While all available figures confirm Iran's broad economic failures, the best
proof of its dismal economic conditions may be the economic difficulties of
life in Tehran.
A young couple with bachelor degrees and a few years of work experience as
schoolteachers would have a combined monthly income of about US$1,000. If the
couple had a young child, they would need at a minimum $1,000 to pay their
monthly bills (food, clothing, electricity, gasoline, insurance, medical) and
another $1,000 per month in rent for a modest apartment (which also
requires a significant security deposit). How can such couples,
university-educated at that, survive? They can't. They need to get second jobs
or rely on the support of their families.
While official numbers say that inflation is down, life in Tehran tells a
different story. The prices of necessities over the past 12 months have soared
- milk and yogurt prices have about doubled and chickens and lamb prices have
increased by about 75%. At the same time, government-subsidized items, such as
electricity and gasoline, have also increased in price. These are items that
figure heavily in the Iranian consumer basket - what families have little
choice but to buy. Contrary to government pronouncements, inflation has not
declined to under 10%, as recently reported by the government; in all
likelihood it has increased to over 20%.
More broadly, unemployment and underemployment may be the regime's Achilles'
heel. Unemployment is around 20%. Most depressingly for the young, there is
little hope of a better future, with the result that a significant proportion
of young educated Iranians, the brightest and the best, have emigrated and will
continue to emigrate from Iran.
The country is losing a generation of its most highly educated citizens to
countries that promise a brighter future. While the government is concerned
only for its short-term survival, the emigration of talented Iranians paints a
bleak economic future for Iran.
Iran's economy and its export sector have diversified very little from oil in
the past 30 years. This is in large part because of disastrous government
policies, including an overvalued currency.
In short, the Iranian economy has structural problems that the regime has found
politically difficult to address. The government has essentially used subsidies
to buy short-term support instead of adopting reforms to develop and support a
vibrant private sector, because it has been afraid of eliminating subsidies and
redirecting the proceeds for supporting broad reforms.
The choices are difficult but are unlikely to get much easier than they have
been in the most recent years with the support of a booming oil market. Some
observers may attribute much of Iran's difficulties to economic sanctions. This
is in my opinion incorrect. Sanctions have slowed the development of oil and
gas reserves, increased the cost of trade by about 20% and limited Iran's
ability to borrow on international markets. But in the future, at least the
slow development of energy assets may be even seen as a beneficial effect of
sanctions as the government has wasted much of its oil proceeds in the past 30
years.
To absorb the rapidly growing labor force, Iran has no choice but to achieve
much higher gross domestic product (GDP) growth rates. The required growth
cannot come from the overemployed and inefficient public sector, but must
instead come from a vibrant private sector. Iran needs to grow at roughly 10%
per year, a rate that it has never come close to achieving for many years, just
to bring unemployment to the single digits.
The policies for an economic turnaround are obvious, but the regime has not
embraced comprehensive policies in times of plenty because it feels threatened.
It will be even less likely to adopt them in leaner times.
Over the past five years, under President Mahmud Ahmadinejad, much of Iran's
oil revenues have been used to either buy domestic support for the regime or to
make capital flight irresistible for the wealthy. While this harmful
extravagance, whose purpose was to garner domestic support among the masses and
the military, was possible during a period of record oil prices, the squeeze is
now on. Difficult choices will have to be made. The choice for the government
may come down to: tax the rich or starve the poor?
What does Iran need to do? Will it do what is necessary?
To have a chance of success, Iran must adopt comprehensive policy reforms and
ensure that during the transition phase the majority of citizens (the less
well-off economically) see and believe themselves to be better off than before
the reforms.
This will require a well-designed social safety net (affording everyone
necessities in food, shelter, healthcare and education) to compensate for the
loss of indirect subsidies for the majority of citizens; a level playing field
to give everyone a reasonable and equal opportunity for success; and a
political campaign to convince the rich and those closely connected to the
regime that in the absence of reform they are doomed.
A country that is heavily dependent on a depletable resource, such as oil, is
different from other countries in at least one important way. The portion of
its national output that is derived from the depletable resource is not
sustainable. Simply said, when oil runs out its contribution to gross domestic
product (GDP) falls to zero. Even more starkly, imagine a country that produces
only oil. When oil runs out, its GDP will go to zero! So what is a country such
as this to do?
The suggested policies are intuitive. Oil is a part of a country's capital
base. When oil is sold it should be replaced by capital of another form. An oil
exporter should first save at least a significant percentage of its oil
revenues, resulting in a very high national saving rate. Then it could adopt
one of two approaches.
The first approach is to invest the money and issue a check of equal real
purchasing power to all citizens, now and in the future; in the United States,
Alaska has adopted something along these lines. Abu Dhabi in the United Arab
Emirates is investing so much already that it can support its population from
just the return on these assets, and others such as Qatar may follow suit.
The second approach is to use the oil money to transform the economy into a
fast growing non-oil economy to compensate for oil depletion. This would
require the government to adopt policies to diversify the economic and export
base away from oil, to provide non-oil sources of government income, and to
provide attractive employment opportunities for its citizens.
The indicated policies are:
Provision of physical and social infrastructure (especially education).
