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Ahmadinejad’s Achilles Heel: The Iranian Economy

By Dr. Abbas Bakhtiar
24 January 2007

Titus Livius (59 B.C.–A.D. 17) the Roman historian once said that men are only too clever at shifting blame from their own shoulders to those of others. These days Mr. Ahmadinejad, the man the West loves to hate, is in hot waters in Iran. He is blamed for almost everything that has gone wrong with Iran. Iranian newspapers and politicians of all colours are lining-up to criticize his leadership and economic policies. He is blamed for everything from shortage of dialysis machines in some clinics to high inflation and provocative speeches. Some politicians are even talking about impeaching not only some of his ministers, but also the president himself.

What a difference a year makes. It was in mid 2005 that Ahmadinejad won a land-slide victory (62%) in the presidential election. As a presidential candidate he had promised to improve the lives of the poor and the lower classes by “putting petroleum income on people’s tables”. His campaign motto was “it is possible and we can do it”.

Son of a blacksmith, Ahmadinejad was the fourth child of a working class family with seven children. He was brought up in the rough and poor neighbourhoods of south Tehran. He is therefore familiar with the problems facing the poor families and has tried to fulfil his election promises to them by increasing the minimum wage (under pressure was later reversed), the pensions, consumer loans for low-income families, loans for small enterprises in underdeveloped regions, and other popular projects. He has also been travelling around the country approving construction projects and distributing largesse.

This lavish spending has increased the double digit inflation rate even more and has caused concerns among politicians and economists that his economic policies coupled with his hard-line stance on nuclear dispute and approach to foreign policy may damage the country. Some economists argue that while the country’s economy is being pressured externally (sanctions), the government is spending money as though there were abundance of resources.

The Iranian senior economist Dr. Masoud Nili of Iran International points to an ever expanding government budget and increasing dependence on the oil revenues as a serious problem for the country. He argues that:

“in 1998, average oil price stood at 10.8 dollars per barrel and oil revenues grew fourfold in about 7 years. Meanwhile, state budget in 1998 was less than 71,000 billion rials, but Iran’s budget for 2006 has been estimated at 600,000 billion rials; that is, while oil revenues have quadrupled over a 7-year period, state budget has increased eightfold during the same period.
Before 2002, government spent an average of 15 billion dollars in foreign exchange. The figure increased to 21 billion dollars in 2003, to 30 billion dollars in 2004, and to 36 billion dollars in 2005. It seems that the figure will reach 45 billion dollars in 2006, which is indicative of serious budgetary dependence on petrodollars.
The Third Economic Development Plan aimed at reducing government’s dependence on oil revenues to less than 12 billion dollars, but it actually soared to more than 40 billion dollars in 2006. Therefore, the government’s budget experienced such a great leap in 14 months from January 2005 to march 2006, when the government was determined to offer Majlis with a budget supplement. Considering this reality, one can conclude that the country witnessed one of its biggest financial developments in the Iranian year, 1385.”[1 ]

As inflation is rapidly approaching critical levels, economists and politicians have began to sound the alarms. There are now open calls for impeachment of several government ministers and although not openly mentioned, the moderates and some conservatives would like nothing more than impeaching the president himself. The rallying cry for the opposition is “the economy”; a clever point of attack since they know that no president no matter how wise or prudent, can solve the existing economic problems of Iran without a comprehensive restructuring of the economy; something that many special interest groups and powerful economic entities are against. The following are some of the problems facing Iran.

Systemic Problems

Iran has a very young population. Almost 47 million of the nearly 70 million Iranians are bellow the age of 25. That is 67% of the population. Of this 47 million, 25 million are between 15 and 25 years old.

Age million
0-6 10.9
7-14 10.9
15-19 13.7
20-24 10.8
25+ 22.3
Total Population 68.6

Theoretically, a country with abundant natural resources and a young educated workforce should have no problem in economically growing rapidly. Alas Iranian economy, like most other oil dependant economies, is to a very large extent government owned and controlled. Hence all the pressure on the economy automatically becomes political pressure on the government.

For instance, the inflationary policies of the current government is the direct result of the government’s desire to reduce poverty and hence the growing inequality in Iran; which in itself is threatening not only the social fabric of the society but also the stability of the regime. In October 2006, the supreme leader of Iran Ayatollah Khamenei in a letter to the President and Cabinet demanded a reduction in the class gap. He stated that:

“Because of the class gap that has remained from former regime, now our country needs economic justice more than anything. The government should make profits more in this situation and move toward declared goals and mottos. The achievement of justice is too difficult and requires many preparations such as geographic and classic justice, justice in economic and cultural affairs, justice in substituting officials and granting responsibilities and justice in judgments. The execution of justice must be logically within the Islamic frame. According to article 44 and notes (A) & (B), the state should decrease its interferences in economy.” [2 ]

