,
there is no doubt that unless the causes of such poor performance
are clearly recognized and effectively dealt with, the next three
plans will have no better outcome than the first one. A careful
new look at the Perspective’s prospects, challenges and requirements
is thus in order.3 FAVORABLE PROSPECTS The Perspective’s 20-year objectives
actually contain some reasonably favorable potential. With only
one percent of the world’s population, Iran ranks seventh in mineral
wealth, possessing 10 percent of proven global petroleum reserves
and 16 percent of the earth’s natural-gas deposits. New mineral wealth
is being discovered each year, and a large part of the country is
still unexplored. Iran is now called the region’s most “wired”
nation, with more than one-third of its 72 million people having access
to the Internet. The two-thirds under 30 are also educated young men
and women ready to participate in building a thriving and prosperous
Iran. Variegated climate and favorable topography allow for a rich
agriculture under conducive policies. With a strategic location,
surrounded by 15 land and sea neighbors, Iran can serve as a lucrative
trade and transit route in both north-south and east-west directions.
Its abundant natural and human resources would be magnets for foreign
direct investment if a hospitable business climate and sufficient
incentives should prevail. Finally, the minimal infrastructure
needed for growth and development (roads, railroads, air and sea ports,
modern communications) is already in place to promote and sustain
growth under proper maintenance.
Challenging
these favorable prospects, however, is a host of serious ideological,
political, economic, managerial, technological, sociocultural and
external obstacles that threaten the Perspective’s lofty goals.
There is no doubt that such an overly ambitious scheme not only requires
sufficient material and human resources, but also a hospitable
environment free from ideological, political, economic, managerial,
technological, socio-cultural or external challenges that may impede
the achievement of its lofty goals. The following brief references
to each of these existential obstacles may show the enormity of the
task ahead and the need for urgent rescue efforts. IDEOLOGICAL SHACKLES The foremost obstacle to the realization
of the Perspective’s goals is the Islamic Republic’s theocratic oligarchy,
based upon an anachronistic, retrogressive and somewhat xenophobic
constitution that is inimical to economic growth and wealth creation.
This fundamental law, adopted in 1979 and amended in 1989, is based
on a hotly disputed theological doctrine called velayat-e-faqih
(guardianship of a jurist), formulated by Ayatollah Khomeini before
the 1979 Iranian revolution. This theology, challenged from
the start by Shiite divines both in Iran and across the Middle East,
bestows dictatorial power on a vali (rahbar, or supreme
leader), who is presumably infallible. A unique constitutional process
in the Islamic Republic virtually allows this vali to appoint himself
for life and be answerable to no one.4
He sets the country’s major domestic and foreign policies, commands
the armed forces, oversees the state radio and television monopoly,
appoints the six clerical members of the veto-wielding Council of
Guardians, and selects the members of the Expediency Council as the
final arbiter of all national legislation. The basic law also contains
a distinct ideological bias in favor of the poor (mostazafan)
under a banner of “Islamic social justice” that is never clearly defined.
In this bias, akin to equating poverty with virtue, the primacy of
money and wealth is called into question, as is the pursuit of pleasure.
There is also an ill-concealed hostility toward capitalism, free enterprise
and the Western way of life, presumably because they are based on
“secular, humanistic and liberalist” principles instead of theistic
foundations.5 Real economic development, it is held,
may not be attained by adopting foreign economic models, but only
through a genuine “national, home-grown and Islamic” paradigm compatible
with Iran’s own history, geography, politics and culture.6
Searching for this elusive economic
model for nearly 30 years, the government has been operating under
a series of five-year development plans that have never been strictly
adhered to, never attained their targets and never taught a useful
lesson. Yet, this exercise in futility still continues in the
preparation of the Fifth Plan (2010-15). Meanwhile, in search of a
culture-specific model, the regime has shifted from one awkward strategy
to another.7
The irony is that such a specific, domestic-oriented model, even if
it could be fashioned, would not only lack scientific or rational
underpinning, it would also actually go against Iran’s own basic national
interest. For a small, isolated, rural and self-sufficient island
nation, an inward-looking paradigm might perhaps have been tolerable.
But for a large and populous country, dependent for as much as 40
percent of its gross domestic product on foreign trade, it would be
patently absurd. Furthermore, the adoption of such a xenophobic
model would be against the Perspective’s promise of “collaboration”
with the global community. POLITICAL HANDICAPS Politics and governance in Iran is
based on the regime’s self-described Islamic democracy, an
oxymoron that identifies neither a true Islamic state nor a modern
pluralistic, representative government. The regime’s virtually apartheid
character discriminates between khodi (ours) and gheyr
khodi (others); but khodis themselves are treated differently
on the basis of gender, revolutionary credentials, blood relations
and inclusion in the nomenklatura. Even women who are
khodis, for example, are treated as second-class citizens in matters
such as marriage, divorce, inheritance, child custody and court testimony.
Denied access to many occupations, they constitute a small segment
of the labor force and deprive the economy of their productive contribution.
Members of the pasdaran (revolutionary guard), the basij
(volunteer militia) and the martyrs’ families are given special educational,
professional and financial privileges. Clergymen enjoy special
advantages, occupy supervisory positions in all government organizations,
head most of the charitable foundations and have their own court of
justice. Grandees — offspring and siblings of eminent ayatollahs —
are shown favoritism in government projects and no-bid contracts and
treated with kid gloves in judicial proceedings. There is also no equality before the
law for all, regardless of religion, gender or political beliefs,
as real democracy requires. Sunnis, Christians, Jews, Zoroastrians
and Bahais do not enjoy the same rights and privileges as Shiites.
