Iran’s 20-Year Economic Perspective:
Promises and Pitfalls
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
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.
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
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.
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.
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.
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.
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.
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.
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.