TEHRAN – Iran holds about 9 percent of proven world oil reserves. Twenty-three years after the Islamic revolution in 1979, the main problem of the Iranian economy remains its dependence on oil revenues. The state is ubiquitous – and mostly inefficient – as it distributes the revenues generated by a highly concentrated industrial sector. The bottom line is that the whole Iranian economy still depends on the price of a barrel of oil.
Gas and gasoline cost practically nothing in Iran. But internal consumption is increasingly absorbing more production – now more than a third of the total. And oil installations need to be modernized. The only way to do it is with the help of foreign investment.
After the revolution and the eight-year Iran-Iraq war that followed soon afterwards, industrial production was roughly cut in half, and so was the oil revenue per person – because of the demographic explosion. The war was literally a disaster for Iran. Most of the oil revenue went to the war machine – a factor that also justified high state centralization. Meanwhile, the industrial structure was falling to pieces. There was absolutely no investment.
The traditional private sector in Iran has always been what Iranians as a whole call the bazaar. But the bazaar never invested in production. The bazaar is pure speculation: so how could it not be in favor of state centralization, which handed the bazaar endless opportunities for increasing speculation. The bazaar never wanted less, but more state support, including low taxes, so that it could feel free to speculate with gold, with the dollar, with real estate, with products imported from the West or those made in Iran, such as Peykan and Peugeot cars.
The state in Iran subsidizes basic products sold in state-sponsored malls – available to the general public or to a particular sector of the population, like families of martyrs. This redistribution sort of compensates the social revolution that in fact never happened in Iran. One of its side effects is that it does not offer any incentives for productive investment.
A lot of people in Iran – about 35 percent of the active population – seem to be state employees. According to professors who agreed to speak to Asia Times Online off the record, these people have no other option than to settle for these low salaries because after the revolution the regression of industrial development was nothing less than drastic. There are many causes for the regression: the effects of the war; massive state intervention; speculation; bureaucratic corruption; and the brain drain of intellectuals, engineers, captains of industry.
More foreign investment would be an excellent solution. But comparing Ministry of Industry numbers with other developing countries, one finds out that foreign investment per person is 35 times as high as in Mexico, almost 120 times as high as in Malaysia, and almost 170 times as high as in China.
The “Islamic economy” has not really transformed the Iranian economy. It’s more like a code to apply more state control or to develop certain parts of the private sector.
No less than 40 percent of the Iranian gross national product (GNP) is under the control of the so-called foundations – bonyad – which themselves are outside any government control. One of them – the Foundation for the Disinherited – controls more than 400 companies, and is the largest conglomerate in the Middle East. It is not public, nor private. In fact, it is public, but not state-controlled. This foundation is responsible for nothing less than 28 percent of textile products, 42 percent of cement, 45 percent of non-alcoholic beverages, 28 percent of tires and 25 percent of sugar consumed in Iran.
The bonyad were created immediately after the revolution to manage confiscated wealth. They used to be the ultimate instrument of social and economic advance for the revolutionary elite. They operate like holding companies – managing hotels, airline companies, publications. No institution in Iran even today would be able to force then to be more transparent: this would require tremendous political mobilization.
The people who direct these foundations are more or less invisible. They don’t belong to an economic elite, like in many European countries, but among those who were involved in the war in the Revolutionary Guard (Pasdaran). The foundations are under the direct control of the leader of the revolution, Ayatollah Ali Hoseini Khamenei. So no wonder that they are in direct contradiction with the reformist movement of President Mohammad Khatami, and even with the bazaar. Parts of the bazaar want to reinvest in the productive sector. But they simply cannot compete with what they consider the unfair privileges of the foundations.
Khatami was elected president in 1997, promising, among other things, economic liberalization. But Khatami is not exactly interested in economics. And neither are those who support him. The Islamic left may be pro-democracy, but still believes in the economic power of the state. Technocrats threaten at the most to increase taxes to force the private sector to move. And the more liberal parts of the bazaar are still very cozy with the conservatives.
An informal inquiry in the bazaar will reveal that merchants are most of all against the absurd privileges enjoyed by the foundations. They also want a more calibrated foreign policy – and the end of the American sanctions. This is exactly what the Iranian diaspora in the US also wants – because they are itching to invest again in Iran.
More liberalization will inevitably lead to more realistic prices – and thus further and brutal impoverishment of a population that at least now has access to subsidized oil, gas, bread and a few basic products. But even with more liberalization there won’t be a group of Iranian entrepreneurs capable of driving the economic development train. And to increase the state budget – apart from oil revenues – Iran would need to collect more taxes. Seventy percent of the productive population simply does not pay taxes – and this includes all of the crucial foundations.
Critics – internal and external – may complain that reforms in Iran are too slow. In fact, the reformists are not in a position to dismantle a whole system of collusion – involving the foundations, a plethora of subsidies and access to foreign currency. This system is operated by the social base of the Islamic regime – the conservatives.
So far, liberal initiatives have been only cosmetic – like the possibility for nouveaux riches to have access to new markets, such as the pleasant island of Kish in the Persian Gulf, one of the new Iranian free zones.
Mousa Ghaninejad is an economics teacher at the Oil University. His analysis confirms all the main points of this survey. He says, “For years we have been producing below capacity and wasting our assets – especially in the energy sector. Currently, the economy is in a relatively good shape only due to high oil revenues.”
Mousa recognizes that certain reforms at least took place, “such as the amendment to the taxation laws, the formation of the single-tier hard currency system and the establishment of a private banking system.” But he acknowledges that the pace of reform is excruciatingly slow. “They only now have reached the conclusion that we must pursue a free market economy.”
There is a lot of hesitation in moving forward “because the reformists are short of planning schemes and merely give out the slogan of freedom,” Mousa says, adding, “the spirit of competition does not have any place and everything is summed up in oil revenues.” For the moment, he does not believe it is possible to change the mentality of Iranian officialdom.
So the winds of liberalization in Iran are still not blowing towards the productive sector. Pure speculation is still king – like real estate speculation in Tehran, where land is very expensive, although with no relation with the degree of economic activity. The foundations, above all, are benefiting from privatization. Is there a solution? Yes: more political opening, which would attract foreign investment, and investment from the Iranian diaspora. This is the only way to undermine the privileges enjoyed by the elite of the Islamic regime. The ball, once again, is in President Khatami’s and the parliament’s court.