The Islamic Republic continues to be on the list of countries accused
of religious discrimination by the United Nations and the United States.
Those labeled liberals, secularists, monarchists and pro-Westerners
are denied many of their civil rights. Political parties, labor
unions, business associations and nongovernmental organizations are
not free to organize and function, despite constitutional guarantees.
There are more than 100 political “parties” officially registered
and recognized, but none has a national base, sizable membership,
party discipline or meaningful platform beyond some attention-getting
slogans. In the 2009 presidential election, for example, the general
secretary of a major party backed the candidate of another party!
Even the periodic elections that the regime routinely claims as proof
of its democracy are by no means free or fair.8 Governance in Iran may be characterized
essentially as rule by men and not by law, even God’s law. There is
a unique jurisdictional power-sharing arrangement, or political satrapy,
among various clerical, military and technocratic power brokers.
The national constitution remains largely a law on paper only; more
than a dozen of its essential clauses are routinely disregarded with
impunity. A commission established during the Khatami administration
to monitor and report such violations was abolished in 2000 after
only a year, during which it found hundreds of them. Laws are
frequently passed by the Majlis (legislature) but ignored or selectively
enforced by the executive branch or the supposedly “independent” judiciary.
The supreme leader issues lofty proclamations (against corruption
and profligate consumption, in favor of the sale of public entities)
with no follow-up. Disregard for the budget and fiscal discipline
manifests itself in the hundreds of projects approved on the spot
by cabinet members touring the country, with no visible means of fiscal
support.9
The Expediency Council orders various state councils unlawfully abolished
by the executive branch to be reinstated to their legal status, but
the order is not obeyed. The Council of Guardians orders the incumbent
president to halt his provincial tours paid by the state funds during
presidential campaigns, and he defies the order with no consequences.
The judiciary chief gives strict instructions on judicial procedures
and sentencing practices, but they are openly ignored by lower-court
judges. Court orders on individual or business-rights cases
are issued but not enforced by responsible state agencies. Prosecutors
use cruel and unusual means to exact confessions from political prisoners
on trumped-up charges, despite strict constitutional prohibition.
And, while no official raises his voice, whistleblowers themselves
end up in jail. Security agencies run their own prisons. The sitting
president, in a televised campaign debate, openly accuses the three
former heads of government of corruption and misfeasance, and everyone
listens with utter indifference. State entities frequently contradict
each other’s information and statistics with no repercussions. In addition to its anarchist character,
the central government is also big, inefficient and intrusive — characteristics
that are hostile to a thriving economy and a vibrant society. While
Iran’s population has doubled since the 1979 revolution, the number
of public servants has nearly quadrupled. And, while the government’s
general budget has increased tenfold in the last decade, there has
been no notable improvement in public services. Currently, the central
government and semi-public agencies (state-owned enterprises, state-supported
charitable foundations (bonyads) and public-dominated organizations)
control nearly 70 percent of the economy. Despite being deplored and
criticized in recent years and repeatedly targeted for downsizing
in every five-year plan, the bureaucracy has been steadily on the
rise. Parallel operations in the armed forces, the ministries
and state enterprises abound, and they often operate at cross purposes.
There are at least three separate organizations in charge of energy,
three of education and culture, five of economy, and two of labor
and social affairs — all with inadequately defined duties and responsibilities.
The Iranian bureaucracy, in short, suffers from insufficient respect
for the law, lack of transparency, excessive centralization, inadequate
fiscal discipline and significant inefficiency. The lean and struggling private sector,
involving mostly domestic trade and services, does not play a significant
role in the economy’s direction. Various privatization schemes initiated
in the last 20 years, and a recent fundamental revision of Article
44 of the constitution toward de-nationalization, have not made more
than a small dent in the giant structure. Of an estimated $120 billion
in assets owned by state enterprises, some $40 billion have so far
been disinvested. Assets valued at $22 billion have reportedly
been “distributed” among the poorer strata as “justice shares”; another
$7 billion worth has been paid to the Social Security and Employees
Pension Funds in lieu of the Treasury’s delayed debt; and $11 billion
in shares has been sold to the public through the Tehran Stock Exchange,
although in many cases these shares have been purchased by some parastatal
organizations and thus are not really privatized. In all cases,
too, the majority ownership and management of the “privatized” enterprises
have remained in state hands.10 The result has been a reduction of entrepreneurial
efficiency and the undermining of a more rational use of business
income.11 The Islamic government is also an
all-intrusive behemoth. State interference in the economy covers a
whole spectrum: wages, prices, exchange rates, trade and business,
interest rates, and state-bank lending quotas in addition to direct
industrial, agricultural and commercial control. The government
also prescribes (and clumsily enforces) its citizens’ daily lives:
the way people are to eat, drink, dress, read, write, assemble, socialize,
publish, preach and conduct their personal affairs. In this respect
it surpasses other totalitarian (fascist and communist) regimes with
which it shares most other characteristics. The government
also tends to regard political dissent as a threat to national security,
and therefore subject to repression and, in serious cases, prosecution.
Despite clear admonition by the constitution, civil liberties are
routinely curbed by the authorities. People are arrested, incarcerated
and denied access to counsel or courts for weeks and months with no
explanation or charges. Reform-minded newspapers and publications
are shut down. Movies, books and art exhibitions must obtain
governmental permits prior to publication and display. Radio
and TV stations are state monopolies. Freedom House’s 2009 annual
report on press freedom ranks the Islamic Republic 181 among 195 countries.
Reporters without Borders calls Iran the world’s largest prison for
journalists.12
All these restrictions and proscriptions, needless to say, impede
the Perspective’s optimum realization. Economic Fault Lines In the economic arena, the single
most significant weakness now and for the next 15 years is Iran’s
unhealthy reliance on oil-export revenues as the mainstay of its economy.