Sound institutions to promote the rule of law, to reduce uncertainties and
economic transaction costs, to enhance the market mechanism and encourage
private sector growth, to provide sound regulations and its effective
enforcement, and to generally improve the business climate (contract
enforcement, transparency, low level of corruption, elimination of red tape,
and so forth).
High savings and productive investments in areas that the country has a global
comparative advantage.
Consistent macroeconomic policies, including a competitive exchange rate to
support the development of non-oil exports.
Developing better institutions is the key to reducing corruption, upholding the
rights of each and every person in the benefits of oil wealth, eliminating
waste and creating a healthy business environment for the private sector to
flourish. But as in other countries, there is little short-run incentive for
those in power to embrace better institutions as they stand to gain from their
existing practices.
Iran has by default chosen the second approach, but not the indicated policies
that go with it. Iranian institutions are ineffective and corrupt. Instead of
encouraging private sector growth, the government and its various organs, such
as the foundations and the Islamic Revolutionary Guards Corps, dominate the
economy, accounting for roughly 65% of national output.
The government, instead of saving, is consuming as if there were no tomorrow;
wasteful consumer subsidies, as opposed to productive investment, have dragged
down the economy in the past decade. High-quality education is limited. The
Iranian rial is overvalued, discouraging non-oil exports. The list could be
easily expanded, but the results of these policies are everywhere to be seen.
Oil has been a small blessing and a larger curse because of how it has been
used. The clear message of social justice is that all current and future
citizens must reap the same real benefit from resource depletion. Oil resources
must thus be used in a just and efficient manner.
The best approach would be to give each member of present and future
generations a sum of money with the same real purchasing power by doing the
following: (1) place all oil revenues into a fund; (2) invest the resources of
the fund; (3) issue a check to every citizen from this fund (the amount
calculated in a conservative manner and subject to change annually in order to
ensure the same real benefit to all future generations); and (4) allow the
government to borrow up to a fixed maximum percentage of the fund at an annual
cost to be paid to the fund.
In short, the government would develop economic policies assuming essentially
that it could not use oil revenues as if they were current revenues. The size
of payments to each citizen could only be approximated because a great deal of
information would be needed, including the exact quantity of oil reserves and
its quality (type of crude, cost of production and so on), the future path of
oil prices and inflation, and population growth projections for all future
time.
Numerous secondary issues would also need to be addressed. Should each
individual receive the same benefit annually or over his or her lifetime
(assuming we knew everyone's exact life span)? Should transfers for children be
made to their parents and if so up to what age? But assuming for the moment
that all necessary information were available and all subsidiary issues were
resolved, is this the most efficient way to allocate the benefits of oil
depletion to all members of current and future generations of society?
From an efficiency standpoint, it is better to give each individual the same
fixed real sum of money every year than to give him or her the same amount
through subsidies. The reason is simple. All individuals would not want the
same subsidies and to the same extent. One may want food and shelter, while
another may want clothing and healthcare.
But what if social and private returns diverge significantly? The social return
to certain infrastructure and other inputs such as education are so high that a
dollar spent on these increases the welfare of society by more if that same
dollar were divided up between all current and future members of society.
The point is that if we had all such information and could make such
interpersonal welfare judgments, it is possible that individual transfers may
not always be the optimal solution. Even the provision of infrastructure from
oil revenues (for example, the building of a road) could be questioned because
future generations may benefit less (if the road is taken out in the future) or
more (if the road results in a significant economic boom in the future).
Moreover, if a road is constructed by the private sector, the builder might
derive extra benefits if competition in the bidding process is suspect. To
adjust for economic and social distortions, Iran desperately needs an effective
system of taxation.
Will Iran rise to the occasion? The prognosis under the Ahmadinejad government
is not bright.
Most recently, the government has been giving the impression that it is
adopting reform. In reality, it is doing nothing of the sort. It is doing the
opposite. It has announced its intention to eliminate subsidies and give direct
cash payments to the needy. While the elimination of subsidies could have been
a promising sign, in this case it is nothing of the sort.
The government has no plan, no system and no process as outlined above under an
oil fund. Instead this government initiative is driven by the government's
desperate need of resources. Thus it will use some of the savings from
eliminating (reducing) subsidies to finance its other expenditures, and the
cash handouts will go to regime supporters as the government is being
increasingly threatened from within. Politics is driving everything under the
Ahmadinejad regime. It will be a continuation of its policy to use oil revenues
to buy short-term support, no matter what the cost to current and future
generations of Iranians.
In sum, the post-revolutionary government has failed to deliver economic
prosperity for the people. The regime has used and abused resources to stay in
power. The only time over the past 30 years that the revolutionary government
has done an okay job was during the eight-year Iran-Iraq War in the 1980s.
During this brutal conflict, the country only limped along, but at least it did
not incur a large external debt as might have been expected (as did Iraq). And
even then, the reasons for this apparent success were that the constitution did
not permit external borrowing and that no one would have probably lent Iran
because of the attendant risk.
Economic conditions have never been as bad as they are under Ahmadinejad.
Economic performance and social justice are unlikely to improve in the
foreseeable future, with or without US sanctions, as Iran's economic failures
are largely self-inflicted. Unfortunately, the economic failures of the
Ahmadinejad government will be felt for many years to come.
Hossein Askari is professor of international business and international
affairs at George Washington University.
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