But reducing poverty and the gap between the rich and poor in the current economic system is extremely difficult. In a normal liberal economic system the government’s revenues come mostly from investments and taxes. Tax revenue is supposed to cover most of the government’s budget. Tax coupled with social security is also an instrument of wealth distribution. But collecting taxes is something that requires a formal and transparent economy, not to mention information on who earns what. Iranian government can only collate information about what it’s companies and some large corporations earn. The rest is a made up of series of guess works. For example, Bazzaries (Traditional merchants) seldom declare their true net worth or income to the authorities, and the authorities have no system of finding out the true income of these individuals and companies. Another problem is the informal economy. For example, major part of Tehran’s economy, a city of almost 12-15 million people, runs on an informal, off-the-book system, making taxation extremely difficult. Then we have the various tax exempt charity foundations that are involved in almost all aspect of the economy.

Bonyads (Charity Foundations)

In Iran, by some estimates, the Bonyads (charity foundations) control over 30% of the economy and yet pay no taxes at all [3 ]. They are involved in everything from vast Soybean and cotton fields to hotels to soft drinks to auto-manufacturing to shipping lines to….. These foundations represent vast economic empires that are neither taxed nor are directly under government control.

As charity organisations they are supposed to provide social services to the poor and the needy. Yet since there are over 100 of these organisations operating independently, the government doesn’t know what, why, how and to whom this help and assistance is given. Lack of proper oversight and control of these foundations has also hampered the government’s efforts in creating a comprehensive social security system in the country.

These organisations also compete with other private actors in the country. Private companies find it exceedingly difficult to compete with such large corporations, since they (Bonyads) have both the political and financial muscle to compete in any given market segment for as long as they like without considering the profitability of their ventures. These Bonyads, by their very presence, are hampering healthy economic competition and growth.

Subsidies

Another problem facing the government is the subsidies. Subsidies in general are either paid in cash (like food-stamp in US) or child support allowance in Norway, or are paid to the manufacturers of goods/services to reduce the actual prices of goods/services. In the former case, the subsidies are targeted at a particular group, such as unemployed or families with children. In the latter the subsidies cover the whole of the population. This means that a person, regardless of his/her financial situation will benefit from those subsidies.

One of the most pressing issues in Iran today is the mushrooming energy use and the amount of hard currency that is going into subsidies. The government imports over $7 billion dollars worth of petrol per year. Yet the price of a gallon of petrol is only 33 cents. This subsidy does nothing more than encourage smuggling of petrol to the neighbouring countries where prices are higher. It also removes any incentive for the consumers to save on their energy consumption. These subsidies also create an environment in which manufacturers become complacent and not only do not conserve energy in their production activities, but also do not try to build energy efficient appliances and machines; simply because their consumers do not pay attention to the product’s energy consumption. Based on energy consumption, Iranian made cars, freezers, refrigerators, etc. will not be able to compete with the similar sized Japanese, American or European products.

Red Tape and Inefficiency

In Iran, if you want to do anything such as changing money at the bank or starting your own business or anything else for that matter, you have to fill-out many forms and spend hours going from office to office. Often a paper has to be signed by different individuals in different offices in different building in different areas of the town. One can easily spend several days trying to get different officials’ signatures for anything from starting a business to getting a driving license.

Much of the government’s information collection and processing is still paper-based and there are virtually mountains of files being kept in offices around the country. Computerisation is under-way, but for the time being millions of hours of people’s time are being spent taking forms from offices to offices, increasing inefficiency, traffic and frustration.

Couple this kind of red tape with state owned industries and you get a sure way of turning billions into millions. Government run industries usually are less efficient than the privately owned industries. Couple this with political interference, nepotism, cronyism and general corruption and you get industries that produce goods and services of questionable quality at the highest possible prices. Since the losses are covered by the government, the pressure to improve is minimal. The losses are either covered through the budget or through loans by state owned banks. In other words, the funds that could have been made available for economic growth through the private sector, is tied-up in keeping inefficient and loss-making industries alive. For instance it is calculated that each year over one billion dollar worth of electricity is wasted due to the inefficiency of the Ministry of Energy.