Although not the largest sector, oil accounts for more than 80 percent
of annual foreign-exchange earnings and nearly 70 percent of annual
state finances. While reduction and eventual elimination of
this dependence has been mandated in every one of the past development
plans, the reliance on oil has, if anything, actually intensified.
The government’s need for oil receipts has increased from $16 billion
in 2001 to $41 billion in 2009. Recent oil-price volatility
in the face of Iran’s increasing heavy dependence on imports of essential
capital and consumer goods (including such daily staples as wheat,
rice, sugar and red meat) now presents an even more ominous threat.
According to a recent IMF estimate, a protracted oil price below $75
per barrel may play havoc with Iran’s economy. The Perspective’s ultimate
material success may, in fact, depend largely on the fate of Iran’s
gas and oil industries. The national budget’s lack of transparency
is the second gravest economic threat. The annual budget document,
approved by the Majlis usually after weeks of deliberation, is hardly
ever faithfully adhered to. Always formally in balance at the
time of approval, it invariably ends up in deficit13 due to a paltry and inflexible tax base,
recurrent losses of state-owned enterprises, poor tax collection and
unaffordable public-welfare expenditures.14 A shortage of funds in the current
account is routinely made up by transfers from the development (capital-investment)
portion. In recent years, one-fourth of the annual capital-investment
budget has been diverted to regular expenditures, with the result
that thousands of development projects remain unfinished due to lack
of funds.15 Budget deficits are routinely financed by
the Central Bank, operating as the government’s cash cow. Iran’s
endemic double-digit inflation, the highest in the region and among
the eight highest in the world, is the result of this monetization
of the public debt. The budget’s major black hole, on
top of staggering employee compensation and fringe benefits, is across-the-board
public subsidies. In addition to paying the highest energy subsidies
among the 22 countries in the Middle East and North Africa — nearing
20 percent of GDP — the government also subsidizes the production,
consumption, distribution and export of various products. Despite
the lip service paid to the necessity of rapid production growth,
the government’s main concern has always focused on distribution rather
than wealth creation — under the banner of Islamic “social justice.”
Nevertheless, current public subsidies, both explicit (budgeted) and
implicit (foregone opportunity values), leave much to be desired in
terms of fairness, efficiency and sustainability. Anachronistic banking is another economic
handicap. Iran’s banking and financial sector, responsible for
facilitating one-third of the total domestic product, is highly inefficient.
The 11 major commercial and investment banks (controlling 90 percent
of the sector) are state-owned and operate according to government
directions. All state banks are financially undercapitalized; they
suffer from too many money-losing branches and semi-idle employees,
and too few initiatives. Under the country’s so-called “interest-free”
Islamic banking law, state and private banks have the unenviable task
of fitting the twenty-first century’s complicated modern financial
services into the strait jacket of some seventh-century Islamic transaction
modes. Interest rates paid on deposits and charged on loans
are arbitrarily dictated by the government, often in total disregard
of prevailing economic conditions. Since all state banks are
under one corporate board composed of high government officials and
are not required to publish their balance sheets, there is no way
of knowing the true size of their nonperforming loans. The privately
estimated figure amounts to $38 billion (or 20 percent of their total
assets).16
They are also indebted to the Central Bank to the tune of $22 billion,17
as a result of making government-directed loans to various so-called
quick-return enterprises that have proved delinquent in servicing
their debts.18 Stagnant factor productivity is the
third economic shackle. While some 2.5 percent of the 8 percent annual
GDP growth targeted in the Perspective is supposed to materialize
through increases in total factor productivity, the figure realized
so far has been highly disappointing. According to private estimates,
labor productivity in the last four years has risen by about 0.57
percent a year, but total factor productivity has been negative due
to low returns on capital.19
The reasons are not hard to find. Iran has one of the largest
numbers of official holidays in the world. Lax supervision reduces
government employees’ productive daily working hours to a fraction
of the normal. Inadequate wages in the face of rising inflation lead
workers and state employees to work at two to three jobs a day.
Many factories reportedly operate only three hours a day, due either
to lack of input or to insufficient customers.20 There is a significant mismatch between
jobholders’ skills and qualifications and their actual positions.
There are also wide gaps between jobseekers’ training and education,
on the one hand, and basic national needs on the other. Iran’s
education system, at all levels, is both expensive and unproductive.
It largely produces degree-chasing, desk-oriented graduates who, instead
of forming a technically trained and economically productive work
force, are certifiably unemployable. According to a recent police
report, more than 6 percent of homeless people in Tehran have a university
education! Excessive waste of resources is the
fourth problem. Topping the list is profligate energy use. Refineries
and energy-based industries (steel, aluminum, cement, petrochemicals)
use oil or gas at two to three times the world standard.21
Due also to subsidized and dirt-cheap prices, per capita energy consumption
is the highest among OPEC members and several times the world average.22
The country’s energy intensity (share of fuel in the final product)
is three times the world’s norm, using 16 barrels of crude oil to
produce $1 million of final product, compared to three barrels in
major industrial countries.23
Only 3 percent of buildings in Iran are adequately insulated.
By an official estimate, energy waste in Iran rises to as much as
$30 billion a year.24 Poor management also is endemic.
