January 25, 2007 at 08:21:34

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Ahmadinejad's Achilles Heel: The Iranian Economy

By Dr. Abbas Bakhtiar (about the author)     Page 1 of 4 page(s)

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For OpEdNews: Dr. Abbas Bakhtiar - Writer

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 colors 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 neighborhoods of south Tehran. He is therefore familiar with the problems facing the poor families and has tried to fulfill 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 traveling around the country approving construction projects and distributing largess.

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 organizations they are supposed to provide social services to the poor and the needy. Yet since there are over 100 of these organizations 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 organizations 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.

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