“Some 30,000 Gigawatt hour electricity equal to the total electricity generation of some 30 Boushehr-like nuclear power plants is wasted annually in Iran. Some 18.5 percent of the electricity produced in Iran is wasted before it reaches to consumers due to technical problems and mismanagement in the Energy Ministry, a former supervisory body in the ministry told BAZTAB.”[ 4]

Electricity wastage is not the only problem. Iranians use and waste water like never before. According to deputy head of Iran Water Resources Management Company for planning and economic affairs, Alireza Daemi, Iranians use almost double the amount of water as Europeans use. “It is no secret that water consumption level in Iranian metropolitan areas is higher than the average rate recorded for most developed cities in other parts of the world. For example, the per capita water consumption in European cities is 140 litres per day, while the related figure in Iran nears 300 litres. By raising public awareness on the cost of producing water, the government hopes to encourage people to rethink their consumption patterns. This is more like a cultural gesture. The UN Third-Millennium Development Goal for the water sector indicates that setting the value is one of the strategies for correcting water consumption models” Daemi further said that a major challenge for the government is to put in place optimum water consumption patterns in the household sector. “Potable water wastage in Iran is higher than the global rate, while the industrial sector is failing to properly manage its waste often allowing it to trickle down to rivers, causing irreparable damage to the environment.” [5 ]
Corruption
Voltaire once said that when it's a question of money, everybody is of the same religion. When it comes to corruption Iranians are no different than Saudis, Egyptians, Americans or Norwegians. Religion of corruption is the same all over the world: money and power. Corruption is usually the result of three things, lack of transparency, lack of regulations or too many regulations. Paradoxically, you’ll find all three conditions in Iran.

Transparency is vital in fighting corruption. In Norway for example, everyone’s total declared income and taxes paid is available to the public. All government contracts are similarly open to scrutiny. Also at the end of every year, banks issue each of their customers an end of the year statement, detailing how much money they have in their account(s). The customer is required by law to declare that to the government. In such circumstances, it is very difficult for someone to earn anything without paying taxes or hiding how he/she earned that money in the first place. No one is exempt. I know how much the Norwegian prime minister earned last year and what his net worth is. Unless he uses dummy companies, keep cash under his mattress, or carry a suitcase of cash out of the country (not possible because of high security levels at the airports), he has no way of avoiding declaring his income. This and other rules and regulations limit the level of corruption in the country.

Norway is ranked 8th in Transparency International’s Corruption Perception Index. Iran was ranked 105th out of 163. The most corrupt nation was Haiti (163rd). Iran’s ranking or its Corruption Perception Index does not show any sign of improvement. In 2003 when Iran was first included in the list, it was ranked as the 78th out of 133 countries examined. In 2004 it was ranked the 87th out of 145. In 2005 it was ranked 88th out of 158 countries and in 2006 it occupied the unenviable 105th place.[6 ]

The lack of transparency is one of the most important problems facing Iran. Only through complete transparency in financial affairs of the government and Bonyads (charity foundations) that Iran can begin to clean itself of this scourge of corruption. Corruption increases inefficiencies and hampers economic growth. Corruption eats at the social fabric of the society, changing people’s perception of important values such as honesty, loyalty and hard work.

Lack of financial regulations such as the ones described from Norway has allowed people to amass fortunes without anyone asking how these people have earned so much money in such a short time. Large sections of the economy (Bonyads) are beyond scrutiny. Other important sectors such as the traditional Bazzars are also opaque and often operate without proper supervision and regulations. There are virtually millions of people who do not pay taxes and hence operate outside the formal economy.

While lack of regulations has allowed individuals and chosen corporations to avoid taxes and scrutiny; the small private companies are being suffocated by myriad of paperwork and forms. In Iran, like in many other countries, it is the small companies that create the jobs and the economic growth. Yet they are being squeezed as never before. They have to deal with bureaucracy on one side and the competition from large, unregulated and supervised corporations on the other side. It is then not surprising to see that many choose to invest in real estate instead of manufacturing, transportation or farming. Getting necessary permissions, licences etc, is a nightmare. And god help you if you want to import components or raw materials necessary for your production.

Recently the Judiciary asked people (through advertisements) to report the wealth of the government officials to the said authority. [7 ] This financial scrutiny is based on the amended article 142 of the constitution, where the wealth of the Supreme Leader, the President, his cabinet members, other high officials and their families are to be examined by the judiciary both before and after their period in office. This is fine as long as the results are presented to the public.

Privatization

Iranian government is one of the biggest employers in Iran. It is involved in oil, gas, mining, construction, electricity generation, telecom, transportation and lots of other industries, many of which have not made any profits for a long time. These companies are a major burden on the government’s budget and on the economy. Privatisation seems to have been accepted as a solution to the problem. That is until Ahmadinejad came to power.

Ahmadinejad’s idea of privatisation was vastly different from the previous governments. He wants to distribute the shares of the companies equally between the people, while others would like to sell the companies to the highest bidders.