With the government controlling more than two-thirds of the economy,
almost all key managers in state-owned enterprises, including oil
and gas, heavy industry, commerce, transport, communications and charitable
foundations, are government appointees. Their positions are
based mostly on strict fealty to the regime and/or close blood relations
with the ruling elite. Managers are frequently appointed or
removed, not on the basis of performance, but on political and personal
considerations. Turnover is frequent and demoralizing to the
work force. As a result, the country is deprived of the services
of some of its best and brightest individuals, who routinely emigrate
to the West and become successful business executives. The last economic problem is the high
cost of starting and conducting businesses. Obstacles include the
tension-filled internal and external political climate, discriminatory
and ever-changing laws and regulations, uncertainties regarding the
state-determined foreign-exchange rate, an inadequate banking and
financial market, an inefficient and tainted stock exchange, lack
of protection for intellectual-property rights and, above all, a corrupt
and politicized judicial and arbitration system. Domestic and
foreign trade is dominated by a small number of public and private
monopolies in the hands of a few clerical, military, security and
other influential families — commonly dubbed the “economic mafia.”
The absence of a level playing field, and unfair competition by subsidized
state-owned enterprises and bonyads (foundations) discourage
private entrepreneurship. The World Bank’s 2009 international
ranking of hospitable business environments ranked Iran 142 among
180 nations.25
Lack of economic
freedom also hampers rapid economic growth, enhanced factor productivity
and a hospitable business climate. The Heritage Foundation’s
2009 report classifies the Islamic Republic as a “non-free” nation,
placing it 168 out of 179 nations in terms of various freedom measures. Technological Shortcomings Research and development in science
and technology in the Islamic Republic faces dificulties. There are
reports of notable advances in such fields as construction engineering,
nuclear energy, space exploration and defense weaponry (armored vehicles,
speed boats, drones, helicopters, ballistic missiles). There is also
evident progress in medicine and biotechnology (organ transplants,
stem-cell research, animal cloning), as well as in nanotechnology.
Nearly all these advances, however, are borrowed and subject only
to local adaptations. Iran has not been able so far to offer a single
new and truly innovative technological model to the world.26
With more than 100 years of immersion in the oil and gas industries,
Iran has not yet registered a single patent under its own name.
As a result, the bulk of the economy (agriculture, industry and transportation)
operates at mid-twentieth-century technological standards. An average
Iranian farm or industrial plant uses several times more energy, more
workers, more material and more hours to produce a unit of final product
than a similar entity in the West.27 A major reason
is that research and development as such has never been institutionalized
within the system. Research and development activities conducted by
universities, think tanks and other entities in Iran are all financed,
directed and supplied by the government. Demand for business
innovations is scant. As a result, none of Iran’s current industries
can compete in world markets without subsidized imports and/or export
“prizes.” Their minuscule research budgets are generally
wasted on costly, but inconsequential, conferences and seminars arranged
by ambitious bureaucrats instead of serious scientific investigations.
The annual brain drain, coupled with a large number of government-financed
fellowship students abroad who decide not to return home, adds to
the problem. SocioCultural Malaise
The sociocultural stumbling blocks
to the Perspective’s targeted objectives are numerous and complex.
The country’s spiritual and moral social fabric is under severe strain.
Bureaucratic malfeasance, a near-total disregard of meritocracy in
government employment, judicial capriciousness and wasteful distribution
of the oil windfall have all reduced the credibility of Islamic social
justice. The imposition of an antiquated Islamic moral code on a burgeoning
young population enamored of Western dress, pop music and the Internet
has damaged their spirit. The rapid rise of new privileged groups
to fabulous fortunes through lucrative government contracts and access
to enormous economic rents, combined with an ostentatious display
of wealth, has made the nouveaux riches role models for the
youth. Ironically enough, after 30 years of relentless religious
admonition against crass materialism and conspicuous consumption,
Iranian twenty-somethings have never been as rapacious in the pursuit
of the “good life” as they are now. Getting rich quick is their
major goal. At the same time, this subculture has led to a reported
annual exodus of more than 100,000 educated men and women in search
of better and safer opportunities — placing Iran near the top of nations
experiencing a brain drain. Adding to a long list of social ills are
plagues such as the unusually high and growing rates of drug addiction,
prostitution, divorce, runaway teens, youth suicide and juvenile crime.28 Adding to these factors is a new subculture
of martyrdom and messianic anticipation promulgated by the incumbent
administration. Elevating as this belief may be for ultimate spiritual
salvation, it does not enhance mundane economic development or material
rivalry with neighbors; nor is it of much help in competition with
trading partners. The cult of personality — the supremacy and infallibility
of the vali-e-faqih — is also clearly incompatible with the
aspirations of free-thinking, innovative people. The sycophancy
and mendacity spawned by this cult are likewise anathema to a dependable
process of technological and material progress. Dependence by
ordinary citizens on government handouts is another cultural negative.
The harmful habit of seeking state solutions for all individual problems
has now become an accepted way of life for the majority of the population.
Self-reliance, individuality and mutual cooperation are further undermined
by allowing people to submit their requests directly to the highest
authority. Of the millions of officially claimed petitions presented
to the president and his cabinet in their provincial tours, more than
90 percent reportedly involve demands for money to buy a house, pay
debts, get married or make a trip to a holy site. This dependency
has now become a highly charged political issue, as it encourages
office seekers to outbid each other in promising a larger and larger
government dole. Jeopardizing
the fulfillment of the Perspective’s targets is also the plague of
widespread and brazen endemic corruption, not only at the high levels
of administration and state enterprises, but also in small routine
daily transactions involving public services. Lucrative no-bid contracts
given to the pasdarans’ business entities, the sale of state-owned
enterprises to favored groups at below-market prices, large and virtually
unsecured loans made by state banks to privileged businesses or individuals,
access to substantial economic rents in the purchase of goods and
foreign exchange from government agencies, inside information available
to certain parties about imminent changes in trade and exchange regulations,
and petty bribes and kickbacks for routine public services are some
examples. Transparency International places the Islamic Republic’s
position in terms of business ethics at 141 among 180 countries in
2009, down from 88 in 2005. External Drag The Islamic Republic’s recent belligerent
and provocative foreign policies, particularly its hostile posture
towards the West, denial of the Holocaust, threats to Israel and support
for the “terrorist” groups on Washington’s list, have poisoned the
atmosphere for trade and investment transactions with the global community.29
Combined with a series of provocations — launching a “spy” satellite,
displaying thousands of new centrifuges for uranium enrichment, test-firing
a surface-to-surface missile — this contentious stand presents a further
major handicap. Iran’s seemingly resolute intention to enrich
uranium for avowedly peaceful purposes has been called into question
by the West and resulted in a series of crippling economic sanctions.
Without a mutually satisfactory resolution of this issue, the threats
of more severe diplomatic pressure, more effective economic sanctions
and even military action hang over the horizon. These existential
threats would clearly impede Iran’s efforts toward economic progress
and prosperity. Further saber rattling by the Iranian government,
even under the banner of defense and deterrence, is likely to be counterproductive.
The four UN Security Council sanctions resolutions, combined with
U.S. bilateral sanctions, have so far substantially restricted the
Islamic Republic’s access to global financial markets. They
have raised foreign transaction costs and made dependence on volatile
petroleum receipts the main source of external financing. With
the realization of the Perspective’s targets clearly dependent upon
billions in foreign funds and direct foreign investments, anything
short of a good-faith effort to resolve differences with Washington,
Israel and the West would place the Perspective’s final outcome in
great jeopardy. By most estimates, Iran needs some
$25 billion of new investment each year for many years to come to
provide employment for more than one million new entrants into the
job market. Some 40 percent of this investment has to come from
abroad.30
Yet, the Islamic Republic’s present lack of even minimal access to
the world financial markets, coupled with a host of other impediments
discussed elsewhere,31 have placed it at the very bottom of countries
attracting foreign-direct or even portfolio investments.32
In the oil industry, where both capital and technology are badly needed,
economic sanctions aggravated by a frustrating bureaucracy, long delays
in decision making and unattractive “buy-back”33 contract terms have further thwarted the
realization of the targets set in the Fourth Plan and the Perspective.
Nearly all Western oil and gas companies having the mindset, the technology
and the capital for such investments have now stopped their new involvement
in Iran. The Chinese, Indian and local entities that are replacing
them lack most of the essential requirements. As a result, Iran is
reportedly 11 years behind in getting its share from the South Pars
gas reservoirs jointly owned with Qatar in the Persian Gulf, and seven
years behind in the Salman gas field jointly owned with the United
Arab Emirates. Tehran also has no share of the oil and gas exploited
in the Caspian Sea by the other littoral states.34
In the non-energy sectors, too, Iran has been woefully unsuccessful
in attracting direct foreign investment due to the uncertain political
climate, inadequate and ever-changing rules, bureaucratic hassles
in starting a business, uncertainties about future exchange rates,
and the unreliability of the judicial and arbitration systems.35 The brutal
crackdowns — beatings, arrests, jailing, shootings and killings of
peaceful demonstrators protesting alleged fraud in the June
2009 presidential elections — have further raised the level of worldwide
indignation against the theocratic regime. This unprecedented
repression has not only jeopardized Washington’s declared intention
of direct engagement with Tehran; it seems to have further postponed
any conciliatory steps on the part of the European Union in restarting
dialogue. The turmoil and its ensuing climate of increased anxiety
and new uncertainties have more than ever jeopardized new domestic
and foreign investments needed to foster growth and innovation. A Suggested Rescue Plan
Given the Islamic Republic’s seventh-century
ideology, non-democratic politics, socioeconomic flaws, skeptical
worldview and other shortcomings, there is no possibility that the
Perspective can reach its stated goals within the next 15 years.
Nor can Iran become the number-one nation in the region in anything
except perhaps the size of its population. Without drastic revisions
of the current Constitution in both its domestic politicoeconomic
stance as well as its global outlook, the Perspective’s aspirations
cannot even be approached. However, under certain conditions outlined
below, some of its targets may perhaps be reached. The most immediate need for the attainment
of the Perspective’s goals is to make up for the subpar performance
of the last several years and the baggage thus far accumulated. This
burdensome legacy, as already mentioned, is manifested in (a) double-digit
inflation, accompanied by widespread cost/price distortions; (b) double-digit
unemployment36
resulting from insufficient national saving and investment; (c) an
over-valued national currency responsible for the country’s
current Dutch Disease and capital flight; (d) a highly indebted
government with a nearly empty treasury;37 (e) an unfavorable business climate and
the absence of a level playing field between private and state enterprises;
(f) declining management quality due to increased nepotism and growing
intrusion of military and security forces into public enterprises;
(g) stagnant factor productivity due to faulty investment, poor project
design and a mismatch of skills and occupations; (h) a shortage of
basic social amenities (housing, health clinics, recreational facilities)
resulting from misplaced priorities and neglected maintenance; (i)
increasing poverty and a widening gap between rich and poor;38 and (j) international ostracism due the
government’s confrontational stance on nuclear and other foreign-policy
issues. With almost one-fourth of the Perspective’s
life expectancy already passed, the Iranian economy has to play catch-up
to get back on track. With a relatively small percentage of
the world’s population and many times more than its share of natural
and human-capital endowments, Iran’s GDP is barely half of one percent
of the world total. Iran’s average annual exports (of which 80 percent
are oil and gas) add up to only six-tenths of one percent of the global
sum. Iran’s share of the $1.9 trillion annual global foreign investments
is about four-hundredths of 1 percent; its part of the $1 trillion
worth of world tourism is even smaller. The national economy is currently
faced with at least five major imbalances: (1) an international payments
imbalance due to a highly overvalued exchange rate, increasing reliance
on imports, lagging genuine non-oil-based exports, and a precarious
and uncertain future oil-export market;39
(2) a budget imbalance caused by rising expenditures in the face of
stagnant and doubtful revenues; (3) a resource imbalance due to artificially
low prices for water, power and fuels that encourage ever-expanding
demand;40
(4) a monetary and financial imbalance resulting from government-directed
low interest rates, non-performing banking assets, rising defaults,