“The member of Tehran Chamber of Commerce (T.C.C.) representative board in an exclusive conversation with T.C.C. news site said: “The justice share is not a part of privatization. Maybe the result of division of 80 per cent of government share between people equally, is satisfactory but the people can not manage even 10 per cent of these shares because they have not expertise in management. So the government will manage the company again.”
“The main purpose of privatization is the change of management to increase returns and create additional value in economy for more development”, he added.
He said: “The government is against the privatization. The reason for delaying in this process is related to the reluctances of officials.”
“The privatization is a double side process: the private sector that should invest in economy and purchase the companies, and government sector that should accept to delegate its properties. Now the government throws a monkey wrench into privatization process. The government must be restricted for investment and can only invest in especial field such as security and information “, he added.” [8 ]

The problem with normal privatization in Iran is that majority of people do not have the money to participate in such auctions. Who has the money? The Bonyads and others who already have a stranglehold over the economy. Without proper laws and safeguards, privatization may lead to creation of huge monopolies in the country. We must not forget the Russian experience, where privatization was seen by the people as wholesale theft of the country’s resources by a few individuals.

Privatization is the best solution for Iran, but it can only be done after a systemic revision of laws. Anti-monopoly laws have to be strengthened and some large state owned companies have to be broken into parts before privatization.

Government must also strengthen its social security services before any large scale privatisation can take place. Any privatisation will definitely lead to large scale lay-off of part of the work-force which can lead to social upheaval. The country is already suffering from high unemployment and under-employment. Any sudden increase without social safety net (such as unemployment benefits, retraining programs, etc) may well result in large scale protest against the government.

Prior to any privatization, government owned companies have to be turned into limited liability companies with government as the majority share-holder. These companies should then be managed like other private companies. When the proper social security system along with anti-monopoly laws are in place, then the shares of these companies can be sold to the public. It would not be a bad idea for the government to have a closer look at the Nordic system of privatization.

Conclusion

Iran with its tremendous natural resources and a young educated population has the potential to become an economic power house for the whole region. It has the potential to grow at 8 to 10 percent per year for the next two decades. Yet, year after year it grows at a mediocre rate and even that growth is dependent on the price of oil. The country suffers from lack of transparency, lack of regulations where it counts and over regulation and heavy bureaucracy where it isn’t needed. In other words, Iran suffers from systemic problems that can not be addressed piecemeal. The current high inflation, unemployment, underemployment and corruption are symptoms of these systemic problems.

Ahmadinejad’s economic policies certainly can be blamed for the current increasing inflation and unemployment. But he can not be blamed for everything that has gone wrong in Iran. Factionalism, push and pull from special economic interest groups, pervasive corruption, smuggling, bad management of state owned companies, badly planned subsidies, lack of comprehensive social security and health plan, lack of proper system for economic information collection and taxation are just a few of the problems that have existed long before Ahmadinejad became president.

The first step in the right direction is to improve the economic data collection system of the country. It is vitally important for the government to know who (individuals and corporations) earns what. Only through access to this information can the government create a workable taxing system. Only through this can the government begin to reduce corruption, target subsidies, reduce inequality and plan for the future.

The next step is to create a comprehensive social security system where people do not have to rely on charity foundations. These foundations have to be sold-off and the proceeds included in a social security fund for the country; other wise over time, these entities will become so powerful that they will become the effective rulers of the country.

The Iranian economy is now in stable condition going towards critical. As long as United States is threatening Iran, and with Iraq as an example of what can happen, people are willing to accept any kind of hardship. But once that threat is removed, people will demand an improvement in their standard of living, something that current economic system is unable to deliver. In the current economic environment, increasing salaries only increases inflation and unemployment.

The last three Iranian presidents have tried to tweak the system in various ways to optimise it without any success. They all had learned men advising them on the best way to manage this sick economy. Yet none succeeded. It is perhaps time for learning from others. The current learned people in Iran may be masters of squeezing all that is possible out of the current economic system, but that is not enough. It is time to change the economic system and try new things. It is perhaps time to become a learner again, for as Eric Hoffer (writer) once said “in times of change, learners inherit the Earth, while the learned find themselves beautifully equipped to deal with a world that no longer exists.”

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FOOTNOTES:
1. Massoud Nili, “Picture of Iran’s Oil-Dependent Economy”, Iran International, May 2006, No. 40
2. Tehran Chamber of Commerce and Industries & Mines, “Our country needs economic justice more than anything”, 14 October 2006
3. Kenneth Katzman, “Statement of Kenneth Katzman”, Joint Economic Committee Hearing on Iran, July 25, 2006
4. Baztab.com, “USD 1 Billion of Electricity Wasted Due to Energy Ministry Inefficiency”, 20 January 2007
5. Iran Daily, “Water Challenges”, Economic Focus, March 25, 2006
6. Transparency International, “Corruption Perception Index 2006”
7. Baztab.com, “People are urged to report the wealth of the government officials”, 19 January, 2007
8. Tehran Chamber of Commerce, “Justice Share is opposite to privatization”, 14 October 2006

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Dr. Abbas Bakhtiar lives in Norway. He is a management consultant and a contributing writer for many online journals. He's a former associate professor of Nordland University, Norway.
Bakhtiarspace-articles@yahoo.no

Copyright Abbas Bakhtiar, all rights reserved.

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