and an increasing flow of savings into the informal market (the bazaar)
and capital flight; and (5) a labor imbalance resulting from the rising
work force, inadequate investment in housing and industry, and an
anti-business labor code.41
There is no doubt that unless these
imbalances are rectified, the Perspective’s chances of reaching its
grand objectives are nil. Every one of these shortfalls alone is capable
of jeopardizing the ultimate goal. All of them together would insure
the Perspective’s doom. The continuation of recent trends for
the next 15 years is also likely to confront the government with 5
million new unemployed workers and billions in additional foreign
debt. The crucial task is to provide a stable
climate for the conduct of normal trade and business. The quintessential
requirements are a peaceful political environment, public confidence
in the rule of law and the impartiality of the judicial system, and
transparency on the part of state agencies. What is needed is a solemn
and unwavering commitment by the government to abide by the business-sensitive
clauses of the current constitution regarding the sanctity of private
property and contracts, as well as the primacy of an independent and
nonpolitical judiciary. Once these commitments are in place,
the following challenges must be met. Every one of the current imbalances
is directly or indirectly influenced by the Islamic government’s unfavorable
standing in the world community. Due to a number of unwise political
statements and actions by Iran’s upper echelon in the last four years,
Iran has suffered increasing worldwide and regional isolation.
The first step in the Perspective’s rescue efforts must thus begin
with improvements in the Islamic Republic’s external position and
image. The central step toward the Perspective’s salvation should
involve a mutually satisfactory resolution of the nuclear issue and
the country’s pursuit of its legitimate uranium-enrichment program,
resumption of negotiations with the United States and the EU, reduction
of tension with countries in the region, and a de-linking of foreign
policy from its Palestine-centric obsession. Once the government is freed from
external pressure, censure and other punitive measures, the climate
may become receptive to new initiatives. The next step is to shift
the economy’s “commanding heights” from the state to the private sector,
at least to the extent that the recent interpretation of the constitution’s
Article 44 permits. As part of this transfer, state involvement
in the economy should become limited to (a) the design and enforcement
of basic economic policies, (b) the construction and maintenance of
major infrastructure, and (c) the provision of public goods (i.e.,
education, health and welfare). The government should simultaneously
discard its romantic pursuit of economic self-sufficiency as a precondition
for “political independence.” No matter how it may hurt national
pride, it should be recognized that Iran’s physical, climatic and
resource conditions do not allow the country to become self-sufficient
in many consumer staples or industrial wares except at unaffordable
costs.42 The country’s full economic potential can
only be realized through integration into a well-regulated global
economy, including early membership in the World Trade Organization.
Full benefits from such integration may be reaped by specializing
in areas where the country has a distinct strategic or competitive
advantage. And since the ability to develop indigenous
technology is the surest means of achieving genuine economic progress
and acquiring a competitive edge, Iran will have to initiate and strengthen
its own research and development institutes. Instead of relying
almost totally on borrowed technology, the government has to envisage
a major restructuring of its advanced educational curriculum and university
programs, an area in which it has a long way to go.The first step
in this direction is to change students’ obsession with a university
degree to a desire for productive and innovative skills. In no progressive
country is the public’s attachment to an educational title — even
a bogus one — as intense as in Iran, where mushrooming private “universities”
have now largely become commercial diploma mills. National economic policies should
then be directed towards removing the causes of existing imbalances.
In the external-payments case, there is an urgent need for the
adjustment of the foreign-exchange rate. The current parity, kept
relatively stable in nominal terms in the last five years while domestic
inflation has far exceeded that of Iran’s trading partners, should
be corrected as a matter of the highest priority. It should
preferably be left floating and determined by daily interbank transactions.
Otherwise it should be regularly adjusted for differences between
domestic and external price changes. Along with regular rate adjustments,
the government should also reorganize the Oil Stabilization Fund to
deal with unforeseen shortfalls in annual oil receipts and prevent
the need for drastically reducing essential imports.43
To supplement oil funds, the government also has to take necessary
steps to attract direct and portfolio foreign investments, remove
the incentives for domestic capital flights and seriously combat smuggling.
Cutting non-essential imports and increasing non-energy-based exports
should be seriously attempted. The fiscal imbalance is harder to
cope with, but its correction is critical to the Perspective’s success
since the budget deficit is largely responsible for many other economic
disequilibria. The crucial corrective actions involve downsizing
and reinventing the government, liquidating money-losing state enterprises,
closing tax loopholes, reducing comprehensive tax exemptions, raising
and expanding the tax base, and targeting the current across-the-board
subsidies. The value-added-tax system, already tried with dubious
results, may not be the whole answer, nor are pending proposals in
the Majlis for adjusting energy and other subsidies.44 New thinking and new policies are needed.
The cost-price distortions are the
result of years of populist and demagogic intervention by the Majlis,
dating back to the Iran-Iraq War of 1980-88. Extensive and enduring
price controls and minimum-wage legislation, designed to stem the
tide of virulent inflation, have not only failed to achieve their
intended goal; they have resulted instead in creating untold opportunities
for abuse. Strong indications point to economic rents created
by these controls, along with state-endorsed private trade monopolies,
as the main source of nouveau riche wealth and related corruption.
The vexing imbalance in the money
and banking sector calls for a radical shift in the government’s thinking,
expectations and demands. Of essential significance in this
regard is the need to pass legislation endorsing the Central Bank’s
independence and to reorganize the Council on Money and Credit.
The Central Bank should be empowered to preserve the value of the
national currency, control private liquidity and maintain relative
price stability without interference or demands from the Majlis or
the Treasury. The Council, as the main arm of the Central Bank,
should be staffed with independent financial experts without vested
interests — and not, as is currently the case, composed of government
ministers and agency heads who are the main beneficiaries of increased
liquidity. It should be given the sole responsibility of setting
and enforcing monetary policy in the service of price stability and
high employment. A large majority of state banks should be truly privatized
and allowed to conduct their business without mandatory lending obligations
and within prescribed monetary regulations. The labor problem is the hardest nut
to crack for a variety of reasons. First, due to a disastrous
pro-natal policy adopted during the early years of the revolution
(to “produce more soldiers for Islam”), Iran’s youth (ages 15-29)
now comprise more than one-third of the population and more than two-thirds
of the unemployed — both ratios being the highest in the region and
among the highest worldwide. The main concentration is among
women 18 to 24 years of age. At the same time, education and training
have left Iran’s youth ill-suited for the country’s economically viable
jobs. Of the 100 different majors offered by Iran’s state universities,
only 10 are reportedly popular. But these 10 fields are capable of
absorbing only a very small percentage of successful applicants in
the annual university entrance exams. The other 90 fields are filled
with those who simply want a university degree, those for whom free
university attendance has zero opportunity cost, and those with the
fewest job opportunities.45
Although the current Fourth Development Plan has targeted new job
creation at a minimum of 650,000 a year, the actual number in the
last four years has reportedly been less than 300,000.46 Creation of the targeted jobs has, in turn,
required a 10-12 percent annual increase in aggregate domestic investment
growth,47 while the figures published by the authorities
show the rate hovering only around 5 percent.48
Foreign direct investment, too, according to official figures, has
averaged about $500 million a year from 2002 to 2008.49
To employ all current job seekers and keep the current 12.9 percent
unemployment rate from rising, 1.2 million new opportunities have
to be created in each of the next two years — a virtual impossibility.50
As already indicated, the lack of investment security, stifling bureaucratic
regulations, a dearth of incentives for long-range commitments, and
an uncertain political climate have been the major impediments to
adequate job creation.51 The government’s misguided policies
in the last four years have also created another impediment to solving
the labor imbalance. By mandating lower interest rates on bank
loans to industrial and agricultural projects, the cost of capital
has been reduced. At the same time, higher minimum wages and extensive
fringe benefits have increased labor costs. The result has been
increased use of capital-intensive projects at the expense of higher
employment. Furthermore, the state banks’ massive lending to
so-called “quick-return projects” on government order has not only
failed to make a dent in reducing unemployment; it has managed to
increase liquidity to an unprecedented level and push inflation as
high as 29 percent.52 Youth unemployment will continue to
be an albatross for some years to come.
None of these equilibrating measures is politically
easy to adopt or quick to implement. Yet none is dispensable.
If the Perspective’s nirvana is going to be anything but a pipe dream,
all corrective measures enumerated here would have to be followed
simultaneously. But since faith-based and ideology-dominated
regimes seldom achieve genuine socioeconomic progress, a fundamental
change in the Islamic Republic’s orientation and outlook is the essential
condition for the Perspective’s ultimate goals.
2 For
detailed performance shortfalls from the plan’s targets, see http://sarmayeh.net,
June 21, 2009. 3 For
a candid recognition of some of these barriers, see statements by
Iran’s ex-president Ali Akbar Hashemi Rafsanjani, reported in http:emruz.net/ShowItem,
November 9, 2008. 4 For
details regarding this unique process, see Jahangir Amuzegar, “Iran’s
Theocracy under Siege,” Middle East Policy, Vol. X, No. 1,
Spring, 2003. 5 For
a recent reiteration of these tenets, see statements by the Islamic
Republic’s vice president in http://www.jomhourieslami.com, May 18, 2009; see also http://www. iranmania.com, May
17, 2009. 6 A
recent reiteration of this doctrine may be found in the statements
by Supreme Leader Ali Khamenei before students of Kurdistan’s university
on May 17, 2009, reported in www. jomhourieslami.com, May 17, 2009. 7 Economics
of Divine Unity (1979-1980); Islamic/Marxist State Administration
(1981-1988); Postwar Structural and Stabilization Adjustments
(1989-1996); Islamic Democracy Rule (1999-2004); and Messianic/Populist
Autocracy (2005-2009). 8 The
outrageous and admitted fraud in the June 2009 presidential elections,
resulting in the largest popular uprisings since 1979, is the latest
proof of such indiscretions. 9 See
Ahmad Tavakoli and Farshad Momeni in http://emruz.net, May 4, 2009, and May
12, 2009. 10 http://www.jomhourieslami.com,
May 25, 2009. 11 For
a discussion of how forced distribution of earnings as annual dividends
to “justice shareholders” has undermined needed reinvestments, see
http://sarmayeh.net,
June 26, 2009. 12 See
Reporters Sans Frontieres’ statement, June 20, 2009. 13 In
the last 27 years, the budget has ended with a surplus in only four
years. See Iran Economics, June 2009. 14 The
shares of taxes in Iran’s GDP and government revenue are 6 percent
and 24 percent, respectively—one of the lowest in the world and the
region and unchanged for over a decade. See http://sarmayeh.net, January 25, 2009. 15 According
to a high Labor Ministry official, there are presently 9,000 development
projects that are unfinished and idle. Others estimate the actual
number to be upward of 12,000, at a cost to the government of some
$200 billion. See http://sarmayeh.net,
January 19, 2009. 16 http://
donya-e-eqtesad, May 16, 2009. 17 http://sarmayeh.net,
May 17, 2009. 18 According
to a private estimate, state banks’ non-performing loans in the last
four years exceed those of the last hundred years of Iranian banking
and constitute the largest wave of rent-based gains in Iran’s modern
history. See http://www.sarmayeh.net,
November 30, 2008. 19 See
the statement by the minister of industries in http://sarmayeh.net,
May 19, 2009; and Iran Economics, May 2009. 20 Statement
by Secretary General of Islamic Engineers Association, quoted in http://emruz.net, September
23, 2008. 21 http://sarmayeh.net,
May 12, 2009. 22 http://sarmayeh.net,
December 13, 2008. 23
http://www. jomhourieslami.com,
May 16, 2009. 24 For
further comparison of energy consumption with world standards, see
http://www.hamshahrionline.ir/News,
January 14, 2009. 25 For
details and comparison with prior years see, http://emruz.net, February 18, 2009. 26
See “Economic Model,” in http://donya-e-eqtesad.com, November 14, 2008. 27 It
is estimated that, with current American technology, Iran’s daily
flared natural gas could generate four times as much electric megawatts
as the Bushehr-type nuclear reactor. See Nonproliferation Review,
March 2007. 28 While
Iran’s population has doubled since the 1979 revolution, the number
of prisoners has increased more than 12 times, from 13,000 to 163,000
— of which 45 percent are drug addicts. See http://www.iran-emruz.net, February
25, 2006; UN Human Development Report 2007-2008; and Iran
Times, June 5, 2009. 29 Due
to the Islamic Republic’s current near-pariah status, it ranks 193
among 194 countries whose passports require visas for traveling abroad. 30 Some
$50 billion are needed in the petrochemical industry alone in the
next 15 years, and another $50 billion for developing the South Pars
gas fields. 31 Complaining
about the multiple and ever-changing bureaucratic and security steps
required for the approval of foreign investment, the Chief of
the Judiciary is reported to have said that “one must be crazy” to
want to invest in Iran. Kayhan (London), February 12, 2009.
32 Iran’s
short-and-long-run business risks have recently risen, according to
Business Monitor. For comparisons with countries in the
region and worldwide, see http://emruz.net,
January 25, 2009. 33 Cf.
Jahangir Amuzegar, “Iranian Oil Buybacks: A Formula No One Likes,”
Oil &Gas Journal, August 27, 2001. 34
http://sarmayeh.net,
May 10, 2009. 35 According
to a recent report, the Tehran Stock Exchange has received only $92
million in foreign investment in the last five years. See http://sarmayeh.net,
May 17, 2009. 36 The
definition and measurement of employment in Iran largely differ from
global standards as students and housewives as well as those who had
worked at least one hour in the previous month are considered “employed.”
See, http://www.jomhourieslami.com,
January 16, 2009, and May 13, 2009; and http://sarmayeh.net, April 15, 2009. 37 For
the nearly 36 percent rise of government debt to the banking system
(including the Central Bank) in the last four years, see http://sarmayeh.net,
April 14, 2009. 38 The
poverty line and its extent in Iran are subject to intense controversy.
The Ministry of Welfare and Social Security refuses to offer necessary
information. Private estimates of the “poor” range from 10 percent
to 20 percent of the population, giving the actual number from 7 to
14 million. For the latest extensive discussions, see http://www.iran-emrooz.net,
December 21, 2008; http://emruz.net,
January 4, 2009; http://donya-e-eqtesad.com, April 7, 2009; http://www.hamshahrionline.ir,
May 22, 2009; and http://sarmayeh.net,
June 19, 2009. 39 While
the nominal rial/dollar exchange rate has been kept fairly stable
within a 5 percent range in the last five years, inflation has averaged
more than 16 percent a year. 40 Annual
price increases of public utilities and fuel products have been proposed
by the government in every one of the last five-year plans, but the
Majlis has often voted down such proposals. 41 For
further details, see http://donya-e-eqtesad.com/2007, May 9, 2009. 42 For
a discussion of such obstacles, see statement by a former minister
of agriculture in http://www.hamshahrionline.ir, October 15, 2008. 43 For
a proper functioning of the OSF, see Jahangir Amuzegar, “Iran Oil
Stabilization Fund: A Misnomer,” Middle East Economic Survey,
November 21, 2005. 44 For
details of these failed experiments, see Jahangir Amuzegar, “Iran’s
Major Economic Surgery,” Middle East Economic Survey, November
25, 2008. 45 See
statement by the Minister of Labor, who argues that closing most of
Iran’s public and private institutions of higher learning would be
a boon to the economy and individual families. See http://emruz.net, February 10, 2009. 46 http://sarmayeh.net,
May 31, 2009. 47 http://donya-e-eqtesad.com,
May 9, 2009. 48 http://sarmayeh.net,
June 18, 2009, and March 2, 2009. 49 Iran
Economics, June 2009. 50 http://sarmayeh.net,
May 31, 2009. 51 According
to a private estimate, short-term trade and business deals have been
11 times more profitable than long-term industrial investments.
See http://www.jomhourieslami.com,
March 2, 2009. 52 For details regarding the cost of creating
one new job and accompanying inflation, see http://sarmayeh.net, March 12, 2009. |
